Cannabis Rescheduling: Where Do We Go From Here?

The Drug Enforcement Administration’s proposal to reclassify cannabis as a less dangerous substance in the Controlled Substances Act is the “biggest thing to happen in cannabis policy at the federal level in 50 years,” said Brian Vicente, founding partner of Vicente LLP, during his opening remarks on a webinar May 3 that his law firm organized to provide more background on rescheduling and what it could mean for cannabis industry operators.

The “large and meaningful impact on both large and small cannabis business operators … really can't be understated,” he said, setting the tone for the conversation ahead. “It's an incredibly important business change, but also is an incredibly important policy shift that we're staring at that could really accelerate the move toward descheduling altogether.”

Since the DEA confirmed news that it was proposing cannabis move from Schedule I to III of the CSA, aligning with the U.S. Department of Health and Human Services (HHS) recommendation and report submitted to the DEA in August 2023, many have debated what happens next.

There is much to speculate, including how long it will take for the rule to be finalized, if there would be more federal oversight of state-legal markets, what challenges could delay or prevent cannabis from moving to Schedule III, and how rescheduling would impact everything from capital markets to criminal justice reform.

A team of Vicente legal experts spoke during the virtual event, "Briefing on Cannabis Rescheduling: Implications & Next Steps" to address several looming questions and what rescheduling would mean from a business, economic, policy and reform perspective. Cannabis Business Times tuned in and had these 12 key takeaways from the presentation.

1. Schedule III classification would mean the federal government recognizes that cannabis does not belong alongside substances like heroin in Schedule I, which have no currently accepted medical use and a high potential for abuse, and it is the “maximum achievable outcome from an administrative process.”

Shawn Hauser, partner at Vicente, said this alone could chip away at the stubborn stigma of cannabis and result in more public and governmental support.

“I think this really can change the paradigm as far as public opinion and legitimacy in the medical community, which could have long-reaching and dramatic impacts. The medical community and physicians have a huge role in advancing evidence-based medicine, including cannabis, and with the [Food and Drug Administration]/HHS considering state data and medical programs, I think there's going to be a shift in engagement in public opinion by doctors, universities and medical institutions,” Hauser said, emphasizing that although rescheduling is significant, descheduling is the ultimate goal. “This administrative process is going to get us ... much further than we were before.”

2. That being said, rescheduling alone does not remove all barriers to cannabis medical research, and it does not decriminalize cannabis nor legalize it at the federal level.

“While we are optimistic that moving marijuana into Schedule III could reframe how DEA views marijuana, could free up capital to support research, there are still significant restrictions largely arising out of the 2022 Medical Marijuana and [Cannabidiol] Research Expansion Act, which makes regulatory burdens applicable no matter where marijuana is placed,” Hauser said. “So we still have work to do to ensure there's vigorously pursued research in cannabis, but we hope that Schedule III frees up capital for such and reframes marijuana in the minds of DEA, so that they eventually start expanding research opportunities.”

3. Though “state legal dispensaries will remain in clear violation of federal law, there's no reason to believe the FDA and DEA will change enforcement priorities to interfere with state programs as they haven't done in Schedule I,” Hauser said.

 “We understand that there's efforts underway on a Cole Memo 2.0 to ensure the enforcement priorities stay the same,” she said.  

4. The timeline for when cannabis would officially move to Schedule III is unclear.

Jason Adelstone, senior associate attorney at Vicente, said that now that the DEA has aligned with the HHS recommendation to reclassify cannabis, the rescheduling rulemaking process is in its very early stages.

Some time frames of the rulemaking process are specified. The Office of Management and Budget has up to 90 days to review the proposed rule and send it back to the DEA, for example. The DEA then would provide a 30- to-90-day comment period, when the agency can grant an administrative law hearing for “aggrieved parties” requesting judicial review, Adelstone said.

Litigation could delay rescheduling implementation, and there’s no statutory requirement set for how long that could take, he said.

“So it's really unclear how long DEA will take to review all those comments. If there's political pressure and the agency really wants to get this done, then it could again go quickly. If not, then it could take a year or even longer,” he said. “We do believe that this will end up with marijuana in Schedule III. It's just unclear about how long it'll take to actually make that final determination.”

5. There are potential roadblocks to rescheduling, but treaty obligations and how federal agencies analyzed the medical and scientific application of cannabis and are not among them.

When HHS initially recommended that, following data and science, the DEA reschedule cannabis, there was concern that obligations under a 1961 international treaty, The Single Convention on Narcotic Drugs, prevents cannabis from being rescheduled as anything other than Schedule I or II in the CSA. Opponents also said that because HHS, in its most recent review, implemented a new, two-factor test to determine that cannabis had medical efficacy, rather than a five-part test the DEA has traditionally used, it would also prohibit the move to Schedule III.

“As far as both of these go, we believe that there is sound legal arguments for marijuana being in Schedule III under treaty obligations as well as the two-factor tests that HHS used,” Adelstone said. “The DEA has basically said that marijuana cannot be placed outside of Schedule II because of treaty obligations. To be frank, I think it's just an incorrect analysis of the treaty requirements. I've been reviewing the treaties for years now, and there is a very clear pathway, and it actually promotes the treaties even more with marijuana in Schedule III because the treaties promote the medical use of controlled substances and an application for therapeutic uses. Schedule I completely prohibits that, Schedule II would make it difficult. Schedule III would be the most sound place for that to lie if you're wanting to comply with treaty obligations.”

RELATED: Behind DEA’s 1975 Admission That Rescheduling Cannabis Does Not Violate International Treaty

Adelstone also said that the Supreme Court has stated that agencies can modify how they analyze something.

“This two-factor test didn't really change anything about the analysis. What it did change was a DEA analysis of medical and scientific application for marijuana. DEA is an enforcement agency, not a medical and scientific agency,” Adelstone said. “So the fact that HHS I think finally determined that they should be the ones to really set out what constitutes currently accepted medical use makes more sense than leaving that with DEA.”

6. However, an attorney general could cite treaty obligations as a reason to place cannabis back into Schedule I.

“If we do have a Trump presidency, and the attorney general does have an issue with marijuana in Schedule III under the United States code, the attorney general is permitted to schedule marijuana pursuant to treaty obligations in any schedule they want,” Adelstone said. “So they can skip this whole process, put it back in Schedule I, and then you have to go through litigation to discuss why that is inappropriate.”

RELATED: Cannabis Rescheduling FAQ: What Now?

7. If rescheduled, cannabis businesses would no longer be subject to tax penalties under Internal Revenue Code Section 280E (more on that later), and without that tax burden, more money will be infused into the system.

When the news first broke that the DEA had proposed rescheduling cannabis, the stock markets “started ripping the second this became public news,” said Charlie Alovisetti, partner at Vicente.

Once cannabis is rescheduled, the immediate impact is that 280E, which has long prevented plant-touching companies from deducting ordinary business expenses, will no longer apply, eliminating what has been a massive barrier to profitability.

Investor sentiment will likely improve, as rescheduling “shifts the risk analysis,” Alovisetti said, potentially opening the doors to more participation.  

Though there would be an impact on capital markets, companies still would not be able to list on major U.S. exchanges, and Schedule III would still be a barrier to legal protections like bankruptcy.

8. Under 280E, businesses are taxed on gross margin. With rescheduling, instead, businesses will be taxed on net income. They'd have the ability to take normal deductions for expenses and be applicable for tax credits.

Although the primary benefit of no longer having tax code 280E would be the ability to deduct normal business expenses, Mitzi Keating, partner at Citrin Cooperman, said, another important ramification is the ability to qualify for tax credits.

“The other piece that you have to take into account is all of the tax credits that have been unavailable at the federal level to these cannabis businesses since the enactment of code section 280E,” said Cooperman, who also provided a historical background of how 280E came to be. “Things like the research and development credit, things like the work opportunity credit. We can have bonus and accelerated depreciation, which is going to spur investment in fixed assets, and really for our manufacturers and our cultivators, to be able to actually look at their business through the lens of tax planning will certainly be a significant savings to these clients as they move forward in a world where they're not subject to these onerous tax obligations.”

As Alovisetti noted, 280E still applies up until the point cannabis is rescheduled. 

9. Interstate commerce will still be prohibited under rescheduling, and state-legal businesses will continue operating as they have been under state regulations.

Rescheduling does not change regulations from an interstate commerce perspective, said Andrew Livingston, director of economics and research at Vicente.

“They're going to continue operating under a framework in which they're legal at the state level, licensed and regulated at the state and local level,” Livingston said. “Now, that being said, it is possible that we could see some new enforcement memos and, with new Department of Justice guidance, we could see the start of some interstate commerce.”

10. Rescheduling will likely spur additional federal policy and guidance.

In 2013, then Deputy Attorney General James Cole issued guidance, known as the Cole Memo, that the federal government should not interfere with state-legal cannabis programs. Livingston said many have speculated that a similar memo would accompany a rescheduling decision, and it could address anything from FDA oversight to banking to international investments.

“There's a lot of concern that well, Schedule III is going to give [the regulated industry] to pharmaceutical companies, and they're going to just crack down. I don't think that's going to happen for a number of reasons,” Livingston said. “One, even under Schedule I, the FDCA (the Food, Drug, and Cosmetic Act) can be applied to cannabis and in some cases has been, but so far we've essentially seen a lack of desire to deploy its resources toward mass enforcement. … And so what I think is probably most likely is that the FDA uses its limited resources to go after really the most egregious medical claims by cannabis companies who are trying to market their marijuana as a federally approved Schedule III drug when it's not federally approved yet.”

11. Although rescheduling does not legalize nor decriminalize progress, generally, as significant reform happens, laws, prosecution and enforcement priorities for cannabis change. 

Brian Vicente addressed what rescheduling would mean for criminal justice reform, noting that he’s had many people ask him if rescheduling means cannabis is legal now.

“Our job is not done. But having said that, this is a massive incremental step forward, and it certainly sends a strong message to the criminal justice enforcement arena that they need to sort of reprioritize things around cannabis,” Vicente said. “And we've seen this kind of state after state where in Colorado or Massachusetts or California, wherever states legalize cannabis or change cannabis laws in significant ways, there's a ton less prosecutions under state law, right? ... But frequently we see the federal prosecutions of cannabis crimes go way down in those states as well. The feds just get it.”

At the same time, most states have trigger laws that once the federal government changes how cannabis is classified in the CSA, the state must assess its own laws.

“The way it works is you have criminal laws at the state level, and there's a schedule of drugs at the state level in addition to the one we have at the federal level. But those triggers do not take place automatically. They set a process in motion in those states, and I think it'll start a discussion in those states about where should cannabis be?” Vicente said. “Should it be the same place as at the federal level? So that'll be a sort of symbolic win. ... I don't think we'll necessarily see this be a wholesale gift immediately in how prosecutors across the board treat cannabis. But I certainly think as we've seen state after state, as reforms come through, generally laws get better in terms of prosecution enforcement priorities get better in terms of cannabis and its place.” 

12. Descheduling is the ultimate goal, and congressional action is needed to address the limitations of rescheduling and to stabilize state markets.

Hauser said that there is momentum toward legalization, and it’s important for the cannabis industry to “focus on the work ahead and the end game here, which is congressional reform” and participate during the rulemaking process and engage with associations supporting reform. Another goal is to see an updated enforcement memo that “stabilizes and makes healthy the state markets.” 

“We're still under DEA purview with no interstate commerce with this FDCA oversight intention. And as we've acknowledged with hemp, FDA doesn't have a structure really suitable for cannabis or botanicals, and we lack very important protections and criminal justice reform,” she said. “Only Congress can address these challenges. And I think especially with the hopeful injection of capital with the 280E removal and the renewed investment and momentum, it's critical we organize and engage to use this momentum and be resourced to get descheduled through Congress.”

Although much remains to be seen, Hauser said the public support for cannabis reform has never been stronger, and much progress has been made with this rescheduling effort, the reintroduction of key pieces of banking and criminal justice reform legislation, and with 24 states and Washington D.C. now legalized for adult use.

“I think these legalize and regulate structures are unlikely to pass in the election year and a divided government, but I think even the education and discussion moves the ball forward,” Hauser said. “And with Schedule III and legitimacy from the medical community, we can have as much success as possible and [continue] to make sure these reforms stay in play and ultimately getting them passed in years to come.”