North Bay cannabis business leaders reveal their 3 biggest challenges

North Bay Business Journal reached out to local cannabis industry leaders for their insights on the road ahead.

Nearly a dozen responded, talking about the proposal to move cannabis out of the same federal drug classification as heroin and product labeling regulations. Their answers have been edited for clarity and brevity.

The U.S. Department of Health and Human Services has proposed listing cannabis as a Schedule III drug, taking it out of the Schedule I category with hard drugs, such as heroin. Does this step go far enough in relieving pressure on the industry that involves federal scrutiny?

Tiffany Devitt: We’re delighted to see federal movement on cannabis policy. But almost a decade into this cannabis policy roller coaster, it’s hard not to be a little wary. Rescheduling cannabis (meaning reclassifying it) would alleviate the untenable burden of IRS Rule 280e, which prevents businesses like ours from deducting normal business expenses. That would be monumentally positive for the industry, which is frankly being crushed by local, state, and federal taxes.

At the same time, Schedule III isn't a perfect fit for cannabis. Schedule III drugs require a prescription and must be sold through pharmacies. To ensure that state cannabis markets aren’t disrupted in the event of federal rescheduling, Congress will need to take thoughtful action to protect the integrity of existing state markets at the same time it addresses the scheduling. Absent that, we’ll find ourselves in a new period of ambiguity, and we know from experience that regulatory uncertainty typically favors bad actors.

Annie Holman: Does it go far enough. No. Is it step in the right direction toward full-scale legalization. 100% Yes. This move will eliminate major business tax burdens and finally shed 280E, which will allow cannabis business, (like every other business on the planet) deduct standard expenses and gain greater access to capital. It will also accelerate cannabis research, that could lead to FDA-approved medicines in the future.

Karen Kissler: If cannabis moves to Schedule III, we would finally be on equal footing with other businesses that are allowed to deduct legitimate operating expenses like salaries, rent, overhead, and all the many other expenses we are not currently allowed to deduct!

Brandon Levine: This will actually handicap the “legal” cannabis market. Once regulated to a Schedule III, the requirements for production and retail will be much more stringent. Most operators have not built GMP facilities which we can assume will be a requirement for production. Retailers will likely have to operate like a pharmacy as well. Luckily Mercy Wellness has built our operations with this federal move in mind. It is a step in the right direction but decriminalizing cannabis is better for everyone.

John Loe: The proposal to reschedule cannabis is a good step. The industry has been suffocated by the federal tax code 280e that does't allow normal operating expenses to be deduced like every other legal business. The effect is an extremely high effective tax rate. This is a reason why dispensaries generally owe Uncle Sam lots of money. If we want licensed cannabis to compete and replace the unsafe illegal markets the federal government has to even the playing field and give cannabis operators a fighting chance not slam them with a tax code meant for hard core illegal drug dealers. If the licensed cannabis industry is to survive, governments will need to adjust their old thinking soon.

Eli Melrod: In short, the HHS’s recommendation is a positive step, but it does not go far enough. While the Schedule III recommendation by the HHS represents a huge milestone in federal cannabis policy, cannabis should be de-scheduled (i.e. removed from the controlled substances list) so it can be treated like alcohol under federal policy.

Julie Mercer-Ingram: Changing federal cannabis laws is long overdue and desperately needed. The discrepancy between federal and many state laws creates massive issues from banking to criminal convictions. While the proposed change to reschedule cannabis is a positive development, it does not go far enough. So long as people are imprisoned and have criminal convictions for cannabis activities, the only solution is to decriminalize cannabis. Rescheduling alone will create incentives for commerce while thousands of people continue to suffer from the war on drugs.

Rescheduling cannabis will also create confusing regulatory issues. Federal agencies have struggled to regulate industrial hemp, recently the FDA returned CBD oversight to Congress to request guidance. Congress must make it clear that cannabis is legal, and ideally it should be regulated as an over the counter drug or supplement.

Pete Olander: Absolutely, let me share my personal experience with this. As someone deeply involved in the cannabis industry, I can tell you that the recommendation by the U.S. Department of Health and Human Services (HHS) is a breath of fresh air. It's like a long-awaited sunrise after a protracted night. For the longest time, we've been grappling with an unfair classification. Cannabis was grouped with substances like heroin, which are far more dangerous and have no medicinal value. This classification has been a thorn in our side, hindering research, making banking a nightmare, and complicating insurance.

The potential shift to Schedule III is like a shot of adrenaline to the heart of our industry. It recognizes the medicinal value of cannabis and reduces its abuse potential rating. It's like moving from a dark, cramped room into a spacious, sunlit one. But let’s be frank — it's a step forward, but we still have a marathon to run. Many of us believe that cannabis shouldn't just be rescheduled, but descheduled entirely, regulated more like alcohol or tobacco. As a cannabis business owner that's the finish line we are striving for.

So, what we do as entrepreneurs in this space? Keep our eyes on the horizon and stay informed. Adjust our business plans to accommodate these changes. And most importantly, join in advocating for further reform. Let's make all of our voices heard and push for complete descheduling of cannabis. The journey has been be long, but there is light at the end of the tunnel and the destination is worth it!

Erich Pearson: It's a great first step. Moving cannabis to a Schedule 3 will remove the tax burden of 280(e), where cannabis companies are unfairly taxed as a Schedule 1 drug. Also, with this new designation, we'll see new interest in SAFE Banking, legislation that would allow banks to bank the cannabis industry. These are the two largest federal regulatory issues the industry currently faces.

Tom Sheridan: Listing cannabis as Schedule III is a great first step, but it’s not going far enough. It will ease the burden with respect to 280E, and open up banking opportunities to help us move the business forward. It will level the playing field for cannabis companies. But we’re ultimately looking at leveling the playing field with other businesses, not just cannabis businesses. It’s a great first step, but it is just a first step.

Nicole Skibola: Absolutely not. This would do very little to help the struggling cannabis economy and to normalize a plant medicine that has such an incredible breadth of application for so many health issues. We are in the middle of an opioid crisis and we need descheduling now to support patient access and to ensure that noncorporate producers can survive during this challenging time in the cannabis industry.

Should California add more stringent regulating to product labeling in the cannabis industry? If so, why?

Tiffany Devitt: California already has extremely stringent product labeling and advertising regulations for cannabis. The industry is currently prohibited from using any images that are attractive to children, including cartoons, likeness to images, characters, or phrases that are popularly with minors, imitations of candy packaging, use of the word “candy,” etc. So, why is this still a debate? The answer is it’s really hard for consumers to differentiate between state-regulated products and illegal products. Businesses in the latter categories routinely market to children with products like THC-infused Oreoz, Skittlez, and the like and often regulated cannabis gets the blame. The issue then is not a deficiency in cannabis packaging regulations, it’s a deficiency in enforcement against illegal operators that are targeting minors.

Annie Holman: More stringent than it already is? I am not sure how that would be possible?

Karen Kissler: No! Already, labeling is required to show expiration dates (in the case of edibles) and EVERYTHING must go through rigorous testing for pesticides and potency and we retail stores are required to retain this information in the form of COAs (Certificate of Analysis.)

Brandon Levine: California has done a very good job about regulating their cannabis labeling although I believe enforcement on certain brands has been pretty lackadaisical.

Eli Melrod:

No, I do not believe that California should add more stringent product labeling regulations. California already has very strict packaging regulations that include all containers being child-resistant, several required warning statements, a universal symbol that demonstrates the product contains cannabis, and restrictions on health claims. Rather than making it more expensive and difficult for current operators to succeed with new product labeling requirements, the state should focus on addressing the illicit market, high taxation, and burdensome regulations on legal businesses. If the state were to change product labeling regulations, businesses would have to spend tens of thousands of dollars updating their packaging. With so many operators struggling to keep up financially, this could put many small businesses out of business if they were forced to get rid of old packaging and design new packaging to comply with updated regulations.

Julie Mercer-Ingram: California has some of the strictest rules relating to labeling cannabis. The state needs to do a better job of enforcing the rules that already exist rather than continuing to make new rules.

Erich Pearson: No, it is nearly impossible to operate a legal cannabis business in California. Placing further regulatory hurdles on the industry does nothing more than boost the illicit market, which is a larger threat to children than our already overly restrictive packaging/labeling requirements.

Tom Sheridan: We test for parts per billion on products, so it’s very strict as it is. I think California’s regulations go far enough.

What is the biggest challenge you currently face in keeping your business successfully operating within the cannabis industry?

Tiffany Devitt: Taxes, access to adult consumers, and competition from the illicit market.

On the tax issue, and for the sake of comparison, the state excise tax on a bottle of wine is 4 cents. For an eighth ounce of cannabis, it’s $4.90 or over 100 times more. Cannabis products are also subjected to countless local taxes. A single product may be taxed at cultivation, manufacturing, distribution, and retail. Some locals even charge a “road tax” for merely transporting products through their jurisdictions. These taxes compound throughout the supply chain, increasing the price to consumers by as much as 60 percent.

On the question of access to adult consumers, 61% of California cities and counties do not allow any retail cannabis businesses. In other words, California has ceded in two-thirds of the state to illegal operators.

Lastly, the illicit market has changed in dangerous ways. Since enactment of the 2018 federal Farm Bill, we’ve seen a proliferation of companies marketing synthetic THC-like products under the guise of hemp. In state-regulated cannabis markets, the maximum dose of THC per serving is commonly capped at five to 10 milligrams. In the unregulated “hemp” market, brands like Chapo Extrax sell products with hundreds of milligrams of synthetic marijuana per serving in direct violation of California law. The so-called “hemp” market is, in the words of Chapo Extrax, “the newest drug cartel in town.”

Competing with an illicit market that has better access to consumers and substantially lower prices is the industry’s biggest challenge.

Annie Holman: Access to capital paths that are closer to the "normal” market rates, plus access to additional funding opportunities overall. The inability to access capital has been a major stranglehold and has limited expansion within my business. And I would really like to be able to walk into a bank without feeling like a thug.

Brandon Levine: Taxes are the biggest hurdle. Most people don’t realize cannabis margins are slim and then there’s multiple layers of compounding taxes. Tax code 280e is the death of so many cannabis companies.

Pete Olander: As an entrepreneur, the biggest hurdle I face is navigating the financial landscape of this industry. The challenges are twofold: capital and human resources.

Like many others in this space, I've grappled with securing adequate funding. Due to the legal ambiguity surrounding cannabis at the federal level, traditional banking services are often out of reach for businesses like ours, this not only hampers our growth potential but also creates uncertainty about future revenues. In addition, the complex tax structures were subjected to further strain our financial resources. Without the ability to make standard tax deductions that other industries enjoy, our bottom line takes a significant hit.

The second aspect of this challenge lies in attracting and retaining talent. The cannabis industry is exciting and full of potential, but the obstacles we face can deter skilled professionals from joining our ranks. We need passionate, committed individuals who can help steer this ship through uncharted waters, and these hurdles sometimes make it difficult to attract such talent. However, despite these challenges, I remain optimistic. There's a positive momentum building, with initiatives like the Safe Banking Act and the push for rescheduling cannabis at the federal level. If successful, these could significantly alleviate the financial pressures we face and pave the way for a more inclusive, thriving cannabis industry.

Erich Pearson: The over-taxation and overregulation make operating a legal business in California very difficult. These issues cause the illicit market to thrive, and this compounds our problems.

Tom Sheridan: Cash flow, lack of access to traditional borrowing, and tax structure present daily challenges. The regulatory and compliance challenges for cannabis businesses don’t exist in traditional businesses. Those challenges, coupled with lack of access, create unusual hurdles.

Nicole Skibola: Taxes. Plain and simple. Taxes are so high that consumers are opting to revert to the traditional market. It's been pretty devastating to watch.