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The U.S. Drug Enforcement Agency (DEA) is taking steps to reclassify marijuana as a less dangerous substance – a move that could be a boon to the nascent legal cannabis industry and potentially a sales-sparker for promotional products companies.
The DEA’s under-consideration proposal wouldn’t federally legalize recreational marijuana partaking, but it would recognize that cannabis has valid medical uses and reclassify it from a “Schedule I” substance to a “Schedule III” substance. Schedule I drugs are considered to have no medical benefits and be highly prone to abuse – think heroin, meth and LSD.
The reclassification hasn’t occurred yet. The White House Office of Management and Budget must review the DEA proposal, which would then be subject to a public comment period and a review from an administrative judge.
The process could take a while, though precisely how long wasn’t immediately clear.
Still, if the reclassification occurs, it would ultimately become easier for scientific researchers to study cannabis. That could be a benefit to cannabis cultivators, who may then have a larger end-market to serve beyond dispensaries in states where cannabis is legal recreationally and/or medically. The increased success and competition for market share among cultivators could trickle down to investments in marketing from such growers that behoove promotional products firms, some promo pros believe.
24 U.S. states, plus Washington, D.C., have legalized marijuana for recreational use by adults. Still, cannabis remains illegal on the federal level.
Even more importantly, reclassification could lead to easier operating and greater profitability for companies in state-level legal medical and recreational cannabis markets, according to some analysts. That’s because, with reclassification to Schedule III, businesses in the marijuana space would now be able to deduct various expenses like rent, payroll and more – something they can not currently do under the federal tax code due to cannabis’ Schedule I status.
The upshot? Cannabis companies keep more cash due to a lower tax burden, which industry groups say often sits in the 70% or more range currently because of the inability to deduct.
The prospect of more cash-flush cannabis companies is attractive to promo distributors who already do business in the niche.
“The implications of rescheduling for promo distributors would be huge,” says Justin Herman, president of OnPoint Promotions (asi/466954), an affiliate distributor of Top 40 firm iPROMOTEu (asi/232119) that generates approximately 50% of its business with customers in the cannabis space. “If cannabis companies can take federal tax deductions, they can write off marketing expenses,” Herman continues. “It will also free up cash to use for further marketing promotions and campaigns.”
Herman believes his current cannabis clients – and others in the sector – would definitely look to put some of their newfound dollars to use on merch investments to help them stand out in a crowded, competitive marketplace.
“Differentiating your brand from the competition in the cannabis space is very important,” Herman explains. “It stands to reason that rescheduling will increase the budgets these companies will have in the future for promo and apparel items.”
As today is “4/20” – the official unofficial holiday of the #cannabis community – ASI Media is shining a (black)light on the industry with this special report aimed at helping #promproducts distributors spark #merch sales in the legal market. https://t.co/8Fga3GuKco@ASI_MBell
— Chris Ruvo (@ChrisR_ASI) April 20, 2023
Andrew Nunes, president of CB Disco (asi/173050), a Massachusetts-based distributor that works extensively with cannabis companies, believes positives would result for his marijuana-industry clients if rescheduling occurs. “Being able to write off expenses like any normal business will give them better insight into their profitability,” he says.
He also thinks promo stands to benefit, but is more muted in his expectations than Herman, believing such increased investment in merch would not happen immediately after rescheduling.
“Over time, cannabis businesses could have some additional capital for their marketing budgets,” Nunes says. “I think this change will take years. There are so many investors in the market still trying to get their return on their initial investments.”
It’s worth noting that while rescheduling could help relieve cannabis firms’ tax levy, it’s not likely to help with banking. Firms in the industry encounter roadblocks accessing banks, including for important helpers like business loans, because financial institutions are subject to federal regulation and are leery about the nebulous nature of cannabis’ legal standing. The SAFER Banking Act has sought to address the issue, but has not passed Congress.
