Tobacco Journal International May 2024

The legal recreational use of cannabis for smoking, eating and drinking has skyrocketed in  the United States in the more than 10 years since the state of Colorado became the first US jurisdiction to legalise the plant for adult recreational consumers in January 2014.1 As of 29 February 2024, some 38 states have legalised the use of marijuana for medicinal purposes and 24 of these (plus the federal District of Columbia) also allow recreational consumption. More states are expected to follow suit this year, with liberalisation proposals under consideration in Florida, Hawaii, South Dakota and New Hampshire.
As a result, analysts from Germany-based statistical analysis service Statista said annual American sales of legal, regulated cannabis products have already exceeded USD
30 billion.
Meanwhile, given the size of the ongoing illegal market in all US states, Matthew Karnes, founder of New York Citybased cannabis-centric advisory firm GreenWave Advisors predicts the total US marijuana business could reach USD 100 billion in annual sales upon full legalization, a process that could take 10 years. With legalization in the US happening step by step, this “bifurcated (legal/illegal)” market is already merging into a regulated system, and vice versa, he said. In fact, the process has been accelerating more quickly than would perhaps have been expected. The experience of New York State (population 19.8 million) is telling. Since the state in late 2021 became the 15th to allow recreational marijuana, regulatory officials have been slow to license outlets. While the city of New York currently counts ten officially sanctioned dispensaries, the total of openly operating unlicensed cannabis shops is closer to 8,000, according to New York City Council. “Nobody really knows how big the illegal market is,” said Aaron Smith, co-founder and CEO of the National Cannabis Industry Association (NCIA). “It’s kind of an interesting case because its not actually legal but tolerated,” he said referring to the sale of cannabis.
POSSIBLE RECLASSIFICATION
This rapidly expanding market notwithstanding, the American cannabis industry still faces formidable hurdles preventing it from reaching its potential. Despite state and local liberalization during the past several years, cannabis is still illegal on the federal level, where its Drug Enforcement Administration (DEA) categorization as a Schedule I drug (along with heroin) not only prohibits research into its use but also prevents the flow of capital and banking services. Many cannabis operations that are legal locally are effectively prohibited from issuing stocks and bonds in the US and maintaining business bank accounts, increasing cash security concerns. The federal tax implications are even more severe. Under provision 280E of the Internal Revenue Service (IRS) code, any business selling Schedule I drugs is prohibited from taking ordinary income deductions

Could legal cannabis go down the same route as the beer market – dominated by a few players but with room for craft brands?

like employee compensation and materials, resulting in an effective federal tax rate that is “three times as high,” said the NCIA’s Smith. A legislative attempt – a SAFER
Banking Act proposed last April (2023) – to tackle the banking problems associated with marijuana prohibition has so far advanced
no further than the Senate Banking Committee. More encouraging to industry advocates is the hoped-for reclassification of cannabis to a Schedule III drug via regulatory action. In 2022, the Biden Administration directed the Department of Health and Human Services to consider rescheduling. In August (2023) the department completed its study and suggested re-scheduling. It was not until earlier this year that a 254-page report (un-redacted) was made publicly available. Unsurprisingly to most, the recommendation affirms that cannabis meets the criteria for Schedule III classification (has medicinal use and is not deemed as harmful
as Schedule I or II).4 The federal department subsequently recommended a switch to Schedule III in January (2024), with the DEA expected to soon implement this recommendation. Karnes said 2024 being an election year made DEA re-scheduling timing uncertain but should this happen: “Inevitable reclassification will eliminate the 280E
tax burden which materially improves cash flows and unlocks shareholder value
in short order,” he said. “Rescheduling also eliminates a key element of risk and
uncertainty that has kept many institutional investors on the sidelines.” It should allow US cannabis businesses to open bank accounts and freely trade product and inputs between states where cannabis is legal.

Even with re-scheduling, ‘safe harbour’ provisions that protect banks from liability regarding the filing of suspicious transaction reports to US financial intelligence unit
FinCEN, along with Securities & Exchange Commission (SEC) regulated activities (such
as investment banking and stock exchanges) “remain in question”, said Karnes. That said,
should re-scheduling be followed by updated guidance from FinCEN, offering legal protection when banks deal with legal cannabis businesses, that “may suffice in the absence of specific legislation (such as SAFER Banking)”, he added, commenting: “It’s really unfair that the capital is going to Canada [which legalised in 2018] and not the US.”
Nevertheless, the industry is expecting progress on the federal regulatory front to come
soon. “Most indications are that they likely will reschedule this year, and there are already
indications that lots of banks are becoming more willing to do business,” said Smith.
BIG GUNS INVEST
Big companies running legal businesses in different sectors are also showing some willingness to dip their toes into the cannabis sector. Prominent among these are tobacco
companies looking to diversify from a product line burdened by health concerns. In the tobacco sector, Virginia-based giant Altria has been profiting from medical cannabis products since it spent USD 1.8 billion on a 41 per cent stake in Canada’s Cronos Group, a major medical marijuana in 2019. “We support a comprehensive federal framework for all cannabis products that is based on science and evidence, and we believe it is time for a 
national dialogue about that regulatory framework,” Altria said in a February (2024) statement. To foster this dialogue, the tobacco company is participating in a Coalition for Cannabis Policy, Education, and Regulation (CPEAR), which has released policy-focused papers on small business and mental health; convened a Center of Excellence comprised of policy experts to address critical policy questions facing lawmakers debating cannabis regulation; and established a Congressional engagement program, making CPEAR a resource to policymakers engaged in federal cannabis reform. Similarly, British American Tobacco (BAT) announced in 2021 that it was buying 20 per cent of another Canadian cannabis company, OrganiGram Holdings, for GBP 126 million (USD 162 million).
Capital is also flowing in the other direction, with cannabis companies investing in old school enterprises. Tilray, a Canadian purveyor of cannabis and beer, announced
in 2023 it was paying Anheuser-Busch’s InBev division USD 85 million to acquire
eight leading beer brands. The purchase will triple Tilray’s beer business, making it the
fifth-largest craft brewer in the US. Interestingly, the NCIA’s Smith thinks the Tilray-AB deal reflects how market concentration may come to the cannabis sector once full legality comes to America: “I expect things will probably wind up like the beer market – dominated by a few players but still with room for craft brands.”
Ed Zwirn, in New York