On August 29, 2023, the U.S. Department of Health and Human Services (HHS) issued a letter formally recommending the U.S. Drug Enforcement Administration (DEA) re-classify cannabis from a Schedule I Controlled Substance to a Schedule III Controlled Substance under the federal Controlled Substances Act.
Schedules
Since the founding of the DEA in 1970, cannabis has been listed as a Schedule I substance. Under federal law, Schedule I drugs are defined as having “no currently accepted medical use and a high potential for abuse.” Along with cannabis, other Schedule I drugs include heroin and LSD.
Under federal law, Schedule III drugs are defined as having “moderate to low potential for physical and psychological dependence.” Schedule III drugs include ketamine, anabolic steroids, and testosterone.
HHS Recommends Reclassification1
Pursuant to the Controlled Substances Act, the HHS Secretary and Attorney General began their review of how marijuana is scheduled under federal law last year. HHS completed the administrative process in less than 11 months, reviewing eight factors: (1) its actual or relative potential for abuse; (2) scientific evidence of its pharmacological effect; (3) current scientific knowledge regarding the drug and other substances; (4) current pattern of abuse; (5) the scope, duration, and impact of abuse; (6) whether there is (and if so what) risk to public health; (7) its psychic or physiological dependence capability; and (8) whether the substance is an immediate precursor to an already controlled substance.2 After comprehensive evaluations, HHS provided its recommendation for marijuana in a letter to the DEA on August 29, 2023.
Next Steps
The DEA has the final authority to reschedule a drug under the Controlled Substances Act. Therefore, the DEA will now initiate its review based on the information provided by HHS. If the DEA determines the drug should be reclassified, then it will begin the formal rulemaking procedures, as required by the Administrative Procedures Act (APA). Once the formal rulemaking process is complete, an administrative law judge (ALJ) will decide whether to adopt the regulation. If the ALJ adopts the regulation, it will be published in the Federal Register.
Impact
If cannabis is rescheduled to Schedule III instead of Schedule I, the drug will still be federally illegal. States will continue to have the power to legalize cannabis but do not have to. This also means that interstate commerce in cannabis would not, technically, be legal.3
But it does mean that Section 280e of the IRS tax code will no longer be a barrier to cannabis businesses. 280e prohibits state-licensed cannabis businesses from claiming standard business deductions (which are available to every other business in America) and applies to Schedule I and II substances. If cannabis were reclassified to Schedule III, cannabis businesses would have an opportunity to increase their cash flow by claiming the deductions. More cash flow could lead to greater ability for businesses to take in debt for improvements and expansions.
It also means that institutional lenders may be more willing to be a source of capital for cannabis businesses. The reclassification may signal to risk-averse investors that the federal government views cannabis as less of a problem than it once was, and these investors may see the opportunity to get involved as less risky. This may further lead to stimulation of the lending market, which would, hopefully, reduce high-interest rates imposed on current loans in the cannabis space. Further, if the SAFE Banking Act is passed, financial institutions would be exempt from liability and penalties for seeking out opportunities with marijuana businesses that are compliant with state law.
Questions
For now, we must sit and wait to see what the DEA decides, but this is nonetheless a historic step in a direction that would have a strong impact on cannabis businesses.
Footnotes
1. Reclassification (or rescheduling) is distinct from descheduling. While rescheduling would transfer cannabis to another schedule (i.e., Schedule I to Schedule III), descheduling completely removes cannabis from the list of controlled substances entirely. SMART, Understanding The Difference Between Rescheduling and Descheduling Cannabis, September 6, 2023, https://studentmmj.com/rescheduling-and-descheduling-cannabis/#:~:text=Rescheduling%20moves%20cannabis%20to%20a,it%20more%20like%20common%20items.
2. Bradley Arant Boult Cummings LLP, To Reschedule or To Deschedule: That is the (Marijuana) Question, September 20, 2023, https://www.lexology.com/library/detail.aspx?g=fc68e77a-d321-4a4a-abdf-0e13553f0a8f&utm_source=Lexology+Daily+Newsfeed&utm_medium=HTML+email+-+Body+-+General+section&utm_campaign=Lexology+subscriber+d.
3. While interstate commerce may remain illegal, the possibility of rescheduling may impact the ability to advertise across states.
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