The Controlled Substances Act
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, meaning that it has 1) a high potential for abuse 2) no currently accepted medical use, and 3) a lack of accepted safety for use of the substance under medical treatment.1 By comparison, Schedule II substances, which include fentanyl and oxycodone, are believed to have a high potential for abuse but have accepted medical use in the United States.
Schedule I substances are subject to strict federal restrictions, including significant regulatory barriers to conducting research, and they are the only substances that cannot be prescribed by a doctor. Because Schedule I substances cannot be prescribed, doctors can only recommend cannabis to their patients. While recommendations allow doctors to work around the Schedule I limitations, they do not come with the instructions or dosage requirements that are standard of prescriptions. Allowing doctors to prescribe cannabis will ensure that medical patients receive optimized treatment that is both safe and efficacious.
Rescheduling and de-scheduling
Rescheduling cannabis to a less stringent schedule would allow business owners to make standard business deductions, enable doctors to prescribe the plant, 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cannabis altogether- as its inclusion in the Controlled Substances Act and classification as a Schedule I substance is outdated and erroneous.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. The supply of cannabis available to study is limited, with the University of Mississippi housing the only operation licensed by the federal government to grow and distribute cannabis for research purposes.2
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 studied, 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.) which are common across legalized states.3
Note: In March of 2020, the DEA announced its plan to expand federal cannabis research, including increasing the number of registered producers and diversifying the types of cannabis to be studied.4 The proposed plan includes a commitment to review the 37 pending applications that were submitted in 2016 when the DEA initially announced they would authorize more growers.5
Where the federal government stands on cannabis
- 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.”7 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: Attorney General William Barr announces his intent toward a more lenient approach to cannabis enforcement and confirms he will not “go after” states with medical and adult-use markets.
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.8
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.9 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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