Legal and Regulatory Issues Governing Cannabis and Cannabis-Derived Products in the United States
In Summary
A research article has come out describing the medical and legal history of medical cannabis as well as the challenges cannabis-based medicine will face in the coming years. This piece is a comprehensive summary of the modern history of cannabis, its medical purposes, the national and state difference in legal status, as well as the interactions between federal and state governments and how they address illicit cannabis use. Rounding out the article is the encouragement from the author for other researchers to develop cannabis-based medications, such as the successful Epidiolex®.
Highlighted by this piece is the success of cannabinol (CBD) and the potential for proving cannabis medically beneficial without utilizing tetrahydrocannabinol (THC). Cannabis plants are host to a myriad of chemicals that have been revealed as promising therapies for various ailments, including the cannabinoids cannabigerol (CBG), cannabinol (CBN), and terpenes such as beta-caryophyllene, Linalool, and limonene. Developing therapies like Epidiolex®, which has been approved by the federal government, will help prove the medical benefits that cannabis plants provide and hopefully lead to the support of the federal government and rescheduling of cannabis.
The study is available for review or download here
Year 2019 was an up and down year for the cannabis industry. As the year comes to a close, let us take some time to reflect on what transpired during this transitional period for the cannabis industry. Hopefully, a detailed look at what happened may shed some light on what is ahead in 2020.
First, public opinion on cannabis has continued to rise. For the first time, poll results suggested that more than two-thirds of Americans support legalization. Such a pervasive, bipartisan, agreement for a fundamental change in the law is rare, and is a true reflection of the state of the industry now, and where the industry is headed.
Riding along with public opinion, Congress saw more movement towards full legalization than in any single year prior. The list of cannabis-related bills that were introduced in Congress this year tops 15, covering topics from banking to immigration. Most noteworthy among those bills are the MORE Act, a comprehensive legalization bill that passed its committee in the House, and the SAFE Banking Act, which passed the full House by a landmark 321-102 bipartisan vote. At the same time that these provide an optimistic outlook for the federal regime, no actual progress has been made in Congress, largely because the Republican-led Senate remains staunchly opposed to reform (google “Mitch marijuana machete” for an idea of Mitch McConnell’s recent activities relating to drug policy reform).
The executive branch has not been without movement either. President Trump does not have the traditional hard-lined anti-cannabis stance that some Republican leaders espouse. He campaigned on a platform of not interfering with states’ ability to manage their own medical and adult-use programs. He has publicly stated his support for the States’ Act, a bill that would essentially codify the same, leaving enforcement up to the states. Under Trump, the FinCEN continued its policy of allowing banks to do business with the cannabis industry, assuming that the Suspicious Activity Report (“SAR”) requirements were being followed. There are also no known examples of DEA or other federal law enforcement actions taken against operators lawfully operating under state law.
At the same time, the executive branch has made moves against the legalization movement. In 2018, then-AG Sessions rescinded the Cole Memorandum, signaling that the feds were looking into increasing enforcement against cannabis businesses (Thankfully Sessions is no longer a part of the administration, as his views are notoriously more anti-legalization than Trump’s). Just last week, as Trump signed the yearly spending bill into law, he attached a vague statement reserving the right to enforce federal law even in the face of full state-law compliance. Overall the federal government has progressed, albeit slowly, in the right direction.
Many states had significant progress towards legalization in 2019. Illinois became the 11th state to fully legalize adult-use, while Hawaii, New Mexico, and North Dakota decriminalized. We now stand with 33 states having passed a robust medical program, a full two-thirds of the union. Bills were proposed in more than two dozen states, some to expand existing frameworks, and others to create new ones. Just this week Alabama’s legislature’s commission recommended legalizing for medical purposes, a stark shift from the traditional views thought to be widely-held in the deep south. Overall the trend is clearly moving towards more states joining the legalization team, some quicker than others.
Though 2018 set a high bar for the hemp/CBD industry in terms of significant reform, Year 2019 arguably topped the significant progress of the 2018 Farm bill. In October, the USDA published its interim final rule, providing much-needed guidance to the hemp community. It created a federal framework for hemp farmers, creating registration, licensing, and testing requirements. It also allowed states to create their own systems, and many of the largest states for hemp farming are doing just that. FinCEN, the same treasury bureau that regulates banking for marijuana businesses, announced in December that banks may do business with the hemp industry without having to adhere to the SAR reporting requirements like those doing business with marijuana.
At the same time, the hemp/CBD industry skyrocketed in 2019. We saw an explosion of CBD products, and the industry is now estimated to be worth $4 billion. Tinctures, edibles, lotions, balms, you name it, someone has put CBD in it and made money this year. There remains so much uncertainty about the legalities of the market, and many have taken advantage of this “Wild West” atmosphere to quickly seize market shares, without guaranteed continuity once enforcement occurs. Year 2019 was not without foreshadowing of enforcement, however. In November, the FDA sent out warning labels to several companies that were selling CBD products. The letters go into detail regarding the various items being sold and analyzed how each company was violating various laws. Although the FDA hasn’t actually seized anyone’s assets or froze any bank accounts, they are clearly watching and thinking about doing it.
A really interesting piece of news swept the nation this year. At the beginning of November, the NYPD posted a picture of two officers posing with “106 pounds of marijuana that was destined for our city streets”, bragging about its success. Only one problem… it was all legal hemp, with certifying papers and all. The NYPD quickly dropped all the charges, and recently returned the hemp to the owner. This incident also highlights a significant issue with the hemp industry, in that it comes from and has all the outward appearance of marijuana, leading to confusion and enforcement problems. Until law enforcement agencies are properly trained, this type of incident is likely to repeat itself.
Year 2019 also took its toll on many cannabis companies. Large companies like Eaze and MedMen had to lay off many employees, as the actual returns were less than what their projections anticipated. Many stocks took big hits in 2019, for the same reasons. The projections for the industry have been huge, and are likely accurate, but are also likely skewed because of the nature of the industry. There is still a large “traditional” market in existence, which continues to dwarf the legal one. While some have come out of the shadows, progress remains slow because of the monumental taxes, regulations, and difficulties associated with being a fully-legal operating cannabis company.
WHAT ABOUT 2020?
The year 2020 is upon us. The cannabis industry is not going anywhere. It will continue to grow and mature as the year goes on. We aren’t going to see any reversal of the general trend towards legalization. At the federal level, I don’t believe that 2020 will see a single cannabis bill passed and enacted into law, and certainly nothing like full legalization. The country is not ready for it yet, as many of the industry leaders remain staunchly opposed for two reasons. First, there remains distrust and skepticism that is leftover from the reefer madness days. Many politicians still feel that marijuana is a gateway drug to other substances, and until they are convinced otherwise will stay opposed. Second, and more sinister perhaps, legalization denotes trouble for industries like alcohol, tobacco, and pharmaceuticals, all of whom stand to lose significant market shares once cannabis replaces these vices as people’s substance of choice. Lobbyists for these industries continue to work tirelessly to oppose legalization, and members of Congress are still forced to follow. Until these issues change, we must wait for full legalization.
At the state level, change will happen, and rapidly. Already several states seem poised to have recreational programs on the ballot, in states where it is almost certain to pass. These include New Jersey, New York, North Dakota, Minnesota, Vermont, and Pennsylvania, all of whom will pass legalization by years end. More states will join the medical bandwagon, leaving perhaps one or two states with absolutely no cannabis legalization framework.
Public opinion will continue to positively increase and have more of an impact on the industry. If in 2019 we finally hit 66%, I predict that Year 2020 will have us hit 75%. As the younger generation grows up, and as the older one retires and fades away, the numbers will continue to rise. At the same time, science continues to develop, as new studies are coming out nearly every week showing another beneficial use of the cannabis plant. At the same time, organizations like CED Foundation and The IJCA continue to run awareness campaigns and spread the word, adding to the number of people who are exposed to ideas and understanding of the plant’s many uses. More studies and more awareness, reaching even more people, means more backing for legalization.
Hemp is poised for a huge gain in 2020. With the federal regulations in place, the industry now has definitive guidance on the government’s position. While CBD as medicine remains a tricky subject, certainly hemp’s use as a tobacco alternative, a plastic alternative, textiles, fabric, and other industry uses will skyrocket. I also believe that 2020 will see the FDA, DEA and USDA will work out some of the kinks with using CBD as an active ingredient, providing helpful guidance to an industry running around like a headless chicken. Once that occurs, again, the industry will expand rapidly, as more certainty from the government will allow more companies to enter the market.
Lastly, I think 2019 brought some valuable lessons to the industry. The way the projections did not turn into reality, and the hits that many businesses had to take, give us some really important lessons. Caution is urged when investing in an industry plagued by burdensome regulations and strong financial incentives not to join the legal market. The “traditional” market remains the elephant in the room. The likelihood of real enforcement crackdown is low, because of limited resources, sheer numbers, and the probability that any enforcement would result in really bad press. Because investors have now been warned, the industry’s growth will slow. We will continue to see startups join the market, but perhaps on a smaller scale.
I hope that this discrepancy between projections and sales will also be a lesson for our legislatures. They need to come up with solutions that create subsidies for those coming out of the shadows so that states can see the actual revenues they hoped for. They may have to accept several billion in illegal sales as water under the bridge. They may have to lower tax rates to incentivize people to legitimize their operations. They may have to lessen the licensing requirements, making it easier and cheaper for those interested in joining to actually do so. The specific decisions are theirs to make, but they need to get creative about solving this problem.
Overall 2019 was a successful year for the industry. Even the downsizing and financial hits taken will prove to be valuable in the long run. Just like getting out of bed too fast can result in injury, an industry that expands too rapidly can result in harmful consequences.
Benjamin Caplan, MDWHAT 2019 HAS TAUGHT US ABOUT WHAT 2020 WILL LOOK LIKE: PROCEED WITH CAUTION
Cannabis wasn’t always a taboo topic. Hemp, a variety of the Cannabis Sativa plant, has a rich history in the United States as being a valuable and versatile crop. Hemp was booming as a “cash crop” because not only was it useful in a range of industries, but it was also very easy to grow. The fiber from the plant has many uses, ranging from textiles and clothing to sails for rafts, rope, and paper. In fact, the Declaration of Independence was originally drafted on hemp paper! Unfortunately, with the passing of the 1937 Marijuana Tax Act that lumped all cannabis in the same group of regulated narcotics and the rise of inexpensive synthetic fibers in the 1950s, hemp’s popularity took a sharp decline. It wasn’t until 2018 the United States removed hemp as a Schedule 1 substance. Now, the plant is surging in popularity again for its many uses, especially the extraction of CBD for states that do not have any medical cannabis sales available.
What: Laws and regulations about growing cannabis in MA
Cannabis has earned the name “weed” for good reason. While careful allotments of light, humidity, soil, and nutrients affect its health and potency, cannabis is a resilient plant, built to thrive even in the harshest conditions. With its natural flexibility, cannabis growth can be an enjoyable hobby for people who are interested in growing their own medicine, either for the pleasure of attending to a growing plant or the joy of saving from the costs of dispensary products.
There are regulations and firm restrictions in place for how many plants can be grown in a home and any potential impact on visibility to neighbors. In Massachusetts, each adult may grow up to six plants, themselves, and no more than 12 plants per household with more than two adults. The plants must be grown in a secure, preferably lockable location, and they may not be visible from a public place.
It’s also important to know that just because it is legal for adults to grow cannabis, landlords and private living facility operators like nursing home or assisted living facilities often have the final say on the cultivation of cannabis on their property.
In general, gardening has been associated with reducing stress, depression, and anger. Considering these benefits, and the positive effects that cannabis medicine offers, once the crop is ready to be cured, cultivating one’s own cannabis is quite an attractive option.
Of note: Cannabis consumed from a home grow should still be lab-tested. Cannabis is a plant especially skilled at absorbing micronutrients (and micro-toxins) from its environment. Even when grown in “organic” soils, undesired contaminants can seep into the plants. Lab testing facilities exist and are easily accessible in all states with legal medical cannabis, and typically cost anywhere from $0 to $100 dollars for basic testing of final plant products.
The security camera footage has been watched thousands of
times. Breaking in through a skylight in the ceiling, dropping a ladder down,
and methodologically getting away with dozens of bags of finished product. The
video clearly shows that this was a professional job carried out by serious
criminals. The estimated value stolen was over $1M, meaning an estimated tax
revenue loss for Oregon of about $230,000. The culprits remain at large, and they
may never be found.
This isn’t the only incident either. A quick internet search
highlights several other high-profile incidents, with varying degrees of
professionalism, danger, and dollars lost. While each of these incidents have
differences, they all share something in common. The legal industry is known
for having large amounts of cash on hand, surplus product lying around, with
varying amounts of security in place. The industry is susceptible to these kind
of targeted robberies, a fact which is unlikely to change in the near future.
Why is this the case? The answer starts with the fact that
cannabis remains illegal at the federal level. The government classifies
cannabis as a Schedule 1 drug, meaning it is considered to have no medical
benefit and a high potential for abuse. Because that is the case, financial
institutions have been hesitant to open accounts and do business with MRBs
(Marijuana Related Businesses), because they fear financial penalties, asset
forfeiture, as well as civil and criminal repercussions.
Beyond the fact that the government considers MRBs to be
illegal drug trafficking operations, several related details make banks
hesitant. Bankruptcy courts are (almost) completely closed to MRBs. That means
that if a company goes under, the bank has no recourse to get its money back.
Section 280E of the tax code means that MRBs pay exorbitantly high taxes,
making them significantly less profitable, solvent, and viable as account
holders. The industry also still carries a stigma that makes some banks
concerned about their other clients, who may close accounts upon learning that
the banks have been doing business with MRBs.
It’s not all bad news, however. This issue has been talked about for years, and as the number of states with legal cannabis industries grows, banks have become more willing to get involved. The federal government hasn’t been silent either. The well-known Cole Memo, put out by the Obama administration, essentially stated that as long as businesses were operating legally under state law, they were a low priority for enforcement, as federal resources were better spent elsewhere. Subsequently, the FinCEN (Financial Crimes Enforcement Network, a bureau of the Treasury) announced that banks doing business with MRBs should follow the Cole memo’s guidelines to determine whether their customers were operating legally under state law.
When the Trump administration took over, AG Jeff Sessions
rescinded the Cole memo, stating that prosecutors already have discretion as to
how to use their limited resources, and there was no need to single out MRBs
for special treatment. This suggested to some that the DOJ was going to start
going after MRBs even if they were operating legally under state law.
Thankfully, this didn’t happen, at least not on the large scale that some
feared might happen. However, doubt and uncertainly remained for financial
institutions, most of whom refused to bank the money from MRBs. Earlier this
year, FinCEN announced that they still expected banks doing business with MRBs
to be reporting suspicious activity using the Cole memo guidelines. In a
backhanded way, this was an announcement that it was ok for financial
institutions to do business with MRBs, and many have begun or continued to do so.
As long as cannabis remains illegal at the federal level, there will be fear and risk that comes along with doing business with MRBs. This means that many companies choose to keep large amounts of cash on hand, created the obvious incentives that thieves look for when picking a target. If we don’t want these incidents to continue, we need to redouble our efforts to push legalization so that the financial, security, and investment opportunities catch up to the rate of business growth. Two helpful and relevant bills are currently making their way through Congress, though neither seems likely to become enacted. The MORE Act, a comprehensive overhaul of the cannabis laws recently passed the House Judiciary Committee. However, the bill is yet to be brought to a full House vote, and the Senate is even less likely to bring the bill to the floor. Then there is the SAFE Banking Act, which passed the House 321-109 earlier this year, in a landmark bipartisan victory. But that bill seems to be dead in the House, as Mitch McConnell positions himself as opposed to any movement in the field. As such, the immediate future for the industry does not seem to hold significant change, and these problems will persist. While I certainly do not want to see more of these incidents, we likely have not seen the last one.
Benjamin Caplan, MDTHE $1M HEIST OF CANNABIS PRODUCT IN PORTLAND HIGHLIGHTS SECURITY PROBLEMS IN THE INDUSTRY
Starting with the 2014 Farm Bill, and continuing with the 2018 Farm Bill, we have seen a dramatic shift in the landscape governing hemp. Prior to 5 years ago, hemp production was entirely illegal, as the Federal government handled industrial hemp the same as it handled high-THC marijuana. It was an established Schedule 1 controlled substance, entirely illegal to grow, harvest, or possess.
As awareness has grown, and the true benefits of the hemp plant have become more widely understood, the federal government has passed legislation to decriminalize hemp. However, although it is no longer considered a controlled substance, the questions about the process and regulatory requirements abound. This is because all plants grown in the United States are highly regulated by the United States Department of Agriculture, or the USDA, which has a complex framework of licensing, reporting, and general requirements for every specific product grown in the country.
Last week, the USDA published the draft of its regulations
for the hemp industry. Since the 2018 farm bill, we have been living in the
“wild west” for hemp. As promised, the USDA released its rules in time for
farmers to get legal and licensed for the 2020 season. However, this
long-awaited release has been met with mixed results.
Many lawmakers and industry leaders are happy that the
federal government has finally put out regulations for hemp. First, they see
this as a dramatic shift from the era of prohibition, alone a cause for
celebration. Others see the certainty that we are going to have regulations put in place means that the industry will start to
grow and develop at a much faster pace. It is certainly true that the future is extremely
bright for hemp. But other farmers and individuals have expressed concerns with
some of the regulation’s details.
The “0.3% THC” limit, which delineates the difference
between legal “hemp” and illegal “marijuana”, may be too stringent for some
growers. They report that a mature hemp plant will have a THC content that will
vary from day to day, including some spikes over the 0.3% limit. The new
regulations require strict testing to be done prior to harvest, and if the
resulting THC content is too high, the entire crop must be destroyed. This may
cause farmers to harvest before true maturity, leading to a decrease in the
potency or effectiveness of the CBD derived from such a harvest.
The regulations also allow the states to develop their own plans
and submit them for approval. Some are concerned that some states may try to
infringe on the interstate commerce occurring there, which could cause all
kinds of problems and complications for the industry. Still others are worried that
the method for disposing of “hot crops” requires just a little too much DEA
involvement, which could also cause disruption or have a chilling effect on
growth.
It is clear that these regulations are a good step in the right direction. It’s also clear that this is just the beginning, and there is still plenty of room for improvement. The USDA announced a 60-day window for submitting public comments, and then they will consider any suggestions, and then publish a final rule in the future. I encourage you to read the regulations or a summary of them. I encourage you to think about how you would be affected by these rules, and what suggestions you may have. Speak to an expert about how you can do your part to improve the landscape of the industry for the future.
Last week, the Tax Court continued the line of cases denying tax deductions under Internal Revenue Code §280E. That section says that any business which is “trafficking in controlled substances” cannot receive many of the traditional deductions that a business may take. Otherwise put, this means that a company must pay taxes on all of its incoming revenue before it subtracts most of its expenses.
This law can be a severe punishment for a cannabis company
that may be operating entirely legally under state law. Unfortunately, the
federal government still considers them to be “drug-dealers” and holds this
punitive tax measure over their heads.
The case before the tax court involved a dispensary that filed taxes and took deductions for its business expenses. The IRS sent them a bill of $1.26 million, plus another 250K in fines. The company filed suit, asking the court to declare that it did not have to pay those bills.
A divided court rejected the company’s three arguments. In addition to the majority opinion, there were two concurring opinions and two dissenting opinions. Of particular interest is the Gustafson dissent, which opens up a new avenue for declaring §280E to be a Constitutional violation. Essentially, Gustafson argues, that the 16th Amendment allows Congress to tax income. Income is defined as “gain”, or net profits, minus costs, to get those profits. So for Congress to then disallow normal business expenses, it means that they are taxing more than actual income, which violates the 16th Amendment.
This argument was only agreed to by one other Judge on the
tax court, which ultimately ruled against the dispensary. However, in the
future, as the public opinion shifts, the policies behind these prohibitive
rules may fall away, and we may not be far away from a court coming to the
opposite conclusion. Legal Cannabis companies are working tirelessly to follow
the law, and they should be rewarded for doing so. Continuing the regime of
these prohibitive financial policies constitutes a “subsidy for the black market.”
The way to solve this problem is to shift the financial incentives in favor of
operating under a legal framework, and avoiding this severe tax problem is the
best way forward.
To explore related information, click the keywords below:
Benjamin Caplan, MDUS Tax Court denies deduction request under §280E, but leaves the door open for future challenges
Title: Medicinal versus Recreational Cannabis Use among Returning Veterans
In Summary:
A recent study found significant mental and physical health differences between veterans who use cannabis that they label as “medicinal” use versus those who prefer to label their use as “recreational.” Veterans who feel that they are self-medicating with cannabis, in what they believe fits more closely with a “medical” label are five times more likely to suffer from post-traumatic stress disorder (PTSD), nearly four times more likely to suffer from Major Depressive Disorder, and are more likely to experience Insomnia, or trouble sleeping. Furthermore, a majority of veterans medicating with cannabis suffer from conditions that qualify them to receive a medical marijuana registration card. Even so, they tend to refrain from discussing their interest in access with their doctors, out of fear of losing their valuable VA benefits.
Dr. Caplan and the #MDTake:
Over the years, countless veterans have valiantly and courageously dedicated themselves to missions of support for their fellow men, women, and country. In preparation, training, service, battle, leadership, education, and so many other ways, veterans have given back to their culture in a way few others can. The understanding that they may be shunned by their culture for seeking help, related to the suffering they may have experienced while serving their country, is unconscionable. It is shameful that the government and military have not appreciated and supported the easy opportunity to give back to our veterans, and it is long overdue that the culture gives back to those who have given a piece of themselves so that others may share the liberties they have served to uphold.
