DEA Proposal to Reclassify Cannabis to Schedule III

On May 16, 2024, the U.S. Drug Enforcement Administration (DEA) issued a proposed rule that could transform the cannabis regulatory landscape by reclassifying cannabis from Schedule I to Schedule III under the Controlled Substances Act (CSA). If the proposal becomes a final rule, it could be a watershed moment in the legal cannabis industry. This blog post aims to briefly describe the implications of this proposal, outline the procedural steps ahead, and consider the potential impacts on the cannabis industry.

Understanding the Proposal

Cannabis is currently listed as a Schedule I drug, which means the DEA considers it very dangerous with no currently accepted medical use and a high potential for abuse. Some examples of other Schedule I drugs include heroin, LSD and ecstasy. By moving cannabis to Schedule III, the DEA acknowledges the medical utility of cannabis and its lower potential for abuse compared to substances in Schedule I. This does not mean cannabis would be fully legal everywhere or for any use, but it is a big step that could lead to more changes. It also helps align the federal laws regarding cannabis with the majority of state laws, since 38 states currently allow cannabis for either medical use, recreational purposes, or both.

Procedural Steps

Below are the steps that must occur prior to the reclassification becoming official:

  1. Public Comment Period: The DEA has opened a 60-day public comment period following the publication of the proposal in the Federal Register, inviting stakeholders to voice their opinions. The proposed rule was published in the Federal Register on May 21, 2024, with the comment period remaining open until July 22, 2024.
  1. Administrative Hearing: Interested persons may request an administrative law hearing before June 20, 2024 in accordance with the requirements of the Administrative Procedure Act. An interested person is broadly defined and generally includes any individual, organization, or entity that may be affected by or has a vested interest in the outcome of a proposed rule or administrative action.
  1. Final Rule: After considering all comments and other inputs, the DEA will publish a final rule that ideally reclassifies cannabis from Schedule I to Schedule III. There is no established deadline for this process, and has the potential to take over a year to complete.
  1. Potential Lawsuits: The DEA’s final rule will not go into effect for 30 days after publication, during which time aggrieved parties may challenge the final rule in court. The outcome(s) of these lawsuits will help shape the final rule’s scope, enforceability, and interpretation.

Implications for the Cannabis Industry

If the proposal passes, the cannabis industry stands on the cusp of some transformative changes, including:

  • Tax Implications: One of the most significant changes could be the alleviation of tax restrictions under Section 280E of the Internal Revenue Code. Currently, businesses involved in the trafficking of Schedule I and II substances are prohibited from deducting certain normal business expenses, resulting in a heavy tax burden for cannabis businesses. If cannabis is reclassified to Schedule III, it would no longer fall under the purview of Section 280E, allowing cannabis businesses to deduct ordinary and necessary business expenses like other industries. This change could significantly improve the profitability and sustainability of cannabis operations by reducing their effective tax rates.
  • Banking and Finance: Currently, even in the 38 states where cannabis is legal in some form, companies participating in the cannabis industry have been unable to fully participate in regular banking activities due to cannabis being classified as a Schedule I drug. Rescheduling to Schedule III would alleviate some of the banking restrictions currently plaguing cannabis businesses, potentially allowing for safer and more robust financial operations. Banks and financial institutions are likely to be more willing to provide services, leading to improved access to loans, credit, and banking facilities.
  • Research and Development: Since Schedule I drugs are deemed to have no medical benefit, research on the benefits and harms of cannabis has been largely stifled due to onerous requirements labs must meet in order qualify to work with cannabis. With reduced federal restrictions, research into cannabis could flourish, leading to new medical discoveries and product innovations. This could result in an influx of new products and treatments entering the market, expanding the opportunities for businesses involved in the development and distribution of cannabis-based products.
  • Regulatory Compliance: Businesses would need to adapt to the regulatory controls applicable to Schedule III substances, which, while less stringent than Schedule I, still require careful navigation. It is currently unclear how the proposed rescheduling would affect cannabis regulation in the states where cannabis use is already permitted. For example, the proposal does not specify whether state-licensed dispensaries would need to be licensed pharmacies, since typically only a pharmacy can dispense Schedule III drugs. Compliance with the new classification could involve updating operational procedures, securing new types of licenses, and possibly facing new reporting and inspection requirements.
  • Market Expansion: With the reduction of federal restrictions and the reclassification of cannabis, larger corporations and multi-state operators may be encouraged to enter the industry. The shift to Schedule III could attract significant investments from well-established companies in other sectors, leading to increased competition, consolidation, and potentially more robust growth within the industry. This influx of larger players could drive innovation, improve economies of scale, and elevate standards across the industry, but it might also present challenges for smaller operators trying to compete in a rapidly evolving marketplace.

Other Considerations

Importantly, the proposed rule pertains solely to “marijuana” as defined in the Controlled Substances Act (CSA). The CSA defined marijuana as “the plant Cannabis sativa L., whether growing or not; the seeds thereof; the resin extracted from any part of such plant; and every compound, manufacture, salt, derivative, mixture, or preparation of such plant, its seeds or resin.” As a result of the limited scope of the proposed rule, synthetically-produced tetrahydrocannabinol (THC) is not covered. Consequently, synthetic THC will continue to be classified under Schedule I. Additionally, this proposed rule does not impact the status of hemp (as defined by 7 U.S.C. 1639o), since hemp was removed from the definition of marijuana by the 2018 Farm Bill.

Conclusion

The proposed reclassification of cannabis is not just a shift in its legal status; it’s a recognition of the evolving understanding of its benefits and risks of cannabis. All interested parties should stay informed of these changes. We will continue to guide our clients through the transition, and are already preparing for the new legal landscape that will emerge.

We recommend staying engaged in the public comment process, as this is a critical opportunity to voice any concerns or support for the proposed changes. Additionally, we will keep clients updated on any developments and assist in ensuring compliance with new regulatory requirements as they arise.