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Publications | October 6, 2023
4 minute read

HHS Recommends DEA Reschedule Marijuana from Schedule I to Schedule III – Now What?

A year ago today on October 6, 2022, President Joe Biden asked the U.S. Secretary of Health and Human Services (HHS) and the U.S. Attorney General to initiate an administrative process to review how marijuana is scheduled under the federal Controlled Substances Act, or CSA. We speculated at the time that if rescheduling were undertaken, it would move marijuana from Schedule I to Schedule II of the CSA. We also observed that while many would probably applaud the president’s request, a closer look at the consequences of rescheduling suggests such action would actually undercut the progress that’s been made to legalize medical and especially adult-use cannabis cultivation, sale, purchase and use.

Apparently acting on the president’s request, HHS issued a recommendation to the U.S. Drug Enforcement Administration (DEA) on August 29 that marijuana be rescheduled from Schedule I to Schedule III. The administrative machinery has now been engaged and, while it might (or might not) be a lengthy process, it is likely the rescheduling question will be answered in the coming months or years. How that answer may affect the efforts undertaken in 39 states allowing medical and adult use of marijuana remains to be seen in a variety of different ways.

What is the probable timing of a rescheduling decision? It appears that the federal Administrative Procedure Act would apply to this process, including notice and comment periods, suggesting many months if not years to complete. However, some commentors have speculated, possibly as a result of political and election considerations, the DEA may issue a final rule without regard to the notice and comment period.

One immediately positive consequence of moving marijuana to Schedule III would be the elimination of the application of Internal Revenue Code Section 280E to marijuana businesses. Section 280E is the federal income tax law that prohibits deduction of ordinary and necessary business expenses by a taxpayer engaged in the trafficking of Schedule I or II controlled substances. Most marijuana businesses will applaud the fall of 280E, as it applies to them, as their tax liability will almost certainly shrink. Whether the positive financial effects of this change will compensate for other consequences of rescheduling is less clear.

It is important to remember that a Schedule III drug may only be lawfully used for medical or scientific purposes. While marijuana used for medical purposes might meet this criteria, adult-use recreational marijuana will not. All of the negative consequences of federal illegality (e.g., restricted banking and related financial services, no interstate commerce, no bankruptcy protection) will continue unabated for adult-use marijuana.

Moreover, if medical marijuana is moved to CSA Schedule III, future lawful activity will be controlled and regulated by the federal Food and Drug Administration (FDA). Medical marijuana businesses that wish to benefit from federal legality will be required to comply with whatever regulatory framework the FDA creates.

Are medical marijuana consumers ready for what an FDA regulated market might look like? Without knowing precisely what might result, it’s reasonable to suspect that the ways in which medical marijuana is used today under state regulation will be substantially altered by a federal food and drug bureaucracy. For example, it’s almost certain that federally legal Schedule III marijuana could only be obtained with a prescription from a physician or pharmacist. Under that treatment, is it likely the FDA would allow the consumption of medical marijuana by smoking or vaping, or even the more benign methods of ingestion? Are marijuana consumers ready for a supply regime limited to gel-caps and tinctures?

And what about adult-use marijuana legalized by 23 states?

According to an April 2023 article in MJBizDaily, the projected national market for state-legal marijuana in the U.S. in 2023 is $44.7 billion. Of that amount, 75% is adult use. The same article projects that by 2028 the top line sales number grows to $71 billion, of which 80% is projected as adult-use sales. Clearly, these numbers suggest that the bulk of state-legal marijuana business activity is adult use, and that number is growing. What will the rescheduling of marijuana to Schedule III do to this adult-use market? While 280E may disappear, all or most of the other consequences of federal illegality of non-medical marijuana will continue.

There’s also the possible prospect of future renewal of enforcement of federal prohibition. Many marijuana consumers, even medical marijuana patients, use the state-legal adult-use retail system to purchase their cannabis. If a major medical marijuana business wanted to capture that market by developing an FDA-approved marketing and distribution plan, that business might be very interested in seeing the adult-use market restricted. Is that what most marijuana consumers (or the state-licensed businesses that supply them) want?

As we observed last year when President Biden raised the rescheduling issue, this cure may be worse than the illness. Anecdotally, the majority of Americans seem content with allowing their state governments to license, tax and regulate marijuana use separate and apart from the federal machinery under the CSA. We’ve now had enough experience with that process to know that the sky has not fallen. The de-scheduling of marijuana may be the wisest objective.

For questions about rescheduling or any other cannabis-related legal matter, please contact Bob Hendricks, Emily Cantor or a member of Warner’s Cannabis Industry Group.