The Controlled Substances Act of 1970 and Cannabis
In 1970, the United States Congress passed the Controlled Substances Act, placing all substances subject to federal regulation in one of five schedules depending on their safety, propensity for abuse, and medical value. Cannabis was categorized as a Schedule I substance, indicating it has 1) a high potential for abuse, 2) no currently accepted medical use, and 3) a lack of accepted safety for use under medical treatment. By comparison, Schedule II substances, including fentanyl and oxycodone, are believed to have a high potential for abuse but have accepted medical use in the United States.
Rescheduling and de-scheduling
Rescheduling cannabis to a less stringent schedule would allow businesses to access traditional banking and financial services, enable doctors to prescribe cannabis, and increase opportunities for research. Rescheduling cannabis would be an incremental step in the right direction, but on its own would not remove federal criminal penalties or eliminate existing obstacles to conducting clinical research. The best path forward is de-scheduling cannabis altogether- as its inclusion in the Controlled Substances Act and classification as a Schedule I substance is outdated and erroneous.
Cannabis should be removed from the Controlled Substances Act and placed under its own separate federal regulatory framework. Regulating cannabis requires unique considerations because of its application as a medicine and its widespread use beyond just medical treatment. While doctors should be able to prescribe cannabis to their patients, cannabis should also be well-regulated and widely available for adults over 21. De-scheduling cannabis and creating separate federal guidelines is necessary to accommodate the complexity of the cannabis industry, honor the legitimacy of statewide cannabis markets, and protect consumers and businesses from federal criminalization.
Barriers to research
Because of its Schedule I designation, researching cannabis involves a lengthy and complex review process that requires approval from a multitude of federal, state, and local agencies and institutions. Currently, the University of Mississippi houses the only operation licensed by the federal government to grow and distribute cannabis for research purposes.
On top of the significant regulatory hurdles to conduct research, the cannabis being studied does not reflect what is widely consumed in medical and adult-use markets. The cannabis, often stored in a freezer for years before being researched, is significantly less potent. There is also a lack of variety regarding strains and available product types for varying consumption methods (concentrates, oils, topicals, etc.) that are popular among consumers in legal states. The complicated bureaucratic process required to study inferior cannabis prevents meaningful research from taking place and has resulted in a gap in knowledge of the health effects of cannabis.
Note: In May 2021, the DEA announced they would soon issue additional registrations to manufacturers who would be authorized to cultivate cannabis for research purposes. This move will allow for significantly improved research into cannabis and will ensure the cannabis being studied reflects what already is being consumed in medical and adult-use markets.
Where the federal government stands on cannabis
In recent years the Federal Government has communicated mixed signals regarding their official position on cannabis and cannabis enforcement, most notably when former Attorney General Jeff Sessions rescinded the Obama-era Cole Memo. The current U.S. Attorney General, Merrick Garland, explained in his confirmation hearing that low-level cannabis crimes would not be a priority for the Justice Department, and went on to acknowledge the harms of cannabis criminalization.
- August, 2013: Deputy Attorney General James M. Cole released an official memorandum outlining eight priority areas that would guide the Department of Justice’s enforcement of the Controlled Substances Act. The memo expressed that as long as states that have adopted medical and adult-use cannabis laws “implement strong and effective regulatory and enforcement systems,” the Department of Justice will not interfere with state laws and focus its enforcement efforts on these eight priority areas.
- January, 2018: Former Attorney General Jeff Sessions rescinded the Cole Memo, claiming “Congress’s determination that marijuana is a dangerous drug and that marijuana activity is a serious crime.” Despite creating a sense of uncertainty and fear within the legal cannabis industry, states continued to operate their medical and adult-use programs with no federal interference.
- April, 2019: Former Attorney General William Barr announced his intent toward a more lenient approach to cannabis enforcement and confirmed he will not “go after” states with medical and adult-use markets.
May, 2021: Attorney General Merrick Garland explained that the Justice Department would not prioritize low-level cannabis crimes and stated, “the marijuana example is a perfect example. Here is a nonviolent crime that does not require us to incarcerate people and we are incarcerating at significantly different rate(s) in different communities. That is wrong and it’s the kind of problem that will then follow a person for the rest of their lives. It will make it impossible… to get a job and will lead to a downward economic spiral.”
One of the greatest challenges facing the country’s legal cannabis industry is a lack of access to banking and financial services. As a result of the Schedule I classification of cannabis, financial institutions face severe penalties for providing bank accounts and other services to businesses that are involved with cannabis at any point in the supply chain. Potential penalties include the forfeiture of assets associated with cannabis industry clients, prison sentences, financial penalties, and the loss of an institution’s Federal Deposit Insurance Corporation (FDIC) coverage.
There are several federal policies that prevent financial institutions from servicing the regulated cannabis industry. Chief among these are the Controlled Substances Act (CSA), the Bank Secrecy Act (BSA), the USA Patriot Act, and the Racketeer Influenced and Corrupt Organizations (RICO) Act. Until the federal government removes cannabis as a Schedule I substance and/or adopts incremental reforms that provide clarity to financial institutions and parity in regulatory compliance to other business types banked by these institutions, the cannabis industry will continue to struggle outside of the mainstream, established financial system.
Industry reports indicate that a vast majority of cannabis businesses lack bank accounts. This means that the vast majority of business owners are burdened with the task of having to pay their employees, contractors/vendors, utility bills, and taxes all in cash. Not only is this a major public safety issue that puts businesses, employees, and consumers at risk for robbery, this also presents a major barrier to entry, particularly for small and minority-owned businesses. Until cannabis businesses have standard access to the U.S. financial sector, participation in this industry will largely continue to be reserved for wealthy individuals and those with access to venture capitalists and angel investors. Opening up the cannabis industry to standard business loans via credit unions and other FDIC-insured banks will broaden both equity and market participation in the multi-billion dollar market.
Another major challenge facing the U.S. cannabis industry is the Internal Revenue Code’s treatment of regulated cannabis businesses’ expenses. 26 U.S. Code § 280E states:
No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.
Ultimately, Section 280E restricts legal cannabis businesses from deducting standard business expenses—like employee wages, rental costs, and marketing expenses—from their taxable income. This restriction dramatically increases the industry’s federal tax burden and places the regulated market at a major competitive disadvantage relative to the illicit market.
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