By Jean Smith-Gonnell and Michael Lafleur
The impending reclassification of cannabis to a Schedule III drug under the Controlled Substances Act could have implications for the entire cannabis industry.
There a multitude of questions that have arisen since the Department of Justice issuance of the Notice of Proposed Rulemaking (“NPRM”) issued on May 16, based on the Department of Health and Human Services (“HHS”) Recommendation issued August 29, 2023 recommending rescheduling from a Schedule I to Schedule III substance under the Controlled Substances Act (“CSA”). The issuance of the NPRM is the the first step in the reclassification process. After the proposed rules are issued there will be a public comments period, and final issuance of the final rules. This process has historically taken upwards 12-18 months, but many are hopeful this rescheduling may be expediated.
First, rescheduling will not legalize marijuana. But, one true benefit for all marijuana businesses, regardless of medical or recreational, the Schedule III classification will remedy the issues pertaining to tax issues resulting from 280E. Specifically, 280E applies to the trafficking in Schedule I and Schedule III substances, which bars deductions or credits for trades or businesses engaged in “trafficking in controlled substances” with the classification of Schedule I and II of the CSA. The reclassification would eliminate the bar on marijuana businesses from claiming a federal tax deductions for marijuana businesses. This would be a hugely beneficial impact.
Further, rescheduling will allow for actual clinical research into medical marijuana, which will be beneficial for the medical field. There is a lack of clinical studies at this time due to the barriers related to Schedule I classification, which has effectively stymied researchers from doing clinical trials due to barriers related to the DEA’s hefty registration process related to Schedule I substances.
Yet, it is important to keep in mind that there are presently more questions than answers about the ramifications of rescheduling.
Due to the lack of clarity at this point, it is unclear how cannabis rescheduling could affect the marijuana industry outside the benefits of 280E and research. Currently, 38 states have passed legislation permitting the cultivation, manufacturing, and sales of medical marijuana and 24 states, and the District of Columbia with state legalized recreational programs.
Insofar as commerce in cannabis is concerned, reclassification to Schedule III would constitute primarily an acknowledgment that marijuana “has a currently accepted medical use” instead of its present classification (under Schedule I) as having “no currently accepted medical use with a high potential for abuse. Pursuant to the CSA, Schedule III drugs are classified as having a potential for abuse less than the drugs or substances in Schedule I and II, and have an accepted medical use in treatment in the United States, with moderate or low physical and psychological dependence, with less abuse potential than Schedule I or II. How that acknowledgment is codified into federal law could have enormous implications for the industry, specifically related what required registrations will be required for medical marijuana entities and corresponding requirements for doctors and pharmacists, as the DEA could require registration for both industries as to these types of products, unless there is an exclusion is issued.
There are looming questions related to the recreational marijuana market and potential affects. Specifically, banking is currently an issue for marijuana companies at its current status as a Schedule I substance. If rescheduling takes place, it remains unclear if banks will allow banking options for only registered medical marijuana entities, or if the rescheduling will affect the recreational market accessibility. This question arises due to the fact that rescheduling does in fact not make marijuana legal, it merely provides DEA authority related to registrations and additional abilities for studies. At this time, we do not know if recreational marijuana manufacturing and dispensing Schedule III substances will be considered a violation of the CSA. Thus, the question remains whether or not additional guidance will be provided related to the recreational market much like the rescinded Cole Memo, which was and is the basis for FinCEN guidance to date.
Additionally, there are questions if rescheduling will allow for recreational marijuana entities access to bankruptcy proceeding, as there has previously been barriers to marijuana licensee debtors access to protection under the U.S. Bankruptcy Code. Specifically, the DOJ’s U.S. Trustee Program follows an office-wide directive under which a trustee must seek dismissal of any bankruptcy petition by a marijuana-related business. While there have been some varying results in federal courts related to this issue, the question remains whether the DOJ’s guidance will change with the rescheduling.
These are merely some of the highlights related to open questions related to the DEA’s recent announcement, but as more information becomes available (including the proposed rules), we are hopeful clarifications with be forthcoming.
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About the Authors
Jean Smith-Gonnell is a partner at Troutman Pepper. Jean has dedicated her entire career to the cannabis sector, helping growers, dispensaries, investors, receivers, and other stakeholders achieve their business goals and prepare for unexpected issues.
Michael Lafleur is an associate at Troutman Pepper in the firm’s Regulatory Investigations, Strategy, and Enforcement Practice Group.