The Administration took bold steps last year that signaled an openness to federalizing cannabis. Plenty of speculation has followed, and it seems clear that the federal market could open soon.

My perspective is that 2023 is not the year, and probably not 2024 either. Federal legalization is on the horizon, though, and operators should build their business with this inevitability in mind.

The changes to come will significantly impact the way the market operates. A few important areas to watch are the broader competitive landscape, how physical assets might change, and the revocation of the much maligned 280E.

National competition and brand recognition

It is one thing to build a brand in a localized market, seeking to capture customers in a specific radius and under clear state guidelines. It is quite another to compete with operators and cultivators that have a national footprint.

Operators may want to envision what business will be like with a borderless market, and direct some of their resources to building awareness that will remain strong in the face of bigger brands. They should also consider legal steps to protect their intellectual capital. That could be as simple as trademarking a logo, tagline, or strain or as complex as creating a sales or cultivation process that will scale to reach a larger, more diverse audience.

Tax flexibility

One of the most impactful issues related to cannabis being federally classified as a Schedule I substance is the 280E section of the tax code. 280E restricts the ability of businesses to take advantage of tax strategies that are routine for other types of companies. For example, cannabis operators cannot accelerate depreciation on assets or take advantage of certain tax credits.

If 280E were removed after federalization, there would be significantly more tax flexibility. These types of opportunities help create better cash flow and a longer runway for companies.

While 280E remains in effect, operators can still create systems, process, and business metrics that will help in the near term and lead to a smooth transition to a federally legal environment.

An efficient dispensary Enterprise Resource Planning (ERP) and Point of Sale (POS) system can help operators automate and alleviate some of the burden associated with multi-state tax compliance and, eventually, with federal tax compliance. Today’s leading systems can distinguish between state-by-state requirements, and the various levels of taxation on each product. These systems streamline and reduce the administrative burden that comes with the collection, reporting, and tax remittance process.

Physical asset utilization

Federalization will introduce a much more sophisticated supply chain that will benefit large growers in warm U.S. climates. Today, growers are limited to statewide distribution. Each state or region is in effect its own ecosystem of cultivators and dispensaries that cater to an audience within arm’s reach.

Breaking down borders will change that ecosystem dramatically. States such as California will have a tremendous oversupply, with year-round cultivation that produces vastly more than cold weather states, which have shorter seasons or are limited to indoor facilities. Some of the earlier adopters of legalized cannabis in states like Massachusetts and Colorado will certainly feel pressure to make a change.

Once cross-border commercial transport is introduced, companies that invested millions of dollars in their cultivation facilities could suddenly be holding obsolete physical assets. Owners should consider how they might best repurpose these facilities. They may expand their harvest to include other crops, for example, acting as both a local food and cannabis supplier.

In the meantime…

Certainly, it will pay for operators to think ahead to how federalization will change their business. In the here and now, they should of course balance that exercise while continuing to focus on issues that will challenge them in 2023.

While some states have friendlier banking environments than others for cannabis, the recent interest rate hikes mean there will be higher lending rates across the board. The economic slowdown or recession will only serve to exacerbate that situation. Companies will find it harder to secure capital and will have to keep an even closer eye on cash flow.

Competition near state borders is presenting a different challenge as well. With more states coming online, customers have the option of traveling to neighboring communities if prices or inventory are more appealing. And, obviously, consumers from these neighboring communities no longer need to travel out of state to acquire product.

Overall, cannabis operators will do well in 2023 to take short term action – but keep the big picture in mind as the federal story evolves.