Tag Archives: schedule 1

How Section 280E is Still Hindering the Cannabis Industry

By Jay Jerose
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The cannabis industry is an unprecedented industry and one under constant review and control. Following the November 2020 elections, fifteen states and Washington DC have legalized adult use cannabis, a number that will continue to grow as legalization slowly becomes more widely adopted in other states. Beyond that, a continuously growing number of states allow residents to purchase legal medicinal cannabis, and many have also decriminalized adult use. However, it still remains a Schedule I substance under the Controlled Substances Act and is therefore illegal on all accounts at the U.S. federal level, which creates a number of issues for businesses in the cannabis industry duly operating in states where it has been legalized.

Not only is it difficult for cannabis companies to avail themselves of alternative banking solutions, but there are also obstacles in place preventing these companies from taking advantage of notable tax deductions. The primary obstacle being Internal Revenue Code (IRC) Section 280E.

What is Section 280E?

Section 280E is a relatively short code section, only 77 words to be exact, but it carries significant weight and can have a debilitating effect on the taxable income of marijuana [sic] related businesses (MRB). Section 280E of the IRC prohibits taxpayers who are engaged in the business of trafficking certain controlled substances, including cannabis, from deducting typical business expenses associated those activities. Section 280E, which was enacted in 1982 during the “War on Drugs” era, has become increasingly relevant for cannabis businesses. The cannabis industry has grown substantially in recent years with annual market values expected to reach $30 billion by 2025.

However, while Section 280E greatly restricts the tax deductions of state-legal cannabis businesses, there is some reprieve. Current IRC provisions permit state-legal cannabis businesses, including growers, producers, wholesalers or retailers, to deduct the Cost of Goods Sold (COGS) in computing their US federal income tax liability, despite the application of Section 280E.

Impact of Section 280E on Businesses

 What does Section 280E mean for cannabis businesses today? It is intended to prevent dealers from claiming tax deductions for their business expenses, interpreted to include state-legal cannabis businesses, reduced deductions that result in increased taxable income and MRBs will face higher federal tax rates. 

The IRC disallows any deductions or credits paid or incurred during a tax year if those deductions or credits relate to trafficking controlled substances. The courts have taken the position that the term “trafficking” in this case means “engaging in a commercial activity – that is, to buy and sell regularly.” Simply, the law denies cannabis businesses any U.S. federal income tax deduction for ordinary and necessary business expenses, despite being duly licensed as a legal business in their state of operation.

Typically, the ability to deduct ordinary business expenses means that a business is subject to federal tax on its net income (i.e., gross receipts minus expenses). However, the definition of Section 280E and the classification of cannabis as a Schedule I substance severely hinders legal cannabis companies from taking advantage of tax deductions for actual economic expenses incurred in the ordinary course of business, which results in a significantly higher effective tax rate as compared to other businesses.

Legal Actions and Challenges to Section 280E

There have been court challenges and concessions made to Section 280E. Specifically, the 2007 court case Californians Helping to Alleviate Medical Problems, Inc., v. Commissioner. This court case reinforced the precedence that Section 280E does not apply to cost of goods sold. The Internal Revenue Service (IRS) defines cost of goods sold to be “expenditures necessary to acquire, construct or extract a physical product which is to be sold.” Generally, for a retail MRB, this means that the direct cost of acquiring cannabis products for resale. Deductions for rent, utilities, wages, insurance and other operating costs common to ordinary businesses are generally disallowed. New York State has specifically indicated that it intends to follow Section 280E for its own income tax calculations, disallowing these same deductions against New York taxable income

Tax Court and Section 280E

The Tax Court has also been aggressive in tamping down efforts by MRBs to separate cannabis related and non-cannabis related activities. The courts argue that these separate activities constitute a single trade or business when they share a close and inseparable organizational and economic relationship. In addition, the risk of cannabis related activities tainting a taxpayer’s other business concerns exists if services or employees are shared between an MRB and a non-MRB. Allocation of expenditures to cost of goods sold, as well as any allocations of costs between MRB and non-MRB entities, need to be well thought out and supported by defensible tax and accounting positions.

The Future of MRBs and Section 280E

All indications point to an increased frequency of IRS audits of MRBs compared to audits of non-cannabis related businesses. Therefore, documenting the methodology behind the calculation of costs of goods sold is even more important for MRBs. It is vital to consult with a tax advisor to ensure you are maximizing your cost of goods sold deductions and preparing the best documentation possible to support your 280E tax positions.

Disclaimer: The information presented in this article should not be considered legal advice or counsel and does not create an attorney-client relationship between the author and the reader. If the reader of this has legal or accounting questions, it is recommended they consult with their attorney or accountant.

Some CBD Companies Are Getting Millions in Federal Aid

By Aaron G. Biros
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As we’ve covered previously, the coronavirus pandemic has impacted the cannabis industry in the United States in a number of ways. Many states with legal medical and recreational cannabis markets have deemed those cannabis businesses essential, allowing them to remain open during statewide stay-at-home orders. Congress passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) to help small businesses through the economic downturn, directing trillions of dollars to the Small Business Administration (SBA) to administer emergency loans, paycheck protection programs and other financial assistance to small businesses affected by the coronavirus pandemic.

CV Sciences received $2.9 million in federal aid from the SBA

However, pretty much all state-legal medical and recreational cannabis businesses are ineligible to receive money from the SBA because cannabis is designated as a Schedule 1 controlled substance. While Rep. Earl Blumenauer (D-OR) and Rep. Ed Perlmutter (D-CO) introduced legislation recently that would allow cannabis businesses to become eligible for federal assistance, it is unclear if that bill will become law. Furthermore, even if it does pass, cannabis businesses will likely receive little or no help at all, as a vast majority of the funds administered by the SBA have already been spoken for.

Enter the hemp and CBD products market. Thanks to the 2018 Farm Bill, which removed cannabis containing less than 0.3% THC from the list of controlled substances, hemp and CBD companies are not exempt from the SBA’s relief efforts.

According to VICE News, The Trump Administration has handed out millions of dollars to companies that sell CBD products. When VICE News looked into some SEC filings, they found more than $4 million in federal loans that have been granted to CBD products companies.

They found three CBD companies that scored big with federal assistance:

Despite state-legal medical and recreational cannabis businesses being left to fend for themselves, these large online CBD products retailers have received more than $4 million in federal aid money.

Taxes & Cannabis: 280E, R&D Credits, 199A & Qualified Opportunity Funds: Part 2

By Zachary Gordon, Jason Hoffman
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Editor’s Note: This is the second piece in a two-part series delving into tax issues. Part one discussed tax code 280E as it pertains to cannabis businesses. Part two will go into research and development credits, 199A and a discussion of risk as it relates to Qualified Opportunity Zones. 

While 280E is the most influential code section for the cannabis industry, structuring never happens in a vacuum. There are many open questions that each business must answer for themselves without court adjudication. We believe that among the riskiest of questions is whether a cannabis business can claim research and development credits.

There is no clear legal authority that either allows these credits or disallows them but certainly utilizing such credits comes at great risk. At the beginning of this article we talked about Congress and the purpose of 280E. Congress’s intention was to make sure that only the minimum required tax deductions were available to Schedule 1 and 2 sellers. A cannabis business receiving a research and development credit would not be with the intension of Congress. While the credits would be computed based on COGS expenditures, at this time we do not believe that a cannabis business should take this credit. Disallowance of COGS would create a constitutional challenge which is why Congress allowed the COGS deduction. Disallowance of Research and Development Credits does not open up the same constitutional issue since the credit is not part of COGS although calculated based on COGS expenditures. 280E states very clearly that credits arising from other code sections are disallowed in the entirety.

More recently the Tax Cut and Jobs Act (TCJA) opened up new issues for cannabis companies that are still unfolding. Two of the most publicized are Qualified Opportunity Funds and Section 199A, the 20% deduction (Qualified Business Deduction).

The 199A deduction allows eligible pass-through entities to claim an additional deduction of 20% of the income (subject to certain limitations) at the individual level potentially lowering the tax rate from 37% to 29.6%. While the American Institute of Certified Public Accountants (AICPA) and others have asked the IRS to clarify if 280E would make a cannabis business ineligible, the final regulations on the subject did not address this issue. There are other significant limitations and hurdles in 199A regulations that any business would have to first pass to be considered for the rate deduction. If a cannabis business meets all other eligibility and limitation criteria, should the pass-through income to their investors be qualified income under 199A? The answer will depend on whether the courts will treat this “deduction” as falling under the general prohibition of 280E.

We believe that there is a reasonable chance that the courts will allow the 199A deduction for cannabis companies. That does not mean, however, that we advise cannabis companies to claim this on their pass-through returns as Qualified Business Income. Much like everything else, it depends on the particular business and the risk profile that management is willing to tolerate. This is one area of tax law that is sure to be challenged in court. The more risk-averse business should pass on claiming this deduction on their returns, but monitor development with an eye to amending at a later date if favorable precedent emerges. If the amounts are large enough, consideration should be given to applying for a Private Letter Ruling, but that also has its own tax risks.

Another new tax incentive that was in the TCJA was Section 1400Z or Qualified Opportunity Zones (QOZ). The incentive allows for the deferral of capital gains until December of 2026. The use of 1400Z also results in up to a 15% decrease in capital gains tax- and tax-free appreciation if all requirements are met. While the IRS has only released proposed regulations and we anticipate significant changes to them when they are released as final, there was nothing in the proposed regulations limiting cannabis businesses from using Qualified Opportunity Funds (QOF) in their structure. It is interesting to note that the TCJA and proposed regulations did list other types of businesses that could not make investments under 1400Z along with all its benefits. Liquor stores, golf courses and sun tan parlors were among those listed but cannabis growers and dispensaries were not.

As the industry continues to mature, new issues and precedents will require CPAs and attorneys to find new solutions to best serve the industry.Using Opportunity Zones to entice investors sounds like a great opportunity, but there are significant risks. The first risk is that the proposed regulations, while currently proposed, may not be final. There is always a chance that the IRS will take a different position when the final regulations are released and add cannabis to the type of businesses that do not qualify. Another risk, and one that was previously mentioned as part of 199A and other areas of structuring, is that the IRS and the courts can always disagree with the taxpayer’s position. This is a new area of tax law and will eventually be litigated. The loss of the Opportunity Zone benefits can significantly change the return to the investors and lead to other issues.

All of these issues come into play when structuring businesses in this industry. These issues must be evaluated as they pertain to the business needs. This can be very complex and requires a great deal of research for each business opportunity. We have found that professionals operating in this industry like to know about all of their options. The most important thing we can do for the industry is to continue to educate the professionals working in it.

Accountants should be available to assist their clients and their clients’ attorneys with structuring techniques aimed at asset protection and minimizing 280E disallowances. Accountants should also be ready to speak to the questions outlined above and be prepared to explain the risks associated with each choice. As the industry continues to mature, new issues and precedents will require CPAs and attorneys to find new solutions to best serve the industry.

Taxes & Cannabis: 280E, R&D Credits, 199A & Qualified Opportunity Funds: Part 1

By Zachary Gordon, Jason Hoffman
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Editor’s Note: This is the first piece in a two-part series delving into tax issues. Part one discusses tax code 280E as it pertains to cannabis businesses. Part two will go into research and development credits, 199A and a discussion of risk as it relates to Qualified Opportunity Zones. Stay tuned for Part two coming next week!

When building a knowledge base in the cannabis industry as a CPA, one’s tax research typically starts with Internal Revenue Code (IRC) Section 280E. For those that are unfamiliar, 280E is only three lines long. With this in mind, we at Janover realized that we needed to understand the context for this highly influential tax section.

The genesis of 280E dates back to 1981 with a Tax Court case: Jeffrey Edmonson v. Commissioner. The decision in this case was that a seller of cocaine, amphetamines and cannabis could deduct most business expenses, cost of goods sold, packaging, home, phone and automobile expenses relating to the seller’s illegal business.

In 1982, 280E was enacted to reverse the Edmonson decision and deny sellers of Schedule 1 or 2 controlled substances the right to deduct business expenses. Under the Controlled Substances Act, the federal government defined Schedule 1 drugs as drugs that have no currently acceptable medical use and a high potential for abuse. Since cannabis is classified as a Schedule 1 drug, cannabis businesses were unable to deduct most business expenses.

To get a better understanding of what the legislators were trying to accomplish, House and Senate reports provided insight into what their goals might have been. Under the Explanation of Provision, the Senate Report reads:

All deductions and credits for amounts paid or incurred in the illegal trafficking in drugs listed in the Controlled Substances Act are disallowed. To preclude possible challenges on constitutional grounds, the adjustment to gross receipts with respect to effective costs of goods sold is not affected by this provision of the bill.

As the Senate Report explanation provides, 280E specifically excluded cost of goods sold (COGS) from the disallowance of deductions. This treatment was affirmed by the Tax Court in 2012 in Olive v. Commissioner (139 T.C. 19 2012).

To date, there are not many cases that have dealt with the tax issues of 280E. In a 2007 decision involving Californians Helping to Alleviate Medical Problems (CHAMP), the Tax Court ruled that a taxpayer may deduct expenses allocable to an affiliated business that was separate from the entity “trafficking in a controlled substance.” In CHAMP, the legal caregiving business, which was a separate business, was able to deduct the allocated portion of shared expenses. This set a legal precedent that allowed a taxpayer engaged in the selling of a Schedule 1 or 2 controlled substance to distinguish expenses incurred on behalf of other non-prohibited business lines and deduct these expenses.

In addition to these court cases, tax professionals can rely on IRS Chief Counsel Memorandum CCA 201504011. The IRS Chief Counsel released this memorandum in January 2015 in order to respond to questions the IRS was receiving from practitioners.

Although Chief Counsel Memoranda, in general, may not be cited by taxpayers as precedent, this memorandum is the current and best authority outlining the IRS’s position with respect to the extent to which a cannabis business may deduct business expenses. The memorandum also refers to IRC Section 162, ordinary and necessary business expenses that would be disallowed, as well as separately identifying certain direct and indirect business expenses that would be allowed. Citing methods in Treas. Reg. 1.471, the memorandum states that a cannabis producer may allocate to inventory and COGS direct production costs, including direct material costs (Cannabis seeds or plants), direct labor costs (e.g., planting, cultivating, harvesting, sorting, etc.), and transportation or other costs to acquire of the cannabis. It also indicates certain indirect costs that may be taken as COGS.

As the industry continues to mature, more cases are finding their way to the Tax Court. On June 13, 2018, the Tax Court issued a ruling in Alterman v. Commissioner that specifically disallowed the use of 263A under 280E and applied only Section 471 to determine COGS. While we need to follow the facts and circumstances of each case, the broad language used might very well disallow capitalizing of inventoriable costs for companies subject to 280E.

IRC Section 471 is the general rule for inventory accounting for tax. IRC Section 263A is the uniform capitalization rules for tax. Most businesses need to utilize both 471 and 263A when accounting for inventory and to properly capitalize costs into COGS.This opinion may have lasting effects on the part of the industry trying to create brands associated with their cannabis products.

Many resellers and retailers of cannabis thought they could use 263A to capitalize more costs into inventory decreasing their tax burden. The Chief Counsel Memorandum disagreed and more recently the Tax Court in Patients Mutual Assistance Collective Corp v Commissioner sided with the IRS and upheld some of the precedents set in Alterman v. Commissioner. In siding with the IRS, the judge concluded that a taxpayer who is subject to 280E can only deduct costs of goods sold under 471 as the IRC existed when 280E was enacted (in 1982). The taxpayer in the case used two arguments that were not new to the cannabis industry, but to no avail. The first argument was that the business was not trafficking in a controlled substance because the government had abandoned a civil forfeiture action. The second argument that was rejected was that a portion of the business involved branding, marketing and the sales of other non-illegal products. The claimant tried to convince the court that deductions related to these operations should not be subject to the same disallowance of deduction as outlined in 280E.

This second argument is very important for structuring purposes. The court used a significant portion of its opinion to address why the entire business is integrated and completely subjected to 280E. This opinion may have lasting effects on the part of the industry trying to create brands associated with their cannabis products.

This case has even more implications given part of the ruling in which the courts stated that being state licensed in no way effected the Schedule 1 determination at the federal level and, therefore, subjected them to 280E. The judge went so far as to separate the Department of Justice, which enforces the Schedule 1 status of cannabis, and the Department of the Treasury, which has full authority and enforcement rights to treat cannabis as a Schedule 1 drug subject to 280E for income tax purposes. This ruling made it clear that even if the Department of Justice is not pursing criminal charges against state-licensed cannabis businesses the IRS is not precluded from fully enforcing the Internal Revenue Code.

Product Labeling Law: A Primer and a Warning for California Cannabis Executives

By Jonathan C. Sandler
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What do you get when you combine a Schedule 1 federally controlled substance with a plethora of food, beverage and cosmetic entrepreneurs marketing new products to inexperienced users and then place that combustible combination into California’s plaintiff-friendly legal environment?

A lot of rich plaintiffs’ attorneys.

California continues to be a favored plaintiffs’ lawyers’ venue for filing consumer-related lawsuits against food and cosmetic companies. These lawsuits result in tens of millions in settlements each year and hundreds of millions in judgments. Staying current on statutes and trends is critical to doing business in California and cannabis companies are no exception.

While the Food and Drug Administration (“FDA”) has provided very little guidance on how cannabis products should be labeled, a lack of specific regulations does not mean that there are no applicable labeling requirements for cannabis. This is particularly true in states like California that have a multitude of statutes designed to protect consumers from false or misleading advertising and labeling. Below includes a brief list to help guide companies’ labelling processes:

  1. Look to available guidance for the relevant industries. For example, food labeling of cannabis products still requires compliance with other nutritional labeling statutes. The same goes for supplements and cosmetics. The Fair Packaging and Label Act (“FPLA”) regulates labeling of all “consumer commodities” as to net contents, product identity, and manufacturer’s, packer’s or distributor’s name and location.
  2. Consider the intended use of the product as well as the directions. For example, is the product meant to be consumed all at once or should it be consumed over a period of time? Depending upon the product, this question can affect whether compliance with the FDA dietary supplements guidance is required or whether the Food Drug and Cosmetic Act applies.
  3. Consider your supply chains. This can be one of the most difficult aspects for cannabis companies that are looking to expand, but need more supply. However, keeping track of ingredients is a critical aspect to being able to defend against lawsuits. In the past, cannabis companies have been sued because they have expanded their suppliers without assuring consistency in the products and then combining inconsistent ingredients into one common product that is now mislabeled. While the Bureau of Cannabis Control testing requirements should help with some of the cannabis information, all ingredients need to be tracked and the final products tested.
  4. Cannabis companies must label their products with applicable state laws. For example, the California Safe Drinking Water and Toxic Enforcement Act of 1986, better known as Proposition 65 (“Prop. 65”)is being used by the plaintiffs’ bar as a basis to sue cannabis companies.
    • Prop. 65 is a statewide initiative that regulates companies that make or sell their products in California in two ways: (1) it requires companies whose products contain certain levels of chemicals to provide clear and reasonable warnings. Prop. 65 does not ban or restrict the sale of chemicals on the list or their inclusion in products, but it requires warnings if the listed chemicals are included; and (2) It prevents companies from discharging these chemicals into the state’s water supply.
    • All companies doing business in California and all products manufactured or sold in California are subject to Prop. 65 with three exceptions: (1) the company has fewer than 10 employees, (2) government agencies, or (3) the products contain less than a threshold amount of the chemicals.
    • Penalties for violations can be staggering. Prop. 65 is enforced both by the California Attorney General and private lawsuits on behalf of the California Attorney General. The potential penalties for violations of Prop. 65 include a fine of up to $2,500 per day. Additionally, one of the largest drivers of litigation is that the private enforcers (plaintiffs’ bar) can recover their attorneys’ fees. The total amount paid in settlements in 2017 was over $25 million and of the more than $18 million in judgments, $13 million was attributed to attorneys’ fees.
  5. The California Consumers Legal Remedies Act (“CLRA”) is another California statute that is intended to protect consumers from false advertising and other unfair business practices. The CLRA allows consumers to bring individual or California class action lawsuits to recover damages and enjoin the prohibited practices. The statute also allows a prevailing consumer to recover attorneys’ fees and costs. Cannabis companies need to be mindful of their representations related to their products. California courts are filled with cases involving terms like “natural” or “healthy” or “high performing.”

Product labeling, mottos and advertisements may seem straightforward, but they form the basis for hundreds of lawsuits filed every year throughout the country, and especially in California. At this stage of trying to get one’s product out the door and to the consumer, it is tempting to move quickly. However, the importance of sound research, strategy and consulting an experienced team to ensure compliance and avoid costly mistakes is critical.

Hoban Law Group Files Lawsuit Against DEA

By Aaron G. Biros
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The Hoban Law Group filed a petition on behalf of three clients against the DEA in the U.S. Court of Appeals for the Ninth District on January 13th, according to a press release. The clients represented by Hoban Law Group in the suit are Hemp Industries Association, RMH Holdings, LLC and Centuria Natural Foods, Inc. The companies are based in California, Colorado and Nevada respectively and are all active in the legal hemp trade. The press release says RMH Holdings “sources its products from industrial hemp lawfully cultivated pursuant to the Agricultural Act of 2014 (also known as the Farm Bill).”

San Francisco's United States Court of Appeals for the Ninth Circuit Photo: Ken Lund, Flickr
San Francisco’s United States Court of Appeals for the Ninth Circuit
Photo: Ken Lund, Flickr

In December, the DEA published a ‘Final Rule’ that classifies cannabis-derived extracts, such as CBD oil, in their own category with a code number to “better track these materials and comply with treaty provisions.” The announcement by the DEA ultimately serves to make any cannabis extract a Schedule 1 narcotic. “Extracts of marihuana will continue to be treated as Schedule I controlled substances,” says the document.

BobHobanAttorney
Bob Hoban, managing partner

Bob Hoban, managing partner of Hoban Law Group says the action is clearly beyond the DEA’s authority. “This Final Rule serves to threaten hundreds, if not thousands, of growing businesses, with massive economic and industry expansion opportunities, all of which conduct lawful business compliant with existing policy as it is understood and in reliance upon the Federal Government,” says Hoban.

The lawsuit states that they want a judicial review of the DEA’s actions “on the grounds that the Final Rule is (1) arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law, e.g. the CSA, the Farm Bill, and the DEA’s regulations; (2) contrary to constitutional right, power, privilege, or immunity; (3) in excess of statutory jurisdiction, authority, or limitations; and, (4) without observance of procedure required by law.” The suit also claims that the ‘Final Rule’ conflicts with other federal laws like the Data Quality Act, Regulatory Flexibility Act and Congressional Review Act.

According to Garrett Graff, associate attorney at Hoban Law Group, the entire Cannabis genus is not unlawful and the DEA is overstepping its authority. “As the Ninth Circuit found in 2003 and 2004 there are certain parts of the plant like the stalk and seed that are congressionally exempted from the Controlled Substances Act and thus the DEA’s rulemaking authority,” says Graff. “By creating a drug code for ‘marihuana extract’, the DEA is saying that they are a controlled substance, but that goes against a number of existing laws.”

Garrett Graff, associate partner at Hoban Law Group
Garrett Graff, associate partner at Hoban Law Group

The definition of ‘marihuana extract’ under the ‘Final Rule’ also references extracts containing one or more cannabinoids, which goes beyond the realm of cannabis altogether, according to Graff. “The DEA and many other sources have acknowledged and confirmed that cannabinoids can be derived from other varieties of flowers, cacao and other sources, making it virtually impossible to distinguish which cannabinoids would be subject to this drug code,” says Graff. “The DEA’s rule effectively makes the presence of cannabinoids a determinative factor of a controlled substance, which is inconsistent with what Congress has said.”

The petition filed is essentially the initiation or commencing of a lawsuit. Graff says their case is rooted in statute. “We hope to accomplish a striking of the rule, permanent injunction of the rule and for the DEA to engage in the appropriate processes and procedures when making rules in the future,” says Graff. “Alternatively, an amendment to the rule to make the definition of ‘marihuana extract’ consistent with existing law and reflect those portions and varieties of the plant which are in fact lawful could be considered.” It may still be roughly 30 days before the DEA responds with briefing and possibly an oral argument to follow on the various issues surrounding the petition, says Graff. The Ninth Circuit petition, including briefings and hearings, is likely to take at least several months.

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2016 Year in Review: Why the Cannabis Industry Needs Resiliency

By Aaron G. Biros
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2016 was a tumultuous, but productive year for the cannabis industry. Larger companies began to take interest in the fledgling market, like Microsoft and Scotts Miracle-Gro. This year brought major innovations in technology like market data tools, advances in LED tech, efficient cultivation tech and patient education tools. The Supreme Court set an important precedent by shutting down a challenge to Colorado’s cannabis market.

Voters legalized cannabis in 8 states last month Photo: Nicole Klauss, Flickr
Voters legalized cannabis in 8 states on Election Day.
Photo: Nicole Klauss, Flickr

Election Day brought a renewed sense of vigor to the market with voters in eight states legalizing forms of cannabis. California, Nevada, Maine and Massachusetts passed recreational cannabis measures, making legalization’s momentum seem exponential.

But November 8th also gave Donald Trump the presidency, and his cabinet appointments, namely Sen. Jeff Sessions as Attorney General, gave many a feeling of uncertainty for the future of federal legalization. Adding insult to injury, the DEA repeatedly stood by their antiquated and ludicrous judgment for cannabis to remain a Schedule 1 narcotic.

Gage Skidmore, Flickr
Trump nominated Sen. Jeff Sessions (R) for Attorney General Photo: Gage Skidmore, Flickr

A lot of the fervor surrounding public safety could be described as overdramatic or somewhat unwarranted. 2016 was the year of misinformation. Fake news spread like wildfire with people sharing stories like this or this that turned out to be very misleading or just downright false.

States with legal cannabis came under heavy public scrutiny and addressed problems like consumer education, public safety and lab testing. Pesticides became a highly publicized and persistent issue in a number of areas, with some states regulating it heavily and addressing public health concerns. Plenty of new rules were formed surrounding labeling and testing, with Oregon, Colorado and Washington experiencing some regulatory growing pains.

Those growing pains shed light on the need for regulators to craft rules that allow for changes, adding rules where necessary and getting rid of cumbersome rules that might thwart market growth. Rules need to be able to adapt as the industry grows, much like businesses need to adapt to a changing market climate to stay afloat. This is all the more reason why cannabis businesses need to make their voices heard and work with regulators to move things forward.

Pesticide Use was a major issue of 2016 Photo: Michelle Tribe, Flickr
Pesticide use was a major issue in 2016
Photo: Michelle Tribe, Flickr

With so much uncertainty surrounding the future of legal cannabis in America, the word of the year for 2017 should be resiliency. In a social-ecological context, resiliency is “the capacity of a system to absorb or withstand perturbations and other stressors such that the system remains within the same regime, essentially maintaining its structure and functions. It describes the degree to which the system is capable of self-organization, learning and adaptation.”

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A warning label for cannabis in Oregon after the October 1st compliance deadline

Self-organization, learning and adaptation are three very important attributes of a resilient system. Without knowing what will happen when Trump’s cabinet takes the reigns of federal agencies, it is important to prepare for the unexpected. Adhering to standards like FOCUS allows cannabis businesses to prepare for unexpected events like recalls or product safety failures.

Those standards could also become the law down the road, as government officials often look to an industry’s voluntary consensus-based standards when deciding how to regulate it. In 2017, a number of state governments will embark on the heavy undertaking of writing the regulatory framework for legal cannabis.

2017 will bring opportunities and challenges to the cannabis industry. The industry’s rapid growth juxtaposed with political, economic and regulatory uncertainties create a climate that requires resilience to be built into the system at all levels. It is critical, now more than ever, that cannabis businesses build strong relationships with industry groups, advocacy groups and regulators to craft the institutional capacity and mutual trust needed to weather the uncertainty ahead.

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NCIA Guest Post: Waiver Program Could Clear Path for State Legalization

By Aaron G. Biros
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In last week’s guest post on the National Cannabis Industry Association (NCIA) blog, I discussed The State Marihuana [sic] And Regulatory Tolerance (SMART) Enforcement Act, bill H.R. 3746, and its potential to alleviate a number of problems in the cannabis industry.

The bill would exempt states from the federal prohibition of cannabis via a waiver program. The Attorney General could grant those waivers to states that operate a robust regulatory framework and oversight of the cannabis marketplace. It also has measures in place to help prevent diversion of cannabis into the black market, protecting consumer safety and public health, eliminating criminal enterprise involvement and more.

Cody Stiffler, vice president of Government Affairs at BioTrackTHC, believes this bill could be a panacea for many ailments facing the cannabis market. “They [Congress] plan to give the U.S. Attorney General powers to offer waivers to state governments, exempting that state from federal law regarding cannabis, allowing banks and other institutions to take part in the industry without fear of federal backlash under the Controlled Substances Act,” says Stiffler. Perhaps the most significant effect this bill could have on the cannabis industry is knocking down the burden of the 280E tax code on cannabis businesses primarily because it would exempt states from The Controlled Substances Act. Click here to read the full guest post on the NCIA blog.

DEA To Consider Rescheduling Cannabis, Could Mean Policy Shift

By Aaron G. Biros
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In a letter sent to lawmakers last week, the Drug Enforcement Agency (DEA) announced plans to make a decision on rescheduling cannabis by mid-2016. The announcement could represent the culmination of a shift in the federal government’s attitude toward cannabis legalization.Dea_color_logo

Currently, cannabis is a Schedule I narcotic, meaning the government views it as lacking medical benefits and have a high potential for abuse. The rescheduling of cannabis has the potential to open the floodgates for research, including much needed clinical trials.

Derek Peterson, chief executive officer at Terra Tech, a cannabis-focused agriculture company, believes this bodes well for the growth potential of the cannabis industry. “From the perspective of quality and safety standards, I find it unlikely that rescheduling it would negatively impact the degree to which cannabis is examined,” says Peterson. “It’s unnecessarily high position on the DEA drug schedule does nothing but limit the industry’s potential for growth, stall any meaningful pharmaceutical testing and increase law enforcement’s ability to prosecute non-violent drug offenders,” adds Peterson.

The rescheduling could also potentially allow for the prescribing of cannabis for patients. Stephen Goldner, founder of Pinnacle Labs and president of Regulatory Affairs Associates, is hopeful this will lead to a greater shift in public attitude towards cannabis. “The DEA’s announcement is a clear message to all States and possibly even to United Nations policy makers: even the DEA is willing to reconsider cannabis,” says Goldner. “Since the DEA is reconsidering cannabis, state politicians and local police departments can also be flexible and move away from prohibition, towards the regulation of cannabis.”

The rescheduling of cannabis could have a tremendous impact on the growth of the cannabis industry, including more clinical trials, medical research and physician participation. It could also open the door for more federal agency involvement, as the Schedule I status inhibits any EPA research on cannabis pesticide use or FDA guidance on food and drug good manufacturing practices. When reached for comment, the FDA’s press office said they could not speculate on any involvement in the matter.