The cannabis industry faces ongoing challenges due to strict federal regulations. Currently, marijuana is classified as a Schedule I drug, a category it shares with heroin and LSD. Marijuana reclassification hampers research and places tight restrictions on businesses dealing with cannabis products, including CBD. However, changes may be on the horizon.
On May 16, 2024, the US Department of Justice (DOJ) proposed a law to move marijuana from Schedule I of the Controlled Substances Act (CSA) to Schedule III. Schedule III category includes substances like ketamine and certain steroids. It is used for drugs with recognized medical uses and a lower potential for abuse than Schedule I or II drugs.
If approved, this change could significantly benefit the CBD industry by reducing financial and legal barriers and allowing more extensive cannabis research. Businesses and financial institutions should consider how this reclassification might affect their operations and compliance requirements in the cannabis market. Read on for more details.
What Would Marijuana Reclassification Mean?
The DOJ has initiated formal proceedings to downgrade the classification of marijuana to a less restrictive category. This adjustment would recognize marijuana’s medical applications but would keep it illegal for recreational use. Currently, marijuana is grouped with drugs like ecstasy, heroin, and LSD in Schedule I, which are considered to have no accepted medical use and a high potential for abuse.
Marijuana, especially strains with delta-9 THC, exists in a complex legal situation. It remains illegal federally, but 39 states have legalized it for medical or recreational use. Despite cannabis being legally sold in the majority of states, these operations often do not align with federal regulations outlined by the Controlled Substances Act (CSA) or the standards set by the Food and Drug Administration (FDA).
Recreational dispensaries and CBD merchants face difficulties in accessing services from federally regulated institutions like banks despite being required to pay federal taxes. Reclassifying marijuana as a Schedule III drug, which includes substances like ketamine and anabolic steroids, would not only affirm its medicinal value but also reduce these regulatory restrictions.
Financial institutions must understand that even with the reclassification of cannabis from Schedule I to Schedule III, the federal legal status of cannabis operations remains unchanged. It simply reclassifies marijuana to reflect its accepted medical use and its lower potential for abuse.
How Marijuana Reclassification Could Expand Research Opportunities and Impact CBD Merchants?
The reclassification of marijuana from Schedule I to Schedule III within the CSA could substantially improve research opportunities. As it stands, marijuana is classified as a Schedule I drug, grouped with substances presumed to have a high abuse potential and no recognized medical benefits. This strict classification complicates the process of obtaining research approvals and funding, thus stalling extensive studies on cannabis and limiting knowledge of its medical benefits and effects.
Should marijuana be reclassified to Schedule III, it would be recognized as having legitimate medical uses and a lower potential for abuse than Schedule I drugs. Such a reclassification would likely ease bureaucratic obstacles related to research, including the need for a specific DEA license to handle Schedule I substances.
This could allow for more thorough and regulated studies, facilitating access to a broader range of cannabis products, possibly even those from state-licensed dispensaries. This may result in studies that better represent the effects of products that consumers are using. Furthermore, this change could shape legislative and public health policies through a more comprehensive set of data on cannabis’s effects and medical utility.
For CBD merchants, this research could be a double-edged sword. On the positive side, new studies could confirm many of CBD’s claimed benefits, boosting consumer confidence and potentially leading to the development of new, FDA-approved treatments. Conversely, increased regulatory attention could introduce more stringent standards on product quality and marketing claims. As a result, merchants must keep abreast of the latest research and be ready to adapt their product lines and marketing strategies to meet new standards.
Marijuana’s Reclassification Could Ease Tax Burdens for CBD Merchants
The potential shift of marijuana from a Schedule I to a Schedule III drug under US federal law might substantially alter how taxes are applied to cannabis businesses.
Currently, CBD merchants, due to their Schedule I classification, fall under Section 280E of the Internal Revenue Code. This places a heavy financial burden on CBD merchants, as their ability to offset operating costs is severely restricted. This regulation bars them from deducting ordinary business expenditures—like payroll, rent, and advertising—from their taxable income, leading to effective tax rates exceeding 70%.
A change to Schedule III would allow these businesses to claim these deductions, aligning their tax obligations more closely with those of other legal industries. This reduction in tax burden would likely support the financial viability of CBD merchants. It could lead to an increase in savings and reinvestment into growth areas like product development, marketing, and expansion.
This change in tax policy could also enable CBD businesses to engage in more aggressive advertising campaigns, increasing their market presence. The ability to deduct these costs and reduce financial pressure could spur growth within the CBD industry. However, despite these changes, some federal criminal penalties would persist, and selling marijuana would still be federally illegal.
How Will Marijuana Reclassification Affect Banking?
Changing the classification of marijuana will not immediately solve the banking issues that cannabis businesses encounter. Most banks currently refrain from providing CBD merchants with essential services like merchant services and loans or credit to these businesses, largely due to the federal ban and the risk of breaking federal laws. As a result, many CBD companies have struggled to find reliable banking partners, leading to operational inefficiencies, including managing large amounts of cash and facing higher fees from third-party payment processors.
The suggested change in classification does not directly address these banking issues, so banks are likely to remain hesitant.
Cannabis advocates are promoting the SAFER Banking Act to mitigate these problems. This legislation, which has been passed several times by the House of Representatives but stalled in the Senate, primarily offers “safe harbor” protections, which safeguard financial institutions from various criminal, civil, and administrative penalties that could arise from providing services to legally recognized marijuana businesses under state laws, despite marijuana’s illegal status federally.
Although marijuana remains illegal under federal law, the SAFER Banking Act seeks to ease the conflict between federal and state regulations concerning banking, lending, and insuring state-legal cannabis enterprises. There have been no recorded enforcement actions against banks or credit unions for servicing such businesses. However, the absence of enforcement does not guarantee immunity against possible future actions, significantly deterring financial institutions from engaging with the cannabis sector in recent years.
The act would also maintain specific standards and limitations, particularly in due diligence and continuous monitoring for suspicious activities—practices that banks and financial institutions already implement in other strictly regulated sectors.
Regulatory and Other Legal Implications of Rescheduling Marijuana to Schedule III on CBD Merchants
Changing marijuana to Schedule III has regulatory consequences, especially involving the FDA. Cannabis products would need FDA approval, potentially limiting the sale of medical marijuana through dispensaries since the definition of “medical use” in the United States is quite specific. For instance, in Michigan, where recreational marijuana use is permitted, employers retain the right to ban its use in the workplace and enforce drug policies that can include termination for violations. The shift in classification to Schedule III will not change state employment laws. However, federal modifications could lead some employers to reevaluate their policies gradually.
This change would require businesses to update their compliance protocols related to cannabis, and licensing and distribution regulations would likely change.
The rescheduling does not address issues such as access to federal bankruptcy protection for cannabis businesses. Cannabis companies cannot receive federal bankruptcy protection because Section 1129 of the US Bankruptcy Code stipulates that bankruptcy plans must not contravene any laws. Since these businesses still violate the Controlled Substances Act, they are barred from bankruptcy protections, crucial for restructuring or liquidating assets. These companies also face challenges in obtaining federal trademarks, as the continued federal marijuana prohibition prevents registration.
Furthermore, the reclassification does not improve the situation for obtaining federal trademark registrations for state-based cannabis businesses. Currently, these registrations are unavailable to them due to marijuana’s illegal status at the federal level. Despite the shift from Schedule I to Schedule III, cannabis’s federal legal status remains unchanged, leaving state-based cannabis businesses without federal trademark protections. However, as cannabis becomes more widely recognized and regulatory efforts advance toward more comprehensive legalization at local, state, and federal levels, the likelihood of trademark infringement lawsuits increases.
Conclusion
The potential reclassification of marijuana from Schedule I to Schedule III holds significant implications for CBD merchants and the broader cannabis industry. By acknowledging marijuana’s medical uses, this change could alleviate some of the financial and regulatory burdens currently faced by businesses. It may enable more accessible access to research opportunities and tax deductions, fostering growth and innovation within the sector. However, the transition will not address all existing challenges, such as banking access and federal trademark protections, which remain critical concerns for cannabis companies.
While the proposed changes present a path toward better alignment with established industries, stakeholders must remain vigilant about evolving compliance requirements and potential regulatory scrutiny. As speculation around marijuana reclassification continues to shift, CBD merchants must stay informed and adaptable to ensure their operations are both legally compliant and competitive in an increasingly complex market.
