June 20, 2024Client Alert

What Does Schedule III Mean for Me?

How Cannabis Rescheduling Will Impact the Current Market

The Drug Enforcement Administration (“DEA”), following the federal Health and Human Services Department’s (“HHS”) recommendation, has proposed to move cannabis (which is currently a Schedule I Controlled Substance) to Schedule III under the Controlled Substances Act (“CSA”). On May 21, 2024, the DEA published its proposed rule for the move, and the public comment period is open until July 22, 2024. The proposed rule primarily focuses on the currently accepted medical use of cannabis in treating certain medical conditions, the propensity for abuse of cannabis compared with other CSA scheduled substances, and an eight-factor analysis the U.S. Department of Justice conducted to justify its reasoning for rescheduling cannabis. While this is procedurally important to the process of rescheduling, as the DEA is working to show that cannabis qualifies as a substance or chemical with a moderate to low potential for physical and psychological dependence, the proposed rule does not provide clear guidance for current stakeholders in the cannabis industry on the implications of rescheduling. The final rule is still subject to change, but any changes are unlikely to include additional guidance regarding current state-regulated cannabis programs.

The proposed rule stipulates that the Federal Food, Drug, and Cosmetic Act (“FDCA”) will continue to apply to substances containing cannabis, notably that Food and Drug Administration (“FDA”) approval would be required before substances containing cannabis could be introduced into interstate commerce. Additionally, loosening federal restrictions on cannabis could also mean less restriction on cannabis research with regulation similar to other FDA-approved Schedule III substances such as anabolic steroids, ketamine, Tylenol with codeine, and testosterone. Each of these Schedule III substances is subject to ongoing clinical trials and research by major universities, manufactured by pharmaceutical companies, and made available through prescriptions. Rescheduling could lead to major changes in the cannabis industry, including the introduction of pharmaceutical companies and other research institutions.

Though not stipulated in the proposed rule, rescheduling to Schedule III would likely also allow cannabis businesses to take advantage of critical federal tax deductions and tax credits under Internal Revenue Service Section 280E. Section 280E deductions are not available to businesses that traffic Schedule I or II substances, but are generally available to Schedule III businesses.

Under the proposed rule, cannabis would not be legalized at the federal level. Therefore, many current cannabis businesses will continue to face banking challenges related to storing funds in or receiving loans from commercial banks, because they are prohibited from working with customers who make money from "unlawful activity."

State-legal cannabis businesses would still be considered illegal at the federal level, even if federal regulations become less strict. The proposed rule marks a significant shift in federal policy, however, reflecting what appears to be an evolving recognition of cannabis' medical applications and its lower potential for abuse compared to other Schedule I substances. While this change could open doors for more extensive research, potential entry of major pharmaceutical companies into the market, and eligibility for federal tax deductions, it stops short of legalizing current cannabis businesses or providing access to banking at the federal level. Consequently, the industry will continue to grapple with banking restrictions and the complexities of navigating both federal and state regulations. Ultimately, the most substantial benefits for cannabis businesses will likely emerge from state-level legislative actions, spurred by this federal move towards more lenient regulations. The evolving landscape suggests a future where both federal and state policies may become more aligned, providing clearer guidance and greater opportunities for the cannabis industry.

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