On August 30, 2023, the federal government formally acknowledged the medical use and low potential of abuse for cannabis, with the US Department of Health and Human Services (HHS) recommending that cannabis be rescheduled to Schedule III under the Controlled Substances Act (CSA) based on its review of data and science. The final scheduling determination now lies with the US Drug Enforcement Agency (DEA), which will now conduct its own assessment.

This historic recommendation, a result of the administrative process President Biden ordered in October of 2022 to expeditiously review marijuana’s classification under federal law and to right the wrongs of the failed war on drugs, is a critical step toward the end of prohibition. While the final determination lies with the DEA, HHS’s recommendation will support the legitimization of the industry and support needed congressional reforms.

While placement in Schedule III still criminalizes commercial cannabis activity at the federal level, it is a significant step on the path to ending prohibition. This rescheduling would eliminate the application of 280E tax penalties, reduce the level of criminal liability for cannabis-related activity, reduce barriers to research, legitimize the industry through gaining credibility and engagement by physicians and the medical community, and support a growing industry for the American economy.

As a proud member of the Coalition for Cannabis Scheduling Reform and its partnership with the American Trade Association of Cannabis and Hemp (ATACH), Vicente LLP has been a leader in scheduling reform efforts. Our firm was a key contributor to the group’s comprehensive report detailing the legal and policy arguments supporting the urgent need for scheduling reform and we continue to support reform efforts including addressing relevant international treaty obligations and state and federal criminal justice reforms.

Top 6 Things to Know About Schedule III and the Process Ahead

The Federal Government Officially Recognizes Cannabis’s Medical Use and Low Potential for Abuse

The importance of HHS’s recognition of the medical efficacy and safety of cannabis cannot be understated. Marijuana’s placement in Schedule 1, meaning it has no medical use and a high potential for abuse, has long been indefensible. HHS’s determination confirms that the treatment of marijuana under the CSA is inappropriate since substantial evidence supports marijuana’s medical use and safety.

A growing body of scientific literature supports cannabis’s medical efficacy and safety, as does widespread state medical acceptance and use-in-treatment data from 38 state medical markets. These states identify treatment for many recognized medical conditions ranging from cancer and PTSD to opioid use mitigation. Federal agencies appear to be considering data from state-legal markets and recognizing the public health risks inherent in an unregulated illicit market, which is a fundamental shift in the federal government’s approach. The federal government has historically considered all marijuana use outside of federally approved research as abuse.

The Final Decision Rests with DEA, and There Is No Specific Timeline for This Process

HHS’s recommendation has now been provided to the DEA. While HHS’s recommendation is binding with respect to scientific and medical matters, the final determination lies with DEA, which will consider, based on an 8-factor analysis, whether the HHS scheduling recommendation, scientific and medical evaluation, and all other relevant data constitute substantial evidence that marijuana should be rescheduled.

If DEA determines rescheduling is appropriate, it will issue a proposed rule followed by a notice and comment period. There are many factors that could contribute to a delay or obstacle in achieving rescheduling. It is incumbent on the industry to come together and support a data-informed and efficient process.

Schedule III Means 280E Reform and Other Benefits

Moving to Schedule III would remove cannabis-related activity from IRS Code 280E, meaning regulated cannabis businesses could take ordinary business deductions and avoid significant tax penalties. Section 280E was designed to discourage illicit commerce in Schedule I and II substances. The application of 280E on cannabis businesses has handicapped the industry economically and in legitimacy. With 280E, US cannabis businesses are subject to an effective tax rate as high as 80%.

Eliminating 280E would not only enable existing state-legal businesses to grow and retain revenue but would also incentivize investment and new market entrants.

Schedule III Means Federal Enforcement Guidance is Critical to Support Industry Stability and Success

Marijuana’s classification in Schedule III would mean marijuana possession and commercial production activity are still subject to stringent (although lesser) regulations and penalties and the oversight of the DEA. Although rescheduling on its own would likely not drive state-legal markets out of existence, potential enforcement of the CSA and the Federal, Food, Drug, and Cosmetic Act (FDCA) against cannabis businesses could threaten state-regulated marketplaces.

Since the issuance of the 2013 Cole Memo, the DEA and FDA have maintained their policy of non-enforcement where state cannabis operators have complied with federal enforcement priorities. Federal appropriations restrictions prevent the DOJ from using funds to interfere with state-legal medical markets. Similarly clear guidance from federal agencies as to their enforcement policy associated with any rescheduling will be crucial to supporting the stability and success of the state-legal markets. Such guidance will also serve to promote public health and safety interests and federal and state collaboration.

HHS’s Determination Gives Congress the Tools to End Prohibition and Support Legitimate Criminal Justice Reform

HHS’s acknowledgment of the medical use and safety of marijuana and lower potential for abuse gives Congress and states the tools to support a federal regulatory framework that replaces prohibition. HHS’s determination will have far-reaching implications, including promoting the recognition of cannabis’s medical efficacy and safety by a growing number of physicians, US states, and other countries.

Prohibition undoubtedly resulted in disproportionate social harms to communities of color and has led to significant public health and other harms. Schedule III will reduce criminal penalties and is a drastic improvement to the status quo, including that it will likely influence more states to decriminalize medical and adult-use cannabis.

However, it still criminalizes cannabis and leaves it under the purview of the DEA. There is important work ahead to achieve the full federal de-scheduling and state action necessary to achieve meaningful criminal justice reform and an equitable industry.

HHS’s determination sets the stage for Congress to put forward a state regulatory framework that removes marijuana fully from the CSA and significantly supports social equity and criminal justice reform. The industry must work together in this critical moment in time to achieve these critical federal reforms.

The Role of Pharmaceutical Cannabis Would Depend on FDA Enforcement

Rescheduling cannabis does benefit pharmaceutical companies that have obtained or are seeking FDA approval to produce and sell cannabis-derived drugs. It would make it easier for these companies to bring products to market and they may face fewer barriers to research. However, this does not necessarily mean pharmaceutical companies will take over the marketplace as rescheduling does nothing to change the FDA’s non-enforcement approach with respect to the state markets where commercial cannabis operations do not comply with FDA regulations.

The widespread misunderstanding that rescheduling or descheduling would expose the cannabis industry to greater and more stringent FDA regulation rests on the false assumption that the FDA’s jurisdiction over a substance depends on the substance’s scheduling status (or lack thereof) under the CSA. The FDA already has regulatory authority over cannabis products, and such authority does not change with a Schedule III classification.

The federal government, including the FDA, has for years taken a non-enforcement approach concerning state-legal and compliant marijuana businesses. Rescheduling would do nothing to change the FDA’s enforcement resources or enforcement priorities. A change in federal enforcement approach would be a significant departure from the government's longstanding approach, which is unlikely to change given the FDA’s resources and public safety priorities, as well as the increased public and congressional support for medical and adult-use legalization.

As many stakeholders evidenced to Congress in response to its recent Request for Information relating to CBD and hemp products, the FDA model is likely not fit for most cannabis regulation and Congress should regulate cannabis like alcohol.