Many U.S. cannabis businesses could become profitable for the first time... because [rescheduling] could lift a heavy income-tax burden: Section 280E of the federal tax code currently bars cannabis businesses from claiming deductions on many basic business expenses. That rule often results in an effective tax rate of 70% or more, wiping out most licensed marijuana retailers’ earnings.
“It’s an absolute game-changer,” said Boris Jordan, executive chairman of Curaleaf Holdings... “It’s something we’ve been waiting for, for the better part of 10 years.”
A national survey conducted in 2022... found that fewer than 25% of cannabis businesses were profitable. Licensed U.S. cannabis companies this year are expected to make $31.4 billion in sales and pay $2.3 billion more in federal taxes than they would under normal business tax rules...
Business leaders said they could use the cash to invest more in marketing, offer better benefits to employees and expand into newly opened markets such as Ohio. Industry leaders said they are also optimistic that the policy shift could reduce the stigma around cannabis, bring more investors into the sector and make federal lawmakers more open to legalizing marijuana.
“Draconian, I think, is putting it lightly,” said Charlie Bachtell, chief executive of Cresco Labs. ...For each of the past two years, Cresco has paid between $70 million and $80 million more in U.S. federal taxes than it would have under normal business conditions, he said. Despite the hefty tax bill, Cresco in the last quarter of 2023 became free cash-flow positive for the first time since it went public in 2018.
The current tax rules allow cannabis businesses to deduct their cost of goods sold, so growers that put most of their resources into production don’t get hit hard. Businesses closer to the consumer get hammered by Section 280E. For instance, a retailer selling clothes or food can deduct rent, marketing and wages when calculating taxable income. But a cannabis retailer typically can’t take any of those deductions.
“It’s impossible to make those numbers work,” said Wanda James, CEO and co-founder of Simply Pure Brands...
The tax change could also shrink the gap in profitability between legal and illegal cannabis businesses, helping licensed businesses that have struggled to compete with the black market.
More broadly, moving cannabis to Schedule III could create an unusual tax regime. Businesses would still face significant state taxes and high costs for banking and other services. But cannabis would actually have more favorable federal tax treatment than alcohol and tobacco, which are subject to federal excise taxes on top of income taxes.
Sens. Chuck Schumer (D., N.Y.), Cory Booker (D., N.J.) and Ron Wyden (D., Ore.) are reintroducing legislation that would decriminalize marijuana and impose federal excise taxes of up to 25%.