August 2023 was an opportune moment in U.S. cannabis reform. Right before summer ended, the Department of Health and Human Services delivered the recommendation to move cannabis from “Schedule I” (the classification for dangerous drugs of no therapeutic use) to “Schedule III” (the classification for drugs with a therapeutic application that have a lesser potential for abuse than drugs in Schedules I and II). This recommendation has the potential to provide a huge benefit to the U.S. legal cannabis industry. However, there are still a lot of unknowns and differing opinions about how the cannabis industry will be impacted. BDSA is here to help you sort through the pros and cons of the potential U.S. cannabis rescheduling.
Context and Background
The U.S. cannabis reform movement has seen tremendous success at the state level in the past few years. Since the legalization of Adult-Use in Colorado (over a decade ago), 24 states in total (most recently Ohio!) have legalized Adult-Use and 38 states have legalized Medical. These successes weren’t easy, and for reference, bipartisan bills like the SAFE Act and STATES Act stalled in Congress for years.
It comes as no surprise that some are skeptical of the August 2023 rescheduling recommendation. However, it’s important to note that this is the most substantive U.S. federal cannabis reform we have seen to date. While rescheduling is not a perfect solution, it should be seen as a positive sign that federal agencies have shifted away from prohibition support.
Tax Relief at Last!
One of the most likely impacts of rescheduling is the potential for it to release legal cannabis businesses from the burden of 280E. IRS Code 280E prohibits cannabis businesses from deducting ordinary business expenses, except for the cost of goods sold, resulting in significantly higher federal tax liabilities for the industry. Freedom from 280E would have a massively positive impact on profitability of state-legal cannabis industry. It’s unlikely that taxes paid under 280E in the past will be refunded, or that past due tax bills under 280E will be forgiven, but being able to take standard business deductions would improve the bottom line for businesses across the country.
Easing Access to Banking and Capital
The move to Schedule III could also improve banking access for state legal cannabis, as many financial institutions currently hesitate to engage with businesses involved in activities that remain illegal at the federal level. While the industry has already built a patchwork of solutions to their banking worries, rescheduling could potentially open the door for cannabis companies to bank at larger institutions, and access more capital from more sources.
The move to Schedule III could potentially allow for legal interstate commerce of cannabis. While regulations in legal states mandate a closed supply chain for cannabis, there have been some efforts exploring the possibility of interstate cannabis trade. In 2022, California passed SB 1326, which would allow for interstate cannabis commerce between California and other legal states. However, some markets (with high cannabis demand) have been incentivized to do the opposite; not allow imports from high supply markets like California. Interstate Commerce is not necessarily going to be a result of rescheduling, but it is a possibility.
The Unknowns of Cannabis Rescheduling
We would be remiss to not recognize that most people in the cannabis industry consider full de-scheduling the best route for the businesses and consumers in the industry. Many states have passed regulatory programs to govern cannabis like alcohol, yet Schedule III would be the status of a controlled pharmaceutical. Even though the stigma around cannabis has waned, a move like rescheduling still takes a significant amount of political capital. Many are concerned that accepting a rescheduling makes it potentially less likely that a full de-scheduling is soon.
Aside from this, rescheduling presents an unknown impact on existing state-legal regulated markets:
- What will happen to Adult-Use markets?
- While being Schedule III does legitimize medical cannabis, we do not know what effect it could have on adult use markets.
- Will existing medical markets and programs now be under FDA regulations and oversight?
- Schedule III could be a boon or a detriment to medical cannabis, as it is unknown what level of oversight FDA will exert of existing medical markets.
Like many aspects of the industry, the end results of the potential rescheduling of cannabis are complicated. The move to Schedule III could ease some of the regulatory burden in the industry. But when will it happen? And how will it happen? Still remains unclear. One thing that is clear, is that this move to Schedule III is a sign that public opinion on cannabis is continuing to shift; major policy changes are not far behind.
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