How cannabis reclassification in the US affects Europe

A byline by Anthony Traurig

The ongoing discussion in the United States about rescheduling marijuana (defined as cannabis with more than 0.3% delta-9 THC) has primarily focused on its domestic implications, particularly the potential benefits for US cannabis companies. But while US industry stakeholders are a key part of the conversation, a significant question looms: how, if at all, would rescheduling affect Europe’s rapidly evolving cannabis industry? 

Despite some stakeholders enthusiastically trumpeting the impact that rescheduling would have – which is undeniable in the area of taxation – I remain skeptical that its effects will be felt across the Atlantic. 

Let’s get a few things out of the way quickly. If marijuana is moved from Schedule I to Schedule III it will remain a controlled substance under federal law. This means that the states that allow medical and/or recreational cannabis will still run afoul of federal law. It also means that only cannabis that meets the definition of hemp under the 2018 Farm Bill will be possible to import and export (with limited exception). 

One potential exception to the ban on exporting medical cannabis – should marijuana be rescheduled – would be for the eight Drug Enforcement Administration (DEA) registrants, as my colleague Jason Adelstone points out, but that would still require regulatory action from the notoriously anti-cannabis DEA. 

The most significant direct impact of rescheduling will be tax relief for marijuana companies. Under Section 280E of the US Tax Code, companies illegally dealing with Schedule I and II substances under federal law cannot deduct ordinary business expenses – like payroll, rent, and utilities – from their federal taxes. By moving marijuana to Schedule III, marijuana businesses will be able to deduct those expenses, significantly reduce their tax burden, and become more profitable.

So how might this boost in profitability impact the European cannabis industry? That is the million-dollar question. Given the multitude of factors – such as the economic conditions, state of the industry, and regulatory developments at the time when rescheduling might actually occur – that would affect the outcome, it is like trying to predict what the weather will be like on a specific day in six months.

US marijuana companies might use the increased profitability to expand their operations into Europe via M&A or expansion. Perhaps more likely, though, the extra cash flow will be absorbed by high-interest debts coming due after years of fighting for survival in a brutal industry. 

Another potential positive for the US cannabis industry if marijuana is moved to Schedule III is that it might make financial institutions more willing to work with state-legal businesses, particularly in the area of financing. While rescheduling will certainly help in this area, I am not so convinced that its impact will be as significant as many expect.

At the end of the day, financial institutions will make a business decision about whether they are willing to work with cannabis businesses, and there is only so much that can be done regulatorily (short of descheduling, of course). These financial institutions will still be weighing things like reputational risk and heightened regulatory burdens that prevent many of them from working with cannabis businesses now. 

It is important to remember that there is currently nothing in federal law that prohibits financial institutions from working with marijuana companies – these are business decisions. Rescheduling does not mean that most state-legal marijuana companies will become legal under federal law. This still matters to financial institutions who have to worry about increased suspicious activity report (SAR) filings, enhanced due diligence, and increased risk exposure.

While rescheduling could ease some concerns that financial institutions have about dealing with cannabis, it won’t be the panacea that the industry is looking for. There will likely be more in-roads made into European markets due to an increase in access to capital, but it will likely be more akin to leaks rather than the opening of floodgates. 

The irony of the situation is that the largest cannabis market in the world is mostly shut out of the global market. While exciting new medical cannabis markets come online and exponential growth is seen in markets like Germany, the US is on the sidelines. (Not only can US marijuana operators not export, they cannot even ship across state lines.)

While the focus of the marijuana debate in the US has been rescheduling versus descheduling, there is another option that would completely change the game on a global scale; if the US merely followed the same legalization path as every country and state that has legalized and first just legalize cannabis for medical purposes, it would allow the US to enter the global market.

Unless Donald Trump was to get a wild hair one day and surprise everyone (a scenario that cannot be completely discounted), descheduling cannabis does not appear to be a realistic possibility in the next few years.  

All of this is not to say that rescheduling would not be a major boon for US cannabis operators – particularly those in medical cannabis. But will it be such a boon that its tremors will reverberate in Europe? Consider me doubtful. 

About the author:

Anthony Traurig is senior advisor to CannIntelligence, where he provides regulatory guidance on issues within the global cannabis sector. Having worked several years as a legal analyst at CannIntelligence, he continues to work on consultancy projects and contribute to regulatory products for the platform. Anthony has a BA in political science from North Carolina State University and a Juris Doctor from Charleston School of Law (South Carolina), and practised law for several years in the United States as a litigator.

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