4 Major Implications of Cannabis Moving to Schedule III

By Andrew Livingston, Jason Adelstone, Shawn Hauser

Apr 30, 2024

After 50 years of being on the most restrictive schedule alongside drugs like heroin and PCP, the DEA will move to reschedule marijuana in Schedule III, where the plant’s medical benefits will finally be recognized by the federal government. This monumental shift in federal drug policy was made possible because of the patients, physicians, activists, entrepreneurs, scientists, and policymakers who have worked for decades to create regulated medical cannabis markets and establish the necessary scientific evidence. This work laid the political foundation for President Biden’s historic directive demanding a review of marijuana’s scheduling. Schedule III is not just a significant improvement for reality-based science, it also will have major tax benefits for cannabis businesses and will amplify reform progress at the state and federal level as we collectively push for full federal legalization.

Below are answers to four of the most important questions about the effects Schedule III will have on cannabis and society.

What will Schedule III mean for federal enforcement of state cannabis operators? 

Reclassifying marijuana to Schedule III means that the US government finally recognizes marijuana’s medical use and relatively low potential for abuse. The Department Health and Human Services (“HHS”) and Food and Drug Administration’s (“FDA”) medical and scientific review outlines how marijuana is used as a medical treatment in the US and the promising medical evidence for certain conditions while emphasizing the need for further research. Schedule III means the long-overdue legitimization of marijuana as medicine, including legitimacy in the medical community which will have important far-reaching benefits.

Unlike Schedule I drugs that are not recognized as having medical use, Schedule III drugs that are FDA-approved can be prescribed by a physician and dispensed by a Drug Enforcement Administration (“DEA”) registered entity. Schedule III does not mean state dispensaries will suddenly be compliant with federal law, or that whole-plant marijuana products will be dispensed at your neighborhood pharmacy. The sale of marijuana products within state programs, which are not FDA-approved drugs distributed by DEA registrants, was federally illegal under Schedule I and will remain federally illegal under Schedule III. For these same reasons, the reclassification to Schedule III does not mean that marijuana grown pursuant to state programs can be sold in interstate commerce. Marijuana products, even under Schedule III, are only federally legal if they are federally approved and there are only three FDA-approved cannabis-based drugs developed to date (Marinol, Epdiolex, and Syndros).

Throughout the Obama, Trump, and Biden administrations, the federal government has declined to enforce federal law against the overwhelming majority of compliant marijuana businesses in states with marijuana programs. This policy began when the US Department of Justice (“DOJ”) issued its first enforcement guidance in 2009 and has continued despite the DOJ enforcement guidance being rescinded during the Trump administration. It is possible we will see the DOJ reissue another enforcement memo, akin to the Cole Memo, that makes clear that the federal government will not use its limited prosecutorial resources to enforce federal law against state-legal marijuana businesses that do not violate federal enforcement priorities (i.e., selling to minors, crossing state lines). While it is uncertain, Schedule III may push the FDA to enforce against false and misleading drug claims as it has for hemp products. In addition, Congress has enacted appropriations legislation that prohibits the Justice Department from using funds to interfere with the implementation of state medical programs. These protections do not extend to adult-use programs, emphasizing the imminent need for descheduling and regulation of cannabis.

When will Schedule III become effective? 

Once the DEA publishes its ruling to move marijuana to another schedule, the public will have the right to submit comments for the official record, and interested parties should have the ability to request and participate in a formal administrative hearing.

The DEA’s comment period could be 30-90 days, but the formal hearing is a bit more open-ended and operates much like a court trial. The administrative hearing is overseen by an administrative law judge who presides with the authority to administer oaths, issue subpoenas, accept or reject evidence, and allow for cross-examination. The type of evidence that may be presented in the hearing is much like a regular court proceeding and must be relevant to the DEA’s scheduling recommendation. Opponents will undoubtedly request a hearing and flood the agency with comments showing why marijuana must remain on Schedule I or go no further than Schedule II. Submitting comments to create a robust record of the evidence supporting marijuana’s reclassification is critical to a successful process.

Once the comment period and administrative hearing have concluded, the DEA will review the entire record and issue its final rule based on its analysis, HHS’ analysis, the comments submitted, and the administrative hearing record. The timeframe for issuing a final rule is uncertain and not statutorily defined, but since the DEA is required to review and respond to every comment submitted during the notice period, it could take some time.

Whether the DEA goes straight to issuing a final order or allows notice and comment, after the final decision/order is issued, it will not become effective until 30 days after it is published in the Federal Register. During this time, an aggrieved party that participated in the notice and comment period has 30 days to file a lawsuit to seek judicial review of the agency's decision. In the event of a lawsuit, it is possible the effective date of the reclassification is delayed by a court order.

Does Schedule III fix 280E and banking for cannabis businesses? 

If cannabis moves to Schedule III, state-regulated marijuana businesses will no longer be subject to Section 280E of the Internal Revenue Code, which has long prohibited such businesses from writing off standard business expenses when calculating their pre-tax profits. This will save individual marijuana businesses hundreds of thousands, if not millions, in excessive taxes. Businesses across the entire industry will be able to reinvest and boost retail employee pay without being taxed on the expenditures they make to expand their business. 

At the state level, many legislatures have already passed laws to enable marijuana businesses to make 280E deductions on their state taxes. But for those states whose 280E policies still mirror the federal code, Schedule III will allow for 280E deductions on state taxes as well. As to when 280E reform will become effective, this really depends on the administrative processes described above. It is possible but unlikely that the Internal Revenue Service will apply 280E relief retroactively or forgive back taxes for marijuana businesses. It is highly likely that shortly after rescheduling is announced, the Internal Revenue Service (“IRS”) will provide guidance on the practical effects the change will have on 280E and marijuana businesses’ tax filing requirements.

Unfortunately, Schedule III will not solve the marijuana industry’s banking troubles, but it should improve current conditions and has the potential to garner more congressional support on cannabis issues in general. Banking woes often fall into three categories: 1) business bank accounts, 2) cash-only transactions, and 3) bank lending.

While some marijuana companies still have trouble forming commercial banking relationships, the inability to open a business checking account has become less common over the years as many small community banks and credit unions now work with marijuana companies. These financial institutions often charge significant fees and implement stringent due diligence informed by best practices and the 2014 Financial Crimes Enforcement Network (“FinCEN”) memorandum. As of the third quarter of 2023, FinCEN reports 508 banks and 172 credit unions filing required reports on behalf of marijuana business clients.

The second issue, that marijuana transactions occur almost entirely in cash, is a payment processing problem created by the reality that major credit card companies will not service marijuana businesses. To get cash out of the system, the cannabis industry needs Visa, Mastercard, and other credit card companies to change their internal policies. While Schedule III will not make existing marijuana companies legal, it does send an important cultural signal that the federal government continues to reform its stance on cannabis and the legal risk of handling the financial transactions of state-licensed marijuana companies may be further reduced.

Finally, marijuana companies struggle to access standard commercial bank loans and lines of credit. The availability of these types of financial services is up to the individual banks and their legal and financial risk departments. Schedule III will likely result in more access to capital by reducing both the legal and financial risk of lending to state-licensed marijuana companies. Schedule III sends a message reinforcing the current reality that the federal government is not interested in prosecuting groups that work with state-licensed marijuana businesses. On the financial side, the elimination of 280E will make marijuana companies significantly more profitable. This reduces the financial risk for bank lenders and, as such, should increase the availability of financing.

What does Schedule III mean for broader legalization and the future of reform? 

Schedule III is likely the best outcome that can be expected via an administrative reclassification process. While this rescheduling does not go far enough to reduce or remove criminal penalties or achieve other imminently needed reforms, incremental reform builds momentum with small steps. Full legalization is needed to ensure no one goes to jail for using marijuana and comprehensive legislation is necessary to rectify the racial harms brought by the War on Drugs. 

President Biden initiated this historic process to “right the wrongs of the failed war on drugs” and advanced the United States towards fully ending prohibition. While rescheduling does not accomplish the ultimate goal of legalization, it is an important step on the path to ending the drug war, and it puts the cannabis reform movement in a better position to pass the congressional reforms necessary to deschedule cannabis entirely.

Schedule III creates a new cultural opportunity to change the cannabis conversation in America. Cannabis businesses employ more than 400,00 Americans and generate over $25 billion in sales annually. But with excessive taxation from 280E, free cash flow is limited and only a handful of the largest companies invest significantly in federal reform. Rescheduling will bolster profitability for all cannabis businesses, enabling the types of political investments necessary to continue incremental steps toward legalization.

Rescheduling provides a time for policy reflection, for Congress to see once again that now is the time to legalize and regulate marijuana as a legitimate taxpaying industry. Congress has the opportunity to legalize cannabis while respecting states’ rights and individual liberties with legislation like States ACT 2.0, which would remove marijuana legal under state law from the CSA, federally regulate it under the purview of the federal Alcohol, Tobacco and Trade Bureau (TTB) and FDA, allow state control over whether marijuana is legal in their jurisdiction, allow for interstate commerce amongst legal states, and provide other key legal protections. HHS/FDA’s acknowledgment of medical use and its robust analysis outlining the medical and scientific evidence supporting its placement in Schedule III (including marijuana’s safety compared to alcohol) can bring legitimacy to cannabis that will help garner support from conservative leadership who have been reluctant to support cannabis while it was classified as one of the world’s most dangerous drugs. 

Smart and responsible legalization frameworks, including STATES Act 2.0 and SAFER Banking, as well as social justice reforms, the HOPE Act, and the Clean Slate Act, would further these goals. It is also likely that the Schedule III reclassification will spur more states to legalize adult use or adopt medical programs, which is a key primer for federal legalization. While congressional action on marijuana is a steep uphill battle, Schedule III is a major incremental win that, in conjunction with public opinion, positions us better in Congress and the states than ever before.

Watch our special briefing "Cannabis Rescheduling: Implications & Next Steps

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 criminal justice reforms.

For more on this subject, read: US Officially Recognizes Medical Use and Safety of Cannabis: The Top 6 Things to Know About Schedule III and the Process Ahead

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