It’s one piece of the cannabis industry that gets left out of the 280E conversation and this is the marketing side of the business. Since companies can’t deduct marketing expenses, when it’s time to tighten the belt, that’s the first place the cuts happen.
Public relations, advertising, sponsoring events and the creatives who make all the artwork happen have been affected by being subject to budget cutting. Now though, cannabis marketing companies could be big beneficiaries of change to the 280E tax provision.
While most of the focus has been centered on the effects on standard cannabis companies, those on the marketing side also stand to win.
Tax Change is in the Air
Since cannabis is federally illegal, cannabis companies have not been able to take standard business deductions. If the federal government reschedules the plant from Schedule 1 to Schedule 3, that would immediately change that dynamic.
Aaron Grey of Alliance Global Partners said during a presentation at the Benzinga conference in Chicago earlier this year that it typically takes 110 days after the Department of Health and Human Services (HHS) makes a recommendation to another agency – in this case the Drug Enforcement Agency – for a ruling. And once the DEA makes a ruling, it goes up for public comment.
This comment period lasts for 37 days on average, but Grey conservatively guessed it would be open for 60 days for cannabis. Then he expects an additional 203 days for a final ruling. That would place the decision sometime in the summer of 2024.
If all of this goes accordingly, companies could consider all appropriate expenses starting with the 2024 tax year.
How Does Marketing Win?
Most mainstream businesses spend as much as 9% of their budgets on marketing, according to Gartner. That number has fallen steadily from 12% back in 2016, settling at 9.5% in 2022 and 9.1% in 2023.
The Cannabis Marketing Association estimates that cannabis industry marketing budgets are much lower, coming in at roughly 0.5%-1.5% of total revenue.
“While CMA’s data and Gartner’s data are not a perfect apples-to-apples comparison, it’s still worth noting a significant gap,” Lisa Buffo, CEO and founder of the CMA, said.
If 280E is changed, Buffo said marketing companies could be beneficiaries of increased spending.
“Increased budgets for cannabis marketing will have a ripple effect. Service providers will be able to charge more (agency retainers in cannabis are far below the norm), a true omnichannel strategy could be possible, and real dollars could be spent on ad campaigns,” she said. “Marketers don’t want to be caught flat-footed when these changes happen, so we are trying to let the communications community know about this possible milestone now.”
This year was certainly a challenge for many in the cannabis industry, but the marketing side took it on the chin. Budgets for public relations were slashed, and sponsorships for events disappeared.
While cannabis companies are limited as to where they can advertise, the available spaces were also devoid of ads over the past year. An increase in these budgets would also help news outlets, marketing agencies, and event producers.