September 1, 2023Client Alert

HHS Recommends Reclassifying Cannabis to a Schedule III Drug

On August 30, 2023, a significant development occurred in the cannabis industry as the Department of Health and Human Services (HHS) made a recommendation to the Drug Enforcement Administration (DEA) to reclassify marijuana under the Controlled Substances Act (CSA) from Schedule I to Schedule III. This recommendation comes as a result of President Biden’s directive in October 2022 to review marijuana’s current federal scheduling and address the consequences of the war on drugs. The HHS’s determination marks a historic step toward ending cannabis prohibition in the United States.

The HHS’s recommendation highlights the need for updates to how marijuana is regulated under federal law, and would have several important impacts on the U.S. cannabis industry, if approved. Rescheduling would reduce criminal penalties for cannabis-related violations of the CSA, although it would not completely remove federal criminalization. Rescheduling to Schedule III does, however, represent a critical step toward normalizing cannabis under federal law and help to align with efforts aimed at ending federal prohibition.

The final decision on cannabis rescheduling rests with the DEA and U.S. Attorney General, and there’s no fixed timeline for this process. The DEA is required to go through its statutory process, and if they deem rescheduling appropriate, the DEA will issue a proposed rule followed by a notice and public comment period. Several challenges and uncertainties surround the rescheduling process, including:

  • The U.S. is a signatory to international treaties that impose specific requirements on the control and prohibition of cannabis. Rescheduling may raise issues related to treaty compliance.
  • In 2016, the DEA and HHS determined that cannabis should remain a Schedule I drug. Changing this position requires evidence of substantial changes in scientific literature and supporting data.
  • While DEA decisions typically receive deference from courts, the outcome of potential legal challenges remains uncertain.
  • The timing of the decision will likely coincide with the presidential election, which may introduce additional political factors into the decision making process.

If cannabis were to be rescheduled to Schedule III, there would be several immediate and potential long-term positive effects for the U.S. cannabis industry:

  • Immediately eliminate 26 U.S. Code § 280E tax burdens for cannabis businesses, allowing them to claim ordinary business deductions and reduce their tax burdens which have historically posed a significant financial burden on the industry.
  • Immediately contribute to criminal justice reform by reducing penalties for cannabis-related offenses in violation of the CSA. 
  • Rescheduling may attract more investment to the cannabis industry, as investors perceive reduced federal legal risk. It could also prompt stock exchanges like Nasdaq and NYSE to reconsider their stance on listing plant-touching U.S. cannabis companies.
  • Rescheduling could stimulate other federal legislative action, including bills like the Safe Banking Act, the MORE Act, or the Cannabis Administration and Opportunity Act.

The HHS’s recommendation to reschedule cannabis to Schedule III represents a significant step forward for the cannabis industry. However, the road to reform is complex and filled with countless obstacles. Stakeholders in the industry, as well as policymakers and regulators, must work together to navigate this critical juncture and shape the future of cannabis regulation in the United States. If you have any questions regarding these potential changes or the unique nature of the cannabis industry in general, please reach out to our cannabis team with Michael Best & Friedrich LLP.

back to top