How CBD Merchants Are Affected By Marijuana Reclassification

As many merchants know, the CBD industry can be difficult to navigate. With marijuana’s laws and regulations consistently evolving, it can be tricky to understand what is and isn’t allowed for CBD retailers. Even though cannabis has become legal in many states, it is still classified as a Schedule I drug. Since the most dangerous substances share this status, it has been an uphill battle to normalize marijuana federally. However, this ruling appears to be on the verge of changing.

On May 16th, The Department of Justice began formal proceedings to reclassify marijuana into a less harmful drug category.^[1]Bloomberg Law. “Marijuana Reclassification Impacts Bank Servicing of Businesses.” Accessed July 30, 2024. In this case, cannabis would switch from Schedule I to Schedule III, which could lead to significant adjustments in the CBD marketplace. With the reclassification on the horizon, merchants everywhere may be wondering how this transition will affect their businesses, as will financial institutions that may be cautious of supporting CBD retail sellers. In this article, we will break down what will and will not change about the CBD industry and how this can affect your business as a whole.

What the Marijuana Reclassification Means for CBD Merchants

Despite moves to reclassify cannabis, there will not be much change to CBD’s nationwide legality. Switching marijuana to a Schedule III drug won’t legalize it further for adult and medical use unless already following the regulations of the Controlled Substances Act.^[2]DEA. “The Controlled Substances Act.” Accessed July 30, 2024. Even in states where marijuana is legal, cannabis stores and products will still not be able to fully comply with the CSA or the Food and Drug Administration. However, other reforms could affect the CBD industry if passed.

Currently, medical marijuana programs exist in 38 states, and recreational marijuana is legal in around 23. Although there is no current proposal to change these legal standards, there are some potential benefits for CBD merchants and researchers.^[3]AP News. “What marijuana reclassification means for the United States.” Accessed July 30, 2024. 

Typically, it is very challenging for researchers to conduct clinical trials studying Schedule I drugs. By switching marijuana to a Schedule III drug, which would put cannabis in the same category as ketamine, anabolic steroids, and certain acetaminophen-codeine combinations, scientists will have more opportunities to research the plant’s pros and cons. Through increased research, there will be more clarifying details about cannabis available. With that information, legislators and industry professionals can propose future laws and regulations that can lead to more impactful development. Even if not immediately seen, the marijuana reclassification can set the stage for CBD professionals to have more options in the years to come. 

For CBD merchants, there would be tax adjustments that could be financially game-changing. Under the current federal tax code, companies involved in Schedule I drugs cannot deduct rent, payroll, or other expenses as tax write-offs. Since these barriers do not apply to Schedule III substances, CBD companies could, in theory, save exponentially during tax season. CBD sellers could benefit similarly to other businesses in less high-risk industries and have more resources to compete against their illegal counterparts. According to Beau Kilmer, co-director of the RAND Drug Policy Center, “It could also mean more cannabis promotion and advertising if those costs could be deducted.” Although marijuana would remain federally illegal, CBD merchants could potentially have a larger budget to increase their visibility and legitimacy in the field. With that said, there are still ways to go before marijuana is wholly accepted nationwide.

What the Marijuana Reclassification Means for Bank Processing

As CBD merchants already know, many financial institutions are cautious about serving high-risk companies in the cannabis industry. Despite many marijuana businesses having found processors that suit their payment needs, others have struggled to open merchant accounts. As marijuana has become increasingly legitimized across the country, this area has improved. However, many banks and processors are wary of taking a certain level of risk. This cautiousness is due to them being legally liable if their CBD merchants fail to comply. Of course, many banks do work with CBD-related companies as long as they follow their state’s most recent compliance laws. Although the reclassification does not change the overall dynamic between processors and CBD merchants, positive changes are on the horizon.

As the laws and regulations around marijuana have changed, financial institutions have shown that they will change alongside them. With the rescheduling of marijuana’s status, processors may be more willing to work with CBD businesses. However, financial institutions need more support from the federal government to be in a position to serve this industry fully. Although the SAFE Banking Act—which would increase legal marijuana businesses’ access to banking institutions—passed in 2023, legislators have done very little since. Therefore, much remains to be seen on how marijuana’s reclassification will ultimately affect the CBD marketplace.

What CBD Merchants Can Do Now

Despite the challenges, many processors will gladly work with CBD businesses operating in legal states. However, many of these financial institutions have their own set of standards regarding what types of CBD-related companies they support. Their decision to work with a CBD merchant mainly depends on what state they’re registered in. For instance, some processors will work with businesses selling Delta-8 or Delta-9 THC, while others will only accept THC-less products. With the passing of the 2018 Farm Bill, hemp products with less than 0.3% THC have become federally legal. This legislative action has done wonders in normalizing CBD across the country. 

Hopefully, the reclassification of marijuana will also pass, and the rules around this substance will become further streamlined and universal. First, the White House Office of Management and Budget must review the proposal. Then, the proposal must undergo a public comment period before an administrative judge evaluates its prospects. Until then, it’s critical to understand your state’s current laws and regulations. Luckily, merchant service providers can help you navigate this ever-changing marketplace, ensuring you have everything needed to set up shop. With PaymentCloud Merchant Services, staying up-to-date has never been easier, providing your CBD business with every chance to succeed.

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