Schedule I to Schedule III: Cannabis Reclassification on the Horizon!

Apr 30, 2024

Today, the Associated Press (AP) reported that the U.S. Drug Enforcement Administration (DEA) has agreed to reclassify marijuana under the federal Controlled Substances Act (CSA), moving it from its current Schedule I status to Schedule III. The DEA has yet to make a formal announcement, but nevertheless, this news was immediately met with excitement from the state-legal cannabis industry which has long been awaiting reform at the federal level. This alert spread like wildfire, with other major news sources picking up the story and doing deeper dives into the practical implications of such reclassification.

Certainly, this is a historic development and once effectuated, would be the first time the federal government has recognized the medical benefits of cannabis (something individual states have long been ahead on). However, there is still a long process ahead that involves approval from the White House Office of Management and Budget (OMB), and then rulemaking and public comment before this reclassification is official.

Beyond the obvious recognition that cannabis does not belong on Schedule I of the CSA, which houses the most dangerous drugs such as heroin, the state-legal cannabis industry is also reacting to what is expected to be a positive financial impact for operators. The industry has long been plagued by Section 280(e) of the Internal Revenue Code. The rescheduling of cannabis to Schedule III would make Section 280E inapplicable to licensed cannabis operators. This change will significantly reduce the tax burden on cannabis businesses, which has been hindered by the inability to deduct normal business expenses due to the current federal classification of marijuana. This could also be the catalyst for renewed investor appetite and additional cannabis reform from Congress, which has introduced several bills (some bipartisan) over the years in an attempt to address and reconcile the tension between state-legal cannabis programs and federal illegality, including the Strengthening the Tenth Amendment Through Entrusting States (STATES) Act, the Marijuana Opportunity Reinvestment and Expungement (“MORE”) Act, the Cannabis Administration and Opportunity (CAOA) Act, the Secure and Fair Enforcement (SAFE) Banking Act, the Preparing Regulators Effectively for a Post-Prohibition Adult-Use Regulated Environment (PREPARE) Act, and the Small Business Tax Equity (SBTE) Act.

While we do not want to temper the excitement of today’s news, we would be remiss if we did not point out that there is still a long road ahead — rescheduling will occur after proposed rules are published, and those proposed rules will be subject to notice and comment period, wherein we can expect challenges, delays, and likely litigation. Patience, persistence, and perseverance are to get this across the finish line.

This is an exciting and developing story and there will likely be additional details coming out over the next few days and weeks. Be sure to follow our blog for more information on all cannabis developments at the federal level.

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Schedule I to Schedule III: Cannabis Reclassification on the Horizon!

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