By M. Tyson Daniel, Esq., Evan Pease, Esq., and Kimberly C. Haugh, Esq.
Despite decades of stigma, the cannabis industry has become a prominent fixture on the world stage. Hemp and medical cannabis have become important global commodities. From budding underground shops and grassroots startups to large corporate multi-state operators (MSO), canna-centric businesses are making headlines as they open new verticals daily.
In short, the business of cannabis is on fire. This is appropriately confusing — state and federal law are often in hopeless conflict. Like every new industry, regulation is inevitable and, as with any product intended for human use, appropriate for consumer safety. It remains to be seen, however, if the industry can avoid the type of regulatory capture that prohibits free market competition via huge application fees and compliance with regulatory morass that limit meaningful opportunities for small businesses to participate.
A plethora of new laws and regulations have been proposed, rejected and passed within the past several years. As lawmakers slog — often blindly with little-to-no understanding of the subject matter— it’s no wonder that observers and stakeholders are confused.
Defining cannabis
To understand the various industries within “cannabis,” one question is: “What exactly is cannabis?” Understanding the cannabis plant is critical to framing sensible legislation.i Cannabis has several genuses — namely, cannabis sativa, cannabis indica and cannabis ruderalis. Considering the various “genetics” of cannabis, one must remember that the type of plant being grown (i.e., “the cultivar”) is relevant to the purpose for which it will be used.
As such, a plant grown for rope (often described as “hemp”) is simply a cultivar that has been bred to grow tall with a thick fibrous stalk, have as few “flowers” (a.k.a. “buds”) as possible, and, to the extent there are “flowers,” contain low percentages of tetrahydrocannabinol (THC). Conversely, a plant grown for medical or recreational use (a.k.a. “marijuana”) comes from a cultivar bred to yield a high percentage of cannabinoids, such as Delta 9 THC, and which are contained in the “flower” and are harvested and used for human and animal consumption.
Simply put, “hemp” (defined by 7 USC 1639(o)) and “marijuana” (as defined in Virginia by 18.2-247) are legal fictions. Yet, they are constructs that shape discussions about the sale and regulation of a plant that is simply grown with different genetics and are bred to yield crops for very different purposes. This is important for service professionals to recognize because the societal — and, hence, legislative — interest in “public safety” engenders a very different regulatory analysis for psychoactive cannabis while the same is not true for non-psychoactive, “industrial” cannabis.
Cannabis legalese
Cannabis with high THC levels is cultivated and harvested to harness its medicinal and psychoactive effects, while hemp has historically been considered “rope, not dope.” When couched in these terms, it’s easier to understand why “marijuana” remains federally illegal while hemp is legal.
One remedy that some have proposed is a “One Plant One Rule” policy, which would legalize cannabis and then provide reasonable and appropriate regulation based on the purposes for which the harvested crop will be used.
For now, though, the rules and regulations are confusing. Some historical context is helpful:
- Marijuana, cannabis sativa L with a concentration of 0.3% or > Delta-9 THC on a dry weight basis, was made illegal at the federal level in 1970.
- Marijuana remains a Schedule I drug under federal law.
- Hemp is currently federally legal under the Agriculture Improvement Act of 2018 (also known as the 2018 Farm Bill), provided that the hemp contains no more than 0.3% Delta-9 THC on a dry weight basis. This provision is regulated and enforced by several federal entities, including the U.S. Department of Justice, U.S. Justice Department of Drug Enforcement Administration, U.S. Federal Trade Commission, U.S. Department of Agriculture, and U.S. Food and Drug Administration.
Cannabis in the Commonwealth
In Virginia, lawmakers have made several attempts to regulate cannabis. To address the issues of medicinal uses for cannabis products, Virginia enacted a provision in 2015 allowing a diagnosis of intractable epilepsy to be used as an affirmative defense against the prosecution of cannabis possession charges. Additionally, the 2015 provisions authorized a licensed M.D. or D.O. to prescribe cannabidiol (CBD) oil or THC-A oil for treatment related to children with the same epileptic condition.
In 2017, the Chapter 613 Acts of Assembly expanded the availability of CBD and THC-A oil to adults who were diagnosed with intractable epilepsy. The practitioners licensed to provide a prescription for these products remained limited to doctors and doctors of osteopathic medicine; however, the Board of Pharmacy was also authorized to issue permits for medical marijuana operators (a.k.a. “pharmaceutical processors”) to legally produce THC oil for the purpose of treating intractable epilepsy. The permits were limited to one per each of the five Health Service Areas in the Commonwealth.
In 2018, Virginia expanded the prior “intractable epilepsy” language and replaced it with “diagnosed condition or disease” and the General Assembly allowed hemp growers and processors to legally register with the Virginia Department of Agriculture and Consumer Services for a $50 fee.
Virginia further expanded the law in 2019 to allow for the legal use of medical cannabis with the Chapter 681 and 690 Acts of Assembly. As enacted, that legislation authorized the delivery of medical cannabis to a “registered agent” and authorized the production, use and sale of full therapeutic strength THC products that did not contain more than 10 milligrams of THC. Additionally, nurse practitioners and physician assistants were authorized to issue certificates for cannabis.
By 2020, the General Assembly made possession of small amounts of marijuana without a medical authorization punishable as a $25 civil offense rather than a misdemeanor criminal charge. Contemporaneously, law enforcement was also prohibited from stopping, searching and seizing an individual merely because they detected the odor of marijuana about their person.
Regulated, legal cannabis use in Virginia saw its biggest change in 2021 with the enactment of the Chapter 205 and Chapter 227 Acts of Assembly. These Acts allowed for legal possession of up to one ounce of cannabis on one’s person as well as the possession and cultivation of four cannabis plants per person per household — provided the grower in question was 21 or older.
The retail sale of cannabis was tentatively set to begin in 2024 by these Acts if this specific provision was re-enacted by the 2022 legislative meeting. “Pharmaceutical processors” with dispensing locations for medical marijuana also gained the authorization to provide botanical cannabis products. “Designated care giver facilities” were also authorized to receive medical cannabis deliveries during this time.
A stalling legal market in Virginia
Despite high hopes for industry stakeholders, 2022 brought a stifling effect on legal cannabis business in Virginia when the underlying framework for the adult use market was not re-enacted during the 2022 session. Indeed, there was an attempt to further regulate advertising and THC limits via Senate Bill 591, which failed, and was just about the only victory for legalization advocates that session.
During the latest 2023 legislative session, multiple categories of bills related to the cannabis industry which were proposed and considered. They included bills concerning adult-use retail cannabis, consumer safety, criminal penalties, and medicinal aspects of cannabis use.
The least successful of these bills pertained to the adult use of cannabis and cannabis products. H.B. 1464, if passed, would have authorized medical dispensaries to distribute cannabis products to any adult regardless of whether they had obtained the proper medical certification. H.B. 1750 would have provided for a framework and timeline allowing retail markets and the legal sale of cannabis to begin on Jan. 1, 2025. While, on the other hand, S.B. 1133 would have authorized existing medical dispensaries to begin retail sales of cannabis on July 1, 2023, as well as the authorized issuance of retail licenses beginning in 2024. Both bills failed.
In contrast, several bills concerning consumer safety of cannabis products were successful. H.B. 2428 (and its counterpart S.B. 1233) passed with language placing restrictions on advertising, similar to those applied towards alcohol use. These bills prevent advertising of cannabis products that targets minors, and restrict advertisements placed near schools, referencing the intoxicating effects of cannabis, and from promoting the overconsumption of cannabis products.
Despite strong opposition from the small business community, H.B. 2294 (S.B. 903) also passed and was signed into law. These bills increased regulations on hemp-derived extracts and products made with those extracts. The negative impact is now being felt by hemp retailers and growers, since the legislation took effect July 1, 2023. Additionally, a permit is now required to sell food products, or “edibles,” containing hemp extracts.
Further, several bills related to medical cannabis passed this past session. One notable change involves shifting the oversight and administration of the medical cannabis program from the Board of Pharmacy
to the Virginia Cannabis Control Authority (CCA) beginning Jan. 1, 2024. H.B. 1846 (S.B. 1337) also permits medical practitioners to issue medicinal use certificates via telehealth or telemedicine, provided the patient was on the premises of a dispensing facility. The bills also eliminated the previous requirement mandating that medical cannabis providers be registered with the Board of Pharmacy. New label requirements, a framework for product registration through the Board of Pharmacy/CCA, and the express prohibition of “quid pro quo” arrangements between medical cannabis providers and cannabis processors were also enacted.
The 2023 bills pertaining to the retail, growth and production of hemp-derived cannabinoids are some of the most problematic for current non-medical “hemp product” retailers. Rather than attempting to establish a distinction between recreationally popular cannabinoids and other non-psychoactive cannabinoids, the new regulations effective on July 1, 2023, allow regulation of all forms of cannabinoids. This broad, sweeping approach — relying on what seems to be a tortured definition of “synthesis” — will likely cost small retailers millions of dollars in unsellable inventory and lost revenue even though many of the products are used for therapeutic purposes and have been demonstrated to be safe.
Taxation headaches
Another point of interest, and controversy, is 26 U.S. Code § 280E. This provision of the Internal Revenue Code disallows businesses from deducting expenses from their gross income if the expenses consist of or derive from the trafficking of “controlled substances” as defined by federal law. Since cannabis is still considered a Schedule I drug at the federal level, cannabis entrepreneurs have endured massive amounts of non-deductible expenses resulting in huge amounts of money owed to the IRS every year. However, section 199A may provide for deductions relevant to W-2 wages paid to employers of cannabis companies.
Virginia attempted to address the issue of cannabis taxation with S.B. 1095. The failed bill would have provided for an exception to 280E by allowing for tax deductions related to ordinary and necessary expenditures made in connection with carrying on a trade or business licensed in Virginia to deal in medical cannabis. While the bill failed to pass, its mere consideration strikes a positive note by showing that productive changes are being proposed and considered. Hopefully, this is a harbinger of further progress recognizing the cannabis industry in Virginia as a legitimate market.
Where does this leave CPAs?
Given the consistently increasing presence of cannabis in business, coupled with the enormous revenue it will bring to government coffers, service professionals should anticipate frequent changes in rules and regulations. While it is unknown when cannabis will be “legal across the board” to buy and sell, progress is being made daily.