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Vince Sliwoski
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The DOJ Final Order on marijuana rescheduling dropped last week. Acting Attorney General Todd Blanche ordered that “FDA-approved drug products containing marijuana, as well [as] marijuana in any form covered by a state medical marijuana license, be placed in Schedule III of the CSA.”
The Order went further than many of us anticipated. It also includes a short section on “Tax Implications.” Here is that section, in whole:
“The Acting Attorney General further notes that, as a consequence of this rule, state licensees 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. 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.”
There is plenty to unpack in that paragraph.
The Order doesn’t define “state licensee.” However, “state medical marijuana license” is now defined at 21 CFR § 1300.01 as:
“a license issued by a state entity (or by a District of Columbia entity or a federal territorial entity) authorizing the licensee to manufacture, distribute, and/or dispense marijuana or products that contain marijuana for medical purposes.”
Taxpayers holding these licenses, presumably, are “state licensees.” Many of these medical marijuana sellers may finally escape the stifling grasp of Section 280E.
Reader, I said “may.”
In states that allow only medical marijuana (e.g. Florida, Oklahoma, Pennsylvania), things appear straightforward: that is, state-licensed operators have become 280E-exempt under the Order. The marijuana being produced, processed, transferred and sold in these states all goes to cardholders—at least theoretically—and all of that marijuana is now in schedule III.
In states with adult-use programs, the analysis could be complex. All states with adult-use marijuana programs also have medical marijuana programs. Most of these states have blended their programs to varying degrees. In some states, a plant may begin in the adult-use CTS, grown by a non-medical licensee, but evolve into a medical marijuana item somewhere along the supply chain. The resulting product may or may not be more potent, will likely be packaged differently, and may or may not be taxed. Invariably, though, it is transferred or sold to a medical marijuana cardholder. It has undergone a definitional transformation, if not a physical one.
The licensees in these mixed supply chains may be adult-use licensees, with “endorsements” or “registrations” or other permissions to create or handle medical marijuana products. At the grow level, the distinction is virtually meaningless—a marijuana plant is just a marijuana plant, after all. But, are these hybrid operators “state licensees” within the meaning of the Order? They handle medical marijuana, but they also traffic in non-medical marijuana. They may or may not segregate inputs; they may or may not segregate outputs. You can see where I’m going with this.
In this respect, DOJ stays in its lane. Further along, though, the Order repeats the paragraph on Section 280E that I quoted above, adding one striking sentence:
“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.”
Retrospective relief from Section 280E would be the ultimate prize for many marijuana businesses, short of an entrée to interstate commerce. The possibility is utterly tantalizing. Could it actually happen?
It could, although the Treasury need not heed the “retrospective relief” suggestion—it operates independent of DOJ in the executive branch. That said, the IRS has granted retrospective relief to taxpayers on numerous occasions, most recently last month in relation to OBBA tax credits. OBBA was signed into law in July of 2025, yet the IRS will allow taxpayers to amend returns as far back as 2022 for purposes of making certain elections.
However the Service proceeds, marijuana taxpayers would be wise to heed the Order’s advice to consult with tax counsel. An exception involves tax counsel who argue that Section 280E doesn’t apply to any marijuana businesses whatsoever. In that case, please read this.
I’ll be watching three things.
First, I’ll be watching for Treasury guidance. On Thursday, April 23, the Treasury and IRS promptly announced such guidance is forthcoming. The press release forecasts “a transition rule providing that, for purposes of Section 280E, rescheduling generally will be considered to first apply for a business’s full taxable year that includes the effective date of the Final Order…”. For most marijuana businesses, that will be calendar year 2026.
Second, I’ll be watching for litigation. The Order will be litigated. The fundamental question is whether DOJ exceeded its authority in issuing the Order. Challengers will argue, inter alia, that 1) the Order undercut an ongoing rescheduling process, not yet withdrawn; 2) that the Order’s heavy reliance on international treaty compliance, and specifically, its permissive reading of a 2024 Office of Legal Counsel opinion on that issue, is flawed; and 3) that the bifurcation of marijuana into medical and non-medical channels by DOJ, outside of FDA purview, is statutorily incoherent.
Third, I’ll be watching for adult use rescheduling. In its press release announcing the Order, DOJ announced it would also “expedite the ongoing rulemaking process required to fully remove marijuana from Schedule I and place it in Schedule III under the Controlled Substances Act.” This rulemaking would apply to all marijuana, and not just medical marijuana. DOJ says DEA will “commence a new administrative hearing beginning June 26, 2026.” How that would work in an agency that no longer has any administrative law judges is a very good question. We’ll save that for another day.
For now, medical marijuana is in schedule III. State licensees should watch these further developments, but also focus on things that they can control. These include: 1) consulting with tax counsel; 2) revisiting accounting practices, especially where allocations to medical marijuana may be distinguishable from allocations to non-medical marijuana; and 3) recall that local tax laws still apply, including state laws limiting certain deductions for all marijuana businesses.
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Vince Sliwoski
Vince is an award-winning business lawyer, problem solver and dealmaker. His clients run the gamut from individual investors and entrepreneurs to widely held domestic and international corporations. Based in Portland, Oregon, he is Managing Partner of Harris Sliwoski and Editor of the Canna Law Blog and the Psychedelics Law Blog.
FDA, Federal law and policy, Medical Marijuana, Tax
The Canna Law Blog™ is a forum for discussion about the practical aspects of cannabis law and how it impacts those involved in this growing industry. Our goal is to provide insight into how cannabis businesses and stakeholders can use the law to their advantage.
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