On August 29, 2023, the U.S. Department of Health and Human Services (“HHS”) recommended to the Drug Enforcement Administration (“DEA”) that marijuana be reclassified from a Schedule I controlled substance to a Schedule III controlled substance. Reclassification in this manner, should the DEA choose to follow this recommendation, could have profound implications on the marijuana industry, medical research, tax and banking, and criminal enforcement.

Currently, marijuana and the active chemical THC (except as derived from hemp) are classified as Schedule I controlled substances, along with heroin, ecstasy, and LSD.^[1] Under federal law, this means that controlled substances have “a high potential for abuse,” “no currently accepted medical use in treatment in the United States,” and that there “is a lack of accepted safety for use of the drug or other substance under medical supervision.”^[2] However, 38 states have passed legislation allowing for some form of medical use of marijuana and 23 states have legalized recreational use of marijuana. These state laws all conflict with the current federal law, which is one reason why HHS was tasked with providing a scheduling recommendation to the DEA.

Should the DEA reschedule marijuana as a Schedule III drug, it would remain illegal under federal law, but it would be a recognition that marijuana has a “potential for abuse less” than Schedule I and II drugs and “has a currently accepted medical use in treatment in the United States.”^[3] In general, rescheduling marijuana to Schedule III opens the door for it to be an FDA-approved drug, like ketamine or Suboxone^®, that are only legally available with a valid prescription.

Reclassification would also ease restrictions on medical research and would help legitimize the marijuana industry on a national level. For over 50 years, the Schedule I designation has created a “Catch-22” by preventing the very medical research that could support an acceptable medical purpose. However, HHS now recognizes—following its consideration of a “scientific and medical evaluation” of marijuana under its statutorily mandated eight-factor analysis—that there is evidence to support marijuana’s use for medical treatment, despite finding in 2016 that it should remain Schedule I.^[4] Not only was HHS required to make binding findings on the DEA of a legitimate medical use, but also a substance’s abuse potential and safety or dependence liability. Ultimately, the DEA has the final authority to schedule or reschedule a drug under the Controlled Substances Act. Now the DEA—which is oftentimes much stricter than HHS—will consider HHS’ recommendations and “all other relevant data”^[5] under its five-part test to determine whether marijuana has a “currently accepted medical use”^[6] and there is “substantial evidence”^[7] to warrant its transfer to Schedule III. The last time the DEA conducted such a review it took over two years, and ultimately resulted in marijuana remaining a Schedule I.

If the DEA reschedules marijuana, it will likely take some time as the Administrative Procedure Act rulemaking process and proceedings are complex and time-consuming. The DEA would first publish a proposed rule with HHS’ and the DEA’s summarized analyses and conclusions, which would open up the notice and comment period. Once the comment period was complete, the DEA would review the submitted comments and issue a final rule. On the other hand, the DEA may issue a final rule without the notice and comment period. Moreover, any final rule would be subject to challenge in court. Accordingly, the path and timeline to reach Schedule III reclassification is not certain.

In addition, the federal tax code currently prohibits deductions or credits for businesses that consist of “trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act).”^[8] This means that businesses in the cannabis industry, even though legalized on a state level, cannot claim the same business deductions as non-cannabis businesses on their federal taxes, resulting in significantly higher tax burdens for these companies. Should marijuana be rescheduled as a Schedule III drug, Section 280E would no longer apply and cannabis businesses could claim the normal business deductions. The change could also have far-reaching impacts on banking and finance for the cannabis industry, such as allowing for increased investment opportunities on national stock exchanges, making bankruptcy protections available, and potentially permitting foreign companies the ability to sell their products in the United States.

While it remains to be seen how the DEA will take the scheduling recommendation, it appears that the medical data, as relied on by HHS, supports loosening legal restrictions on a federal level. The DEA’s review is just beginning and we look forward to monitoring the process as it proceeds.

_{[1] See 21 U.S.C. § 812.
[2] 21 U.S.C. § 812(b)(1).
[3] 21 U.S.C. § 812(b)(3).
[4] 21 U.S.C. 811(b).
[5] 21 U.S.C. 811(b).
[6] 81 FR 53687, 53700.
[7] 21 U.S.C. 811(b).
[8] 26 U.S.C. § 280E.}