CBD, Drug Enforcement Policies, the Tax Code and Market Confusion – What does it All Mean?

August 9, 2018

On June 25, 2018, the Food and Drug Administration (the FDA) gave its approval to a new drug called Epidiolex to treat two fairly rare types of severe epilepsy.  This is the sort of statement that would not typically register any interest outside the limited world of pharmaceutical news, neurologists, and epilepsy support groups.  But Epidiolox is different.  It is a purified form of cannabidiol (CBD) derived directly from marijuana.  While other synthetic forms of marijuana have been approved, this is the first time any marijuana plant-based drug has received FDA approval.  This has the potential to bring about change in drug enforcement, the CBD industry, and taxation of marijuana-based companies.

Drug Enforcement

When the FDA approves a drug, one of the next steps on its way to market is for the Drug Enforcement Administration (the DEA) to “schedule” it.  One of the DEA’s duties with respect to different drugs, both illicit and prescription, is to schedule them into one of five categories depending on the drug’s acceptable medical use and the drug’s abuse or dependency potential.  Most prescription drugs are classified as Schedules II through V and the higher the classification, generally, the lower the potential for abuse.  Schedule I drugs, however, are substances with no currently accepted medical use and a high potential for abuse.  As of the date of publication of this article, marijuana and any of its derivatives are classified as Schedule I and lumped together with drugs like LSD, heroin, and ecstasy.

The fact that a marijuana derivative is likely to be downgraded in its Schedule classification has enormous potential consequences, especially since CBD has a very low abuse potential. How the DEA handles this change and where it lands on the schedule will set in motion huge ripple effects through this part of the cannabis industry

CBD Market

Currently, the CBD market is estimated to be roughly $1 billion industry.  CBD has been used for the treatment of a number of seizure disorders but is also touted as valuable for other maladies, as well.  It exists in a legal gray area that will not be clarified regardless of DEA action.  CBD is a dietary supplement and the FDA has regulated it as such, focusing its enforcement actions against manufacturers making unsupported claims regarding the product.  Presently, one of the great complaints against these CBD products is the lack of consistency among them.  A DEA public affairs officer has suggested that, after this change, all CBD manufacturers will have to register with the DEA, which would presumably implement quality standards. While there is an understandable argument for this position, especially with respect to marijuana-derived CBD products, it is not clear how this will apply to hemp and seed derived products.  The DEA’s goal will be to promote uniformity and quality controls, but its reach remains uncertain.

Additionally, assuming Epidiolex obtains the approvals and can be prescribed, the cost is estimated to be between $2,500 and $5,000 per month, far more than the $100 to $1,000 per month patients have been averaging on other CBD therapies.  The big difference to patients is that Epidiolex may qualify for Medicare and insurance coverage while over-the-counter supplements do not.

Tax Law Changes

A potentially larger implication of these changes arises out of with an otherwise obscure tax law well known to those in the cannabis industry.  Internal Revenue Code section 280E forbids businesses from deducting otherwise ordinary business expenses from gross income associated with the “trafficking” of Schedule I or II drugs.  Section 280E has been lamented as an enormous drain on the cannabis industry in states that have legalized medical or adult use marijuana and has increased the operating expenses of the businesses operating in that space.  Depending on how the DEA reschedules Epidiolex, this could have potential implications for the eventual scheduling of marijuana and, in turn, on the operating costs of cannabis businesses.

These are but a few of the many potential consequences that warrant consideration as the law in this area evolves.  The rules governing CBD and other aspects of the cannabis industry remain in flux and will for some time.

For more information about "CBD, Drug Enforcement Policies, the Tax Code and Market Confusion – What does it All Mean?," contact Guy J. DuBeau at gdubeau@axley.com or 608.283.6704.