October 24, 2023

In October 2022, President Biden requested a U.S. Secretary of Health and Human Services (HHS)  administrative review of cannabis’s classification under federal law. After conducting a scientific and medical review of cannabis, HHS issued a recommendation to the U.S. Drug Enforcement Agency (DEA) that cannabis should be recategorized from Schedule I to Schedule III, recognizing that cannabis has a “currently accepted medical use.” While the DEA holds the ultimate authority regarding the federal classification of cannabis, reports indicate that the DEA is “likely” to reschedule cannabis to Schedule III.

Within the industry, the rescheduling recommendation has been met with a mix of praise and criticism. Some say rescheduling does not go far enough to remedy the harms of the War on Drugs. Others are more optimistic about the proposed change’s potential impact on the cannabis industry. However incremental, HHS’s recognition that cannabis has a “currently accepted medical use” is historic, given the federal government’s long-standing prohibitionist position. Nonetheless, some conservative lawmakers argue that rescheduling cannabis would be “irresponsible” because cannabis has a “high potential for abuse” and lacks “accepted safety [measures] for use.”

Here’s everything you should know about the potential impact of cannabis moving to Schedule III. 

  • Existing State-Level Cannabis Programs Would Remain Illegal Under Federal Law. 

Cannabis is currently illegal under federal law because it is a Schedule I controlled substance under the Controlled Substances Act (CSA). Schedule I substances have “no medical purpose” and may not be prescribed or sold.

In contrast, Schedule III substances may be legally manufactured, sold, or prescribed, given that operations are compliant with applicable federal regulations. As a Schedule III substance, commercial cannabis operations would need to be compliant with federal regulations, including the Controlled Substances Act, Federal Food, Drug, and Cosmetic Act, and Agricultural Marketing Act of 1946, in order to be legal under federal law. Existing state licensing programs are not set up to comply with these regulatory requirements. As such, existing cannabis operators would not suddenly become legal upon the rescheduling of cannabis.

Currently, state-regulated cannabis industries are able to operate because the federal government has elected not to prioritize enforcement of federal laws prohibiting cannabis against operators in states legally operating within a robust state regulatory framework to prevent diversion. Moving forward, if cannabis is rescheduled, it is unlikely current state operators (within the current framework of their respective states) would be compliant with federal regulations. All the same, the future of operators who are not compliant with federal law depends on whether the federal government opts to enforce Schedule III requirements or not. There is no current indication that the federal government intends to crack down on state programs, although that is something to keep an eye out for.

  • Cannabis Operators Will Have Access to Much Needed Federal Tax Deductions. 

Currently,  Section 280E of the Internal Revenue Code prohibits state compliant cannabis business operators from deducting costs incurred during the course of business because 280E prohibits “traffickers” of Schedule I and Schedule II substances from receiving any federal tax deductions or credits.

Section 280E is a significant burden on the cannabis industry across the country. In 2022 alone, cannabis companies were found to have paid $1.8 billion more in federal taxes compared to non-cannabis businesses as a direct result of Section 280E, which translates to cannabis businesses being taxed at a rate 70% greater than non-cannabis businesses.

If the DEA agrees to reschedule cannabis to Schedule III, cannabis businesses would enjoy tax deductions for ordinary and necessary business expenses (e.g, rent, payroll, marketing), just as any other business can do. This would significantly increase available cash flow for cannabis operators, which in turn could invest more into their businesses and employees.

  • Lack of Access to Banking and Financial Issues Would Likely Persist. 

Any cash flow tied to illegal business can be considered money laundering, which comes with serious penalties under the law. Given that cannabis operators are currently engaged in business involving cannabis—an illegal controlled substance––major financial institutions do not serve the cannabis industry in order to avoid liability risks. As a result, the cannabis industry is generally unable to open bank accounts or use credit or debit cards from national providers.

Unfortunately, rescheduling cannabis is unlikely to create safe and reliable access to banking services for cannabis businesses. This is because, as mentioned above, existing cannabis businesses are not set up to comply with federal regulations, and thus would remain illegal under federal law. That said, comprehensive access to banking and financial services could open up for medical cannabis operators who are compliant with all federal regulations applicable to Schedule III substances.

Separately, there is a cohort of congressional legislators who are championing efforts to directly reform the banking issues plaguing cannabis operators across the country. Namely, the SAFER Banking Act aims to exempt financial institutions for penalties and liability costs associated with serving cannabis businesses who are compliant with state law.

  • Cannabis Use Would No Longer Provide a Basis to Deny Consumers Federal Employment or Social Services. 

Federal government workers are prohibited from using cannabis, due to its Schedule I status. If rescheduled, federal government employees may be permitted to use medical cannabis. Although, the application of this right would likely depend on whether a given agency has additional regulations in place restricting cannabis use.

The Schedule I status of cannabis also poses an obstacle for cannabis consumers who need to access social services. For example, history of cannabis use or related charges can be used to deny applicants seeking public housing and immigrant visas. If cannabis is rescheduled, medical cannabis would no longer be an illicit substance, and thus medical cannabis users could not be denied services on the basis of their cannabis use.

  • Cannabis Research Would be Easier to Conduct.

Research on Schedule I substances is highly regulated and restricted. Researchers must obtain approval from both the FDA and DEA, and are limited to using cannabis provided by the National Institute of Drug Abuse, which is exclusively cultivated at the University of Mississippi. These burdensome and time consuming requirements have significantly obstructed cannabis research and development of cannabinoid-based pharmaceuticals to-date.

Under Schedule III, cannabis and its compounds would be significantly easier to research. This structure, coupled with the fact that commercial cannabis will no longer be federally illegal, would likely encourage significant investment into the cannabis industry and development of cannabis-derived pharmaceutical drugs.

Looking Ahead

Altogether, the rescheduling of cannabis would immediately benefit current cannabis operators by granting access to general business tax deductions and credits. A Schedule III classification would also open up research opportunities, which would likely attract a host of new players to the cannabis industry, including investors, researchers, and drug developers. Moreover, while less tangible, rescheduling could play a big role in transforming national public opinion on the efficacy and safety of cannabis.

The Manzuri Law team welcomes you to contact one of our cannabis law attorneys online and/or  to sign up for our newsletter to stay abreast of cannabis policy developments at the federal, state, and local level.