Federal Policy

In 1970, the United States Congress passed the Controlled Substances Act (CSA), placing all substances subject to federal regulation into one of five schedules depending on their safety, propensity for abuse, and recognized medical value. Cannabis was categorized as a Schedule I substance, a classification reserved for substances believed to have: 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. The Controlled Substances Act is still in effect today, where cannabis remains an illegal Schedule I substance.

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. For many years, the University of Mississippi housed the only operation licensed by the federal government to grow and distribute cannabis for research purposes. Fortunately, this has begun to change as more entities receive approval from the DEA to cultivate cannabis for research.

On top of the significant regulatory hurdles to conducting research, the cannabis being studied does not reflect what is widely available in medical and adult-use markets. The cannabis, often stored in a freezer for years before being researched, is significantly less potent and, in some cases, moldy. 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. The recent addition of more research-focused growers will hopefully increase the quality of research, but comprehensive federal reform is needed to make significant headway in improving and expanding cannabis research.

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their official position on cannabis and cannabis enforcement, most notably when former Attorney General Jeff Sessions rescinded the Obama-era Cole Memo.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.”

Banking

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 risk severe penalties for providing bank accounts and other services to businesses involved with cannabis at any point in the supply chain, as well as ancillary service providers. 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 most 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, meaning many business owners must pay their employees, contractors/vendors, utility bills, and taxes in cash. Not only is this a major public safety issue that puts businesses, employees, and consumers at risk for robbery, but this also presents a significant 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.

Section 280E

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.