Cannabusiness Advisory

For many, the most exciting prospect in the cannabis industry for 2024 is the possibility of rescheduling cannabis from a Schedule I controlled substance to Schedule III under the Controlled Substances Act (as amended and in effect, the “CSA”). Rescheduling would be a marked step forward for the legal cannabis industry and provide much-needed financial relief to embattled cannabis operators. The process of reviewing cannabis under the CSA is ongoing, but little else is known about the timeline. Here’s what we do know.

Introduction

As it stands today, cannabis is a Schedule I controlled substance under the CSA. This means that cannabis has no medical use and is illegal to produce, dispense, and possess. There are mandatory minimum prison sentences for possession of cannabis under federal law. Despite this, many states have legalized, decriminalized and/or permitted the medical dispensation of cannabis within their borders. The Supreme Court of the United States and many anti-pot hardliners believe that states cannot do this because state laws are not permitted to alter federal law and that the Supremacy Clause in the U.S. Constitution explicitly states that federal laws supersede state laws regarding similar matters. However, the federal government has not cracked down on legal cannabis markets for over a decade. Beginning in 2014 and continuing through each successive fiscal year, Congress includes a rider to the annual federal budget prohibiting federal taxpayer money from being used in interference with legally operating medical marijuana programs. Congress has advanced no such implicit acceptance of adult-use cannabis, but the Executive branch, through the DOJ, has maintained a hands-off policy when it comes to adult-use markets.

If cannabis were to be rescheduled to Schedule III, it would be considered a controlled substance with proven medical applications, with a low physical dependence and high psychological dependence. However, without other changes to federal law, rescheduling will not bring the state medical or recreational cannabis industry into compliance with federal controlled substances law. The support for rescheduling is overwhelming.

Executive Support

Rescheduling of cannabis has the support of the current presidential administration and many Executive branch agencies. At President Biden’s bidding, the Executive Office of Health and Human Services (“HHS, recently reviewed cannabis classification under the CSA and concluded that it should be rescheduled to Schedule III. This recommendation and the summary of the findings have been shared with the Drug Enforcement Agency (“DEA”), which has the authority to reschedule controlled substances under the CSA. The DEA is currently conducting its review and seems poised to reschedule cannabis in 2024.

Further support for rescheduling has been expressed by the Food and Drug Administration (FDA), which is a branch of the HHS and currently regulates several medicines and products containing cannabinoids. The National Institute on Drug Abuse concurs with the HHS and FDA.

Additionally, several state attorney generals[1] have submitted a letter to the DEA in support of rescheduling.

Legislative Support

Congress also has the authority to reschedule cannabis under a change in law but does not seem to have the necessary support (or the competence) to achieve this in any foreseeable timeline. Several congress members support rescheduling efforts, including certain Senators[2] who sent a letter to the DEA urging them to finish their review and enact the change to the CSA. This letter also included questions for the DEA, including an explanation of the evidence relied upon in the review, the status of the review, and a summary of the change in its enforcement policies since the rescheduling efforts began. No response has been provided to date.

Opposition

There is always opposition to reasonable, common-sense cannabis reform. The majority of the opposition stems from the Republican party but for two different primary reasons. Opponents of rescheduling seem to be in one of two camps: (1) cannabis is the seed of the Devil, and to reschedule it would result in all of our children becoming addicted and then turning to heroin use and committing crimes (facetious, but its hard for me to entertain this camp at all); or (2) rescheduling is “lawmaking” and the executive branch is not authorized under the Constitution to make law, that is the domain of the legislature. The second group doesn’t necessarily oppose rescheduling but opposes enacting this change through the DEA, an executivr branch agency. This view is grounded in the traditional republican principles espoused by states’ rights champions like Jefferson and Madison, who were focused on strong state governments and strict adherence to the separation of powers in the Constitution, and not in misinformation, unreasonableness, or ignorance like camp number one (insert eye roll).

Impact

Rescheduling will have several impacts on our cannabis industry.

280E

Everyone in the industry is familiar with the devastating effect 280E has on cannabis operators. For those needing a refresher, 280E is a section of the tax code allowing businesses to deduct certain business-related expenses from their taxable income thus reducing the amount of taxes owed. Typical deductions include payroll, advertising, travel, and employee benefits, but cannabis businesses are not entitled to deduct these (and dozens of other expenses) under 280E because of their federal illegality. Cannabis businesses must pay millions more in taxes than non-cannabis businesses, and none are hit harder than retailers. While non-cannabis business experience a tax rate of about 21%, retailers are subject to an effective tax rate of up to 70%! Given that this prohibition on utilizing 280E deductions only applies to Schedule I and Schedule II controlled substances, upon rescheduling, cannabis businesses will be able to afford these deductions and drastically reduce the amount they pay in taxes.

New Players

Many hypothesize that pharmaceutical companies will begin to enter the cannabis space if the plant is rescheduled. These companies typically have a lot of cash for acquisitions, and many cannabis operators are looking for their exit from the tasking cannabis industry. There could be an acquisition frenzy from pharma companies upon rescheduling.

Banking

Federally chartered banks currently do not provide banking or lending services to cannabis businesses due to federal anti-money laundering laws. These AML laws do not apply as stringently to businesses dealing in Schedule III controlled substances. Therefore, rescheduling may open the capital markets for cannabis businesses and provide debt on more reasonable terms than currently available. The SAFER Banking Act would also solve this issue more broadly and effectively, so we hold out hope Congress will stop sitting on its hands and get some work done there.

Courts and Crime

Criminal penalties for Schedule III controlled substance-related offenses are less severe than Schedule I. Companies may also be able to avail themselves of the federal bankruptcy courts and the related privileges. As of today, restructuring processes are limited to state courts.

[1] Phil Weiser, Colorado; Rob Bonta, California; Anthony Brown, Maryland; Andrea Campbell, Massachusetts; Aaron Ford, Nevada; Michelle Henry, Pennsylvania; Kathleen Jennings, Delaware; Peter Neronha, Rhode Island; Matthew Platkin, New Jersey; Kwame Raoul, Illinois; Ellen Rosenblum, Oregon; and William Tong, Connecticut.

[2] Sen. Elizabeth Warren, D-Massachusetts; Sen. John Fetterman, D-Pennsylvania; Democratic Senate Majority Leader Chuck Schumer, New York; Sen. Cory Booker, D-New Jersey; Sen. Jeff Merkley, D-Oregon; Sen. Bernie Sanders, I-Vermont; Sen. Kirsten Gillibrand, D-New York; Sen. Ron Wyden, D-Oregon; Sen. John Hickenlooper, D-Colorado; Sen. Peter Welch, D-Vermont; Sen. Chris Van Hollen, D-Delaware; and Sen. Alex Padilla, D-California.