The Good, The Bad and The Ugly: DEA Rescheduling Marijuana to Schedule III

On April 30, the U.S. Drug Enforcement Administration issued a proposed rule to move marijuana from the Schedule I class to Schedule III. If approved this will be the most significant change in federal marijuana law since 1970 when the Controlled Substance Act was enacted and marijuana was first classified as a Schedule I substance cited as having a high potential for abuse and no accepted medical value.

In the intervening 54 years, 38 states, three territories, and the District of Columbia have firmly established the medical use of marijuana through state-regulated programs and overwhelming public support for full legalization of marijuana. This DEA rescheduling effort significantly reforms federal marijuana law in many areas of the law but not all areas of the law. This proposed change carries significant implications for medical use, research, regulation, and the economics of the broader cannabis industry.

At its base level, the Controlled Substances Act (CSA) categorizes drugs into five schedules based on their potential for abuse, medical use, and safety. Schedule I substances, which include heroin and LSD, are deemed to have a high potential for abuse and no accepted medical use. Marijuana has been classified as a Schedule I substance since the inception of the CSA in 1970, despite growing evidence of its therapeutic benefits. Rescheduling marijuana to Schedule III would acknowledge its potential medical benefits while subjecting it to stricter regulation than currently exists in states where it is legal for medical or recreational use.

One of the primary barriers to marijuana research is its Schedule I classification, which imposes stringent regulations and bureaucratic hurdles. Rescheduling marijuana to Schedule III would streamline the research process by allowing scientists greater access to cannabis for clinical studies; including health benefits and risks associated with the more than one hundred cannabinoids produced or derived from the cannabis plant. This could lead to a deeper understanding of its therapeutic properties and potential applications in treating various medical conditions, including chronic pain, epilepsy, and PTSD.

Moving marijuana to Schedule III also puts pressure on the Food and Drug Administration (FDA) to establish a regulatory framework for cannabis products in the marketplace. Many low-dose marijuana products are already available to consumers but the FDA has declined to regulate them or allocate enforcement resources to remove them from the public domain. FDA regulation would include quality control standards, labeling requirements, and oversight of manufacturing processes. Standardization of marijuana products would enhance consumer safety by ensuring potency, purity, and consistency across different products and brands.

The rescheduling of marijuana to Schedule III could have significant economic ramifications, both positive and negative. On one hand, it would stimulate growth within the legal cannabis industry by removing some legal barriers and stigma associated with marijuana. This could lead to increased investment, job creation, and tax revenue at the state and federal levels.

On the other hand, rescheduling could also pose challenges for existing cannabis businesses, particularly those operating in states where marijuana is legal for recreational use. Federal rescheduling does not render state marijuana regulatory programs legal under federal law. State-licensed marijuana businesses are still illegal under federal law but face reduced penalties in the event of federal enforcement of federal criminal laws against them. Not the full legalization safe zone these marijuana businesses would like to operate in but certainly better than a pre-rescheduling era.

From a states’ rights standpoint, rescheduling could prompt states that have not yet legalized marijuana to reconsider their policies. It could also provide a pathway for full federal legalization or decriminalization efforts, as seen in recent legislative proposals such as the MORE Act and the STATES Act.

Finally, if marijuana is rescheduled, an immediate benefit to state-licensed marijuana businesses is the end of Internal Revenue Service Code section 280(e) which prohibits certain marijuana businesses from taking business deductions when calculating the tax liabilities. However, IRS 280(e) only applies to Schedule I and II substances, not Schedule III substances which might now include marijuana. For some businesses, this will allow them to deduce ordinary business expenses from gross revenue that they are not able to take advantage of prior to rescheduling. This may result in an immediate 70-90% increase to their bottom-line fiscal sheets.

Other questions this will raise that will need to be addressed are employer-employee relationships, immigration status, and ancillary marijuana business risks.

The rescheduling of marijuana to Schedule III represents a significant step toward acknowledging marijuana’s medical value and integrating it into the broader healthcare system. By facilitating research, enhancing consumer safety, and providing a framework for federal regulation, rescheduling could pave the way for a more rational and evidence-based approach to cannabis policy.

However, rescheduling alone is not a panacea and must be accompanied by broader reforms addressing social justice, equity, and access to medical marijuana. As the conversation around marijuana continues to evolve, policymakers, researchers, and stakeholders must work collaboratively to navigate the complex challenges and opportunities presented by marijuana rescheduling and beyond.

If you need assistance navigating this complex legal landscape, please contact Clark Hill to better understand how these developments will impact your business interests.

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