"This error in interpreting the guidelines requires reversal."
Exotic, 58, has admitted it is the "best news" he's received in "a long time".
Speaking in a video on law firm Phillips & Hunt's YouTube page, he said: "I got the best news I've had in a long time.
"Today my sentence was vacated, which we knew was absolute crap to start with and I'm looking extremely forward to ... the rest of the lawyers proving the rest of my innocence in the very, very near future.
"We're going to get through all of this corruption and expose the truth for a chance and I'm finally going to have a voice in hopes to walk home."
Exotic's attorney Brandon Sample is hopeful the decision is "one of many more victories to come" for the star, who is currently in prison in Fort Worth, Texas.
He told E! News: "I am pleased with the appellate court's decision in Joe's case.
"I knew when I agreed to represent Joe that an appeal would be difficult, but I also knew that the law was on Joe's side.
"I am optimistic that the decision today is but one of many more victories to come for Joe — and his eventual freedom."
Exotic was previously hopeful he would be pardoned by former President Donald Trump in his last days at the helm, but he left office without signing the paperwork.