What HHS’s Recommendation to Reschedule Cannabis Really Means

The U.S. Department of Health and Human Services (HHS) has recommended that the DEA move cannabis from Schedule I to Schedule III of the Controlled Substances Act…

The U.S. Department of Health and Human Services (HHS) has recommended that the Drug Enforcement Administration (DEA) move cannabis from Schedule I to Schedule III of the Controlled Substances Act (CSA). This recommendation from the country’s top health agency will have significant implications for the cannabis industry, but it is only one step towards legalization.

What the HHS Recommended

Last year, President Joe Biden had asked Health and Human Services Secretary Xavier Becerra and Attorney General Merrick Garland to evaluate how cannabis is classified under federal law. According to a letter leaked to Bloomberg, HHS has determined that cannabis no longer deserves its Class I status under the CSA.

The Class I designation is reserved for substances with no accepted medical use and have a “high potential of abuse.” In light of new “data and science,” HHS is recommending that the DEA reclassify cannabis as Class III, a designation given to drugs with a “moderate to low potential for physical and psychological dependence.” Common examples of Class III drugs include ketamine, anabolic steroids, and Tylenol with codeine.

As HHS officials have emphasized, the agency’s recommendation is just the first step in the rescheduling process. As explained by an HHS spokesperson:

While HHS’s scientific and medical evaluation is binding on DEA, the scheduling recommendation is not. DEA has the final authority to schedule a drug under the CSA (or transfer a controlled substance between schedules or remove such a drug from scheduling altogether) after considering the relevant statutory and regulatory criteria and HHS’ scientific and medical evaluation. DEA goes through a rulemaking process to schedule, reschedule or deschedule the drug, which includes a period for public comment before DEA finalizes the scheduling action with a final rulemaking.

How the Cannabis Industry May Be Impacted

While the exact impact of rescheduling is currently being debated, a few things are certain:

• Legality Under Federal Law: Cannabis would still remain generally prohibited under federal law as a Schedule III substance, which means cannabis businesses are still susceptible to federal enforcement. Of course, given that the federal government has taken a hands-off approach in states with legalized cannabis, the risk is already fairly low.
• Taxation: The change from Class I to Class III would significantly impact the taxation of cannabis businesses as IRS Tax Code Section 280E would no longer apply. As discussed here, the federal tax law prohibits businesses who traffic in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) from deducting their ordinary and necessary business expenses.
• Banking Access: Unfortunately, rescheduling will not improve banking access. Because trafficking in a Schedule III drug is still illegal under federal law, financial institutions will likely remain wary of conducting business with the cannabis industry. To effect any significant changes, Congress would still need to pass legislation, such as the SAFE Banking Act.
• Medical Research: Due to its Class I status, cannabis research has been challenging despite its medical promise. Classifying cannabis as a substance with medical value is a game changer, improving access to the drug as well as federal research funding. Of course, cannabis will still be a controlled substance, which brings heightened health care regulations. Some in the industry have expressed concern that rescheduling cannabis as Class III may allow the pharmaceutical industry to encroach. However, it is also possible that the two industries will develop side by side. How the U.S. Food and Drug Administration (FDA) will handle cannabis once it becomes a Class III substance also remains to be seen.
• State Regulations: Cannabis has been legalized for adult use in 23 states, along with the District of Columbia. Medical use is approved in an additional 15 states. Depending on how such laws are written, states may need to overhaul their regulatory structures for cannabis in order to reflect its new Schedule III status and accompanying restrictions.

What Comes Next for Cannabis Legalization

While rescheduling cannabis would be a monumental change, there is a lot that remains unaddressed. Most importantly, it is clearly not the same as legalization, and it would not make adult-use cannabis businesses legal under federal law. For full legalization, cannabis needs to be removed from the CSA entirely.

Nonetheless, a win is a win. Removing the tax challenges posed by Section 280E and improving access to cannabis medical research are important changes that will benefit the industry tremendously. Rescheduling may also provide the momentum to push through other key reforms, such as the SAFE Banking Act.

Going forward, we encourage cannabis businesses to stay on top of legal developments, as the DEA will now review the recommendation and conduct its own rulemaking process.

If you have questions, please contact us

If you have any questions or if you would like to discuss the matter further, please contact Dan McKillop, or the Scarinci Hollenbeck attorney with whom you work, at 201-896-4100.

This article is a part of a series pertaining to cannabis legalization in New York, New Jersey and the United States at large. Prior articles in this series are below:

• What the Cannabis Industry Should Know About the Hemp Access and Consumer Safety Act
• Big Changes Coming to New Jersey Cannabis Licensing
• AMA Clears Way for Reimbursement of Psychedelic Therapies

Disclaimer: Possession, use, distribution, and/or sale of cannabis is a Federal crime and is subject to related Federal policy. Legal advice provided by Scarinci Hollenbeck, LLC is designed to counsel clients regarding the validity, scope, meaning, and application of existing and/or proposed cannabis law. Scarinci Hollenbeck, LLC will not provide assistance in circumventing Federal or state cannabis law or policy, and advice provided by our office should not be construed as such.