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Navigating the complexities of cannabis rescheduling

The prospect of rescheduling cannabis from a Schedule I to Schedule III classified substance has stirred a mix of hope and caution within the cannabis industry. While on one hand, reclassification could have significant benefits from a taxation perspective, it also brings a host of unanswered questions about how cannabis would be regulated, licensed and sold moving forward. Further, it raises the question of how banking in this line of business could be affected.

To better understand the nuances and complexities of this potential shift, I sat down with Zane Gilmer, a partner at Stinson LLC, who counsels clients on emerging legal issues, including the vast and ever-changing legal and regulatory issues concerning doing business with state-licensed cannabis entities.

First, some context. In October 2022, President Biden directed the Department of Health and Human Services (HHS) and the Attorney General to review how cannabis is scheduled under federal law. This was the first time a rescheduling petition was filed by the White House (in an election year, to boot), and while the HHS, in a historic first, recognized the acceptable medical use of cannabis in its rescheduling recommendation, the DEA, which has final authority, has yet to announce a decision. It is worth noting that the DEA has rejected five previous rescheduling petitions dating back to 1972, each time on the basis of science, so it’s anyone’s guess what the DEA will do this time around.

All this said, even if cannabis is reclassified as a Schedule III substance and is recognized as having federally accepted medical use, it does nothing to resolve the conflict between state and federal rules that apply to banking this industry, which required the FinCEN guidance (and the since rescinded Cole Memo) to begin with.

So, what are the implications for banks and credit unions?

The Relationship between medical and adult use markets could change

One of the biggest uncertainties at this stage is what rescheduling would mean for the adult-use segment of the cannabis industry. Currently, all cannabis – regardless of whether it is for medical or recreational use – is technically federally illegal. This, conversely, strips away some complexity in terms of how cannabis is banked. Rescheduling could, according to Zane, set up a system that is more challenging than what we currently have because it could result in the medical market becoming federally recognized, leaving the adult-use market unaddressed. There is also the question of what kind of regulations would accompany rescheduling. While there’s been some chatter in industry circles about a “Cole 2 Memo,” there are still many unknowns about what the regulations would look like, and how they would impact financial institutions. As Zane put it, “rescheduling is only part of the story. The rest of the story is about the regulations that come with it.”

An improved tax environment will improve profitability

Amidst the many unknowns, a clear benefit of rescheduling would be the removal of tax code Section 280E prohibitions. This change would allow licensed cannabis businesses to deduct ordinary and necessary business expenses on their federal tax returns. This would have a significant impact on cash flow, making cannabis-related businesses significantly more profitable and attractive targets for financial institutions – not just for their increased deposit balances, but also for their enhanced creditworthiness.

Strategic partnerships are necessary to navigate the complexities

Because cannabis rescheduling is not a panacea for the conflict between federal and state laws, licensed operators and the financial institutions that serve them must approach this evolving landscape with vigilance, adaptability and a strong understanding of the regulatory frameworks at play. Engaging with experts in the legal, compliance, audit and BSA/AML space who understand the cannabis industry and operational requirements can be instrumental in ensuring banks and credit unions have the right risk management processes in place and are set up for success to serve the needs of their cannabis customers and the broader community. To learn more about banking the cannabis industry, please download our Cannabis Banking Playbook.

This article was originally published in Banking Dive


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