By: Irina Dashevsky, Esq.
Over the past week, much has been written about the recent recommendation from the Department of Health and Human Services (“HHS”) to reschedule cannabis from a Schedule I narcotic on the Controlled Substances Act (“CSA”) to Schedule III. Here at Greenspoon Marder, we are taking a deeper dive into the implications of rescheduling on a variety of topics that have affected the state-legal cannabis industry, including regulatory, tax, intellectual property, and financial services.
With that in mind, welcome to the first part of our four-part series. Here, we discuss the rescheduling process, related timeline, and the likely implication of rescheduling on state cannabis programs.
Background
On or about August 29, 2023, Deputy Secretary of HHS Rachel Levine transmitted a letter to the Drug Enforcement Agency (“DEA”) head Anne Milgram recommending that cannabis and its derivatives be moved off Schedule I of the Controlled Substances Act. It has been widely reported that HHS’s recommendation is to reschedule cannabis to Schedule III. The practical effect of this recommendation is that the Attorney General has 90 days (21 US 811(j)) from receiving the recommendation of HHS to issue an interim final rule, which is around Thanksgiving.
Before getting into the details, we want to recognize and underscore how monumental this single act from the HHS really is. After many past attempts through a variety of channels and initiatives, this represents the only movement from the federal government with respect to cannabis in 70 years! This is a huge boon for the cannabis industry and the product of a great deal of hard work, dedication, and cooperation, which was all initiated by President Biden last year when he directed HHS and the Attorney General to review the scheduling for marijuana.
The Details
It is important to understand the differences between Schedule I and Schedule III designations, as well as the process for rescheduling.
Schedule I substances are deemed to have no currently accepted medical use in the United States, a lack of accepted safety for use under medical supervision, and a high potential for abuse.[1] Schedule III substances, on the other hand, are deemed to have medicinal value, a decreased potential for abuse compared to Schedule I or II drugs, and abuse that may lead to moderate or low physical dependence or high psychological dependence.[2] Schedule III substances require a prescription and may be refilled up to five times within six months. Perhaps the most immediate and critical distinction for the state-legal cannabis industry in the U.S. is that Section 280E of the Internal Revenue Code does not apply to Schedule III drugs (this point will be further explored in our forthcoming tax segment).
As to the process, importantly, HHS’s recommendation is binding as to scientific and medical matters, which is significant. Now, the DEA, which has already acknowledged receipt of HHS’s recommendation letter, is tasked with promulgating the rule to effectuate any rescheduling within 90 days.
This rule will be posted and interested parties will be allowed to provide public comment and request hearings. This comment period will be at least 30 additional days once the rule has been posted. However, an interim final rule becomes effective immediately upon publication—with the exception that the rule may be changed if input from public comments necessitates such change. This means that if the DEA and the Department of Justice (“DOJ”) accept the HHS recommendation (which historically they have without reservation), cannabis will be for all intents and purposes be moved to Schedule III upon issuance of the interim rule. As such, we may see an interim rule issued rescheduling cannabis before the end of the year.
As a result of this rule, federal agencies outside the HHS and DOJ (for example, the Internal Revenue Services “IRS” and Department of Transportation “DOT”) will need to issue accompanying guidance that details how cannabis will be treated based on a scheduling change.
The Impact
It is equally important to underscore that a rescheduling is not a de-scheduling. Marijuana will remain federally illegal. Consequently, the ban on interstate commerce for state-legal cannabis companies remains in place. Even if rescheduled to Schedule III, it remains illegal at the federal level to manufacture, distribute, and retail such a drug without a prescription or DEA registration. There is currently no process for cannabis prescriptions, nor will there be a process set forth for this for quite some time. We are unlikely to see Food and Drug Administration (“FDA”)-approved cannabis drugs in the stream of commerce any time soon. In other words, state-licensed cannabis medical products will not automatically qualify as approved Schedule III cannabis drugs. The rescheduling will not alter how the state-legal cannabis industry operates, but this rescheduling does lead to some interesting new options for the future, including increased access to medical research and development.
Importantly, an immediate impact upon the publication of the interim rule would be the repeal of 280E for cannabis businesses. IRC 280e prohibits deductions other than cost of goods sold for individuals or businesses trafficking in Schedule I or Schedule II controlled substances but has no such prohibition for Schedule III substances. With this repeal, the IRS would likely need to issue additional guidance on audits, accounting practices, and tax collections for cannabis businesses.
The upshot is that while it will be some time before we can understand the full impact of rescheduling, this move is incredibly significant for the existing state-legal cannabis industry which has been plagued by high taxes, high cost of debt, lack of access to investment capital, lack of access to traditional financial services, and strained cash flow. Indeed, the capital markets have already reacted favorably, and we hope this is an impetus for Congress to take action on pending cannabis reform legislation like the SAFE Banking Act.
[1] Some examples of substances listed in Schedule I are heroin, lysergic acid diethylamide (LSD), marijuana, peyote, methaqualone, and 3,4-methylenedioxymethamphetamine (“Ecstasy”).
[2] Some examples of substances listed in Schedule III are products containing not more than 90 milligrams of codeine per dosage unit (Tylenol with Codeine), buprenorphine (Suboxone), benzphetamine (Didrex), phendimetrazine, ketamine, and anabolic steroids such as Depo-testosterone.
