Federal, State, And Constitutional Shifts In The Cannabis Legal Landscape

Federal cannabis policy is entering a period of transition. Executive action toward federal rescheduling under the Controlled Substances Act, ongoing constitutional litigation, and congressional efforts to amend the federal hemp framework are collectively reshaping the legal and commercial landscape for state-licensed operators and hemp business alike.

Federal Rescheduling and Its Commercial Implications

The Administration's Executive Order directing federal agencies to initiate proceedings to reschedule marijuana under the Controlled Substances Act, from Schedule I to Schedule III, represents a significant shift in federal cannabis policy. While the rescheduling process remains ongoing and would not legalize marijuana at the federal level, a move to Schedule III would materially alter the regulatory and tax landscape for state-licensed operators.

Tax Implications: Section 280E Relief

The most immediate commercial consequence of rescheduling would be relief from Internal Revenue Code § 280E, which currently prohibits businesses trafficking in Schedule I or II substances from deducting ordinary and necessary business expenses.¹ If marijuana were placed in Schedule III, state-licensed operators would no longer be subject to § 280E and could deduct payroll, rent, marketing, and other operational expenses in the same manner as other businesses.²

For many operators, the inability to deduct ordinary expenses has resulted in effective federal tax rates exceeding 60-70%, materially impairing profitability and reinvestment capacity.³ Removal of § 280E would likely improve margins, enhance access to capital, and narrow the competitive gap between licensed operators and illicit market participants.

Capital Markets and Financing

Rescheduling could also reduce compliance risk for institutional lenders, insurers, and certain investors that have historically avoided direct exposure to Schedule I activity.⁴ While marijuana would remain federally controlled, placement in Schedule III may shift internal risk assessments among financial institutions and could modestly improve access to debt financing and transactional liquidity for multi-state operators.⁵ However, rescheduling alone would not resolve the absence of comprehensive federal legalization, nor would it automatically authorize interstate transport or preempt state regulatory regimes.

Bankruptcy and Restructuring Considerations

One area of continuing uncertainty is bankruptcy eligibility. Federal courts are split on the issue of access to bankruptcy protection for businesses engaged in federally prohibited marijuana activity.⁶ While rescheduling to Schedule III would reduce the severity of federal prohibition, it remains unclear whether bankruptcy courts would treat Schedule III cannabis activity differently, absent explicit statutory clarification. As a result, restructuring options may remain constrained even after rescheduling.

Regulatory Overlay and FDA Considerations

Rescheduling may also trigger increased scrutiny by the Food and Drug Administration regarding medical claims, product formulation, and marketing practices.⁷ Movement to Schedule III could strengthen arguments that cannabis products intended for therapeutic use fall more squarely within FDA oversight frameworks, particularly if marketed with health-related representations.

In sum, while rescheduling alone would not resolve the tension between federal prohibition and state legalization, it would materially alter the economic calculus for licensed operators and could reduce certain structural disadvantages relative to illicit market participants.

Although federal legalization remains uncertain, the combined effect of constitutional litigation, hemp reform efforts, and potential rescheduling signals a recalibration of federal cannabis policy. Market participants should anticipate continued legal and regulatory movement and consider how these evolving frameworks may affect capital planning, compliance strategy, and competitive positioning in the months ahead.

Dormant Commerce Clause Litigation Creates Ongoing Uncertainty for State Cannabis Markets

Federal courts remain divided on whether state cannabis licensing regimes that favor in-state participants violate the Dormant Commerce Clause (“DCC”), which generally prohibits states from enacting protectionist measures that burden interstate commerce.

The First and Second Circuits have held that state cannabis programs are subject to DCC scrutiny notwithstanding federal prohibition, reasoning that Congress has not expressly authorized states to discriminate against interstate commerce in marijuana.⁸ Under this view, residency requirements and other in-state preference rules may be constitutionally vulnerable, particularly where they categorically exclude out-of-state ownership or investment. By contrast, the Ninth Circuit has declined to apply the DCC to state cannabis markets, reasoning that marijuana remains illegal under federal law and cautioning against using judge-made constitutional doctrine to promote interstate commerce in a market Congress has not legalized.⁹ The Ninth Circuit warned that applying the dormant Commerce Clause here could “invalidate state and local laws governing marijuana dispensaries” and effectively override Congress's judgment in continuing to classify cannabis as unlawful under federal law.¹⁰

In pending Connecticut litigation challenging the state's social equity framework, defendants have moved to dismiss on the grounds that an in-state applicant's exclusion from a licensing preference program does not implicate interstate commerce.¹¹ The Plaintiff in that action, Brant Smith, is a Connecticut resident who alleges that he is unable to obtain a cultivation license under the Responsible and Equitable Regulation of Adult-Use Cannabis Act (“RERACA”).¹² Smith argues that the state has favored social equity candidates as defined by the RERACA, and that favoritism amounts to discrimination under the DCC.¹³ Courts, however, have traditionally applied the DCC to police interstate economic protectionism and not to address intrastate regulatory distinctions that affect only in-state residents.

Taken together, these cases indicate that while the risk of a DCC challenge is real, particularly for state programs that impose categorical residency or ownership restrictions, it remains highly jurisdiction-specific and fact-dependent. Federal rescheduling of marijuana would likely intensify this debate rather than resolve it. While rescheduling would weaken arguments that cannabis markets are categorically outside the scope of interstate commerce, it would not itself authorize interstate transport or establish a comprehensive federal regulatory framework. As a result, courts may continue to diverge in their treatment of state market protections unless and until Congress provides clearer guidance.

Hemp Farm Bill Changes and Legislative Responses

Since passage of the 2018 Farm Bill, lawmakers and regulators have debated what many characterize as a “loophole” in the statute's definition of hemp, which legalized cannabis containing no more than 0.3% delta-9 THC on a dry-weight basis. Critics have argued that this definition permitted the proliferation of hemp-derived products containing intoxicating cannabinoids, such as delta-8 THC and other chemically derived compounds, so long as the finished product complied with the delta-9 threshold.¹⁴ The 2025 omnibus appropriations bill responds to those concerns by narrowing the federal hemp definition and imposing additional limits on total THC and certain synthetic or concentrated cannabinoids in hemp-derived products.¹⁵ In practical effect, the revisions substantially limit the range of hemp-derived products that may be lawfully marketed dunder federal law. Industry stakeholders warn that these revisions, if implemented without further legislative adjustments, could eliminate up to 95% of the U.S. hemp industry, which is currently estimated at approximately $28 billion.¹⁶

In response, Congress has introduced bipartisan legislation to postpone the implementation of the new hemp provisions, giving farmers, processors, and regulators additional time to adjust and to explore more workable federal regulatory frameworks.¹⁷ H.R. 7024, the Hemp Planting Predictability Act, would amend the Agriculture, Rural Development, Food and Drug Administration, and Related Agency Appropriations Act, 2026, by replacing the current one-year delay with a three-year delay, extending the transition period for implementation of the amended hemp definition and related changes until November 2028.¹⁸ Supporters, including the U.S. Hemp Roundtable, argue that this extension would provide critical certainty to farmers and the broader hemp supply chain while lawmakers and stakeholders continue to work toward a comprehensive regulatory framework that balances public safety with economic viability.¹⁹

In addition to legislative responses, the Administration's recent Executive Order on cannabis policy includes language directing the Executive Branch to work with Congress on updating statutory definitions related to hemp-derived cannabinoid products to preserve access to appropriate full-spectrum cannabidiol (CBD) products while restricting products “that pose serious health risks.”²⁰ Although the Executive Order does not itself amend the underlying statute and is not self-executing, this language suggests an openness from the Administration to legislative or regulatory measures designed to protect the CBD market and other lawful hemp products as a part of a broader federal cannabis policy.

The Cannabis Practice Group at Wiggin and Dana is a multidisciplinary team of attorneys across a variety of key practice areas in the firm, including regulatory compliance, which advises clients in the cannabis and cannabis-adjacent space, helping them navigate through the ever-changing and complex federal, state, and local regulations governing this vibrant and expanding industry.

Footnotes

1. Sloan Speck, Rescheduling marijuana would be a big tax break for legal cannabis businesses – and a quiet form of deregulation, The Conversation (Jan. 29, 2026) https://theconversation.com/rescheduling-marijuana-would-be-a-big-tax-break-for-legal-cannabis-businesses-and-a-quiet-form-of-deregulation-274022.

2. Id.

3. Id.

4. Vijay S. Choksi, et al., Executive Order Reignites Process to Move Marijuana to Schedule III, Fox Rothchild Firm Publ'n (Dec. 18, 2025) https://www.foxrothschild.com/publications/executive-order-reignites-process-to-move-marijuana-to-schedule-iii.

5. Id.

6. Joanna R. Lampe, Legal Consequences of Rescheduling Marijuana, Cong. Rsch. serv. (Dec. 22, 2025).

7. Kendall A. Schnurpel, President Trump's Executive Order on Cannabis Rescheduling: What does it mean?,  Krieg DeVault (Dec. 23, 2025) https://www.kriegdevault.com/insights/president-trumps-executive-order-on-cannabis-rescheduling-what-does-it-mean.

8. Ne. Patients Grp. v. United Cannabis Patients & Caregivers of Me., 45 F.4^th 542, 544 (2022); Variscite NY Four, LLC v. N.Y. State Cannabis Control Bd., 152 F.4^th 47, 53 (2025).

9. Peridot Tree WA, Inc. v. Wash. State Liquor & Cannabis Control Bd., 2026 U.S. App. LEXIS 14, 19-20 (Jan. 2, 2026).

10. Id. at 21-22.

11. Memorandum of Law in Support of Defendants' Motion to Dismiss at 7-11, Smith v. Lamont et al, No. 3:24-cv-01728 (D. Conn. Jan. 15, 2026).

12. Plaintiff's Response to Defendants' Motion to Dismiss at 2-3, Smith v. Lamont et al, No. 3:24-cv-01728 (D. Conn. Jan. 16, 2026).

13. Id.

14. Natalie Fertig, Hemp and marijuana go to war, POLTICO (May 21, 2024), https://www.politico.com/news/2024/05/21/hemp-marijuana-farm-bill-00159040.

15. Legis. Analysis and Pub. Policy Ass'n, Closing the Hemp Loophole: The New Federal Definition of Hemp and its Impact (Dec. 2025).

16. Will Yakowicz, $28 Billion Hemp Industry Faces Extinction With Government Re-Opening, Forbes (Nov. 13, 2025) https://www.forbes.com/sites/willyakowicz/2025/11/13/28-billion-hemp-industry-faces-extinction-with-government-re-opening/.

17. Tony Lange, Bipartisan Bill Aims to Delay Federal Hemp Product Ban Until November 2028, Cannabis Business Times (Jan. 13, 2026) https://www.cannabisbusinesstimes.com/hemp/news/15814536/bipartisan-bill-aims-to-delay-federal-hemp-product-ban-until-november-2028.

18. Hemp Planting and Predictability Act, H.R. 7024, 119th Cong., 2d Sess. (2026).

19. USHR on Capitol Hill Today Supporting Rep. Baird's and Rep. Criag's Bipartisan Hemp Bill, U.S. Hemp Roundtable (Jan. 14, 2026) https://hempsupporter.com/news/ushr-on-capitol-hill-today-supporting-rep-bairds-bipartisan-hemp-bill/.

20. Exec. Order No. 14,370, 90 Fed. Reg. 60541 at §2(b) (Dec. 18, 2025).

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