U.S. HHS Recommends Cannabis Move to Schedule III of the Controlled Substances Act

If Approved, Move Could Federally Legalize U.S. Medical Cannabis

Written by Courtney Barnes and David Feldman

On August 30, 2023, the U.S. Department of Health and Human Services (HHS) recommended to the U.S. Drug Enforcement Administration (DEA) that cannabis, currently a schedule I controlled substance, be reclassified as a schedule III controlled substance under U.S. federal law. This recommendation, if adopted by the DEA, could have a monumental impact on the U.S. state legal cannabis industry. 

In the United States, controlled substances (i.e., “drugs” such as cannabis) are regulated pursuant to the federal Controlled Substances Act (CSA). The CSA classifies drugs into five schedules based on their respective psychological and physical harms, potential for abuse, and any redeeming therapeutic value. Cannabis is classified as a schedule I controlled substance, meaning the federal government considers it to have a high potential for abuse, no currently accepted medical use in treatment in the U.S., and a lack of accepted safety for use under medical supervision. In other words, the U.S. federal government regulates cannabis akin to heroin – more tightly controlled than fentanyl, oxycodone, and cocaine.

President Biden’s proclamation

This scheduling recommendation comes as a result of President Biden’s October 2022 proclamationdirecting that the HHS and Attorney General initiate administrative proceedings to reconsider how cannabis is currently scheduled under federal law and determine whether the plant should be “rescheduled”. Procedurally, once a scheduling request is received by HHS, eight different scheduling criteria are considered. These criteria include but are not limited to the substance’s actual or relative potential for abuse, its pharmacological effects, and potential risks to public health.

The recommendations from HHS to the DEA Administrator are binding as to its scientific and medical conclusions. Thus, generally, if the HHS recommends that a drug not be controlled, the DEA is bound by the HHS’s recommendation; however, if the DEA Administrator determines that the facts and all other relevant data constitute substantial evidence of potential for abuse such as to warrant control, or, for example, substantial evidence that the drug should be removed entirely from the schedules, they will initiate proceedings for additional control, rescheduling, or removal, accordingly.  

Impact on 280E

Among many significant impacts, rescheduling cannabis from schedule I to schedule III would remove the applicability of Section 280E of the Internal Revenue Code, dramatically increase access to research, and fundamentally change the legal and operational landscape. Often referred to as “the cancer of the cannabis industry,” Section 280E prohibits businesses from deducting otherwise ordinary business expenses from gross income associated with the “trafficking” of schedule I or II substances. The IRS applies Section 280E to state-legal cannabis businesses. If the DEA adheres to the HHS Secretary’s schedule III recommendation, the 280E tax penalty would no longer be applicable to state-legal cannabis operators (whether medical or adult use) which would drastically increase the potential profitability of industry participation.

Access to research

In addition to historic tax implications, rescheduling cannabis from schedule I to a less restrictive schedule (i.e., II, III, IV, or V) would increase access to and the feasibility of conducting federally recognized research on cannabis. Engaging in research involving a schedule I substance is incredibly costly and onerous from a regulatory compliance perspective. Rescheduling cannabis would dramatically reduce the difficulty in obtaining the proper DEA and regulatory permitting for engaging in cannabis research, as well as remove the stigma associated with researching a substance that does not have any “currently accepted medical use.”  

Other potential impacts of rescheduling

 It is expected that a federal regulatory scheme to oversee the medical cannabis industry would follow to supplement existing state regulation (in a “be careful what you wish for” moment). As a result, however – and depending on the authorizations contained in such a federal regime – medical cannabis operators may then be free to engage in interstate commerce as well as global import and export. For example, a New York medical dispensary could sell medical cannabis grown, say, in California. Over forty countries have already federally legalized medical cannabis, with a small but growing handful starting to legalize adult use – something the U.S. has not accomplished to date.

In addition to interstate and global commerce, there is potential that U.S. medical cannabis companies would be able to obtain federal trademarks, listings on major U.S. exchanges such as Nasdaq and the NYSE, and see an end to the ban on “clearing” trades of stocks of medical cannabis companies by major brokerage houses. If legalized, institutional investors whose previous reluctance was related to federal illegality, may now consider investing in the space. We may see major multistate operators (MSOs) with both medical and adult use operations spin off their medical cannabis operations to allow for the exchange listing, broader investment potential, and the like.

One hopes that if medical cannabis is rescheduled, the U.S. government will continue to take its mostly “hands off” approach to the state-legal marketplace. One would also hope that federal agencies such as the U.S. Patent and Trademark Office, the Small Business Administration, and others that previously would, for the most part, not engage in business with cannabis companies, change their approach. It remains to be seen how rescheduling cannabis to schedule III could impact the U.S. Food and Drug Administration’s (FDA) enforcement priorities relating to state-legal but not FDA-approved cannabis products on the market, and whether state operators would be required to go through some sort of FDA or other federal-agency approval and compliance process. That said, recommendation of cannabis to schedule III by the HHS is still a historic moment for the drug policy reform movement.

Stay tuned as we continue to provide updates and analyses related to this announcement.