Rescheduling Marijuana: Practical Effects of a Potential New Legal + Regulatory Landscape

On October 6, 2022, President Biden issued a long-awaited mandate to the U.S. Department of Health and Human Services (HHS) and the Attorney General’s Office to “initiate the administrative process to review expeditiously how marijuana is scheduled under federal law.”

Remarkably, a longstanding political discourse is now transitioning into tangible policy.

On August 29, 2023, the HHS—after receiving the Food and Drug Administration’s (FDA’s) review of marijuana — recommended to the U.S. Drug Enforcement Administration (DEA) that marijuana be rescheduled from a Schedule I drug to a Schedule III drug under the Controlled Substances Act (CSA). Whether the DEA adopts this recommendation remains uncertain, as the Agency still must conduct its own investigation into the proposed change.

Assuming the DEA does follow the HHS’s recommendation, rescheduling marijuana to a Schedule III drug is certainly a promising first step toward federal marijuana legalization. This becomes evident when we examine the stark differences between Schedule I and III drugs. Schedule III drugs are characterized by their moderate to low abuse potential, acknowledged medical applications, and a reduced risk of leading to psychological dependence. Schedule I drugs, on the other hand, lack recognized medical uses and are associated with a high risk of abuse and addiction.

But the consequences of moving marijuana to a Schedule III drug go beyond just a change in definition under the CSA. Indeed, there are wide-ranging implications for all kinds of marijuana affiliates and aficionados. This article will explore some of these implications, with a general focus on their effects on marijuana users, business owners, and investors.

Legality of Manufacturing, Distributing, Selling, and Possessing Marijuana

As one might expect, rescheduling marijuana to a Schedule III drug will reduce the restrictions governing its manufacturing, distribution, and sale. Unlike Schedule I drugs, which are subject to a near-absolute bar on any manufacturing, distribution, or possession, businesses can legally manufacture, distribute, or sell Schedule III drugs. However, any business intending to manufacture, sell, distribute, or dispense a Schedule III controlled substance must first obtain proper federal DEA registration. Similarly, individuals must possess a valid prescription authorizing their possession or use of any Schedule III drug. Rescheduling marijuana paves the way for obtaining federal DEA registration and receiving federally lawful recommendations and prescriptions.

Compatibility of State Medical Marijuana Programs and the CSA

As things currently stand, all medical marijuana programs exist in direct conflict with the CSA. They exist in a legal limbo where executive directives and selective prosecution mandates serve as the only barriers to federal prosecution. How will this situation change if marijuana is rescheduled as a Schedule III drug? Fortunately, the CSA explicitly provides for the limited manufacturing, distribution, sale, and use of Schedule III drugs for medical purposes. State medical marijuana programs mirror some requirements of the CSA, such as requiring a recommendation or prescription from a licensed medical professional. Other CSA requirements—like requiring marijuana cultivators or processors to be DEA-registered—will need to be incorporated into existing state medical marijuana regulatory frameworks.

Tax Benefits for Marijuana Businesses

Perhaps the most notable tax consequence of rescheduling marijuana as a Schedule III drug is the inapplicability of § 280(e) of the Internal Revenue Code to marijuana businesses. Under current regulations, the marijuana industry is subject to IRC § 280(e), which disallows any “deduction or credit . . . for any amount paid or incurred . . . in carrying on any trade or business if such trade or business . . . consists of trafficking in” a Schedule I or II controlled substance prohibited by federal or applicable state law. In lay terms, § 280(e) prohibits any marijuana business from deducting routine business expenses like payroll, advertising, or rent from federal income tax filings. Rescheduling marijuana to a Schedule III substance eliminates that burden.

Medical Marijuana Users Increased Access to Rights, Protections and Federal Programs

Obtaining a medical marijuana recommendation or prescription comes at a cost for users. Under current rules, medical marijuana users are disadvantaged and do not enjoy the same access to certain rights, protections, and federal programs as non-users. For example, those with a medical marijuana prescription cannot own or possess a firearm, are severely disadvantaged (if not outrightly prohibited) from pursuing federal employment opportunities, cannot serve in the United States military, and cannot enjoy certain employment protections. This is a direct consequence of participation in a criminal activity and/or use of an illicit substance as outlawed by the CSA. However, if marijuana were a Schedule III drug, what was once “criminal activity” becomes legal activity, and what was once illicit use of a controlled substance becomes permissible use of a controlled substance. With that recharacterization comes the enjoyment of all the benefits noted above. Marijuana businesses will also be able to file for bankruptcy upon marijuana’s rescheduling. According to 11 U.S.C. § 1129(a), courts cannot confirm a bankruptcy plan “proposed ... by any means forbidden by law.” Federal courts appear to be split on how that provision applies to marijuana or cannabis businesses (compare Garvin v. Cook Investments bNW, SPNWY, LLC, 922 F.3d 1031, 1033 (9th Cir. 2019), with In re Rent-Rite Super Kegs W. Ltd., 484 B.R. 799, 809 (Bankr. D. Colo. 2012)

Eliminating DEA Production Quotas

The CSA requires the DEA to establish aggregate production quotas for controlled substances in Schedules I and II, as well as individual quotas for each registered manufacturer. This avoids production of excess amounts and oversupply of controlled substances. The CSA does not, however, impose the same obligations on the DEA to regulate the supply of Schedule III drugs. Therefore, if marijuana becomes a Schedule III drug, manufacturers can expect to see reduced or even eliminated production quotas.

While these are not all the consequences that could flow from marijuana becoming a Schedule III drug, they are the most relevant for most marijuana affiliates in Ohio and the nation. It is best practice to keep these in mind, even as the DEA continues deliberating the FDA’s recommendation.