The United States’ cannabis legal landscape remains one of the most complex in modern law. While dozens of states have legalized cannabis for medical or recreational use, the federal government continues to classify it as an illegal substance. This tension creates a confusing patchwork of laws that affect everyone—from casual consumers to multi-state cannabis operators.

Federal Cannabis Law: The Foundation

At the federal level, cannabis remains a Schedule I controlled substance under the Controlled Substances Act (CSA). That classification places it alongside drugs like heroin, meaning it is deemed to have a high potential for abuse, no accepted medical use, and a lack of safety for medical treatment.

Because of this, it is a federal crime to grow, distribute, or possess cannabis. Enforcement falls under the Drug Enforcement Administration (DEA), which continues to regulate production and research through strict permits and quotas.

The classification also carries financial consequences. Cannabis businesses cannot claim standard business deductions under IRS Code Section 280E, which applies to traffickers of Schedule I or II substances. As a result, these businesses often pay taxes on gross revenue rather than net income—an immense financial burden.

However, the landscape may be shifting. In 2023, the Department of Health and Human Services (HHS) recommended that the DEA reschedule cannabis to Schedule III, a move that would acknowledge its medical use and reduce tax penalties. While this proposal remains under review, it marks a major step toward reconciling decades of conflicting policy.

State Cannabis Laws: Legalization Within Borders

In contrast, state governments have steadily advanced legalization efforts. As of 2025, 24 states and Washington, D.C. allow adult-use cannabis, while roughly 40 states permit medical marijuana in some form.

State programs vary widely but generally regulate:

• Licensing and cultivation
• Possession and purchase limits
• Packaging, labeling, and testing
• Taxation and retail operations

Because states control their criminal laws, they can choose not to prosecute cannabis activity under state jurisdiction. However, federal law still preempts state law—meaning Congress could override state legalization if it chose. In practice, federal enforcement has largely respected state systems since the 2013 Cole Memorandum, which prioritized federal resources for more serious violations, such as trafficking across state lines or sales to minors.

How the Legal Divide Affects Consumers

1. Federal Prosecution Risk

Although rare, consumers technically remain at risk of federal prosecution for cannabis possession or use, even if it is legal under state law. The risk increases on federal property—such as national parks, airports, or government buildings—where state laws do not apply.

2. Employment and Housing

Legalization does not guarantee protection in the workplace. Many employers enforce drug-free workplace policies, especially those with federal contracts. Testing positive for THC can still result in termination or disqualification from employment.

Similarly, federally funded housing programs and immigration proceedings may treat cannabis use as grounds for denial or penalty, since cannabis remains federally prohibited.

3. Firearms and Travel

Under the Gun Control Act, cannabis users are considered “unlawful users of controlled substances,” making firearm ownership illegal under federal law. Additionally, transporting cannabis across state lines—even between two legal states—violates federal trafficking statutes.

For consumers, these inconsistencies can lead to severe unintended consequences, particularly when cannabis use intersects with employment, travel, or public benefits.

How the Divide Affects Businesses

1. Licensing and Regulation

Businesses must comply with rigorous state-level licensing standards that govern cultivation, testing, and retail sales. Even minor violations can result in license suspension. Yet, these state permits offer no protection against federal enforcement—leaving business owners in a constant state of legal uncertainty.

2. Banking and Financial Services

Federal prohibition forces many cannabis companies to operate as cash-only businesses. Financial institutions are hesitant to offer services because of potential violations of federal money laundering laws. This lack of banking access creates security risks and accounting challenges.

The proposed SAFE Banking Act aims to protect banks that serve legitimate state-licensed cannabis businesses. Although it has gained bipartisan support, it has yet to be fully enacted into law.

3. Taxation and Federal Restrictions

Under Section 280E, cannabis businesses cannot deduct operating expenses, significantly inflating their tax liabilities. This rule applies even when companies comply fully with state regulations. Rescheduling cannabis to Schedule III would remove this restriction, but until then, businesses face steep costs that hinder growth and investment.

4. Interstate and Investment Barriers

Federal law prohibits transporting cannabis products across state lines, even between two legal markets. This restriction prevents the creation of national supply chains and raises costs for operators. Additionally, many institutional investors and lenders avoid the industry entirely, fearing federal repercussions.

Why the Conflict Persists

This legal tug-of-war stems from the structure of American federalism. While the federal government can regulate interstate commerce, the Tenth Amendment gives states control over criminal law within their borders. Courts have generally upheld federal authority over cannabis under the Commerce Clause, as seen in the 2005 Supreme Court case Gonzales v. Raich.

Despite that ruling, Congress has allowed states to continue operating their own cannabis programs. The annual Rohrabacher–Farr amendment, first passed in 2014, prohibits the Department of Justice from using federal funds to interfere with state medical marijuana laws—offering limited protection to patients and operators.

However, the lack of permanent, comprehensive reform means uncertainty remains. Several federal bills have attempted to bridge this gap:

• The STATES Act would exempt compliant state activities from federal enforcement.
• The MORE Act seeks to de-schedule cannabis entirely, removing it from the CSA.
• The Cannabis Administration and Opportunity Act would create a federal regulatory framework while promoting equity in the industry.

None have yet passed both chambers of Congress, leaving the current conflict unresolved.

The Path Forward

Rescheduling cannabis to Schedule III could mark a historic shift, enabling medical research, easing business taxation, and normalizing banking access. Yet, it would not fully legalize cannabis federally—state conflicts would persist, and interstate commerce would remain restricted.

Ultimately, only Congressional action can align federal and state laws. Until then, cannabis will remain in a legal “gray zone,” where millions participate in a state-sanctioned market that federal law still technically forbids.

Practical Takeaways

• Consumers: State legality doesn’t equal federal immunity. Avoid cannabis on federal property, during interstate travel, or in federally funded programs.
• Businesses: Stay compliant with state rules and retain legal counsel to manage risks tied to taxes, banking, and contracts.
• Advocates: Watch for DEA rescheduling outcomes and new legislative efforts that could finally harmonize the nation’s cannabis policy.