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The U.S. Drug Enforcement Administration is taking steps to reclassify marijuana as a lower-risk substance, a move that could open more avenues for medical research and make it easier for cannabis businesses to turn a profit.
Cannabis is currently a Schedule I narcotic – meaning it’s deemed to have no accepted medical use and a high potential for abuse. But the federal agency recommended April 30 that the substance be designated as a Schedule III drug following a review by the U.S. Department of Health and Human Services, multiple outlets reported.
The DEA’s move comes eight months after HHS initially advocated for the change following a review by the U.S. Food and Drug Administration.
The initial recommendation stemmed from an October 2022 statement from President Joe Biden asking HHS Secretary Xavier Becerra and Attorney General Merrick Garland to review how cannabis is classified under federal law as part of a wider marijuana reform effort.
Despite cannabis being legalized in some form in most states, it remains illegal on the federal level, hindering the industry’s growth. Reclassifying it, however, could eliminate some of those hurdles faced by cannabis-related ventures – such as access to banking services, capital and tax breaks – and ultimately better position the emerging sector for success.
As of May 2024, cannabis has been legalized for recreational use in 24 states and Washington, D.C., and approved for medical use in 38 states, according to data from the National Conference of State Legislatures.
Since the first legalized adult-use sale took place 10 years ago in Colorado, cannabis has grown into a $34 billion industry that has captured the attention of multinational companies across such sectors as alcohol, pharmaceuticals, tobacco and agriculture.
If cannabis was moved to a Schedule III substance, it will be considered to have some medical uses and a moderate-to-low potential for physical and psychological dependence, joining a category that includes certain opioid-based pain medications, testosterone and anabolic steroids.
Mack
Sean Mack, co-chair of Hackensack-headquartered Pashman Stein Walder Hayden’s cannabis and hemp practice, said that while the rescheduling would be “truly historic” it is “likely to cause significant confusion.”
The new proposed classification does not fully address the inconsistencies between federal restrictions and laws in the growing number of states that have authorized medical and recreational use. Manufacturing, distributing and possession of recreational marijuana would remain illegal under federal law and subject to enforcement and prosecution regardless of a state’s legality.
“People who do not have federal licenses are still prosecuted, face years in jail and significant fines for illegally selling ketamine and steroids. So, despite the rescheduling, the manufacture and sale of marijuana will remain illegal under federal law because there is no federal license to manufacture or sell marijuana. Even after this rescheduling the dichotomy between state legal cannabis businesses and federal illegality of marijuana will remain in place,” Mack said.
The change does not take immediate effect. The rulemaking process could take months to complete as it will include a 60-day public comment period, as well as a review by the White House Office of Management and Budget, the Associated Press reported.
Medical, tax benefits
Rescheduling cannabis would make it easier for the drug to be researched, something that public health officials and scientists have sought for years. Studying cannabis to identify concrete medical benefits could open the door for pharmaceutical companies to get involved with the sale and distribution of medical marijuana in states where it is legal.
Rescheduling cannabis would make it easier for the drug to be researched, something that public health officials and scientists have sought for years. – DEPOSIT PHOTOS
Mack explained, “As a Schedule I drug, it was extremely difficult to conduct any research into cannabis and access to DEA authorized cannabis was extremely limited. The increased ability for researchers to study marijuana will be good for consumers and for patients as researchers will be able to study its compounds to better understand the effects they produce in the human body.”
Daniel McKillop, a partner and chair of the cannabis law practice group at New Jersey-based business law firm Scarinci Hollenbeck, said, “From a medical perspective, Schedule III drugs require a prescription and are still subject to federal oversight by the DEA. So, state-legal cannabis entities would likely have to register with DEA and comply with federal reporting, record-keeping and other requirements currently imposed on pharmacies, which these entities may not be prepared to do and which the DEA may not be prepared to handle.
McKillop
“One question on this point is whether these entities could distribute medical cannabis directly to patients without a prescription so long as the interaction does not involve interstate commerce. We will need to see how the rulemaking process proceeds on this issue,” he said.
For legal cannabis-related businesses, the change means they could soon be free from Section 280E of the federal tax code. That prevents them from writing off most basic expenses and makes it difficult to turn a profit. New Jersey policymakers have tried to give the state’s legalized cannabis industry some much-needed tax relief by decoupling corporate business tax provisions from 280E. Several other states have made similar moves, including New York, California, Hawaii, Michigan, Colorado and Oregon.
McKillop said, “From a business perspective, the biggest potential effect of rescheduling would be to relieve state-legal cannabis entities from the impact of IRS Code section 280E.”
“Under 280E, because state-legal cannabis entities are ‘trafficking’ in a Schedule 1 drug, they are precluded from taking federal tax deductions available to non-cannabis entities related to several business expenses (rent, payroll, cost of materials and labor, the wholesale price of goods to be resold, overhead, storage, and other costs),” he said.
“This often results in an effective tax rate of 70% or more, which severely impacts cannabis businesses’ financial health and potential for success. 280E does not apply to Schedule 3 drugs, so rescheduling would have a significant positive impact on state-legal cannabis companies,” said McKillop, who added, “It will be interesting to see if the likely relief from current 280E tax restrictions will spur additional interest in obtaining state cannabis licenses.”
Joyleaf is co-owned by Jason Ackerman (right), the founder and former CEO of online grocery delivery service FreshDirect, and Dharshini Casinathen (left), a certified cannabis sommelier and CPA with over 20 years of experience. – PROVIDED BY JOYLEAF
Jason Ackerman, co-owner of Roselle dispensary Joyleaf and founder of online grocery delivery business FreshDirect, agreed that eliminating 280E as a barrier will be one of the biggest benefits. “It is a big deal for retailers as they are most impacted negatively by the current tax code,” he said. “But rescheduling does not solve other important industry issues. SAFE Banking could unlock more competitive engagement with banks, the possibility to transact with credit cards and eventually making it easier for investors, both public and private, to participate in the industry.”
Mack said it will remain to be seen whether the rescheduling will have “any impact on the willingness of banks to provide traditional banking services or for the more traditional financial markets to open up to the cannabis industry.”
“As a Schedule I drug, most mainstream financial institutions did not service the cannabis industry because they would effectively be participating in illegal money laundering. While the penalties for illicit activity involving Schedule III substances are substantially less than that for Schedule I drugs, because marijuana will remain federally illegal it is not clear whether additional financial institutions will be willing to now service the industry,” Mack said.
Clearing the schedule
Although many stakeholders in New Jersey’s cannabis industry praised the DEA’s proposal, they believe it’s time for the government to remove marijuana from the Controlled Substances Act entirely.
Bauchner
Joshua Bauchner, a partner and chair of Roseland-based Mandelbaum Barrett PC’s Cannabis & Psychedelics Practice Group, said, “While it’s an important step forward in recognizing the long-established medicinal value of cannabis, the ultimate goal is not rescheduling, it’s descheduling.”
“We know from the historical record that cannabis was criminalized for racist and political reasons leading to the unjust persecution of minority communities we are, to this day, trying to cure. It simply is not subject to the CSA,” he said.
Scott Rudder, president of the New Jersey CannaBusiness Association, a leading statewide trade group, issued a statement saying, “This is long overdue and represents giant progress in the industry.”
“The equation of cannabis with hardcore drugs that have devastated lives and communities was always pure nonsense,” said Scott Rudder, a longtime cannabis advocate and now owner of Township Green cannabis dispensary. – PROVIDED BY TEAM AVOQ
“The equation of cannabis with hardcore drugs that have devastated lives and communities was always pure nonsense. This is great news for patients and for businesses that have struggled to avail themselves of the same financial opportunities as other lawful, government-sanctioned industries,” said Rudder, a longtime cannabis advocate who recently launched his own dispensary in South Jersey.
“That said, leaving cannabis on the schedule at all still leaves room for bad faith actors to manipulate and utilize the cannabis market to their benefit. We should continue to push for full descheduling of cannabis while remaining vigilant in preventing anyone from taking unfair advantage of the new rules,” he said.
David Goubert is president and chief executive officer of Ayr Wellness, a Miami-based multistate cannabis business operator with dispensaries in Woodbridge, Union and Eatontown. He applauded the DEA’s move, calling it “historic.”
“This represents the most significant step toward federal cannabis reform in U.S. history and will provide much needed relief to operators of all shapes and sizes, allowing us fair tax treatment by eliminating 280E, in addition to allowing for additional research into the medical efficacy of cannabis,” he stated.
After undergoing an expansion in 2023, the Ayr Wellness cannabis dispensary in Eatontown debuted a bigger and brighter retail space. – PROVIDED BY AYR WELLNESS INC.
Goubert went on to say his company will join its peers in continuing to advocate for “the full de-scheduling of cannabis” and believes the latest development “represents positive progress toward that eventual outcome.”
He also thanked the Biden administration “for following through on their commitment to modernize the federal government’s approach to cannabis regulation.”
Matt Darin, chief executive officer of Curaleaf, a New York-based MSO with dispensaries in Bordentown, Edgewater Park and Bellmawr, described the DEA’s decision as “one of the most monumental developments that cannabis has seen in years.”
“It is a crucial step in undoing the harms caused by the failed and discriminatory War on Drugs,” Darin said. “This ruling reflects evolving attitudes toward the plant, recognizing its well-documented therapeutic value and medicinal applications…As the cannabis industry undergoes regulatory transformations, Curaleaf remains committed to collaborating with regulatory authorities, industry members, and the broader community to ensure the responsible and sustainable growth of the cannabis sector.”
“The future for the cannabis industry is real and we look forward to seeing what 2024 has in store,” said Darin, who also thanked the Biden administration.
“}]] The move to designate the substance into a lower-risk category may open more avenues for medical research and make it easier for cannabis businesses to turn a profit. Read More