Tag Archives: LLP

Why California Cannabis Businesses Remain at Risk After the Schedule III Order

By Richard Ormond
No Comments

On April 22, 2026, Acting Attorney General Todd Blanche signed an order placing state-licensed medical marijuana into Schedule III of the Controlled Substances Act. The cannabis industry declared it a turning point. In certain respects, it is.

But turning points are not endpoints. And for California cannabis retailers who operate in the most complex, most taxed, and most litigated cannabis market in the country, the April 22 order resolves far less than the headlines suggest.

 

The §280E Problem, Revisited

Section 280E was enacted in 1982 in response to a tax court decision that allowed a convicted drug trafficker to deduct ordinary business expenses. Congress’s response was blunt: no deduction or credit shall be allowed for any amount paid or incurred in carrying on a trade or business that consists of trafficking in controlled substances prohibited by federal or state law. Only the cost of goods sold (or “cogs”, which is treated as an adjustment to gross income rather than a deduction) survives.

The practical consequence is financial absurdity. Cannabis businesses are taxed not on net income but on a fictional gross margin that bears little relationship to actual profitability. Effective tax rates routinely exceed 70% of gross revenue and, in loss years, can exceed 100% of cash flow. The tax obligation exists regardless of whether the business is solvent. The statute thus becomes a primary driver of insolvency, causing businesses to appear profitable for tax purposes at the precise moment they are failing.

The Schedule III order addresses this problem — but only partially, and only for one category of operator.

Section 280E applies to businesses trafficking in Schedule I or Schedule II controlled substances. For licensed medical cannabis operators in California, the federal tax picture changed materially on April 22 when medical cannabis was moved to Schedule III. Rent, payroll, insurance, utilities, professional fees, and interest are now deductible. Taxable income will, for the first time, bear a rational relationship to actual profitability.

For adult-use retailers — which represent the majority of California’s licensed retail market — nothing has changed. Recreational cannabis remains on Schedule I under the April 22 order. The broader rescheduling rulemaking that would extend Schedule III treatment to all cannabis is now the subject of a new DEA administrative hearing scheduled to begin June 29, 2026. That process will take time. Its outcome is not guaranteed. Until it concludes, the typical California Type 10 licensee is still being taxed as if it were running a criminal enterprise because, under federal law, it still is.

 

The California Tax Stack: Even Without 280E, the Math Is Brutal

Even for a California cannabis retailer that qualifies for Schedule III treatment and sheds its §280E burden, what remains is formidable.

California imposes a 15% cannabis excise tax at the point of sale, collected by the retailer and remitted to the California Department of Tax and Fee Administration (CDTFA). That excise tax is not optional and is not deferred. It is due whether or not the business is profitable. It sits on top of state and local sales tax, and on top of municipal cannabis business taxes, which in some California jurisdictions approach ten to fifteen percent of gross receipts on their own.

The cumulative tax burden of state excise, local cannabis tax, and sales tax consumes thirty-five to forty cents of every dollar of retail revenue before a single operating expense is paid. Now add the cost of goods, rent at two to three times conventional commercial rates (because landlords price in the regulatory risk), payroll, security, compliance consultants, insurance, and accountants. What remains, in many cases, is insufficient to service debt, fund reserves, or generate a return on invested capital.

I have sat across the table from operators who did everything right, licensed on time, METRC compliant, CDTFA current, local permits in order, who still could not make the economics work. The math is not a function of poor management. It is a function of a cost structure that the regulatory regime has made structurally unworkable for a significant share of the market.

When a California cannabis retailer falls behind on its CDTFA obligations, the consequences are not merely civil. Under Revenue and Taxation Code Section 34015.2, enacted in 2022, officers, managers, and other responsible persons of a cannabis business can be held personally liable for unpaid cannabis excise taxes. The CDTFA does not merely pursue the entity. It pursues the individual. That exposure is one of the most underappreciated risks in California cannabis, and one that rescheduling does not touch at all.

 

The Licensing Regime: A Patchwork Quilt That Does Not Lie Flat

A retail licensee in California must maintain: (1) a valid state license from the Department of Cannabis Control; (2) a local license or permit from its city or county; and (3) often a conditional use permit or variance from the local planning department. These three tracks run on separate timelines, have their own independent and significant costs, answer to different agencies, and typically do not “speak to one another”.

The local licensing bottleneck is the most consequential. Many jurisdictions cap the number of cannabis retail licenses available within their borders. Once those caps are filled, the market is closed, not because an applicant is unqualified, but because the cap has been reached. Getting an existing license transferred in connection with a business sale requires regulatory approval at both the state and local levels, a process that can take months and that introduces material uncertainty into any transaction. Deals collapse not because the buyer and seller cannot agree on economics, but because the regulatory approval timeline makes the financing structure unworkable.

License compliance is existential. A cannabis retailer whose state or local license is suspended or revoked does not merely face a fine. It faces the destruction of its enterprise value overnight. And because adult-use cannabis businesses still cannot access federal bankruptcy protection, the April 22 order did not change that; a distressed California retailer’s options are confined to state-court tools: a receivership under Code of Civil Procedure Section 564, an assignment for the benefit of creditors, or an out-of-court workout.

These are legitimate and sometimes effective mechanisms. The state court receivership inherits all of the regulatory complexity of the underlying cannabis license, including CDTFA priority claims under Revenue and Taxation Code Section 6756, which places the state’s tax claim ahead of most other creditors in the distribution waterfall.

Rescheduling does not simplify the licensing regime. It does not reduce the number of layers, accelerate transfer approvals, or change the CDTFA’s priority position. The regulatory architecture of California cannabis retail is unchanged by the April 22 order.

 

The Illegal Market: The Structural Competitor That Tax Relief Cannot Fix

The illegal cannabis market in California is winning on price, and it has been winning on price for years.

The arithmetic is straightforward. A fully compliant California cannabis retailer pays the state excise tax, local cannabis taxes, sales tax, and a full load of regulatory compliance costs: METRC, Livescan, insurance, security, professional fees, that an unlicensed operator does not pay. The licensed retailer must charge a price that sustains all of that. The unlicensed operator pays none of it: no excise tax, no local tax, no CDTFA reporting, no DCC compliance, no background checks. The price differential between licensed and unlicensed products in many California markets is thirty to fifty percent, and that gap is not the product of better growing or lower overhead. It is the direct product of tax and regulatory avoidance.

Rescheduling and the partial elimination of §280E will reduce the licensed retailer’s federal cost burden. But it will not reduce the state excise tax, the local cannabis tax, or the compliance cost burden that drives the price gap. The unlicensed market’s competitive advantage is not primarily a function of federal law. It is a function of California’s own tax and regulatory structure.

State and local enforcement against unlicensed operators is chronically underfunded and inconsistent. In Los Angeles, thousands of unlicensed cannabis retailers operate openly. A business that is raided often reopens under a different name within weeks. Until enforcement becomes a genuine deterrent rather than an occasional inconvenience, the licensed retailer will continue to compete at a structural disadvantage against operators who have simply declined to follow the rules. No federal rescheduling order fixes that.

 

Banking and Civil Asset Forfeiture: Still Unresolved

For adult-use retailers, the banking environment after the April 22 order remains unchanged. Recreational cannabis remains on Schedule I. Bank Secrecy Act obligations — KYC, AML, SAR filing — continue to apply to any financial institution serving cannabis clients. The FDIC insurance, FedWire access, and charter risks that have kept most mainstream financial institutions out of cannabis banking are not eliminated by Schedule III treatment of medical cannabis alone.

The civil asset forfeiture exposure for adult-use operators is similarly unchanged. Federal law authorizes the forfeiture of property used in the manufacture, distribution, or sale of Schedule I controlled substances, and for adult-use licensees, that authorization remains fully intact. Lenders who hold a UCC-1 security interest recorded under California Commercial Code Section 9610 have established creditor priority within the state court system — but that position offers no tangible protection against a federal forfeiture action targeting the same collateral. The “innocent owner” defense under the Civil Asset Forfeiture Reform Act exists as a potential avenue of relief, but asserting it requires expensive, slow, and uncertain litigation. And, it places the burden of proof on the “innocent owner” to prove a negative. In practice, most lenders in this position lack the appetite for that fight, and most borrowers lack the resources to fund it.

Hopefully, the banking picture will improve as the broader rescheduling process advances and federal banking regulators issue updated guidance. Yet sadly, that guidance has not arrived.

 

What the April 22 Order Actually Accomplishes

Precision matters here because the market has created significant confusion about the scope of the order.  To be clear, recreational cannabis, unlicensed cannabis, and synthetically derived THC products remain on Schedule I.

The April 22 order places two categories of cannabis into Schedule III: FDA-approved cannabis drug products, principally Epidiolex, the first FDA-approved prescription medication derived from the cannabis plant, indicated for the treatment of seizures associated with Lennox-Gastaut syndrome, Dravet syndrome, and tuberous sclerosis complex in patients one year of age and older, and marijuana products subject to a qualifying state-issued medical marijuana license.

What the order accomplishes for qualifying medical operators is meaningful: it eliminates §280E exposure on a going-forward basis, it opens the door to expanded banking relationships, and it reduces civil asset forfeiture risk. For research institutions, it meaningfully eases the regulatory burden on clinical studies.

What it does not do is equally important. It does not open federal bankruptcy courts to cannabis businesses. It does not resolve the FDA’s prohibition on cannabinoids in food and beverages — a live issue for any California retailer selling edibles, beverages, or infused products. It does not reduce California’s excise tax, local cannabis taxes, or compliance cost burden. It does not address the personal liability exposure under Revenue and Taxation Code Section 34015.2. It does not accelerate license transfer approvals. And it does nothing to level the competitive playing field between licensed retailers and the unlicensed market.

 

The Path Forward, Stated Plainly

The §280E reform embedded in rescheduling is the most consequential positive development for cannabis businesses since California legalized adult use in 2016. For the medical cannabis sector, it is transformative. For adult-use operators, it remains a promise to be kept, pending the June 29 hearing and the subsequent rulemaking process.

But rescheduling, even in its most complete form, addresses only the federal dimension of a problem that is substantially a California problem. The state tax stack, the licensing fragmentation, the enforcement gap that sustains the illegal market, and the personal liability exposure for responsible persons under Revenue and Taxation Code Section 34015.2. These are California-made conditions, and they require California-made solutions.

For the California cannabis retailer navigating the CDTFA, the local licensing authority, the Department of Cannabis Control, and a price-cutting unlicensed competitor down the street, the finish line remains further away than the headlines suggest.

 

 

Cannabis in 2023: Here to Stay, but Major Challenges Remain

By Joshua Weiss, Osiris Morel
No Comments

2022 brought more change and visibility to the cannabis industry than nearly any year before. Two of five legalization ballot measures passed, bringing the total number of states with legal medical or medical and recreational laws to 39. President Biden issued an executive order pardoning nonviolent offenders and directing a review into rescheduling cannabis. The Medical Marijuana and Cannabidiol Research Expansion Act was enacted. Cannabis arose prominently in legislatures across the country, with over 50 federal bills and hundreds of state-level measures introduced.

We’ve yet to see the full impact from Biden’s October 6 announcement

But as 2022 came to a close, only a handful of actions are being carried into the new year, and the industry faces more hardship and turmoil than it has since the inception of legalization. Legal cannabis retailers and cultivators in markets across the country continue to struggle with onerous regulations and competition from the illicit market, and oversupply in these markets is driving down prices as West Coast growers and manufacturers anxiously await interstate commerce.

Looking ahead to the coming year, industry watchers can anticipate certain issues and legislation: further investigation into cannabis’ classification on the Controlled Substances Act (CSA) from federal agencies, federal cannabis pardons coming to fruition, a follow-up from the Department of Justice’s technical report, and the reintroduction of high-profile federal legislation, like the Cannabis Opportunity Act (CAOA), the States Reform Act, Marijuana Opportunity Reinvestment and Expungement (MORE) Act, Harnessing Opportunities by Pursuing Expungement (HOPE) Act and the Secure and Fair (SAFE) Banking Act.

Below, we recap some of the big moments of 2022 and what to expect in 2023.

A Presidential Pardon for Simple Possession

On Oct. 6, President Biden made a historic announcement to “grant a full, complete, and unconditional pardon to all current United States citizens and lawful permanent residents who committed the offense of simple possession of marijuana in violation of the Controlled Substances Act” and “all current United States citizens and lawful permanent residents who have been convicted of the offense of simple possession of marijuana in violation of the Controlled Substances Act.” His executive order also encouraged governors to follow suit for cases regarding state offenses and requested that the secretary of Health and Human Services and the attorney general “expeditiously” review how cannabis is scheduled under federal law.

Biden signing his executive order back in October of 2022

The president’s strategic plan attempts to at least partly address some of the adverse impacts of the United States’ war on drugs on certain populations like low-income and Black and Latinx Americans. While an admirable and important effort, certain portions of his executive order will take much longer than others to yield tangible impact. A federal pardoning can take anywhere between two to five years, and the laws and duration of state-level pardoning vary—depending on the state and its governing practices. Additionally, since governors are not required to pardon individuals following the president’s executive order, some convicted persons may never see or be able to seek justice. And the most uncertain timeline relates to the review of cannabis’ classification on the CSA. Rescheduling or descheduling a substance under the CSA can be tedious and grueling, and, as seen with other substances, the process can range from four to ten years. However, the exercise is ongoing, and although results may not be shared in time for the 118th Congress, it is to be expected that the issue will be discussed at length in 2023 and beyond.

Descheduling, Decriminalizing & Banking Legislative Efforts  

1. CAOA.

When it comes to legislation, there is no question that Majority Leader Chuck Schumer (D-NY) and Sens. Ron Wyden (D-OR) and Cory Booker (D-NJ) will reintroduce the CAOA in 2023. The comprehensive legislation aims to decriminalize cannabis by removing the drug from the CSA and tackles issues related to research, public safety, restorative justice and equity, taxation and regulation, public health and industry practices.

2. States Reform Act.

Sen. Schumer unveiling the Cannabis Administration and Opportunity Act

Another piece of legislation we anticipate seeing in the 118th Congress is Rep. Nancy Mace’s (R-SC) States Reform Act. Coming from a state without any cannabis laws, the freshman congresswoman introduced a measure that would federally decriminalize cannabis by fully deferring to state powers over prohibition and commercial regulation and regulate cannabis products like alcohol. In 2022, the bill received positive feedback from the industry and dominated the discussions during the Developments in State Cannabis Laws and Bipartisan Cannabis Reforms congressional hearing. With its bold cannabis sponsor, who will now serve as the House Oversight Subcommittee on Civil Rights and Civil Liberties chair, the States Reform Act will undoubtedly take center stage in 2023.

3. MORE Act.

Sponsored by Rep. Jerry Nadler (D-NY), the MORE Act will also be reintroduced in 2023; however, it remains to be seen how much attention the bill will receive. The MORE Act aims to decriminalize cannabis by removing the drug from the CSA and eliminating criminal penalties for anyone who manufactures, distributes or possesses cannabis. In the 117th Congress, Rep. Nadler served as the chair to the House Judiciary Committee and was able to advance his measure through the chamber with ease. But since the House majority has flipped, and Rep. Jim Jordan (R-OH) is likely to serve as the chair, getting the MORE Act to the floor for a vote may be challenging—especially given Rep. Jordan’s opposition to the cannabis sector.

The House passing the MORE Act back in 2020

4. HOPE Act.

The HOPE Act often flies under the radar, but this Republican-sponsored bill made headlines during the 117th Congress. Sponsored by Co-Chair of the Congressional Cannabis Caucus (CCC), Rep. Dave Joyce (OH), the bipartisan legislation aims to help states with expunging cannabis offenses by reducing the financial and administrative burden of such efforts through federal grants. Although it was not considered in the House, the language of the bill was heavily debated by the Senate, particularly toward the end of the year when the chamber was negotiating the final text for end-of-year must-pass packages, like the National Defense Authorization Act (NDAA), the Omnibus and the Continuing Resolution (CR). Alongside the SAFE Banking Act, the HOPE Act was one of the only cannabis bills that had a realistic chance of advancing as part of a larger legislative vehicle, so there is no question that the congressman will reintroduce the measure in the upcoming congressional session.

5. SAFE Banking Act.

And last, but certainly not least, is the most discussed cannabis bill this year: the SAFE Banking Act. The legislation aims to create a safe harbor for financial institutions to provide traditional banking services to cannabis businesses in states that have legalized the drug. It also allows cannabis businesses to access lines of credit, loans and wealth management. It has now passed in the House seven times, with bipartisan support. And although the SAFE Banking Act was debated by the House several times throughout the year, the Senate did not tackle the bill until November. By the time discussions for the bill’s language had taken off, Sen. Booker remained firm that he would only support a cannabis bill if it included criminal justice and social equity reform language. In an attempt to satisfy the senator’s demands, Majority Leader Schumer considered marrying the SAFE Banking Act and the HOPE Act as part of a larger package.

However, and much to the cannabis industry’s detriment, not only was the timeline for those bills a little too late, but Democrats were, unfortunately, unable to fix the money laundering and cash legacy concerns of Sen. Chuck Grassley (R-IA) and other Republicans.

Sen. Cory Booker (D-NJ)
Photo: Nick Fisher, Flickr

After attempting to attach the SAFE Banking Act to multiple vehicles, retiring Congressman Ed Perlmutter (D-CO), sponsor of the legislation, and Sen. Schumer were unsuccessful in getting the bill over the finish line. In a final Hail Mary, Sen. Schumer attempted to include the language to the Omnibus, but compounded with the technical assistance report from the Department of Justice (DOJ) and ongoing media flurry, he and the Democratic party yet again came up empty-handed.

The question now is: who will carry the SAFE Banking Act and Rep. Perlmutter’s legacy in 2023? Many will look toward cannabis industry champions like Reps. Joyce, Mace, Earl Blumenauer (D-OR) and Brian Mast (R-FL). However, it would be worth considering other members of the CCC and some of the incoming freshmen, particularly those from a state with legal cannabis laws. It is also entirely possible that Sen. Jeff Merkley (D-OR) finds his own sponsor to carry his companion bill in the House since he has already announced that he looks forward to working on the legislation in the upcoming year. Regardless, it is highly likely that the SAFE Banking Act will be reintroduced in 2023 and considered throughout the year.

6. Other Measures

Other measures that are likely to reappear in 2023 are the Capital Lending and Investment for Marijuana Businesses (CLIMB) Act, Veterans Equal Access Act, the GRAM Act, Common Sense Cannabis Reform for Veterans, Small Businesses and Medical Professionals Act, VA Medicinal Cannabis Research Act and the Homegrown Act. Additionally, the passage of the Medical Marijuana and Cannabidiol Research Expansion Act and the advancement of many of these federal bills have opened the gates for new legislation related to medical and recreational cannabis, research, veterans’ access, financial services, criminal justice reform and social equity, and public health and safety to emerge.

For states with legal cannabis laws, bills related to enhancing the state’s medical or medical and recreational programs, preventing industry oversaturation and price gouging, expanding licensing opportunities, criminal justice reform, youth and advertising protections and impaired driving are likely to be introduced. States where cannabis ballot measures failed will likely see those measures resurface.

The continued growth of legalization across the country is all but inevitable. In the nearer term, the industry will focus on how to remain viable in the face of high taxes and oversupply in 2023. New Congressional leadership could lead to bipartisan cannabis legalization if enough members are willing to rally behind their colleagues who are pushing for cannabis legislation. While the road is long before we will see the full impact from President Biden’s Oct. 6 announcement, the action proves those in power cannot ignore the ever-growing numbers of Americans across party lines and demographics who agree that cannabis use should be legal and regulated.