In a historic move the Drug Enforcement Agency announced it plans to reschedule cannabis. Monumental shift in the marijuana industry.
After three years of waiting for President Biden to fulfill his promise of doing something about legal cannabis, the Drug Enforcement Agency (DEA) announced its plan to reschedule cannabis. This follows the recommendations from Health and Human Services (HHS) and the Food and Drug Agency (FDA). They are sending their recommendation to the White House Office of Management and Budget for review of the impact on the budget. The shifts acknowledged the medical benefits of cannabis and can pave the way for PTSD treatment for veterans, something the President and Senator Patty Murray (D-WA).
“Moving to Schedule III is the single biggest thing that can happen to the US cannabis industry. It removes the 280E tax burden, increases medical research, and opens the investor base. Today is truly a tipping point for this burgeoning industry.” declared Jesse Redmond, Managing Director at Water Tower Research.
“This historic move from the Biden Administration to reclassify cannabis from Schedule I to Schedule III reflects changes in the scientific and medical understanding of cannabis. It echoes moves in other countries around the world. Domestically, it lays the groundwork for federal tax benefits for the cannabis industry, as cannabis businesses will be treated like other businesses with regard to deductions and credits. It will also lower the costs and hurdles of conducting research on the plant and its products. Despite skeptics arguing that this spells the beginning of the end of the cannabis industry as we know, those doomsday scenarios fail to answer a basic question: why would the Biden Administration want to crack down on a substance that it classifies as “less dangerous” when it refused to crack down on the substance when it was a Schedule I substance? Little, if anything, will change at the state regulatory level, but that should not take away from the historic nature of this decision. Cannabis has been a Schedule I substance for 54 years, and despite multiple opportunities to reclassify it in decades’ past, today is the first time the US Government has been willing to say otherwise” shares John Hudak, Director, Maine Office of Cannabis.
Hudak is widely respected in the industry and has been a thought leader for the growing industry. The move reclassifies cannabis from Schedule 1 of dangerous drug with zero medical benefits to to Schedule III such as ketamine, Tylenol with codeine, and anabolic steroids. The timing is still unsettled, but there is hope it will have an impact in 2024. The industry as been struggling under schedule III despite a huge growth of consumers. This will also open the door more for mainstream companies to become involved in the market.
“While this is great news for the cannabis industry, it’s too early to break out the Champagne,” said Lonnie Rosenwald, Partner at Zuber Lawler, LLP. “We don’t know yet when rescheduling will occur, or, perhaps more important, when the tax changes will take effect. For companies and entrepreneurs considering entering the industry, rescheduling alone should provide an incentive to launch their businesses. But existing cannabis businesses will have to wait to see whether they’ll be able to deduct business expenses on their 2024 or 2025 returns. We expect answers to these questions in the coming weeks.” says Lonnie Rosenwald, an attorney for Zuber Lawler, a national law firm which covers the cannabis industry.
This is a historic shift for the federal government and puts in more in line with the American Medical Association, most medical professionals, Canada and the general public.
The Biden keeps sort of promising/pushing rescheduling – will be in time to help the industry this year?
The public has turned a corner about marijuana use. Except for a few older members in Congress (Mitch McConnell being one), the majority of the US and Canadians believe cannabis should be legal. The American Medical Association, founded in 1847 and long the platinum standard of medical decision in the US, has declared marijuana has medical benefits. But the older members of the current administration, and most likely Biden himself, are still reluctant to make a move to help patients, people and the industry. The concern is will rescheduling come in time to help the marijuana industry in 2024.
In October of 2022, in order to fulfill a campaign promised to younger voters, the government decided to look at scheduling. Both Health and Human Services (HHS) and the Food and Drug Administration (FDA) did the research and recommended to the Drug Enforcement Agency (DEA) to reschedule it from a dangerous drug to one with health benefits. While the DEA has never not followed their decision, the DEA has been quiet about doing so regarding cannabis. And time has marched on, rumor was it would be declared by the end of 2023, then 4/20, now maybe the end of summer.
And while customers continue to spend on legal weed, the underpinning of of the industry is crumbling with zero tax benefits, onerous decisions and a business stigma. The Vice President mentioned it should move forward and the President tried to take credit during his State of the Union address, but nothing has happened.
A key benefit is rescheduling would allow the industry typical business tax write offs. Currently, businesses which touch the plant can take zero tax deductions, but have the gift of extra business expenses. Rescheduling with give an industry with 50+% mom and pop businesses a chance. A decision will have to be made by the beginning of October to have any sway with young voters for the election, but will be it be too late to help this year? And how many small businesses will be hurt or be forced to close.
In political circles, it is clear while this isn’t a policy wanted by Biden and his team, it is a necessary one to help attracting increasingly distant younger voters. The DC rumor mill says a decision will be made in the fall if a decision is “need” or if they have regained enough ground with young voters.
Lonnie Rosenwald from Zuber Lawler shared “Whether the timing of rescheduling makes a difference depends on the effective date. For example, if the effective date is January 1, 2025, companies could deduct their ordinary and necessary business expenses on their 2025 federal income tax returns.”
“Rescheduling could be retroactive, in which case companies would need to file amended returns claiming deductions for past years quickly enough to avoid the running of the statute of limitations. Finally, if rescheduling is effective in 2024, it should be retroactive to January 1, 2024, regardless of the specific effective date of rescheduling. Companies that overpaid their 2024 taxes in making quarterly payments prior to the effective date of rescheduling would be able to claim deductions for ordinary business expenses for the entire year, and to receive refunds in 2025 for their overpayments.”
The general feel in the industry is the rescheduling decision needs six months of runway to go into effect before the elections. However, there is the potential to skip the interim process and go right to a final ruling and, in theory, this could happen as late as September.
The GOP’s argument against marijuana took a body blow from Germany
Running against the grain of public sentiment, some members of the GOP are fighting against cannabis rescheduling and trying to be clever. The Drug Enforcement Agency (DEA) is still having internal discussions about whether to reschedule cannabis from a schedule I to schedule III-controlled substance with some in the GOP wishing to stop the process. But along comes Germany and they are deflating their efforts.
Germany has the biggest economy in the EU and are a leader in the United Nations and NATO. A practical country, they just legalized marijuana. Officials shared legalization would undermine criminal trade in the drug, guard against harmful impurities, and free police to pursue more serious crimes alongside providing medical benefits.
Republican Senators Jim Risch (R-), Mitt Romney (R-UT) and Pete Ricketts (R-NB) are unhappy with the the administration’s plan to reschedule marijuana. To stop or slow the process, these senators question if it violate US treaty obligations. Data shows 89% of citizens believe it should be legal in some form, so they are definitely swimming against the flow of public opinion. Additionally, science, data and the healthcare community have proven it has clear medical benefits.
The United Nations’s (UN) drug control body reaffirmed legalizing marijuana for non-medical or non-scientific purposes a violation of international treaties. But enforcement is non-existent. While Uruguay was technical the first, Canada was the first to fully implement it and the UN has done nothing. Since then Georgia, Luxembourg, Malta, Mexico, South Africa and Thailand have made the move without any issues.
The Senators move has some support in the house, but Senator Chuck Schumer (D-NY) has made it clear he wants progress on cannabis legalization. Germany’s move severely undercuts the GOPs efforts.
Andrew Cooper, partner at Falcon Rappaport & Berkman LLP, one of the top cannabis law firms believes “Consequently, if anything, the fact that Germany legalized adult-use cannabis despite all the hurdles (including not only the Single Convention, but the Schengen Convention of 1985, the EU Framework Decision 2004/757/JHA of 2004, and the Narcotic Drug Act (BtMG), when the U.S. only really needs to address (and likely ignore) the Single Convention, may provide some impetus to the DEA to follow suit”.
Tom Zuber, Managing Partner of Zuber Lawler whose west coast firm has a robust cannabis division states “It’s exciting to see Germany making history by legalizing cannabis at the recreational level as the largest economy in the European Union. I hope that Germany’s leadership on this front will inspire other countries throughout the world to do the same, including the United States.
The Biden administration has been slow in fullfilling the last campaign promise of helping the cannabis industry….is the DEA waiting
In 2012 Colorado and Washington legalized recreational cannabis. Science, public opinion, how we consume, and support from groups as varied as HHS to Fox News watchers have already moved to supporting federal legalization. In the last election, the Biden administration committed to helping the industry. A key factor is his support of veterans. Veterans, along with federal and medical research, has shown cannabis is a solid help to PTSD. Also, as the country struggles with an opioid crisis, expert believe medical marijuana can be part of the solution. But the administration and dragged it’s feet and now it seems another agency is lingering on change. What is taking the DEA so long to reschedule marijuana. Experts weight in.
Terran Cooper, a leading cannabis expert at Falcon Rappaport & Berkman Law shares his thoughts. “While we have comparable examples of controlled substance rescheduling, the ramifications of cannabis rescheduling are beyond anything we’ve ever seen. There are a number of policy issues to be navigated by the DEA, including the existence international drug treaties, which may have delayed the DEA’s review (though Congresswoman Kamlager-Dove and others have argued that applicable treaties shouldn’t prevent rescheduling). The widespread consequences of potential cannabis rescheduling may have also muddied the water, as numerous parties have sought to influence the DEA’s review in various ways. “
“While it is possible that the DEA is attempting to navigate denying the Department of Health and Human Services’ (HHS) recommendation for cannabis to rescheduled, many are skeptical of this likelihood. The HHS recommendation is binding on the DEA (21 USC 811(b)) as to scientific and medical matters, meaning in order to deny cannabis rescheduling the DEA would have to rely on other relevant data to outweigh HHS’ recommendation. This is a tall order, even for the historically cannabis-averse DEA.”
Jesse Redmond, Managing Director at Water Tower Research and a keen analyst for the industry has this take. ““It’s critical to realize the rescheduling process is occurring during an election year and it is possible democrats are coordinating efforts for maximum political impact. Many are pointing to the week of 4/20, which falls on a Saturday this year, for the DEA’s response to the HHS’ recommendation. This would give time for the public comment period and final rule before the elections in November.”
“There is no easy explanation of the delay. Some factors are the fact that the DEA and the FDA have different interests in cannabis regulation, the lack of clarity regarding how the DEA would regulate the rescheduled drug, how rescheduling and varied state cannabis laws would intersect, the loss of federal tax dollars when cannabis business expenses become deductible, and political considerations in a presidential election year.” said Lonnie Rosenwald from Zuber Lawler.
The industry is in need of support as consumer demand increase, but the cost of doing business is becoming prohibitive. President Biden and Vice President Harris have been traditionally anti-marijuana, so you wonder if their lack of urgency or support is weighing in on the DEA’s slow walk of a decision.
Consumers continue to drive an ever expanding marijuana industry and new opportunities appear at every turn. While the market is involving, there is still opportunities to make money and start a successful business. Public opinion is pro-legalization and it is just a matter of time before the government reschedules driving more growth. If you are considering it, here is the best advice for starting a cannabis business.
Lonnie Rosenwald is a partner in Zuber Lawler’s cannabis practice group and shares some valuable insight into starting a business. In the rapidly growing cannabis industry, small business owners face a myriad of challenges, ranging from the typical complexities of business structures and investment to navigating the particular nuances of cannabis contracts, banking, and real estate. Establishing a successful cannabis business requires careful consideration of these areas of law to ensure compliance, mitigate risks, and foster growth. Here’s a brief guide for small cannabis business owners on five key areas for your focus: legal entities, investments, contracts, banking, and real estate.
Photo by Luis Llerena via Unsplash
Legal Entities
Choosing the right legal entity is crucial for cannabis businesses. Each state’s cannabis program differs from all other states, and the legal entity you need may be required by your state’s program. Additionally, each structure has advantages and disadvantages. Sole proprietorships, partnerships, limited liability companies (LLCs), and corporations all offer distinct benefits. For example, LLCs are popular structures for new cannabis businesses due to the liability protection they provide their owners (called “members”) while maintaining flexibility in management and favorable tax treatment. Some sophisticated investors prefer corporations. A sole proprietorship is not an entity, but it is simpler than the other business structures in that you, and only you, control the business, but you do not have liability protection. Partnerships are just that: a number of partners work or invest together in the business. A joint venture is a type of partnership whereby the partners are committed to a common goal; general partners may not be protected from liability; limited partners typically are. Corporations have limited liability for the shareholders and employees. A decision on your business entity structure should be made with advice from your attorneys and tax professionals familiar with cannabis other applicable laws and regulations. Your business may also be required to comply with the U.S. Corporate Transparency Act with respect to reporting to the Financial Crimes Enforcement Network (FinCEN) certain information regarding the beneficial ownership of your entity (effective as of January 1, 2024). Whether you are required to report should be a topic of conversation with your attorney.
Securing funding by private capital raises, financial institution lending and/or friends and family commitments is often a crucial step in the growth journey of a small cannabis business because of the significant costs of real estate, equipment, and employees. Investors, whether individuals or venture capital firms, are attracted to businesses with a solid legal foundation, clear growth strategies, and compliance with laws and industry regulations. Business owners should be prepared to present potential investors and lenders comprehensive business plans, showcasing not only the financial viability of the venture, but also a deep understanding of the legal and regulatory landscape. The U.S. and state securities laws typically apply to offerings of securities in cannabis entities notwithstanding that your state may have a cannabis program and that cannabis is illegal at the federal level. These laws are particularly complex, so before issuing shares or member or partner interests in your cannabis business, please seek legal advice from securities-competent counsel. Businesses should have an attorney review all investor materials to avoid problems down the road.
Photo by Cappi Thompson/Getty Images
Contracts:
Clear and comprehensive contracts are the foundation of any successful business. In the cannabis industry, contracts play a vital role in clarifying and documenting relationships with suppliers, distributors, employees, investors, lenders, and partners. Ensuring contracts comply with state cannabis regulations (as well as other applicable laws and regulations) is critical to avoiding the potential that the contract is unenforceable or worse, illegal. We frequently see clients desiring to buy or sell a cannabis business, obtain loans or investments, and those entering into complex contracts regarding real estate or equipment leases, cultivation, manufacturing, transport, marketing services agreements, and partnership agreements. Many of these contracts are lengthy, and of course, use legalese that you may not understand. Some include complex rights and responsibilities, as well as how the parties will calculate various fees and expenses relating to the contract. Seeking legal advice during the contract drafting and negotiation stages is a prudent step.
Accessing banking services remains a significant challenge for many cannabis businesses as the sale and consumption of cannabis remains illegal under federal law, and most financial institutions (banks) are regulated by the U.S. and are required to follow certain regulations applicable to their operations. While some banks are cannabis-friendly, business owners must establish relationships with banks that have experience in the cannabis industry and that understand and comply with state-specific cannabis regulations. It is imperative to maintain meticulous financial records. Exploring alternative financial service providers, such as credit unions or specialized cannabis banking services, can help businesses navigate the financial landscape. Financial institutions such as banks will want to see what collateral your business has, such as ownership of real estate (a lease typically won’t work here), to secure your promises to repay a loan. Most banks will not lend to plant-touching cannabis businesses (even those with real estate assets), nor will they even process your deposits, debits or credits. Ask cannabis leaders in your state for cannabis bank referrals; caution, most banks doing business with cannabis businesses don’t publicize that fact!
Cannabis businesses must carefully consider real estate issues, including zoning, building, health and safety and other applicable laws and regulations, lease and lending agreements, and compliance with state, county, and municipal property laws, as well as owners associations’ regulations. Zoning regulations can significantly impact the location of cannabis operations, making it crucial to choose properties where cannabis activities are permitted under local ordinances. Often, the cannabis business’ compliance with local zoning codes requires a lengthy and time-consuming review process with a substantial amount of documents, plans, specifications and other costly information, as well as public hearings and numerous conferences with planning staff. Leases should address cannabis-related activities explicitly by including cannabis use (for cultivation, extraction, retail, etc.) in the permitted use provision, permitting limited access to the facility by landlord (and its lenders), allowing early termination in the event of a change in cannabis law prohibiting a cannabis use, and the like, also ensuring alignment with both state and local regulations. Engaging with real estate professionals and attorneys familiar with the intricacies of the cannabis industry can streamline the process of finding and using suitable properties.
Small cannabis business owners must be thoughtful and proactive in choosing suitable legal entities, negotiating enforceable contracts, accessing banking and investment and acquiring real estate. Navigating the complex regulatory landscape requires collaboration with legal and financial professionals who specialize in the cannabis industry. By establishing a solid foundation in these five key areas, small cannabis businesses can position themselves for sustainable growth and success in this dynamic and challenging industry.
Lonnie Rosenwald is a partner in Zuber Lawler’s cannabis practice group. Ms. Rosenwald is located in Seattle, WA. These comments are general and not specific to your particular business or business situation; these comments are not intended to be legal advice, nor is Ms. Rosenwald or her firm representing you. We encourage you to seek qualified legal counsel to represent you or your business especially with respect to a cannabis (touching or not) business.
