Monday, June 3, 2024

Proposed Cannabis Rescheduling May Allow Business Expenses

According to Law360On May 21, the U.S. Department of Justice's proposed rules to move marijuana to Schedule III of the Controlled Substances Act were published in the Federal Register. Public comments will be solicited for 60 days from that date, and hearings will be scheduled before final rules are adopted.

Despite widespread media reports heralding the "game-changing" nature of this development, the DOJ's proposed rulemaking leaves the cannabis industry with more questions than answers.

The DOJ explicitly warns that (1) "if marijuana is transferred into Schedule III, the manufacture, distribution, dispensing, and possession of marijuana would remain subject to the applicable criminal prohibitions of the CSA [Controlled Substances Act]," and (2) marijuana would remain subject to the limitations within the Food, Drug, and Cosmetic Act.

It instead sidesteps the challenging questions and punts by "seeking comment on the practical consequences of rescheduling marijuana." By way of explanation, the DOJ offers:

DOJ recognizes this action may have unique economic impacts. As stated above, marijuana is subject to a number of State laws that have allowed a multibillion dollar industry to develop. DOJ acknowledges that there may be large impacts related to Federal taxes and research and development investment for the pharmaceutical industry, among other things. DOJ is specifically soliciting comments on the economic impact of this proposed rule. DOJ will revise this section at the final rules stage if warranted after consideration of any comments received.

One Immediate Positive Effect Of Moving Marijuana To Schedule III Is That Cannabis Companies Will Avoid The Draconian Impact Of Section 280E of The Internal Revenue Code, Which Prevents Most Business Deductions and Results
In Exceedingly High Effective Tax Rates That Have
Impeded Profitability For Most Cannabis Companies.

The industry could also expect better access to commercial banking, new financial services products offered to cannabis companies and new listings on public exchanges. 

In addition, moving marijuana to Schedule III will mean that an insurance company's risk of violation of the Bank Secrecy Act and anti-money laundering statutes will effectively end.

The DOJ will accept public comments for 60 days commencing May 21, and we can expect robust commentary from cannabis businesses, state regulators, trade organizations and ancillary industries.

We might see regulatory dysfunction if the DOJ's final rules on marijuana as a Schedule III drug provide inadequate direction to the FDA and other federal agencies on the enforcement of existing federal laws. It seems apparent that clarity through congressional action is needed now more than ever.

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