The Impacts of Cannabis Rescheduling: Panelists Weigh In During International Cannabis Bar Association Webinar

With the industry still buzzing with the news that the U.S. Department of Health and Human Services (HHS) recommended cannabis be reclassified as a Schedule III drug under the Controlled Substances Act (CSA), the International Cannabis Bar Association (INCBA) hosted a webinar Sept. 11 where panelists weighed in on the rescheduling process and the impact the move could have on businesses.

RELATED: ‘Rescheduling is Not Enough,’ And Other Reactions to HHS Recommendation on Cannabis

In a discussion that lasted more than two hours, speakers on the “What HHS’s Schedule III Recommendation Could Mean and What Comes Next” webinar—Khurshid Khoja, founder of Greenbridge Corporate Counsel; Amber Littlejohn, Of Counsel at Ice Miller; and Shane Pennington, partner at Porter Wright Morris & Arthur LLP—shared insight into what the HHS recommendation means and the potential next steps in the rescheduling process, as well as how a Schedule III classification could impact several areas of the industry, including taxes, research and federal enforcement.

Here are some of the panelists’ key takeaways on these issues.

Taxes

Khoja, Littlejohn and Pennington agreed that if cannabis is reclassified as a Schedule III drug, IRS Code Section 280E, which prohibits certain tax deductions and credits for cannabis businesses, would go away.

“If Schedule III happens, I believe we get the tax equity because … 280E is explicit when it comes to [only being applied to] Schedule I and II,” Littlejohn said. “That doesn’t mean that Congress doesn’t … say, ‘OK, but we’re going to hit you with an excise tax.’ It doesn’t mean that they couldn’t find a way to make up the slack, but in terms of ending 280E, if we do get to schedule III, I believe we actually finally get relief from that.”

With the fall of 280E, Littlejohn said that investment capital will likely flow more freely into the space.

“When money starts flowing into the industry and these businesses actually become profitable, people will want to invest,” she said.

Research

In December 2022, President Joe Biden signed the Medical Marijuana and Cannabidiol Research Expansion Act, the first piece of standalone federal cannabis reform to be enacted since the drug war began more than 50 years ago.

The legislation was touted as much-needed reform to facilitate research on cannabis and its potential health benefits, but Khoja and Pennington said the law could actually mitigate the expansion of research if cannabis is rescheduled.

“The Medical Marijuana and Cannabinol Research Expansion Act delivered a lot of the research-related benefits that were promised by rescheduling advocates, and we got a lot of those benefits in December 2022,” Khoja said. “That being said, that act does not apply to non-plant-derived THC. I have clients that are producing that at scale through biosynthesis for research and development applications, and they would not be covered under that act. Assuming that both marijuana and THC are dropped to Schedule III, in that instance, that move would still benefit medical research using non-plant-derived forms of THC.”

Pennington took a harder stance against the Medical Marijuana and Cannabidiol Research Expansion Act, saying that it “actually made cannabis research harder at the federal level, not easier.” He explained that because the law’s provisions specifically apply to cannabis as opposed to, say, all Schedule I drugs, rescheduling cannabis does nothing to change the restrictions the act placed on cannabis-related research.

“Unlike other substances, where the research restrictions hinge on scheduling and when you get past Schedule II, they get a lot easier and so forth and so on, that’s no longer the case for cannabis,” Pennington said. “Now, [the restrictions are] totally agnostic towards schedule and they just apply to cannabis as cannabis.”

Federal Enforcement

The panelists discussed at length which agencies would be responsible for industry oversight should cannabis be rescheduled.

Littlejohn said the U.S. Drug Enforcement Administration (DEA) would still have enforcement authority over the CSA, and the U.S. Food and Drug Administration (FDA) would not get any new authority over the industry, although it would of course retain authority over drug safety.

“What you will likely see, though, is what we have seen with hemp and CBD,” Littlejohn said. “We’re not seeing a big rush of enforcement down on the hemp and CBD industry. What we are seeing [is enforcement action] when FDA is saying that these companies and these products and their claims are infringing into an area that is drug territory.”

RELATED: FDA Issues Warning Letters to Companies Claiming Their CBD Products Can Treat COVID-19

However, other than FDA officials cracking down on products making health claims or those being marketed as dietary supplements, Littlejohn said she believes the agency will be “extraordinarily resistant to anything that disrupts their current framework,” meaning that the FDA will likely not make a major shift in its enforcement actions should cannabis be rescheduled.

“Without an act of Congress, … it isn't like we wake up one day and now all of a sudden DEA is done and we are being regulated by FDA,” Littlejohn said. “DEA will still be looking at diversion and other issues concerning safety. … There isn’t a magic button that switches on and then all of a sudden this is an FDA problem. FDA has been very clear that it’s not trying to regulate state cannabis products, especially ones that are sold in the adult-use market. This isn’t their thing.”

Key Takeaways

As the webinar started to wind down, Khoja, Littlejohn and Pennington offered their overall thoughts on what rescheduling could mean for the industry. The trio agreed that this is not the end of policy reform efforts, but rather a turning point, and that the legalization movement must keep pushing forward.

“I think if we do actually reschedule, rightly so, this will be viewed as a turning point for U.S. federal policy and cannabis prohibition,” Khoja said. “Finally accepting and saying that there is accepted medical use is a milestone. It’s a huge one. … How will it impact the cannabis legalization movement? Well, I think that we’re unfortunately probably going to continue to see a bit of a disagreement and sparring among different proponents. But I think by and large, as long as this results in further work, as long as this is not a stopping point but is a way point on the way to descheduling, then this will be viewed very positively. If we don’t do that, I think the legalization movement will have lost some momentum. So, I think that we just can’t stop here.”

“This can’t be the stopping point,” Littlejohn said. “Folks here in cannabis actually will not accept anything short of complete legalization and descheduling. A lot of the interest—big banks, a lot of big industries—won't participate in this industry until it is legalized. So, while that is also traumatizing, it is also [a sign that] there is going to be money and political will being used to push this forward.”

She added, “The immediate impacts are going to be good. Once [rescheduling is] passed and things are implemented and we get the 280E [reform], that alone could help to stabilize an industry that is really, really, really struggling right now.”

Similarly, Pennington said rescheduling will allow the industry “to keep fighting for another day,” but the work isn’t over yet.

“All that I can say is that we need everybody who’s gotten us here to double down now,” he said. “It’s easy to get exhausted and it’s easy to get divided. And that is what the enemies of any social movement need and want right now.”