Jeff Sessions' War on Marijuana May Be Validated With This New Data

Few industries have grown with the speed and consistency of legal marijuana in recent years. Depending on the source, the legal cannabis industry is growing at between 23% and 35% annually, with North American sales estimated to push well past $20 billion a year by 2021. With numbers this large, it's no wonder why investors have piled into pot stocks and pushed their valuations considerably higher.

Support for cannabis has also shifted dramatically in what could be considered a relatively short time period. Gallup, which has polled Americans on their perception of weed since 1969, found this past October that 64% of respondents supported the national legalization of pot. Comparatively, only 25% of respondents supported the same idea in 1995, just 22 years earlier. Other polls have all demonstrated similar support for legalization in the United States.

Marijuana's scheduling makes life difficult for U.S.-based pot businesses

Yet, in spite of this clearly defined public support, the marijuana engine in the U.S. is stuck in neutral. Though sales have grown in the 29 states to have legalized weed in some capacity, the federal government hasn't budged on its view that marijuana is a schedule I substance. As a schedule I drug, it's deemed as wholly illegal, highly prone to abuse, and is also categorized as having no recognized medical benefits.

This bifurcation between federal law and state law creates a slew of problems for the U.S. weed industry. For instance, most cannabis companies have little or no access to financial services. They can't get loans or even open a checking account. This is because financial institutions report to the Federal Deposit Insurance Corporation, a federally created entity (and pot is illegal at the federal level). If found to have offered financial services to pot businesses, banks could face criminal and/or financial penalties.

Marijuana businesses are also financially constrained by U.S. tax code 280E, which disallows companies that sell a federally illegal substance from taking normal corporate income-tax deductions. The result, for profitable weed companies at least, is an effective tax rate that can range as high as 70% to 90%. This leaves little wiggle room to hire new workers and expand a business.

Jeff Sessions brings the war on marijuana to Washington, D.C.

At the heart of this opposition is Attorney General Jeff Sessions. Sessions hasn't minced words when describing his feelings toward pot, suggesting that "good people don't smoke marijuana." He's also intimated (in summary) that marijuana is no cure for the opioid crisis. In fact, Sessions has blamed marijuana, among other illicit drugs, for giving rise to the opioid epidemic.

Last year, Sessions sent a letter to a few of his fellow lawmakers requesting that they repeal the Rohrabacher-Farr Amendment (also known as Rohrabacher-Blumenauer), which is what protects medical marijuana businesses from federal prosecution. His attempts to repeal this federal spending measure haven't been successful thus far.

However, Sessions was successful in rescinding the Cole memo, effective Jan. 4, 2018. The Cole memo, which was drafted by former Deputy Attorney General James Cole in August 2013, set out a series of "rules" that states with legalized marijuana would abide by in order to keep the federal government off their backs. Sessions' removal of this memo clears the way for state-level attorney generals to use their discretion when bringing cannabis charges against businesses and people.

Though Sessions' rescinding of the Cole memo was viewed as the first official strike in his war on marijuana, it turns out he might have a very valid reason to have made such a move.

Surprise! Sessions may be validated in rescinding the Cole memo

When the Cole memo was written and implemented, it set out regulatory guidelines that states needed to follow to satiate a federal government that still deemed pot illegal. These guidelines include, as written in the memo:

• Preventing the distribution of marijuana to minors;
• Preventing revenue from the sale of marijuana from going to criminal enterprises, gangs, and cartels;
• Preventing the diversion of marijuana from states where it is legal under state law in some form to other states.

Though there are eight bullet-point guidelines, these first three were far and away the most important. It could be argued that regulated weed industries have done well to keep criminal enterprises out, as well as keep adolescent use down. However, diversion does appear to be an issue, at least in Washington state.

According to a recent report from the Seattle Times, cannabis appears to be leaving Washington's borders into adjacent states. Corporal Curt Sproat of the Idaho State Police told the Seattle Times that 1,375 pounds of pot were seized last year during traffic stops where more than a pound was collected. That was nearly triple the 507 pounds of weed recovered in 2016. By his estimation, 2018 is on track to blow what was seized in 2017 out of the water. It should also be pointed out that there's usually no clear way to trace the origin of this seized cannabis, so it could just as easily be illicitly grown, or from other sources than Washington.

Similarly, Oregon's U.S. attorney general has suggested that marijuana leaving his state is a problem, and it's one he's looking at resolving quickly.

The issue behind the diversion of legally grown cannabis to other states is overproduction. With harvests yielding more than ever as additional growers have entered the picture, wholesale prices have plunged. That could, in some regulators' eyes, push growers to move their product to illicit markets. Even though growers risk prosecution by doing so, it may still be happening, especially in Washington state, which has switched to a new, and purportedly less effective, system of tracking pot from seed to retailer in the past three months.

Regardless of people's opinion on cannabis, diversion clearly violates the Cole memo guidelines and gives Sessions full authority to reintroduce the superseding federal law.

Blockchain may resolve diversion issues, but clear divisions remain

Interestingly enough, blockchain -- the digital, distributed, and decentralized ledger that underpins virtual currencies and is responsible for recording all transactions -- might be the solution to marijuana's often murky supply chains. Being a transparent and immutable ledger, blockchain would offer a means to track a product from start to finish in real-time. Emerald Health Therapeutics (NASDAQOTH: EMHTF), a Canadian cannabis grower with up to 5.8 million square feet of growing capacity, recently announced that it was finalizing a joint venture with DMG Blockchain Solutions, to be known as CannaChain Technologies, that'll offer supply chain solutions to the cannabis industry.

For instance, Emerald Health's blockchain solutions joint venture could offer more transparency for auditors, as well as ensure that state governments are collecting their fair share of taxes. It would also provide immutable record-keeping to ensure that no grown cannabis is leaving a state for an adjacent state.

But even with blockchain, there's no guarantee that the deep-rooted bifurcation between the federal government and states would be solved. As long as Sessions is in office, there's virtually no chance of marijuana being rescheduled at the federal level. A recently filed lawsuit may offer a glimmer of hope for change, but Sessions seems set in his ways that expansion of the industry in any form isn't an option.

10 stocks we like better than Emerald Health Therapeutics IncWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Emerald Health Therapeutics Inc wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of February 5, 2018

Sean Williams has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.