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Marijuana Rescheduling Plan - Smoke or Fire?

The Drug Enforcement Agency (DEA) announced that it will shift marijuana’s regulatory status from a Schedule I controlled substance to a Schedule III controlled substance under the Controlled Substance Act (CSA). This action follows President Biden’s 2022 request to review rescheduling marijuana and the Department of Health and Human Services’ recommendation of the change last year.

While the announcement is not unexpected, it represents a historic shift in government policy.

Here are some takeaways regarding the rescheduling:

Schedule III

Justice Department director of public affairs Xochitl Hinojosa issued a statement that “the Attorney General circulated a proposal to reclassify marijuana from Schedule I to Schedule III.” While Schedule I substances – such as heroin and ecstasy (methylenedioxymethamphetamine) - are prohibited by federal law and have a “high potential for abuse” (according to the CSA), Schedule III substances – such as ketamine and anabolic steroids - are legal to possess in licensed pharmacies under a professional’s prescription.

Still Federally Illegally

Even though the manufacturing, distribution, sale, and use of marijuana has long violated federal law (and, to be clear, will continue to do so to a lesser degree notwithstanding this announced shift), 38 states and the District of Columbia have legalized medical marijuana and, further, 24 states and the District of Columbia have legalized its recreational use.

Rescheduling does not make marijuana federally legal, and the pro-cannabis industry asserts that while a step in the right direction, shifting the scheduled classification does not resolve the tension between federal and state laws when it comes to marijuana.

Tax Consequences to the Cannabis Industry

One potentially significant change to result from the rescheduling is the projected tax benefit to the estimated 12,000-15,000 state-licensed cannabis dispensaries across the country. Many cannabis businesses pay federal taxes, but the inability to take any federal tax credits or deductions means that their effective tax rate is much higher (sometimes as high as 70%) than it would otherwise be for a non-cannabis business. Rescheduling marijuana to a Schedule III substance will allow cannabis businesses access to certain tax deductions that are unavailable to sales involving Schedule I controlled substances.

What’s the Timeline for Rescheduling?

Any change to the status of marijuana via the DEA rulemaking process would not take effect immediately.

The DEA will submit a formal rule proposing that marijuana be moved from Schedule I to Schedule III to the White House Office of Management and Budget (OMB). The OMB will conduct its own review of DEA’s rescheduling proposal for budget and regulatory impact. The expectation is that the OMB will approve the proposed rule for publishing in the Federal Register. Once the proposed rule is posted to the Federal Register, there will be a public comment period, which usually lasts 30-60 days.

After the public comment period, the DEA will then review the entire record and publish its final rescheduling rule in the Federal Register. After the final rule is published in the Federal Register there will still be a short period of time before the final rule goes into effect. Current estimates have a final rule that will probably be posted before the end of the current presidential term in January.