State-Licensed Medical Cannabis Is Now Schedule III: Your Federal Exposure.

The DEA’s April 22 final order did not move all marijuana into Schedule III. Instead, the Order specifies two categories of marijuana and THC-containing products and subjects them to the laws and regulations of the controlled substance schedules. The Order moves the first category of marijuana (that covered by “qualifying state medical licenses”) from Schedule I into Schedule III, but leaves the second category of marijuana (unlicensed bulk marijuana and recreational marijuana) under Schedule I’s classification regime. As a result, many individuals and businesses are still at risk for criminal prosecution, as are some financial institutions and business entities serving as wholesale, retail, or distribution companies under the state-licensed medical marijuana industry.

The distinction between marijuana classified as a Schedule I substance and marijuana classified as a Schedule III substance is that while both are still controlled substances under the Controlled Substances Act, marijuana in Schedule I is more severely regulated and carries harsher criminal penalties for possession and for other criminal offenses. The DEA’s recent order has reduced some of the federal exposure of individuals and business entities by reducing the severity of the penalties they face, but it also did not remove the risk of federal prosecution for medical cannabis business owners facing charges related to bulk unlicensed marijuana and recreational marijuana.

Crucially, a qualifying state medical license or compliance with state recreational marijuana laws does not qualify individuals and entities for Schedule III protections. Instead, to secure Schedule III status, individuals and entities must have compliance with one of the specific DEA requirements as detailed in the Order. This means that unlicensed individuals and business owners facing criminal prosecution, even for marijuana that is medical in nature and that is not being sold for recreational use, need to understand the specific legal boundaries of the DEA’s Order. This is true because the most important question is not whether their activities fall into the Schedule I or Schedule III regime, but rather whether their activities are federally lawful.

Unfortunately, marijuana activities that do not fall under the Schedule III classification are considered Schedule I offenses and the DEA’s Order does not protect marijuana businesses and individuals from criminal prosecution for distribution, cultivation, sales, and other activities related to unlicensed bulk marijuana and recreational marijuana under the Controlled Substances Act.

Which dispensary products qualify without becoming FDA-approved prescriptions?

The DEA’s final order specifically lists a limited number of product types that move from Schedule I to Schedule III. These include:

• Plant-derived delta-9-THC contained in FDA-approved products and devices
• Marijuana extracts in FDA-approved products
• Marijuana extracts that are covered by “qualifying state medical licenses”
• THC-containing other compounds in FDA-approved products and devices and other compounds covered by “qualifying state medical licenses”

The DEA’s final order does not change the status of all of the types of marijuana and THC-containing substances. Importantly, under the final order:

• Synthetic THC remains classified as a Schedule I substance
• Marijuana outside of FDA-approved products or not covered by a “qualifying state medical license” remains federally restricted

For many medical marijuana business owners, patients, and consumers, these facts may mean that the DEA’s final order has reduced their federal exposure for many of their activities, even if those activities are not federally lawful. For example, if a medical marijuana business owner is facing allegations of violating the Controlled Substances Act under marijuana’s Schedule I classification, the reclassification of their marijuana products into Schedule III could significantly narrow their potential liability. However, this only applies to medical cannabis business owners that are engaged in activities related to medical marijuana, which will no longer be considered a Schedule I offense.

Medical marijuana business owners that engage in other activities, including illegal distribution, cultivation, and sale of unlicensed bulk marijuana and recreational marijuana, could still be subject to Schedule I’s prohibitions under the Controlled Substances Act and will not be able to rely on the DEA’s final order. Medical marijuana business owners should consult with their defense counsel to determine their liability for federal prosecution under the Controlled Substances Act and other federal laws.

What must qualifying operators and researchers do before relying on the new schedule?

In the DEA’s final order, the DEA has established the process under which an eligible entity or individual may apply for registration to receive, manufacture, distribute, or dispense Schedule III substances on a “provisonal” basis. As noted, for the time being, this is only available to entities and individuals which are “state medical licensees.” A “state medical licensee” may apply for a “federal Schedule III registration” by submitting “proof of a state medical marijuana license.” These applications must be submitted through the expedited registration process, and applications submitted within 60 days of publication of the final rule in the Federal Register will receive expedited processing.

The DEA must make every effort to process applications submitted within 60 days of publication of the final rule in the Federal Register within six months, and those early applicants may continue operating under their state-issued licenses while their applications remain pending. Although the “state medical marijuana license” qualifies them to file for registration on a “provisonal” basis, registration is not automatically granted to all “state medical marijuana licensees,” as the DEA notes that all “expedited application” requirements must still be met before it can register an entity or individual under the new Schedule III designation.

If you think you may be eligible for registration as a “state medical licensee” under the DEA’s final order, or if you are facing federal charges under the Controlled Substances Act or other federal law and need to determine your potential liability, contact our federal criminal defense attorneys today. We provide comprehensive federal criminal defense representation for individuals and companies throughout the country. Many state and federal lawyers are now questioning their liability under the Controlled Substances Act after the DEA’s recent action and the impending Supreme Court decision, and it is important for medical marijuana license holders and investors to make informed business and legal decisions in light of these developments.

The first consultation is free and confidential, and it runs as long as your questions do.

How do 280E, banking, and anti-money-laundering rules actually change?

Section 280E of the Internal Revenue Code is the provision that imposes the prohibition on business expense deductions that has plagued the marijuana industry for years. Under section 280E, “No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.” which is derived “trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.”

As the DEA’s final order states: “The Administrator further notes that, as a consequence of this rule, holders of state medical marijuana licenses will no longer be subject to the deduction disallowance imposed by Section 280E of the Internal Revenue Code, which applies only to businesses engaged in "trafficking in controlled substances... in a schedule I or II," 26 U.S.C. 280E. The Administrator encourages the Secretary of the Treasury to consider providing retrospective relief from Section 280E liability for taxable years in which a state licensee operated under a state medical marijuana license. Nothing in this rule constitutes a determination regarding federal tax liability, and qualifying state licensees should consult with tax counsel regarding the applicability of Section 280E to their specific circumstances.”

Regarding whether the Order provides for retroactive tax relief under section 280E, the DEA notes that “The Administrator encourages the Secretary of the Treasury to consider providing retrospective relief from Section 280E liability for taxable years in which a state licensee operated under a state medical marijuana license. Nothing in this rule constitutes a determination regarding federal tax liability.” “no retroactive tax relief is available,” and that the “Nothing in this rule constitutes a determination regarding federal tax liability, and qualifying state licensees should consult with tax counsel regarding the applicability of Section 280E to their specific circumstances.”

However, while acknowledging that retroactive tax relief is not available under the Order alone, the Acting Attorney General encouraged the Treasury Department to consider the possibility of providing retrospective tax relief.

The same applies to how banking and other financial and business considerations are likely to change following the DEA’s move of marijuana into Schedule III. While many aspects of the DEA’s final order provide federal marijuana business owners and investors with greater peace of mind, they will still need to be extremely careful with regard to their operations going forward, especially if their operations are in an area that is not covered by the Order.

When can patients, workers, and drivers still face cannabis consequences?

Unfortunately, the DEA’s recent order also has little bearing on quantity-based mandatory minimums for offenses under 21 U.S.C. section 841. Mandatory minimums for marijuana offenses are based on the quantity of marijuana involved, and even if defendants can argue that their marijuana should have been in Schedule III, it seems likely that those who were already being prosecuted under Schedule I’s classifications will still have to face those penalties.

For drug-involved vehicle arrests and traffic violations, some courts are starting to recognize the fact that the odor of marijuana is not alone sufficient to establish probable cause for vehicle search warrants and arrests under Pennsylvania’s case law. For example, as one appellate court in Pennsylvania held: “The odor of marijuana alone, absent any other circumstances, cannot provide individualized suspicion of criminal activity when hundreds of thousands of Pennsylvanians can lawfully produce that odor. What it does provide to police is a general, probabilistic suspicion of criminal activity based on the fact that most citizens cannot legally consume marijuana. Thus, it is a factor that can contribute to a finding of probable cause, consistent with prior precedent, assuming some other circumstances supply more individualized suspicion that the activity is criminal.”

Moreover, the courts in Pennsylvania are now assessing marijuana search probable cause based on the totality of circumstances, taking into account factors such as location and the driver’s reactions to questions from the officers. This may mean that any driver arrested for driving while under the influence (DUI) needs to rely on these arguments to establish that the vehicle search was not legally valid, and they need to show that they were not actually impaired at the time of the stop. Even with the reclassification of medical marijuana into Schedule III, any evidence of impairment while driving will still expose patients and drivers to civil and criminal penalties. As many of our clients note, cannabis metabolites may remain detectable in the driver’s system long after their last joint, and field sobriety tests were originally developed for alcohol rather than for detecting impairment from smoking cannabis.

Contact a Federal Criminal Defense Attorney

Nothing here is legal advice, and the details of your case matter. Todd Spodek and Spodek Law Group take federal criminal and white collar cases nationwide, from offices in New York, Brooklyn, Queens and Los Angeles. You can reach the firm at 888 348 8028.