The Cannabis Industry Needs Federal Reform Now

An opinion piece by: Anton Harb

The cannabis industry in the United States is experiencing an unprecedented surge, with sales soaring to an astounding $17.5 billion in 2020 alone, marking a remarkable 46% increase from the previous year. This exponential growth reflects a shifting landscape as more than one in three Americans now reside in states where cannabis is legalized for adult use, and more than two-thirds live in states where medical cannabis is sanctioned. Beyond economic prosperity, cannabis businesses are proving to be significant contributors to job creation, tax revenue generation, and community development. Simultaneously, consumers are benefiting from a diverse range of products that contribute to improved health and overall well-being.

While the cannabis industry continues to gain ground and popularity across the nation, it is essential to acknowledge and address the formidable challenges posed by the existing federal framework. Despite the thriving acceptance, the industry grapples with substantial hurdles that obstruct its full realization. A primary impediment emerges from cannabis’s classification as a Schedule I substance under the Controlled Substances Act (CSA). This classification, shared with substances like heroin, LSD, and ecstasy, designates cannabis as having no accepted medical use and a high potential for abuse. This classification enforces severe restrictions and penalties on both cannabis businesses and consumers, despite its growing acceptance as a legitimate industry.

An immediate and pressing concern for the cannabis industry revolves around the onerous tax burden imposed by Section 280E of the Internal Revenue Code. This provision deprives cannabis businesses of the ability to deduct crucial operational expenses, including rent, utilities, payroll, advertising, and security, from their taxable income. The sole exception lies in the deduction of the cost of goods sold, which pertains to the inventory’s cost. Consequently, cannabis businesses are subjected to taxing gross income rather than net income, leading to staggering effective tax rates that could exceed 70%. Inequitable and unsustainable, this tax structure severely impairs the industry’s competitiveness and growth potential within an already heavily regulated marketplace.

Banking and financial services constitute yet another formidable challenge for the cannabis sector. Due to the ongoing federal prohibition, most banks and credit unions are apprehensive about servicing cannabis businesses, fearing potential legal repercussions. Consequently, the industry largely operates on a cash basis, inviting security vulnerabilities, operational inefficiencies, and accounting complexities. Additionally, this financial exclusion restricts access to vital financial products, such as loans, credit cards, and insurance, thereby stunting growth and progress. A recent survey conducted by the National Cannabis Industry Association (NCIA) underscores this dilemma, revealing that a mere 30% of cannabis businesses possess a bank account, with a paltry 12% having access to capital.

A further distressing challenge the cannabis industry faces is the lack of bankruptcy protection. Although bankruptcy serves as a federal process enabling individuals and businesses to address insurmountable debt, cannabis’s Schedule I classification has led to consistent dismissal or denial of bankruptcy cases involving the industry. Consequently, cannabis businesses are deprived of relief during financial distress or insolvency, eroding investor and creditor confidence and stifling industry growth.

While these barriers illustrate the formidable challenges within the cannabis sector, they are merely a fraction of the hindrances impeding its potential. Additional critical issues, such as interstate commerce, research and development, veterans’ access, social equity, environmental sustainability, and consumer protection, necessitate comprehensive reform.

Addressing these challenges and unlocking the full potential of the cannabis industry demands a proactive approach from federal lawmakers. There are several bills pending in both chambers of Congress that offer a promising path forward:

  1. The Marijuana Opportunity Reinvestment and Expungement (MORE) Act: This bill seeks to deschedule cannabis from the CSA, expunge prior cannabis convictions, allocate grants to communities disproportionately affected by cannabis criminalization, eliminate licensing and employment barriers, safeguard immigrants from cannabis-related citizenship denials, and grant VA physicians the authority to recommend medical cannabis to veterans.
  2. The Secure And Fair Enforcement (SAFE) Banking Act: This legislation aims to prevent federal regulators from penalizing banks and credit unions complying with state law while serving cannabis businesses.
  3. The Strengthening The Tenth Amendment Through Entrusting States (STATES) Act: This bill proposes amending the CSA to exempt state-sanctioned cannabis activities from federal enforcement.
  4. The Small Business Tax Equity Act: This act endeavors to create an exemption to Section 280E for state-legal cannabis businesses adhering to specific requirements.

Backed by bipartisan support and extensive public consensus, as indicated by a recent Gallup poll showing 68% of Americans favoring nationwide cannabis legalization, the time has come for Congress to heed the voices of the people. The future of the cannabis industry and the well-being of millions of Americans hinge on the immediate passage of comprehensive federal cannabis reform. The time for change is now, and the promise of a thriving, regulated, and equitable cannabis industry is within reach.

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