In late August 2023, the Department of Health and Human Services (HHS) recommended rescheduling marijuana from a Schedule I substance to a Schedule III substance under the Controlled Substances Act (CSA), signaling the potential for drastic change in the marijuana market. The recommendation comes seven years after the Drug Enforcement Administration (DEA) declined to initiate rulemaking to reschedule marijuana.
Currently, marijuana is classified as a Schedule I drug under the CSA, defined to have no “accepted medical use and high potential for abuse,” like lysergic acid diethylamide (LSD) and heroin. Schedule III drugs, however, are defined as those “with a moderate to lower potential for physical and psychological dependence,” and include ketamine, certain over-the-counter pain relievers and anabolic steroids. The DEA will conduct its own review to evaluate marijuana’s safety and proceed through the formal rulemaking process; however, under the CSA, HHS’ recommendations “shall be binding … as to [] scientific and medical matters.”
Rescheduling marijuana would have a critical impact on medical marijuana programs and products. If marijuana is rescheduled as a Schedule III drug, businesses that “manufacture, distribute, dispense, and possess medical marijuana” would be able to do so legally under the CSA, subject to state and federal licensing and manufacturer registration schemes. Further, such rescheduling would render certain manufacturers subject to increased U.S. Food and Drug Administration (FDA) oversight, including requiring manufacturer registration and compliance with current good manufacturing practices. The FDA likely would release additional regulations regarding composition, labeling and advertising. Research limitations also may decrease, which could further encourage innovation in the industry.
Rescheduling likely would have downstream effects on marijuana business tax burdens. Under Section 280E of the Internal Revenue Code, the Internal Revenue Service limits tax deductions claimed by businesses that “traffic” in Schedule I and II substances. Marijuana businesses cannot deduct rent, utilities or marketing expenses that other businesses are permitted to deduct. The rescheduling of marijuana would allow producers and retailers to “deduct the costs of selling their product for the purposes of federal income tax filings.” Rescheduling would be a boon to their bottom line.
Until marijuana is rescheduled, having a safe place to deposit revenue remains a concern for marijuana businesses. Since marijuana is still federally illegal, most commercial banks refuse to open deposit accounts or provide financing. Seeking to reduce banking burdens in states where marijuana is legalized, the Senate Committee on Banking, Housing, and Urban Affairs has pushed through an amended version of the Secure and Fair Enforcement Regulation (SAFER) Banking Act, a bipartisan marijuana banking bill. The SAFER Banking Act would create federal safe harbors for financial institutions to accept deposits from state-sanctioned marijuana business operators, potentially mitigating some dangers of running a cash-only business and permitting banks and marijuana businesses to grow. Although the SAFER Banking Act is now on the Senate floor, it’s unclear whether it will become law this legislative session, given past failures to pass similar versions of the bill.
The federal government’s changing views on the benefits and harms of marijuana may reinvigorate investment and growth in this sector. Rescheduling and changes in the banking regulations are signs that broader acceptance may present greater business opportunities at all phases of marijuana and marijuana-related business.
McGuireWoods attorneys are experienced in representing and advising investors in the marijuana and marijuana-related industry. If you have questions about navigating the complex regulations, please contact one of the authors of this article.