Medical cannabis licenses suddenly became more attractive with the Trump administration’s rescheduling order, potentially sparking a new wave of state-by-state regulatory reform.
State-licensed medical cannabis businesses can start deducting standard business expenses as of Q1 of 2026 – and possibly find retrospective relief – while adult-use cannabis businesses are still tied down by the punitive tax burdens under Section 280E of the Internal Revenue Code.
This resulted from Acting Attorney General Todd Blanche’s signed order last month that immediately reclassified state-licensed medical cannabis to Schedule III under the Controlled Substances Act.
Adult-use businesses await the outcome of a new, expedited administrative hearing process that’s scheduled to begin June 29 and conclude no later than July 15 to find out whether they’ll also no longer be subject to the deduction disallowance imposed by Section 280E.
This federal policy shift represents $268,000 in annual tax savings for the typical dispensary across 24 state markets analyzed by industry data and analytics provider Headset, turning many unprofitable storefronts into moneymakers under the Schedule III classification.
But with the unknowns surrounding the hearing process, some state regulators are already taking action or considering action that could lead to the next license rush for medical cannabis participation, especially in adult-use markets.
In California, the Department of Cannabis Control (DCC) announced on April 30 a streamlined process for businesses to change their license designation.
“Cultivation licensees no longer need to wait until renewal to request a change to their adult-use (A) or medicinal-use (M) designation,” according to the announcement. “Additionally, DCC no longer requires a new local authorization for requests that:
- Change a license to M‑designation only; or
- Add an M-designation to an existing A‑designation license
“These changes are intended to simplify the request process and expedite the review process.”
The department indicated this change was connected to the federal government’s rescheduling of medicinal cannabis and that the DCC requested a meeting with the U.S. Drug Enforcement Administration (DEA); however, the DEA “indicated it will share information publicly and all at once,” instead of administering state-specific briefings.
“DCC will continue to monitor federal updates as they are released, and we remain committed to supporting regulatory alignment and simplifying processes wherever possible,” according to the department.
While California had a once-booming medical cannabis market that peaked at more than $2.5 billion in sales in 2017, the Golden State has lost sight of its patient population, with less than $185 million in medical cannabis sales in 2025. Some blame this market decline on high taxes, registration fees and a lack of product availability for specific conditions.
California is not alone in this storyline of shrinking medical markets following adult-use legalization: Some patients may seek cheaper alternatives in the unlicensed market; others simply become adult-use customers but with the same medical needs.
Special Report: The Downfall of Medical Cannabis in 17 Adult-Use Markets
While some businesses may, or may not, lose focus on prioritizing patients when a medical-only market expands to adult-use, there’s now a new incentive for cannabis businesses to reprioritize that original focus under the federal government’s policy changes and instead “expand” to medical.
The Schedule III order could also spark incentives for state cannabis regulators, who often focus on prioritizing diversity, equity and inclusion. Many state programs only have well-capitalized multistate operators holding medical cannabis licenses.
In New Jersey, which launched adult-use sales via seven existing medical operators in 2022, Cannabis Regulatory Commission (CRC) officials could soon consider providing a pathway for new adult-use entrepreneurs to enter the medical market in light of the Schedule III order.
Well, at least that seed of thought has been planted.
“I ran into one of the NJ CRC commissioners on Thursday evening and said that we will have to come up with a process for the rec dispensaries to ‘expand’ to medical,” Susanna Puntel, a cannabis and hemp consultant who serves as a New Jersey national council member for the American Trade Association for Cannabis and Hemp, said on LinkedIn.
“I think everyone is (understandably) trying to wrap their heads around the various moving pieces,” she said.
Other states could take myriad approaches, including designating their entire adult-use programs as medical now that there’s a federal tax incentive involved for their licensees.
In Washington, D.C., for instance, where voters legalized adult-use cannabis in 2014, all licensed cannabis sales are considered “medical” due to a congressional rider orchestrated by U.S. Rep. Andy Harris, R-Md., which has stripped the district’s power to regulate an adult-use cannabis retail industry since 2015.
In 2022, Democratic Mayor Muriel Bowser and city council members crafted a loophole, allowing all adults 21 years and older to self-certify as medical cannabis patients without a doctor’s recommendation, including tourists, and purchase cannabis at licensed dispensaries.
“We have made it a priority over the years to build a more patient-centric medical marijuana program, and this legislation builds on those efforts,” Bowser said at the time.
With Schedule III policies on the line, states hoping to ease federal restrictions for their adult-use businesses could follow a similar approach, especially with the unknown outcome of the upcoming administrative hearing.
Should the approach in Washington, D.C., become the standard, then Harris’ prohibitionist rider could unintentionally end up serving as a door opener to further Schedule III reform despite the congressman adamantly opposing cannabis rescheduling.
“As a physician and former scientist, it is vital that we make decisions based on established data, and the current HHS recommendation to reschedule marijuana lacks both substance and data,” Harris said in a 2024 letter to the DEA. “As I have long said, the American public deserves to know the effect modern marijuana has on the human body, and I urge the DEA to consider the true harms of marijuana before making the final decision to reschedule it.”
The upcoming administrative hearing will allow interested party participants to debate the merits of that U.S. Department of Health and Human Services recommendation from the Biden administration.
