July 02, 2024 – On May 16, 2024, the Department of Justice (“DOJ”) issued its Notice of Proposed Rulemaking related to the transfer of marijuana from schedule I of the Controlled Substances Act (“CSA”) to schedule III (“NPRM”), consistent with the recommendation provided by the Department of Health and Human Services (“HHS”) in August 2023. The CSA requires that rescheduling must be accomplished through a formal rulemaking process and public comment starting 60 days from the date of publication in the Federal Register.
Pursuant to the HHS Recommendation and the corresponding NPRM, the basis for rescheduling marijuana is based on the view that marijuana has a currently accepted medical use and lower propensity for abuse potential and physical or psychological dependence. While many believe rescheduling is a positive step forward for marijuana, the recreational marijuana markets may see only one true benefit from rescheduling.
Specifically, rescheduling is expected to eliminate the bar on claiming a federal deduction for marijuana business expenses under Section 280E of the Internal Revenue Code, opens new tab for both recreational and medicinal marijuana enterprises because, by its plain terms, the Section 280E, opens new tab bar only applies to trafficking in schedule I and II controlled substances. Section 280E, opens new tab prevents marijuana businesses from claiming tax credits and deductions for ordinary business expenses, including salaries, rent, utilities, travel and property expenses.
Yet, it is unclear what reclassification could entail or how it would affect recreational/adult-use marijuana enterprises. For example, the DOJ’s NPRM states, within its summary, that “if marijuana is transferred into schedule III, the manufacture, distribution, dispensing, and possession of marijuana would remain subject to the applicable prohibitions of the CSA.” Thus, at this point it still unknown how the recreational market may be affected, outside of the benefits of the 280E no longer being applicable to marijuana.
At this time it is by no means clear that reclassification would cure all regulatory ills in the multi-billion dollar industry, which is permitted under state law to sell marijuana for medicinal use in 38 states and the District of Columbia, and 24 states plus the District of Columbia have legalized recreational, or adult-use, marijuana products.
Further, insofar as commerce in marijuana is concerned, reclassification to Schedule III would constitute only an acknowledgment that marijuana “has a currently accepted medical use” and that its abuse “may lead to moderate or low physical dependence or high psychological dependence.” How that acknowledgment is codified into federal law could have enormous implications for the marijuana industry.
For instance, would marijuana be a prescription drug requiring manufacturers and distributors to be registered and, if so, would enterprises engaged in the sale of recreational marijuana products remain barred from accessing the federal bankruptcy system due to perceived violation of the CSA?
What changes will marijuana companies see as to bank access if they are engaged in the recreational market outside of Drug Enforcement Administration (DEA) registration for schedule III substances, or will the Attorney General not require registration under a determination that the requirement for registration is inconsistent with the public interest? 21 U.S.C. § 823, opens new tab.
Further, what will be the effect on existing state medical marijuana laws? As of now, these questions have no clear answers.
Ultimately, much remains to be determined, and there are presently more questions than answers about the implications of marijuana rescheduling. But many current industry players agree that rescheduling to a schedule III substance will in fact be a positive action related to the immense ramifications related to 280E, providing the same tax relief non-marijuana businesses enjoy today.
Additionally, the state-by-state legalization of medical marijuana seems to have been a catalyst for the widespread state legalization of recreational marijuana. A summary of the history since the 1970 enactment of the CSA, which criminalized any use of marijuana nationwide, is instructive for consideration of the potential ramifications of the federal government’s current, apparent openness to federal regulation of the use and sale of medical marijuana.
From federal prohibition to state legalization of medical and recreational marijuana
Beginning in 1973, when Oregon , opens new tabbecame the first state to decriminalize possession of small amounts of marijuana, downgrading it to a fine comparable to a traffic offense, states gradually began to push back against the federal marijuana prohibition. These decriminalization efforts grew into the medical marijuana movement, which scored its first major legal victory in 1996, when California voters approved Proposition 215, the Compassionate Use Act of 1996, opens new tab, which exempted certain patients and their primary caregivers from criminal liability under California state law for the possession and cultivation of marijuana for medicinal use.
Enactment of Proposition 215 marked a significant shift in the national conversation around marijuana, as it acknowledged and codified the plant’s potential therapeutic benefits.
Medical marijuana in California also spurred the U.S. Supreme Court’s landmark Gonzales v. Raich decision, which held that congressional authority under the Commerce Clause includes the power to prohibit local cultivation and use of marijuana notwithstanding compliance with state law, if such regulation is necessary and proper to serve an interstate regulatory goal.
Then, in 2012, Colorado and Washington became the first states to legalize adult-use recreational marijuana. This landmark moment was followed by increasing federal ambivalence toward enforcement of marijuana prohibition in states where marijuana is a state-regulated commodity.
Indeed, in August 2013, then-Deputy Attorney General James Cole issued the so-called Cole memo, opens new tab stating, among other things, that it was not a priority for the DOJ to prosecute persons for acting in compliance with state-regulated marijuana regimes. And for each fiscal year since 2015, Congress has attached a rider to its annual appropriations bill (the Rohrabacher-Farr Amendment) that prohibits funds appropriated to the DOJ from being used to prevent states “from implementing their own laws that authorize the use, distribution, possession, or cultivation of medical marijuana.”
Although then-Attorney General William Sessions nominally rescinded the Cole memo in January 2018 (Sessions memo, opens new tab), the DOJ has continued the policy expressed under the Cole memo of declining to prioritize prosecutions of state-regulated marijuana enterprises, opens new tab.
Current landscape and future prospects
If all that rescheduling accomplishes for recreational marijuana is the elimination of the Section 280E bar on claiming a federal deduction for business expenses, further regulatory actions will be needed to truly remove the industry’s major regulatory impediments — namely the lack of access to the banking system and to the federal bankruptcy system, as merely two examples in a very complicated industry.
This means that pending congressional bills like the Cannabis Administration and Opportunity Act, opens new tab, the Marijuana Opportunity Reinvestment and Expungement Act, opens new tab, and the States Reform Act, opens new tab — all of which would de-schedule marijuana from the CSA, making marijuana legal — ultimately could prove more vital to the industry than reclassification of marijuana to a Schedule III drug under the CSA.
This is due to the fact it is unknown if the DEA would still see manufacturing and sales of marijuana for recreational use as illegal and a violation of the CSA due to lack of registrations required for Schedule III substances.
H/T: www.reuters.com
