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How Law, Policy, and Economics Shape the Modern Cannabis Industry
Cannabis is an evolving business sector that now touches real estate, finance, employment law, intellectual property, and restructuring. Yet despite its growing visibility, cannabis remains one of the most legally complex industries in the United States. That complexity is the result of decades of marijuana perceived to be a ‘gateway drug,’ overlapping federal and state laws, inconsistent enforcement, and economic realities that continue to shape how cannabis is grown, sold, taxed, financed, and regulated.
For investors, business owners, and professionals, cannabis law is complex. Under state law, legal cannabis businesses are estimated to generate between $35 billion to $47 billion of sales in 2026; they employ thousands of workers, and pay substantial taxes, yet remain illegal under federal law. Understanding how this situation developed and how it functions today is essential for anyone looking to evaluate the opportunities and risks of the cannabis industry.
A Brief History Lesson: Cannabis, Marijuana, and Hemp
At the most basic level, cannabis is a plant: Cannabis sativa L. From a legal perspective, however, not all cannabis is treated equally. The law draws a sharp distinction between ‘marijuana’ and ‘hemp,’ even though they come from the same species and can look and smell nearly identical in the field.
The US Drug Enforcement Agency defines marijuana as “a mind-altering (psychoactive) drug, produced by the Cannabis sativa plant. Marijuana has over 480 constituents. THC (delta9-tetrahydrocannabinol) is believed to be the main ingredient that produces the psychoactive effect. For nearly 50 years, marijuana has been a Schedule 1 drug, the same as heroin and LSD.”
Hemp is a legal agricultural product under federal law provided that it must contain no more than 0.3 percent THC on a dry weight basis. The legalization of hemp and industrial scale hemp production led to the creation of products containing CBD, that is extracted from hemp. Although 0.3% THC does not provide a psychoactive effect, it did not take long for creative manufacturers to create intoxicating hemp-derived cannabis edibles, vapes and other products by extracting Delta-8 THC and other derivatives. This has drawn the attention of state and federal government and a recent amendment to the Farm Bill to prohibit hemp-derived psychoactive products.
As Jonathan Havens of Saul Ewing observes, “Marijuana and hemp are both cannabis but the legal treatment of each couldn’t be more different.” The single definitional threshold determines whether a cannabis business is federally illegal or federally lawful, with cascading implications for taxes, banking, insurance, and interstate commerce, among many others.
Cannabis Regulation
For most of US history, cannabis, particularly hemp, was an unremarkable agricultural commodity. Hemp was widely used for rope, textiles, sails, and paper; cannabis extracts appeared in pharmacies during the 19th century.
That changed dramatically in the early 20th century as cannabis became associated with intoxication, social panic, racialized narratives, and sensational media coverage. Public perception shifted quickly, and policymakers responded with increasingly restrictive laws.
By 1970, cannabis was swept into the Controlled Substances Act (CSA), which grouped marijuana with drugs like heroin and LSD. This classification ignored historical use, emerging medical research, and economic reality, but it cemented cannabis’s legal status for decades.
“By the time we reached the Controlled Substances Act, marijuana and hemp were effectively erased from legitimate commerce, even though they had been part of everyday life for generations,” notes Chris Lindsey of the American Trade Association for Cannabis and Hemp.
The Controlled Substances Act and Scheduling
The CSA organizes drugs into five schedules based on perceived medical value and potential for abuse. Schedule I substances are deemed to have no accepted medical use and a high potential for abuse. Marijuana has remained in Schedule I for more than 50 years.
This classification has far-reaching implications. Schedule I substances cannot be prescribed, researched easily, or legally sold under federal law. Even today, state-licensed cannabis businesses technically operate in violation of federal law, relying on a combination of enforcement discretion and congressional budget restrictions.
This disconnect, legal at the state level, illegal at the federal level, is the foundation of nearly every financial and operational challenge cannabis businesses face.
What Rescheduling Really Means
In recent years, federal agencies have begun reconsidering marijuana’s Schedule I status. On December 18, 2025, President Trump signed an Executive Order directing the Department of Justice to initiate the process of reclassifying marijuana from Schedule I to Schedule III.
Rescheduling would not legalize marijuana nationwide. States would still control licensing, sales, and distribution. Interstate commerce would remain prohibited unless Congress acts directly. Cannabis would remain a controlled substance, subject to oversight by federal agencies.
“Rescheduling does not mean federal legalization. It means less punitive tax treatment, but the state-by-state system remains intact unless and until Congress gets involved,” cautions Jonathan Havens.
The Tax Issue: Internal Revenue Code Section 280E
One of the most significant consequences of Schedule I status arises because of Internal Revenue Code Section 280E. This provision prevents “plant-touching” businesses from deducting ordinary and necessary business expenses. However, cost-of-goods sold can be expensed.
Rent, payroll, marketing, and professional fees are largely nondeductible, leaving operators with distorted financial statements and limited reinvestment capacity.
As a result, cannabis businesses often face effective tax rates exceeding 70 percent of gross income, and that is before state and local taxes. For this reason, it’s not unusual for cannabis companies to pay more tax than they earn in profit. If marijuana moves to Schedule III, 280E would no longer apply, fundamentally changing cash flow, profitability, and cannabis business valuations across the industry.
Business Structuring and Workarounds
“Section 280E has forced cannabis operators to create complex business and legal structures, with holding companies, operating companies, real property and IP companies designed to isolate the parts of the business subject to 280E. This creates tax compliance risk and makes it more complicated for investors and lenders to analyze a cannabis business”, notes Seth R. Freeman of GlassRatner Advisory & Capital Group, LLC. The IRS has increasingly scrutinized these arrangements, and poorly designed structures can create more risk than relief. This structural complexity adds legal costs, accounting burdens, and operational friction that most businesses outside cannabis never encounter.
The Rise (and Fall?) of Hemp
The 2014 and 2018 Farm Bills removed hemp from the CSA, triggering explosive growth in hemp-derived products. Farmers, processors, and investors rushed into the market, particularly around cannabidiol (CBD). Prices surged, farmers, particularly in the South that previously grew tobacco and other crops converted to hemp. A new industry of CBD consumer products flooded the market.
By 2022, that boom quickly turned to oversupply of raw hemp and the CBD oil and paste raw materials used to produce consumer products. Prices collapsed, farmers struggled, and several large hemp growers and processors filed bankruptcy.
The creation of legal hemp-derived intoxicating products exposed a gap between legislative intent and market innovation. Products derived from hemp could technically comply with the 0.3 percent rule while still delivering powerful intoxicating effects, highlighting a loophole in federal definitions based solely on dry hemp THC concentration.
Politicians and some public health agencies began calling for clearer federal standards on psychoactive hemp-derived products. In response several states have moved to ban or restrict these products. Most recently, in November 2025, a federal ban on most psychoactive hemp-derived products was enacted as part of the Big Beautiful Bill spending package to end the government shutdown, with the new law scheduled to go into effect in November 2026.
Employment and Workplace Issues
Legalization at the state level does not eliminate workplace risk for employers operating in or around the cannabis industry. In many respects, cannabis-related employment issues are more complicated today than they were when marijuana was universally prohibited.
Employers must navigate a difficult intersection of state cannabis laws, federal employment regulations, safety requirements, and evolving case law. In some states, employees may lawfully consume cannabis during non-working hours, while employers still retain the right to prohibit impairment on the job. In other jurisdictions, employee protections go further, limiting when and how discipline may be imposed based on cannabis use.
Drug testing presents another challenge. Traditional drug tests detect the presence of THC metabolites, not real-time impairment. As a result, a positive test does not necessarily indicate that an employee was impaired while working. This creates workplace safety compliance risk, particularly in construction and warehouses where driving a forklift is required.
Federal law further complicates matters. Certain industries, such as transportation, aviation, and defense contracting, remain subject to strict federal drug-free workplace requirements. Employees in those roles may be prohibited from using cannabis regardless of state law, and employers must ensure that policies clearly reflect those obligations.
For cannabis businesses themselves, employment compliance is especially critical. Licensing authorities often scrutinize workplace practices, training programs, and safety protocols. Clear written policies, consistent enforcement, and regular legal review are essential tools for managing risk in an environment where the law continues to evolve.
Looking Ahead
The cannabis industry continues to evolve, but it is doing so slowly and unevenly. While rescheduling marijuana could provide meaningful tax relief and reduce some enforcement risk, it will not eliminate the underlying complexity that defines the industry.
State-by-state regulation is likely to remain the norm for the foreseeable future. Even with rescheduling, states will continue to control licensing, market structure, and consumer access. Businesses will still need to navigate patchwork rules, shifting political priorities, and uneven enforcement.
At the same time, incremental federal reform could reshape the financial landscape. Relief from Section 280E would improve cash flow, stabilize operations, and make cannabis businesses more attractive to institutional investors and financing sources. Over time, that could lead to consolidation, more professional management, and increased scrutiny from regulators and taxing authorities alike.
What remains constant is the need for careful planning. Cannabis is not an industry where operators can afford to ignore legal or financial fundamentals. Regulatory compliance, tax strategy, employment policies, and corporate structure all play an outsized role in determining long-term success. For investors and professionals, the takeaway is straightforward: opportunity exists, but it comes with unique risk.
To learn more about this topic, view Basic Cannabis Concepts. The quoted remarks referenced in this article were made either during this webinar or shortly thereafter during post-webinar interviews with the panelists. Readers may also be interested to read other articles about Alternative Investments.
This article was originally published here.
©2026. DailyDACTM, LLC d/b/a/ Financial PoiseTM. This article is subject to the disclaimers found here.
