March has been a big month for cannabis reform and the $40 billion state-regulated marketplace.

President Biden mentioned cannabis reform and his administration’s efforts to reschedule the substance in his State of the Union address—a historic first for any U.S. president. Vice President Kamala Harris held a cannabis event in the White House, where she publicly expressed her desire to see the U.S. Drug Enforcement Administration (DEA) move quickly to reschedule and privately indicated her support for full legalization. The Journal of the American Medical Association released a report and editorial, noting that use of unregulated intoxicating hemp is more prevalent in states without a state-regulated cannabis marketplace. Multi-state operator Trulieve announced that they were receiving $113 million in IRC Section 280E tax refunds. ProPublica reported that the U.S. Department of Justice has prepared an updated Cole memo; this is significant because even in Schedule III, the industry will need clarity on enforcement priorities. A high-profile litigation challenging the constitutionality of Schedule I classification of cannabis continues to press forward. Previously, 12 state attorneys general wrote a letter to the DEA supporting rescheduling to Schedule III, and six governors did the same.

Meanwhile, Perkins Coie lawyers are leading law and public policy strategy for the Coalition for Cannabis Scheduling Reform, which will be filing public comments upon DEA’s issuance of a draft rule. The rule is anticipated to be released as soon as April. If DEA proposes moving marijuana to Schedule III, it is expected that rescheduling and the elimination of Section 280E tax penalties will mark a new chapter for the state-regulated cannabis industry.

On January 12, 2024, a 252-page memorandum from the U.S. Department of Health & Human Services (“HHS”) was publicly released. This memorandum, dated August 29, 2023, portends a potential monumental shift in the regulation of marijuana under federal law and recommends that marijuana be regulated under schedule III of the Controlled Substances Act (“CSA”). The decision to reschedule marijuana under the CSA has been under U.S. Drug Enforcement Administration (“DEA”) review for a few months now.

If cannabis is moved to schedule III, it would be a seismic transformation of cannabis business operations. Among other things, cannabis businesses will be able to write-off ordinary business expenditure deductions. Under current law, Internal Revenue Code 280E prohibits this tax treatment because marijuana is controlled as a schedule I substance. Upon rescheduling, this provision of the tax code would no longer apply, treating cannabis businesses more similarly to other businesses participating in U.S. the economy. This is because IRC Section 280E only applies in schedules I and II.

By way of background, on October 6, 2023, President Biden issued a statement regarding reforms associated with marijuana, a substance currently controlled in schedule I of the CSA. Among those reforms, he directed his Administration to conduct an “expeditious” review of the current classification of marijuana under the CSA.

In November 2023, Perkins Coie convened the Coalition for Cannabis Scheduling Reform (“CCSR”), including cannabis multi-state operators, brands, and ancillary companies, in addition to doctors and scientists, and legal and policy experts. The team engaged with stakeholders and provided critical analysis about the urgent need for scheduling reform. Among other things, CCSR focused on the fact that marijuana has “medical use in treatment in the United States” and less “abuse potential” than other substances in schedules I and II of the CSA. In a report co-led by Perkins lawyers, CCSR discussed how HHS and FDA could find “currently accepted medical use in the United States” by analyzing the 38 state medical markets, instead of requiring FDA approval for interstate marketing like they have done in the past.

In subsequent weeks, Colorado Governor Jared Polis, six governors, and twelve state attorneys general circulated open letters of support on cannabis rescheduling efforts.

The HHS memorandum to DEA recommending that marijuana be placed in schedule III of the CSA contained a new test for “medical use in the United States,” largely mirroring the coalition’s work.

It is widely expected that DEA will be releasing their final decision in the coming months. CCSR, and Perkins Coie attorneys, will be out in front as the process moves forward. Once DEA releases a draft rule, there will be a public comment period. As with other rulemaking procedures, DEA will consider these public comments and eventually promulgate a final rule. The agency may also hold an Administrative Law Judge (ALJ) hearing. When the rule is finalized, the policy change is expected to dramatically increase the profitability of the state-legal cannabis industry.

Beginning in 2024, both Washington and California will prohibit employers from basing hiring decisions on an applicant’s legal marijuana use.

What Is Prohibited?

Effective January 1, 2024, employers are prohibited from discriminating against job applicants on the basis of lawful, off-the-job marijuana use. Specifically, employers may not rely on preemployment drug tests that screen for nonpsychoactive cannabis metabolites when making hiring decisions. A similar law is slated to take effect in California the same day.

Nonpsychoactive cannabis metabolites remain in the body even after it has metabolized any tetrahydrocannabinol (THC) (the active chemical in marijuana). As a result, tests that detect nonpsychoactive cannabis metabolites show whether someone has consumed marijuana within the last few weeks.

In passing this new law, the state legislature noted “[m]any tests for cannabis show only the presence of nonpsychoactive cannabis metabolites from past cannabis use … that have no correlation to an applicant’s future job performance.” SB 5123 (to be codified at RCW Ch. 49.44). The legislature’s express intent in passing the new law was to “prevent restricting job opportunities based on an applicant’s use of cannabis.” Id.

The law does not prohibit employers from basing hiring decisions on drug tests that do not screen for nonpsychoactive cannabis metabolites, nor does it affect employers’ ability to maintain a drug- and alcohol-free workplace. Employers are still permitted to test employees after accidents or when they suspect an employee is under the influence of drugs or alcohol at work.

Employers may continue to use testing methods that screen for marijuana in addition to other substances only if the cannabis-related test results are not provided to the employer. In short, except as otherwise specified below, employers may not receive information about—or base hiring decisions on—applicants’ off-the-job marijuana use.

Who Is Affected?

All employers in Washington state are subject to the new law, but the ban on preemployment testing does not extend to all positions. The law does not apply to applicants pursuing roles:

  • That require a federal background check or security clearance.
  • With “general authority Washington law enforcement agencies” as defined in RCW 10.93.020.
  • With a fire department, fire protection district, or regional fire protection service authority.
  • As a first responder.
  • As a corrections officer.
  • In the airline and aerospace industries.
  • That are safety-sensitive positions for which impairment while working presents a substantial risk of death. The employer must identify such safety-sensitive roles in advance (i.e., before the applicant applies).

Washington’s law does not preempt state or federal laws that require applicants be tested as a condition of employment, as a requirement under a federal contract, or in order to receive federal funding or licensing-related benefits.

Employer Takeaways

To ensure compliance with this new law, employers should review their drug testing policies and procedures. If an employer plans to continue testing applicants for various substances, the employer must ensure that either the test they are using does not screen for cannabis or, at a minimum, that the employer will not be provided any cannabis-related results. They should also identify which jobs they consider “safety-sensitive” and be sure to include that information in any job postings.

Employers should work with experienced legal counsel to determine the best approach to ensuring compliance with this new law.

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After Tuesday’s election, Ohio is the latest state to legalize adult-use cannabis despite opposition from Republican Governor Mike DeWine and several trade groups.

Voters approved State Issue 2 with 57% voting in favor and 43% against. The measure allows Ohioans 21 years or older to buy, possess, and grow cannabis up to certain limits. It also establishes the Division of Cannabis Control to regulate and license cannabis operators and facilities. The regulations give licensing priority to existing medical operators but will allow additional licensure to meet the needs of the market.

The measure also levies a 10% tax on cannabis sales but prevents local governments from implementing additional taxes on cannabis operators. Tax revenue is estimated to reach $300 million in the first year of legal sales.

Lawmakers in the state’s legislature have the authority to amend or repeal the initiative, and any legislative battle over amendments could delay implementation.

Four states (Arkansas, North Dakota, South Dakota, and Oklahoma) rejected ballot proposals to legalize adult-use cannabis this year, after Maryland and Missouri approved similar proposals last November. Two other states (Delaware and Minnesota) legalized adult-use cannabis possession and sales this year through the legislative process. With the addition of Ohio, more than half of the U.S. population now live in a jurisdiction with legal adult-use cannabis.

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Politico and Bloomberg both reported today that the U.S. Department of Health and Human Services (HHS) is officially recommending that marijuana be moved to Schedule III from Schedule I under the Controlled Substances Act (CSA), a historic shift that indicates the top health agency no longer considers cannabis to have high abuse potential with no medical value.

The rescheduling recommendation is not binding on the Drug Enforcement Administration (DEA), but DEA is statutorily obligated to accept HHS’s scientific and medical evaluation. If DEA decides to reschedule cannabis, the agency will go through a rulemaking process that includes a public comment period before issuing a final rule.

This development follows the completion of a scientific review into cannabis directed by President Biden last October. Marijuana is presently listed in Schedule I under the CSA, subjecting it to the greatest level of control reserved for substances deemed to have “no accepted medical use” and a “high potential for abuse.” As a result of its classification, state-licensed cannabis businesses operate under extreme regulatory burdens.

Lawyers and business professionals from Perkins Coie were instrumental in formulating the Coalition for Cannabis Scheduling Reform (CCSR), a diverse group of cannabis companies and scientific and legal authorities. In June, CCSR released a comprehensive report on the federal classification of cannabis co-authored by Andrew Kline, Co-Chair of Perkins Coie’s Cannabis Industry Group, with support from associate Tommy Tobin, and edited by paralegal Hanna Barker Mullin.

CCSR made the case in its report that marijuana is improperly placed in the same schedule as drugs like heroin and argues that the more appropriate options are to either remove the plant from the list of controlled substances altogether or reschedule it to Schedule III or below. The report outlines the scientific, economic, legal, and social justice considerations of these options compared to the status quo.

While cannabis would remain federally illegal under Schedule III, the reclassification would remove Internal Revenue Code Section 280E tax penalty, which prevents businesses “trafficking” in schedule I and II substances from taking deductions for ordinary business expenses, resulting in an effective tax rate of up to 80%. Rescheduling would eliminate this financial burden, providing much needed relief for regulated cannabis businesses. Moving cannabis out of schedule I would also eliminate a major obstacle for researchers, who presently must register with DEA to access cannabis for use in medical and scientific studies.

Perkins Coie is proud of its support for this burgeoning industry and will be working tirelessly to get this policy change over the finish line in the coming weeks.

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