HHS Proposes Rescheduling Cannabis to Schedule III – What It Means for the Industry

Troutman Pepper

Troutman Pepper

It has been widely reported and confirmed publicly that, on August 29, the U.S. Department of Health and Human Services (HHS) sent a letter to the Drug Enforcement Administration (DEA) recommending that cannabis be moved from Schedule I to Schedule III of the Controlled Substances Act (CSA). While this change would not lift the federal prohibition on cannabis, and the DEA will need to perform its own review, the move could have profound implications for researchers and industry participants.

Currently, cannabis is classified under Schedule I of the CSA, a category reserved for substances with a high potential for abuse, no accepted medical use in treatment in the U.S., and a lack of accepted safety for use under medical supervision. This classification imposes significant barriers to research and substantial tax burdens on state-legal cannabis businesses. The HHS recommendation, reportedly based on a review by the Food and Drug Administration (FDA), proposes moving cannabis to Schedule III, a category for substances with a lower potential for abuse, accepted medical use in treatment in the U.S., and moderate to low physical dependence or high psychological dependence. Examples of Schedule III-controlled substances listed on the DEA’s website include products containing not more than 90 milligrams of codeine per dosage unit (e.g., Tylenol with Codeine®), buprenorphine (Suboxone®), ketamine, and anabolic steroids such as Depo®-Testosterone.

Why It Matters

It is important to note that a move to Schedule III will not convert cannabis products into consumer-packaged goods that can be purchased over the counter at convenience stores, gas stations, or grocery stores — a prescription would be required. The move would also not help to clarify the status of state-legal recreational cannabis systems, as Schedule III substances may not be sold or used recreationally under federal law. The rescheduling of cannabis to Schedule III would, however, have significant legal implications for researchers and industry participants.

Retail cannabis businesses would be able to deduct ordinary business expenses from their federal income taxes, a benefit currently unavailable due to Internal Revenue Code Section 280E, which forbids businesses from deducting otherwise ordinary business expenses from gross income associated with the “trafficking” of Schedule I or II substances. While some states have taken measures to ease the tax burdens on retail cannabis businesses at the state level, this change at the federal level could dramatically improve the financial viability of retail cannabis businesses, some of whom currently pay upwards of 70% in income taxes. Cultivators and manufacturers are not subject to the same restrictions under 280E, so a move to Schedule III may not provide much relief to those portions of the industry.

Moreover, the rescheduling of cannabis to Schedule III could also ease restrictions to access for cannabis researchers. The Schedule I classification imposes significant requirements on researchers, making it difficult for scientists to study the potential benefits and risks of cannabis. The move to Schedule III could unlock new opportunities for research, potentially leading to new medical treatments and a better understanding of cannabinoids like tetrahydrocannabinol, the main psychoactive substance contained in cannabis plants.

The HHS’s recommendation to move cannabis to Schedule III of the CSA could have far-reaching implications for the cannabis industry and research community. While it’s still early days, and action from the DEA will be required, the potential changes could significantly impact the legal and regulatory landscape for the cannabis industry in the U.S. Based on prior precedent, moving cannabis to Schedule III would require administrative rulemaking and opportunity for comment, which could take anywhere from 18 months to several years for DEA to complete.

Cannabis remains an illegal controlled substance under federal law.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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