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Cannabis: what corporate law departments need to know

Information from this article was taken from the “Cannabis Toolkit,” one of more than 65,000 resources in Thomson Reuters Practical Law.

The Controlled Substances Act (CSA) identifies marijuana (as "marihuana" in the Act) as a Schedule I drug. Marijuana is defined as the cannabis plant, including seeds and its derivative products, with a delta-9 tetrahyrdrocannabinol (THC) concentration over 0.3 percent on a dry-weight basis. Under the CSA, all Schedule I drugs are illegal and are defined as having no currently accepted medical use and a high potential for abuse. Marijuana is therefore still illegal to grow, possess, or sell under federal law for any purpose, despite several state laws legalizing its cultivation, distribution, sale, and use for medical or recreational purposes. Additionally, financial institutions are required to file Suspicious Activity Reports (SAR) for disclosure of any US marijuana-related transaction.

Historically, marijuana under the CSA included all parts of the cannabis plant and derivative products. However, the 2018 Farm Bill amended the CSA to exclude hemp from the definition of marijuana and, therefore, exclude it from the controlled substances list. Cannabis plants and derivatives with no more than 0.3 percent THC on a dry weight basis are defined as hemp (Pub. L. No. 115-334).

Hemp and its derivatives, such as cannabidiol (CBD) derived from hemp, are not illegal under the CSA, but various federal agencies have authority to regulate hemp, such as the US Department of Agriculture (USDA), the Food and Drug Administration (FDA), the Federal Trade Commission (FTC), and the Department of Justice (DOJ). Until the applicable federal agencies implement frameworks for regulating hemp, some cannabis businesses may decide to comply with the law prior to the 2018 Farm Bill.

Additionally, certain hemp products and the finished goods incorporating its derivatives may still be illegal under the Food, Drug, and Cosmetic Act (FDCA). FDCA violations occur when these products are:

  • Sold with the intent that they be used to:
    • address adverse health conditions; or
    • alter the structure or function of the body.
  • Incorporated into any food, beverage, dietary supplement, or cosmetic, unless generally recognized as safe (GRAS) by the FDA.

Violators are subject to both civil and criminal enforcement action under the FDCA. This includes CBD and CBD products derived from hemp.

The US Federal Trade Commission can also investigate and take action against hemp-related businesses for untruthful or misleading advertisements regarding the benefits of their products.

Cannabis businesses must navigate the conflict between state and federal law. While the CSA criminalizes all marijuana-related activities, some state marijuana laws:

  • Recognize and protect the cultivation, sale, possession, and use of medical marijuana.
  • Have legalized marijuana for recreational purposes for people 21 and older.
  • Have decriminalized the cultivation, possession, and sale of marijuana.

Marijuana's status as a Schedule I substance at the federal level has significant ramifications for cannabis policy at the state level. For example, as a rule, cannabis businesses must pay taxes on all their revenue without the benefit of using their business expenses to reduce their taxable income under Section 280E of the Internal Revenue Code (IRC). Section 280E states that businesses engaging in the trafficking of a Schedule I or II controlled substance are prohibited from taking tax deductions or credits. Additionally, many cannabis businesses in legal states must operate as cash-only enterprises, since some banks are wary of transacting with businesses that do not comply with federal law.

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