Big news for the cannabis industry: on April 30, 2024, the Drug Enforcement Administration (DEA) announced that it will reschedule marijuana from Schedule I to Schedule III under the Controlled Substances Act (CSA). The Biden Administration has been pushing for this change for months, and the announcement from DEA provides a beacon of hope for operators in the cannabis industry that rescheduling will occur before the end of the year. As a reminder, Schedule I substances are deemed to have no currently accepted medical use and include substances such as heroin, LSD, and MDMA, while Schedule III drugs are those that can be legally prescribed by health care providers, such as ketamine and Tylenol with codeine.

Taxation

The most immediate and substantial impact from rescheduling will be to alleviate the tax burden from Section 280E of the Internal Revenue Code, which prohibits cannabis businesses from deducting business expenses other than those for cost of goods sold. Section 280E does not extend to Schedule III substances, and is limited to businesses that traffic Schedule I and Schedule II substances. This change will allow cannabis businesses to avoid giving a material chunk of their income to the federal government, and in an industry where margins are already very thin, the extra income could be the difference between staying solvent or going out of business. This is an important change that will likely prompt much-needed investment in the space, though don’t expect the same level of capital flow that occurred six to eight years ago during the “green rush,” as investors are now much more risk averse to the industry. Some folks are now wondering if they can try to apply the change in 280E retroactively to prior tax filings, and I suspect that we will see some legal challenges in the tax courts on this issue. Stay tuned on that.

State-Legal Markets

It is important to note that the CSA still contains robust regulations and requirements to manufacture and distribute Schedule III substances – and the Food and Drug Administration approves how these drugs are manufactured. Moving marijuana from Schedule I to Schedule III will have little impact on state-legal marijuana programs, which will continue to operate as they have previously and in conflict with the CSA.

On the plus side, moving to Schedule III will make it much easier to research marijuana in the United States. As a Schedule I substance, marijuana is currently deemed too dangerous to research with human subjects, even under the supervision of doctors and health care professionals, gravely limiting research opportunities at the federal level. While Schedule III substances are still controlled, rescheduling of marijuana to Schedule III will provide more leeway for researchers to better understand the cannabis plant and the physiological impacts it has. Progress on that front will likely lead to the development of prescription-based marijuana drugs.

Next Steps

Rescheduling is not going to happen immediately. The DEA will now have to go through the formal rulemaking process, which will include soliciting public comments on a proposed rule, which the DEA will then review and consider when adopting the final rule. The DEA reportedly has submitted a draft rule to the Office of Management and Budget for review, and that process alone can take up to 90 days. Because the Biden Administration is looking for a win ahead of the election, we expect that there will be some back channeling to accelerate the rulemaking process. My guess is that we will see rescheduling happen before the election, but the timing is uncertain.