Despite prospect of tax savings, MSOs express mix of hope, skepticism on rescheduling

The prospect of federal cannabis rescheduling is on everyone’s minds. Last week, two Chicago-based multistate operators, Green Thumb Industries (CSE: GTII) (OTCQX: GTBIF) and Verano Holdings Corp. (Cboe CA: VRNO) (OTCQX: VRNOF) addressed the issue in conjunction with their annual financial reports.

While GTI reported net income in 2023 of $36.3 million, Verano lost $113 million for 2023, a result it blamed primarily on “income taxes.” That ties directly into the topic of federal taxes and the 280E provision which bars marijuana companies from claiming standard business tax deductions.

The 280E provision would be nullified if the Drug Enforcement Administration were to embrace a rescheduling proposal, because 280E only applies to those dealing in Schedule I and II drugs. And that would mean immense tax savings for all cannabis-touching businesses.

During the company’s investor call, GTI CEO Ben Kovler said that rescheduling would be “helpful” for the company, “especially since we paid over $100 million in cash taxes for 2023.”  In addition, CFO Matt Faulkner estimated that rescheduling “should cut our tax burn in about half or so.”

For Verano’s part, CEO George Archos noted that if the company wasn’t subject to 280E, the company would have saved about $80 million “in federal and state tax dollars in 2023.”

But while Archos maintained an upbeat tone on the odds of cannabis rescheduling this year, GTI President Anthony Georgiadis said the company was “skeptical” that the Biden administration will complete the proposed cannabis rescheduling from Schedule I to Schedule III.

A formal announcement from the DEA has been hotly anticipated by observers for months following a recommendation by the U.S. Department of Health and Human Services last summer. But thus far the DEA has stayed mum on its cannabis policy plans.

“We remain skeptical on the timing of any fundamental federal reform, including rescheduling and capital market accessibility. As a reminder, we were left at the altar on SAFE Banking around this time last year,” Georgiadis said during GTI’s earnings call on Wednesday, referring to the shelving of the SAFE Banking Act in Congress after months of heated negotiations in 2022.

Archos, for his part, said “We continue to believe the DEA will agree with the HHS’s recommendation to reschedule cannabis from Schedule I to Schedule III. We expect the current administration will want to point to not only a promise, but an achievement.”

Additionally, Archos noted that state-level tax reform moves by lawmakers toward “decoupling cannabis” from 280E in Connecticut, Illinois, and New Jersey saved Verano about $16 million last year alone.

“Imagine the formidable cash flow potential we have if and when 280E is decoupled from all of our states and at the federal level,” Archos said.

But as with many things in the cannabis industry, uncertainty underscores all business activities.

“We continue to focus on building a business to succeed regardless of federal change, while remaining hopeful for the potential reclassification of cannabis to Schedule III,” Kovler said.

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