.svg){kind=small}
The U.S. cannabis industry has continued to grow in scale and consumer demand, but financial pressure across the value chain has increased. Margins have tightened, capital has become more expensive, and many operators are focused on preserving cash rather than expanding.
Headset’s latest report, Rescheduling to Schedule III: Why Ending 280E Could Matter Most in a Shrinking-Margin Industry, examines how a potential move to Schedule III and the removal of Section 280E could affect the industry’s cash flow dynamics using transaction-level retail data and modeled scenarios.
View the full PDF report.
While the most direct and measurable impact is on retailers, the implications extend across brands, distributors, and other cannabis businesses that depend on a financially stable retail channel.
Margin pressure is affecting the entire ecosystem
Headset data show that average U.S. cannabis retail gross margins declined from 52.6% in 2021 to approximately 42.7% in 2025 year to date, a compression of nearly 10 percentage points.
Retail margins matter beyond the store level. When retailers have less gross profit available after payroll, rent, and compliance costs, the effects flow upstream. Inventory purchasing slows, promotional budgets tighten, vendor payments stretch, and risk tolerance declines. This dynamic affects brands, distributors, and service providers that rely on healthy retail throughput.
How 280E compounds financial stress
Section 280E limits the ability of many cannabis businesses to deduct ordinary operating expenses for federal tax purposes. In practice, this can cause taxable income to behave more like gross profit than true operating profit.
Headset modeled outcomes for the median store in 24 state markets (2,176 stores total) under current 280E treatment and compared them with a scenario where 280E no longer applies.
The results illustrate why the issue extends beyond individual stores:
- In 11 of 24 states, the modeled median retailer has negative after-tax profit under 280E
- In several markets, the modeled federal tax burden exceeds total net profit
- In high-volume states, hundreds of thousands of dollars per store per year are constrained by federal taxation
When retailers operate under persistent cash pressure, it increases fragility across the broader supply chain.
What changes if 280E is removed
Under benchmark assumptions (operating expenses modeled at 35% of sales and a 21% federal tax rate), the typical median retailer shows approximately $268,000 per year in modeled federal 280E tax drag. In higher-volume states, that figure can reach around $805,000 per store annually.
At the industry level, this translates into an estimated $1.6B to $2.2B per year in incremental after-tax cash flow at current sales levels, based on Headset’s sensitivity analysis.
While retailers see the first-order effect, downstream impacts could include:
- more consistent inventory purchasing and brand launches
- improved payment cycles for brands and distributors
- greater willingness to invest in marketing, promotions, and product innovation
- increased stability in employment and labor hours
Implications for jobs and reinvestment
According to the 2025 Vangst Jobs Report, the legal cannabis industry supports approximately 425,000 full-time equivalent jobs, even as many operators have reduced staffing to offset margin pressure. Improved cash flow does not automatically lead to rapid hiring, but it can support restored hours, reduced turnover, and more sustainable staffing across the industry.
In this context, removing 280E functions less as a stimulus and more as a normalization of the tax structure for a regulated industry.
This post summarizes high-level findings. The full report provides detailed state-level modeling, assumptions, and examples illustrating how 280E interacts with today’s margin environment and why its removal could affect the broader cannabis ecosystem.
Download the full report to explore the data and methodology in detail.