After completing an almost year-long evaluation of cannabis’s current status as a Schedule 1 substance, the US Department of Health and Human Services recommended to the Drug Enforcement Administration that cannabis be moved from Schedule I to Schedule III. While the DEA has the final say on such a change, the HHS recommendation is significant.
Reclassification is a step short of legalizing the drug entirely. Still, it would mark a critical shift away from cannabis’s status as a Schedule I substance, which includes drugs with high risk of abuse, like heroin, LSD, ecstasy, and peyote. Schedule III substances, like Tylenol with codeine, are seen as less dangerous and are available legally with a prescription.
In addition, rescheduling cannabis as a Schedule III substance would place cannabis on a level playing field with other businesses regarding tax policy. Section 280E of the Internal Revenue Code prohibits businesses from deducting business expenses, other than the cost of goods sold, from income if the company is associated with the trafficking of Schedule I or II substances.
As such, the 280e provision is arguably the single most significant financial drain on the cannabis industry — as it treats state-licensed cannabis businesses as drug traffickers and prohibits these businesses from claiming standard business deductions available to every other company in America.
As previously reported on Conduit Street, as of July 1, adult-use cannabis is legal under Maryland law. Nearly all existing medical dispensaries (approximately 100 locations statewide) have converted their licenses and can sell medical and adult-use cannabis products to adults 21+ with valid government identification.
Maryland law allows for a subtraction modification against the State individual and corporate income tax for the amount of ordinary and necessary expenses, including a reasonable allowance for salaries or compensation paid or incurred during the taxable year in carrying on a trade or business as a licensed medical cannabis grower, processor, or dispensary or a registered independent testing laboratory. Still, Maryland cannabis businesses carry a significant federal tax burden compared to other industries across the state.
In addition, reclassification could provide avenues for increased medical research and development.
According to Politico:
The shift in federal cannabis policy would also make it easier to conduct research on the health effects of cannabis consumption and for pharmaceutical companies to bring cannabis-based drugs to market. Researchers have long chafed at restrictions that only allow them to procure cannabis from a single farm at the University of Mississippi that bears little resemblance to the high-potency products many consumers are purchasing in state-legal markets.
Stay tuned to Conduit Street for more information.
Useful Links
Maryland Cannabis Sales Eclipse $90 Million in August
#MACoCon Debrief: Adult-Use Cannabis: Taxes, Zoning, and Safety – Oh My!
MD Cannabis Sales Soar to $87.4M During First Month of Adult-Use Market
Moody’s: Tax, Policy Tweaks Crucial to Unlock State Cannabis Revenues
Adult-Use Cannabis: New Guidance for MD Counties
