Overall, it's been a pretty exceptional two decades for the marijuana industry. Sure, there have been a few bumps in the road, like the failure of a medical marijuana amendment in Florida in 2014. But as a whole, the increasing acceptance of cannabis has been almost constant since 1996.
Since California first legalized medical marijuana for compassionate use in 1996, two dozen states have legalized its medical use -- that's half the country! This year alone, both Ohio and Pennsylvania have legalized the use of medical marijuana for certain ailments, and they both did so through the legislative process (i.e., without putting the issue on the ballot for voters to decide).
On top of the 25 states that have legalized medical cannabis over the past 20 years, four states, along with Washington, D.C., have legalized the use of recreational marijuana since 2012. In Colorado alone, trailing-12-month sales came to $1 billion as of February. Legal marijuana sales generated about $135 million in tax and licensing revenue in Colorado in 2015, much of which will go toward the state's education program, as well as its law enforcement and drug abuse programs.
And this could just be the tip of the iceberg. Cannabis industry analysts at ArcView Market Research see the industry growing at an average clip of 30% per year through 2020. This takes into account growth from existing industries and the potential for new approvals, including up to a dozen states that will be voting on whether to legalize medical or recreational marijuana in the upcoming November election.
This decision is a very big deal
The steady growth of the cannabis industry has been overshadowed by an even more exciting event: the potential rescheduling of medical marijuana by the U.S. Drug Enforcement Agency (DEA).
Currently, the marijuana plant is defined as a schedule 1 substance. This means it has no federally recognized medical benefits and is considered to be an illicit drug. As long as marijuana remains an illicit drug, businesses that sell marijuana face two very big disadvantages.
First, cannabis-based businesses have little to no access to basic financial services. Although banks could probably serve the cannabis industry and add to their profits, most banks fear the potential for legal action from the federal government. Because the marijuana plant is still illegal, allowing a marijuana business to open a checking account or take out a loan could be construed as money laundering. Without access to checking accounts or credit, these businesses are forced to deal primarily in cash, which is both a security concern and an expansion inhibitor.
The other issue for marijuana businesses is that they pay a much higher tax rate than normal businesses. Internal Revenue Service tax code 280E disallows normal tax deductions in instances where the product being sold is illicit. This means companies in the marijuana industry have to pay tax on gross profits, rather than net profits.
If the DEA were to reschedule marijuana to anything other than a schedule 1 substance (i.e., schedule 2 through 5), then cannabis would be deemed to have medically beneficial properties, which would allow physicians throughout the country to prescribe medical marijuana for patients. Furthermore, it would allow medical researchers to study the effects of marijuana on certain diseases without having to jump through a long series of hoops. Presumably, the inherent financial disadvantages would fall by the wayside as well, as banks could serve marijuana businesses without fear of repercussions.
Bad news for marijuana supporters
However, the DEA delivered a buzzkill of epic proportions to marijuana supporters last month.
Originally, the DEA was rumored to be making its decision on whether or not to reschedule medical marijuana by July 1, or, as the Santa Monica Observer claimed, Aug. 1. But the DEA is certainly in no rush to make up its mind on what it considers a critical issue.
In an interview with online publication aNewDomain, DEA staff coordinator Russ Baer noted, "What is under-reported right now is how complex the marijuana plant is." According to aNewDomain, the plant itself contains about 480 compounds, and medical marijuana can be administered in multiple ways, which means the scope of research being conducted by the DEA could be far beyond what marijuana supporters initially expected.
When pressed about the July 1 or Aug. 1 deadlines for a decision, Baer added, "We are not holding ourselves to any artificial timeframe." However, it is worth noting that the DEA has received the scientific and health recommendations from the Food and Drug Administration that are required as part of its own eight-part review process, which may or may not lead to the rescheduling of cannabis.
So what does this mean for the cannabis industry and the potential for reclassification? Essentially, it means a decision is coming, but it will likely come much later than most people had expected. In other words, for the foreseeable future, the marijuana industry will continue to face inherent disadvantages.
Rescheduling may not be a cure-all for cannabis
Even if the DEA decides to reclassify cannabis from schedule 1 to schedule 2, thereby allowing physicians to prescribe cannabis for certain ailments, a number of different obstacles could arise and obstruct growth for the industry.
The biggest concern is that cannabis will be reclassified as a schedule 2 substance -- one that has medical benefits but is considered addictive and prone to abuse. If that happens, then the FDA will have enormous power over the cannabis industry. For example, the FDA could control how the marijuana industry markets to adults, including how packaging material is labeled. It could, and probably would, regularly inspect growing and processing facilities to ensure that consistent manufacturing standards are being met (e.g., consistent THC content).
But most worrisome of all, it could require cannabis businesses to run clinical trials to confirm that marijuana offers the health benefits being advertised. All of these added regulations could be incredibly costly for the cannabis industry, which could wind up pushing smaller players out in favor of bigger businesses that could afford the higher regulatory costs. Strict regulation could also hinder marijuana businesses' efforts to lower their prices and thus make their products more competitive with black-market alternatives.
Don't get me wrong: A reclassification to anything other than schedule 1 should be seen as a step forward for the industry. But how big of a step it will be depends on the DEA -- if it ever reclassifies the drug at all.
For the time being, marijuana supporters, as well as investors hoping to take advantage of a possible reclassification, would be wise to temper their expectations and exercise some patience, as the DEA is in no rush to issue its decision.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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