By a vote of 6-3, the Supreme Court justices overturned an over 40-year-old landmark decision—Chevron v. Natural Resources Defense Council. The long-standing Chevron doctrine crafted during Ronald Reagan’s presidency upheld the notion that if the law drafted by Congress was unclear, the courts are required to defer to the agency’s interpretation of the law so long as it was reasonable. As one of the most cited federal administrative law rulings, those within and outside the legal industry are analyzing the prospective impact of this reversal. With the Drug Enforcement Administration (“DEA”) conducting its rulemaking process to reschedule cannabis under the Controlled Substances Act (“CSA”), the cannabis industry in particular is awaiting the impact. Let’s dive into some of the potential effects overturning the Chevron doctrine can have on the cannabis industry:
Reliance on Executive Agencies’ Guidance
Although the cannabis industry has matured in great lengths since its inception, it has not tackled all the grey areas throughout the law, and further how such laws are applied to its overall operations. The lack of clarity in the law largely stems from the inconsistency of federal and state law, and as such, federal agencies have been providing guidance through official letters, memos, and the like. From the 2013 Cole Memo to the shift of Attorney General Jeff Sessions 2018 Memo, the Department of Justice (“DOJ”) and other federal agencies such as the Food and Drug Administration (“FDA”) have been providing industry guidance in recent years to give additional insight on the federal government’s oversight to the industry’s operators. However, with the overturning of the Chevron doctrine, many are questioning as to whether they can rely on guidance from executive agencies due to the possibility such letters or memos will be upheld in a court of law. Moreover, with federal rescheduling of cannabis at the forefront, any decision by the DEA or the Department of Health and Human Services (“HHS”) will likely undergo more rigorous judicial review as the courts will no longer defer to the agencies’ expertise.
Another executive agency that will likely see an increase in scrutiny is the FDA due to their oversight relying on the Chevron deference. From the drug approval process to how products can be manufactured, marketed, and imported, the FDA’s authority will likely be called into more litigation than prior. One area we may see an uptake in litigation is regarding their FDA Guidance on substances not yet regulated by the federal government and most states, such as amanita muscaria. Due to the ambiguity in the law and/or lack of an outright ban of a product or ingredient from a being a food additive or dietary supplement, manufacturers and distributors that face scrutiny by the FDA may fight back in court and mandate the FDA make a formal, clear rule on every product or ingredient they sell – which seems like an impossible feat.
Increased Difficulty in Regulating and Operating
Although 38 states have legalized medical cannabis and nearly half of the country has legalized the adult-use of cannabis, regulators are still in the infancy of figuring out where the holes are in the legal framework of these programs and how to address them through regulations. Due to the already heightened scrutiny of being sued due to their actions, regulatory agencies overseeing these programs will feel it even more as a result of more parties filing lawsuits as these agencies no longer have the advantage of deference in states that have heavily followed the Chevron doctrine for years. Add on the time it takes to see a case through, it will be extremely difficult for regulators to enforce the regulations they crafted while they are being challenged in a court of law. However, there are states such as Florida, Arizona, and Mississippi, that will likely see less of a domino effect due to the overturning of the Chevron deference as either judicial rulings or legislation ended deference to state agencies in recent years.
Although this change may seem daunting for states that heavily rely on the Chevron doctrine, there now is an incentive for state legislators to draft more clarifying laws regarding cannabis operations. Due to such legislative incentive, the industry will also see an increase in lobbying efforts to have Congress and state legislatures provide clearer and more detailed legislation for agencies. However, the main concern is that most legislators either at the state or federal level are not experts in this field, nor may have the time to understand the complexity or reality of the field, and as such, do not have the understanding of the market to craft more transparent laws.
Implications on Tax Law
Recently, Trulieve and other multi-state operators have taken the position that they can take ordinary business deductions, and as such, have filed for refunds of taxes paid from federal and state governments even prior to the announcement of the potential re-scheduling of cannabis under the CSA. Supreme Court precedent has rejected this position; however, some of the Justices have taken the position that such precedent should be overturned due to the federal government’s “half-in, half-out regime.” Now that the Chevron doctrine can no longer be applied to these types of laws, there is an increase in potential for this type of case to be overruled, and we will be seeing more and more case brought forward as a result.
Further, IRC § 280E states that those trafficking a Schedule I or II substance cannot take ordinary business deductions related to the trafficking activities, which means that operators would not be able to deduct COGS. However, there is a loophole under IRC § 471(c) that allows some operators with less than $25M in gross income to include the facility costs in its inventory calculation, which in essence an operator could include expenses associated with renting storage facility for inventory in COGS. This gray area of the law, along with generally any unclear tax laws coupled with federal guidance, are likely to be challenged moving forward and such rulings are now likely to be in the taxpayer/operator’s favor.
In summation, the overturning of the Chevron deference in Loper Bright Enterprises v. Raimondo marks a significant shift in administrative law with the cannabis industry being one of several industries awaiting to see the impact such decision has on their day-to-day operations—for better or worse.