iAs to the former, the fate of the Marijuana 1-to-3 Act of 2023 remains with the US Drug Enforcement Administration (DEA). And as to the latter, we anticipate that US Congress will once again have numerous opportunities to vote on bills that would allow Federal Deposit Insurance Corporation- (FDIC) insured banks to do business with cannabis-touching companies without fear of federal reprisal. Also under the federal umbrella, IRC 280E, which disallows certain deductions incurred in the sale of cannabis, remains a thorn in the side of cannabis-touching companies. In 2024, we anticipate cannabis companies will continue to explore creative approaches to lessen their tax burden but are still advised to only deploy lawful means, as both civil penalties and criminal charges remain real concerns for tax evasion.
States are weighing in as well, with Florida, Wisconsin, Indiana, Pennsylvania, and South Dakota, all considering forms of marijuana legalization.
Though New York legalized marijuana in 2022, it continues to make the news for its efforts to build the regulatory plane while flying it. Case in point, the New York Supreme Court recently considered an out-of-state marketplace’s challenge to New York’s Cannabis Control Board’s prohibition on third-party advertising for cannabis products. In an astounding April 3 opinion, Justice Kevin Bryant ruled that all New York State cannabis regulations are unconstitutional and therefore, null and void. The next day Justice Bryant narrowed his ruling, finding that only the third-party advertising specific regulations at issue in the case are unconstitutional.
Further, we anticipate that the distress visiting the cannabis market in 2023 will continue in 2024. This has led to widespread restructuring in the cannabis industry, with major players either shuttering entirely or significantly shrinking their industry footprint (witness, MedMen), and other healthy companies combining to take on new marketshare (e.g., TPCO and Gold Flora). However, while cannabis companies remain barred from seeking federal bankruptcy protection, we are increasingly seeing secured lenders successfully pursue state-level receivership or foreclosure proceedings in order to enforce secured claims by seizing collateral.
Read on for a fulsome analysis of these issues facing cannabis companies in 2024.
1. Current State of Federal Cannabis Legislation
In 2023, Congress was actively introducing bills to address cannabis issues on a national basis. Many bills were introduced, but all of those bills are all still pending in Congress. This means the 2024 Congressional cannabis reform efforts are going to look very similar to the 2023 work. The legislation that was introduced includes a variety of bills and we will summarize some of them now.
During the 118th Congress, the SAFE Banking Act gained the most traction. The SAFE Banking Act of 2023 was introduced in the US House of Representatives by Rep. David Joyce (R-OH), and a companion bill was introduced in the US Senate by Sen. Jeff Merkley (D-OR). The bipartisan bill aims to provide protections for federally regulated financial institutions that serve state-sanctioned cannabis businesses. The legislation would make banking services accessible to cannabis businesses by ensuring that financial institutions can offer services to state-sanctioned businesses without fear of penalties. Moreover, provisions in the legislation will enforce transparency and liability so that transactions involving state-sanctioned cannabis businesses are no longer considered proceeds from unlawful activity. In the House, the bill was referred to the Subcommittee on Economic Opportunity with more than 100 cosponsors. In the Senate, the bill was referred to the Committee on Banking, Housing, and Urban Affairs with 42 cosponsors and it is likely to garner more attention throughout 2024.
Kicking off the 118th Congress, Rep. Gregory Steube (R-FL) introduced Marijuana 1-to-3 Act of 2023 which proposes a significant change to cannabis regulation. If passed, it would reclassify cannabis under the Controlled Substances Act. Specifically, it will direct the US Drug Enforcement Administration (DEA) to transfer cannabis from Schedule I to Schedule III. The bill does not address any other provisions of federal law and has not moved out of the Committee on Energy and Commerce, or the Committee on the Judiciary. This legislation might not be relevant if the Executive branch moves administratively to declassify cannabis during 2024.
The Marijuana Opportunity Reinvestment and Expungement (MORE) Act was introduced in September 2023 and would make the federal government the primary enforcement authority over cannabis regulation. Its main goal is to approve full federal cannabis legalization through a complete de-scheduling of cannabis. It also has a primary focus on racial equity and includes criminal case expungements for certain cannabis offenses as well as a community reinvestment program. This legislation remains in committee and has more than 80 cosponsors, including strong support from members of Senate leadership. If any legislation on cannabis goes through the Senate in 2024, this bill will be included at some level.
Also in September 2023, Sen. Cynthia M. Lummis (R-WY) and Sen. Steve Daines (R-MT) introduced the Deferring Executive Authority (DEA) Act. The legislation would limit the DEA’s ability to reschedule cannabis without Congressional approval. The DEA Act sets forth a process for Congressional review of any cannabis rescheduling decision made by the DEA and mandates Congressional approval before any rescheduling decision can take effect. This bill was read twice and referred to the Committee on the Judiciary. This legislation could also be short circuited after Executive action on rescheduling cannabis.
In October 2023, Rep. Nancy Mace (R-SC) introduced the States Reform Act of 2023 with bipartisan support. The legislation would made changes to cannabis regulation by establishing a federal permitting process for cannabis-related businesses, seek to provide federal oversight with medical cannabis products that cross state lines, impose a 3% federal cannabis excise tax structure, and include a 10-year moratorium on any increases to the federal cannabis excise tax. Essentially, it aims to federally regulate and impose a standardized framework for cannabis-related activities. The bill was referred to the Subcommittee on Nutrition, Foreign Agriculture, and Horticulture, and has not passed through committee.
Similarly, the Strengthening the Tenth Amendment Through Entrusting States (STATES) 2.0 Act introduced in December 2023, aims to address cannabis regulation. The bipartisan legislation was introduced in the House by Rep. David Joyce (R-OH). The bill would defer much of the enforcement authority to the states. Both the States Reform Act of 2023 and STATES 2.0 Act would remove the Controlled Substances Act (CSA) entirely and task the US Food and Drug Administration (FDA) with regulation of cannabis products.
The ArentFox Schiff Government Relations team will continue to track cannabis legislation in Congress and update you on important policy developments in the Cannabis space.
2. Democratic Administration
In the event that President Biden is reelected, it is possible, albeit not likely, that the President will come out in favor of and/or champion federal legalization of cannabis. While President Biden has been publicly skeptical and critical of cannabis throughout the entirety of his political career, his party and voters are largely in favor of cannabis legalization. For instance, a recent Pew Research poll from 2022, noted that 73% of Democratic and Democratic-leaning voters supported legalizing cannabis for medical and recreational use. In addition, while the current Biden Administration has not embraced cannabis legalization, it has taken recent steps to de-schedule marijuana as a Schedule I drug under the Controlled Substances Act and has continued the Obama’s Administration’s policy of non-enforcement of legal state cannabis enterprises. Also, if President Biden prevails in November, it is very likely that the Democrats will also take back the House of Representatives (in which Republicans currently only hold a 3-seat majority), removing an impediment to federal cannabis legalization in Speaker Mike Johnson, who has been famously hostile to cannabis in the past.
3. Republican Administration
In the event that former President Donald Trump is elected, the odds of federal cannabis legalization are grim, at best. Former President Trump did not advocate for or advance any cannabis legalization during his prior term in office and famously appointed among the most anti-cannabis Senators, Jeff Sessions, as his first Attorney General. The same 2022 Pew Research poll showed only showed 45% support among Republican and Republican-leaning voters for legalizing cannabis for medical and recreational use. Also, if former President Trump prevails in November, it is very likely that the Republicans will take back the Senate (in which Democrats currently hold a 2-seat majority), adding an additional impediment to federal cannabis legalization.
4. New States Legalizing Cannabis
In 2023, only Ohio legalized recreational cannabis. In 2024, with a presidential election on the horizon, other states may join in the fray. Cannabis legalization supporters in Florida recently qualifiedfor the November ballot, with a state constitutional amendment legalizing cannabis. In Wisconsin, Governor Tony Evers said that while he prefers full legalization, he is open to signing the state legislatures plans for more limited medical marijuana legalization, for which a public hearing is being scheduled. Indiana recently passed a Republican-led psilocybin research bill, but tabled consideration of medical marijuana legalization. Pennsylvania is another state where cannabis legalization may occur, with support from the governor and Democratic-led State House of Representatives, with the Republican State Senate possibly remaining an obstacle. Lastly, citizens in South Dakota are collecting signatures to add cannabis legalization to the 2024 ballot.
5. Generative AI
There was an initial trend to integrate generative artificial intelligence (GenAI) into the cannabis consumer market, but we’re quickly approaching a time when GenAI will be fully incorporated into a wide variety of cannabis-related functions and at every stage of the process, from growing to warehousing to retailing. However, there are certain legal considerations for cannabis businesses to consider before leveraging the benefits of GenAI, as summarized in our recent alert here.
6. Distressed Cannabis Assets/Access to Debt/Access to Capital
Since peaking in February 2021, publicly traded plant-touching operators within the cannabis industry have materially underperformed the S&P 500 Index’s stock performance during 2021, 2022, and 2023. Similarly, the cannabis debt markets have evolved significantly due to the decreasing availability of capital, by requiring real-estate backed financing, higher covenants, and structural protection and equity grants. Many operators with sizable debt have started restructuring.
Restructuring cannabis companies can be more difficult due to the lack of Chapter 11 bankruptcy protection. However, several companies have restructured through various means, including renegotiating credit agreements or negotiating strict foreclosure agreements to “hand the keys” over to secured lenders. Complicated capital structures with various tranches of debt, notes, and equity can mean protracted negotiations to secure required consent. However, the threat of a secured lender foreclosure can be used to entice unsecured creditors or equity holders to consent to overall transaction and agree to applicable concessions (extension of maturity date, reset conversion mechanics, etc.). If a negotiated resolution is not achievable, then secured lenders have started to successfully pursue state-level receivership or foreclosure proceedings to enforce secured claim by seizing collateral.
7. Increased State Regulation (or Prohibition) of Intoxicating Hemp Products
The past few years have seen a proliferation of intoxicating hemp products and hemp-derived cannabinoids throughout the United States. Two increasingly popular hemp-derived cannabinoids are delta-8 THC and delta-10 THC, which, like their close cousin delta-9 THC, produce psychoactive and intoxicating effects. Both cannabinoids occur naturally in hemp plants, but only in trace amounts. They also can be chemically synthesized from naturally occurring cannabidiol (CBD) in hemp (inexpensively, in the case of delta-8 THC).
The 2018 Farm Bill expanded the definition of “hemp” under federal law to include “all derivatives, extracts, cannabinoids, isomers, acids, salts, and salts of isomers [of the Cannabis sativa L. plant] with a delta-9 [THC] concentration of not more than 0.3 percent on a dry weight basis.” While the 2018 Farm Bill was silent regarding the legal status intoxicating hemp-derived cannabinoids like delta-8 THC and delta-10 THC, proponents have argued that these products are federally legal on the basis that they are “derived” from hemp and contain 0.3% or less of delta-9 THC. However, the legality of intoxicating hemp-derived cannabinoids under federal law is far from settled.
The FDA has initiated a few enforcement actions against companies marketing delta-8 THC products, has warned about the “serious health risks” associated with delta-8 THC, and noted that there has been a dramatic increase in the number of reports of adverse events involving delta-8 THC. However, legal ambiguity related to the 2018 Farm Bill has left intoxicating hemp products largely under- or unregulated. They rapidly became widely available to consumers across the country, often with limited or no restrictions on where they can be purchased, who is able to purchase them, or their ingredients, composition, purity, and freedom from toxic contaminants.
In the absence of meaningful federal oversight of intoxicating hemp products, individual states have begun proposing their own controls — a trend that we expect to continue. One of the most recent examples is South Dakota’s HB 1125, which was signed into law on March 26, and bans the sale of any hemp product containing a psychoactive THC isomer, analog, or derivative (including, but not limited to, delta-8 THC and delta-10 THC) that has been chemically derived from CBD or any other chemical substance derived from the cannabis plant. The law also bans any person or entity from performing such a chemical modification. This bill follows in the footsteps of similar legislation in other states, for example North Dakota’s SB 2096, which was enacted in August 2023.
8. Potential Rescheduling of Cannabis
Perhaps one of the most significant potential developments on the horizon for the cannabis industry is the possibility of rescheduling “marihuana” (non-hemp cannabis) — i.e., removing it from Schedule I under the federal Controlled Substances Act (CSA).
Last August, the FDA, via the US Department of Health and Human Services (HHS), issued a recommendation to the DEA to reclassify non-hemp cannabis from Schedule I to Schedule III.
The CSA authorizes DEA to “transfer between [] schedules” any drug that meets the criteria for inclusion in the “schedule in which such drug is to be placed,” or to “remove any drug...from the schedules” if it “does not meet the requirements for inclusion in any schedule.” However, before DEA reschedules a drug, it must request from HHS a “scientific and medical evaluation” and recommendation for appropriate scheduling (which HHS has delegated to FDA).
FDA’s recommendation to move non-hemp cannabis from Schedule I to Schedule III reflects the agency’s conclusion that non-hemp cannabis has a moderate to low potential for abuse, an accepted medical use in the United States, and a moderate or low potential for physical dependence or a high potential for psychological dependence. However, ultimately the decision whether to reschedule non-hemp cannabis will be made by DEA, which is not obligated to follow FDA’s recommendation.
Historically, DEA has cited to international treaty obligations when rejecting previous attempts to reschedule non-hemp cannabis. However, if DEA decides to depart from this historical position and move non-hemp cannabis to Schedule III, there would be many significant implications for state-legal cannabis businesses. Among other things, the burden of Internal Revenue Code 280E would be eliminated and businesses would be able to take credits or deductions other than those for costs of goods sold. Potential penalties for violations of the CSA would be much less severe, but non-hemp cannabis would still be subject to fairly onerous DEA requirements that govern the manufacture and distribution of Schedule III substances. Further, the cultivation and sale of non-hemp cannabis for medical use (i.e., medical marijuana) presumably would be prohibited under the federal Food, Drug, and Cosmetic Act on the basis that it is an unapproved drug — though FDA and/or other policymakers might choose to exercise enforcement discretion and allow existing medical cannabis businesses to continue operating.
9. Current Tax Issues in the Cannabis Industry
Cannabis retailers and their owners are well aware of the pain caused by Section 280E of the Internal Revenue Code, which disallows certain deductions incurred in the sale of cannabis. Anecdotally, a few cannabis retailers are intentionally not applying Section 280E. This idea is a bad one for many reasons. First, the Internal Revenue Service (IRS) actively audits cannabis businesses. If a company is caught in a tax audit intentionally not applying Section 280E, the civil tax penalties can include a penalty equal to 75% of the tax avoided. The possibility of criminal charges being brought for tax evasion also cannot be discounted.
Second, if a company has not properly applied Section 280E, it could make it difficult to sell the company. Often, equity interests of cannabis businesses are sold rather that the assets (including the licenses) of the business. Thus, a buyer could be assuming potential tax liabilities of the acquired company for prior tax periods. Buyers therefore may hesitate to purchase the equity of a company that has a policy of not applying Section 280E. Even the sale of assets may not cure the problem, as there are successor liability rules that could apply to a buyer.
The advisable approach is to apply Section 280E as required under current federal law, but to minimize the tax through lawful means. In part, this means adding as much as permitted to costs of goods sold and having a separate company not subject to Section 280E handle excess inventory. Hopefully, Section 280E will be amended by Congress sooner rather than later, particularly in light of many states legalizing the sale of cannabis. But for now, Section 280E remains a federal law.
Cannabis retailers should also determine if their state has a law that does not apply Section 280E for state income tax purposes. If they do not, they should consider joining a lobbying effort to persuade the state legislature to change the law.
10. Navigating Trademark Challenges in New York's Recreational Cannabis Market
As New York’s recreational cannabis market takes off and new and existing businesses scramble to establish market share, cannabis businesses are reminded of the need to protect their own valuable brands while taking steps to avoid infringing the trademarks of others. Proactive intellectual property (IP) strategies and vigilance are therefore crucial to establishing and protecting unique and distinctive brands, as well as avoiding potential pitfalls and costly disputes.
While federal restrictions on marijuana pose challenges for securing robust trademark protection at the federal level, and largely limit cannabis businesses to registering their marks with the US Patent and Trademark Office (USPTO) in connection with ancillary products and services such as apparel and consulting, as well as hemp-derived products that fall within the narrow scope of the 2018 Farm Bill’s carve-out for “hemp” from the Controlled Substances Act’s definition of marijuana (i.e., those that contain no more than 0.3% THC on a dry-weight basis). Cannabis businesses can otherwise supplement their trademark rights and build strong portfolios by pursuing registration of their brands at the state level, including in New York, in connection with their core, plant-touching products or services. In a rapidly evolving market, cannabis businesses should regularly monitor for potential infringers and take steps to promptly enforce their trademark rights once infringing activity is detected.
It is also critical that cannabis businesses perform due diligence on any new branding initiatives to understand potential risks and avoid expensive and time-consuming conflicts with third-party brands. Although it can be tempting to adopt clever and humorous branding that evokes otherwise well-known brands to stand out and catch the attention of consumers, the ultimate costs to the business can often dwarf any perceived benefits from pushing the boundaries of trademark law. For instance, a pair of Brooklyn cannabis bodegas operating under the name “Zaza R Us” found themselves in hot water last year when they were sued by the owner of the “Toys R Us” brand over their allegedly confusing name, and the US District Court for the Eastern District of New York recently issued an order in TRU Kids Inc. v. ZaZa R Us et al, granting the plaintiff’s claim for trademark dilution and enjoining the defendants from use of the “Zaza R Us” mark. This case serves as a cautionary tale for cannabis businesses and highlights how appropriate trademark clearance strategies are essential to preventing costly business disruptions and forced rebranding efforts.
ANTHONY D. PELUSO , STARSHINE S. CHUN , TIFFANY O. YADEGAR , PATRICK LAI , and ROBERT G. EDWARDS, PH.D. also contributed to this article.
