What the Reclassification of Marijuana Means (And Does Not Mean) for the Cannabis Industry

On April 30, 2024, the U.S. Drug Enforcement Agency (DEA) confirmed that it plans to recommend that cannabis be removed from Schedule I of the Controlled Substances Act (CSA) and reclassified to Schedule III.  Schedule I drugs are drugs with “high abuse potential with no accepted medical use,” such as heroin.  Meanwhile, Schedule III drugs have accepted medical value but are available legally only with a prescription. This is the most significant federal drug policy shift in 50 years.

“Today, the Attorney General circulated a proposal to reclassify marijuana from Schedule I to Schedule III,” Justice Department director of public affairs Xochitl Hinojosa said in a statement to the Associated Press. “Once published by the Federal Register, it will initiate a formal rulemaking process as prescribed by Congress in the Controlled Substances Act.”

What the DEA Reclassification Means and Doesn’t Mean

The DEA’s reclassification decision means that it has generally accepted the findings from a nearly year-long scientific review into cannabis conducted by the federal Department of Health and Human Services (HHS) at the request of the Biden Administration.  This review resulted in HHS’s determination that cannabis “has a currently accepted medical use in treatment in the United States” and has a “potential for abuse less than the drugs or other substances in Schedules I and II.” HHS also recommended to the DEA that cannabis be rescheduled.

While the DEA’s policy shift is significant, it is important to recognize its limitations. Notably, the decision does not make cannabis federally legal and does not expunge prior cannabis convictions.

What Rescheduling Marijuana Would Do

Rescheduling would enable state-legal cannabis entities to take federal tax deductions that were previously unavailable pursuant to Section 280E of the Internal Revenue Code.  As discussed in greater detail here, Section 280E prohibits businesses involved in “trafficking” in cannabis or any other Schedule I or II drugs from deducting rent, payroll, and various other expenses that other businesses can write off, often resulting in an effective tax rate of 70% or more. Section 280E doesn’t apply to Schedule III drugs, so the DEA’s proposed change would substantially reduce cannabis companies’ tax liability.

Additionally, rescheduling marijuana would facilitate greater cannabis research and development for therapeutic uses, which is precluded with respect to Schedule I substances. Rescheduling, however, would likely require state-legal cannabis entities to comply with federal production, record-keeping, and prescribing requirements for Schedule III drugs.

What Rescheduling Marijuana Would Not Do

Rescheduling would not make cannabis federally legal. Accordingly, participants in state cannabis markets would still be in violation of federal law, and existing criminal penalties for certain marijuana-related activity would remain in force. Also, rescheduling would not expunge existing cannabis convictions.

Rescheduling would not enable state-licensed businesses to transact in interstate commerce, and it would also not necessarily facilitate banking services for cannabis entities. Other proposed federal reforms, including the SAFER Banking Act, are being considered towards this end now.  You can find a detailed discussion here.

What Happens Next?

Many cannabis stocks surged following the DEA announcement, with stock prices for some national companies rising as much as 37 percent. State cannabis markets will likely be unaffected in the short to medium term, although relief from 280E tax restrictions may spur additional interest in obtaining state cannabis licenses.

The full impact of the DEA’s policy shift will not be felt for some time, as the rescheduling process will take months. The DEA proposal will first be reviewed by the White House Office of Management and Budget; then, there will be a public notice and comment period and review by an administrative judge. The DEA will then publish the final rule in the Federal Register, and after a waiting period, the new law will become effective.

Notably, on at least one prior occasion, the DEA has issued a final rule in similar circumstances without public notice and comment. If the DEA does so here (perhaps to coincide with the coming general election in November), the timeline may speed up. However, given the range of stakeholders and the historical impact of cannabis rescheduling, this seems unlikely. In any event, legal challenges to any revision to the CSA may delay the effective date of the new law into 2025.