As anticipated, U.S. Attorney General Merrick Garland has submitted to the Federal Register a notice of proposed rulemaking to consider moving marijuana from a Schedule I to a Schedule III drug under the Controlled Substances Act.
The notice, announced Thursday, May 16, by the U.S. Justice Department, initiates a 60-day comment period for members of the public to submit remarks regarding the rescheduling proposal.
The White House released a video on X of President Joe Biden praising the rulemaking notice. In it, he said “far too many lives have been upended because of [a] failed approach to marijuana.”
This is a major shift for Biden, who had a hand in supporting that failed approach while serving in Congress.
The publication of the proposed rule comes after the U.S. Drug Enforcement Agency announced it would move to reschedule marijuana. It also comes after the U.S. Department Health and Human Services determined the marijuana currently has accepted medical uses and is less dangerous than other Schedule I drugs.
The proposed rulemaking does not include a draft rule at this time. The rulemaking process is to craft a rule with stakeholder input, and it can take a long time: from months to more than a year. For now, interested parties should submit their comments and suggestions to the Federal Docket Management System as required by the notice. Hopefully, the proposed rulemaking will move swiftly and the Justice Department will schedule a late summer administrative hearing. At that time, we will see what the contours of the proposed rule will look like and how it could affect existing state licensed medical and adult use cannabis licensees.
While certain effects of rescheduling are still to be determined, cannabis businesses should expect to receive relief from Section 280E of the Internal Revenue Code. That section limits the credits and deductions available to businesses that sell cannabis to only those for costs of goods sold. The section has cost cannabis businesses millions of dollars in lost deductions that are available to almost every other business.
With rescheduling on the horizon, multiple publicly traded cannabis companies have already announced that they will be amending their federal tax returns to reflect the availability of additional deductions. The additional cash available to multistate operators could be used to service debt or to expand and improve existing facilities. It also could spur additional acquisitions and business combinations in the industry.
Rescheduling alone, however, will not provide the cannabis industry with immediate access to all major financial institutions and their traditional banking and lending options. Absent further action by Congress, cannabis businesses will continue to lack access to credit card and payments systems that most other industries enjoy.
One concern raised by some in connection with rescheduling is the potential involvement of the U.S. Food and Drug Administration in established state cannabis industries. While moving cannabis from Schedule I to Schedule III will create a pathway for drug companies to work with the FDA to research and develop prescription medications based on cannabis under the Controlled Substances Act, it will not change the fact that cannabis grown and sold outside of that framework remains illegal under federal law. With that said, the same conflict existed while cannabis remained a Schedule I drug, and the federal government has yet to interfere with any cannabis business operating in compliance with applicable state law.
It seems unlikely that moving cannabis to a less restrictive schedule would result in greater enforcement. Absent a change to the legality of cannabis at the federal level, it also seems unlikely that the FDA would choose to intervene in existing state-regulated cannabis programs.
The eventual proposed rule hopefully will provide clarity on the extent to which rescheduling could change the federal government’s involvement in the industry.
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