Minnesota Adult Use Cannabis Law: What’s the Deal with Rescheduling?

This post is the fourth and final (for now) part in a multi-part series on Minnesota’s Adult Use Cannabis Law. Feel free to check out Parts 1-3 here, here, and here. The last post talked about medical cannabis. This next post will focus on the implications of recent news coverage (like this one from the AP) about the Drug Enforcement Administration’s (DEA) intention to reschedule marijuana under the Controlled Substances Act.

Before we get too far along, it seems some context would be helpful. The Controlled Substances Act, as the name suggests, is one of the cornerstones to the federal government’s enforcement of policies related to controlled substances (think “drugs, both legal and illegal”). The Act established five schedules, which are essentially lists of controlled substances grouped together based on their potential for abuse, the potential risk and severity of addiction, and accepted medical use (or lack thereof).

Schedule I contains the controlled substances with the highest risks for abuse and addiction (with no acceptable medical use), while Schedule V contains the substances that contain the lowest risks of abuse and addiction, as well as accepted medical use. These schedules are subject to change from both Congress and the Executive Branch. Since the effective date of the Act back in the 70s, marijuana has been listed on Schedule I. The DEA has suggested moving marijuana from Schedule I to Schedule III. For the purposes of the schedules, that would be a recognition on the part of the DEA that there is a lower risk of abuse and addiction than Schedule I justifies, as well as accepted medical uses.

Assuming marijuana is moved to Schedule III, why would this matter for cannabis businesses? The big reason is Section 280E. This is a section of the Internal Revenue Code that prevents businesses from claiming tax deductions for expenses incurred in a business that “consists of trafficking in controlled substances,” which explicitly includes substances listed in Schedule I and Schedule II. In other words, if your business involves controlled substances in Schedules I or II, you cannot reduce your taxable income by writing business expenses off of your taxes, such as materials, payroll, utilities, etc. The result of Section 280E is an effective tax rate much higher than businesses not subject to the Section.

Though the rescheduling of marijuana would benefit the tax situation of cannabis businesses, marijuana on Schedule III still means that it would be a controlled substance under federal law. That means recreational marijuana would still be illegal under federal law. Without FDA approval for marijuana for medical use, medical marijuana would still be illegal under federal law. This illegality under federal law will continue to complete cannabis businesses’ access to federally regulated services, such as banking.

Thank you for reading through the final part! This post wraps up the series for now, but if the chatter within Office of Cannabis Management [OCM] and the Minnesota Legislature are any indicator, this likely won’t be my last post on the topic for the year.