Source: JD Supra
On April 30, 2024, the Associated Press reported a significant development in cannabis policy: the U.S. Drug Enforcement Administration (“DEA”) is recommending reclassifying cannabis from Schedule I to Schedule III. This move, spurred by recommendations from the U.S. Department of Health and Human Services (“HHS”) and President Biden’s directive, acknowledges cannabis’ medical benefits and lower potential for abuse. Although this move is historic in nature, the process isn’t immediate; the proposal must undergo review by the White House Office of Management and Budget (“OMB”), followed by a public-comment period and administrative judge review, inevitably elongating the process. Furthermore, potential litigation from conservative State Attorneys General could impede implementation as reclassification could impact sentencing guidelines, access to public housing, and banking regulations.
Impacts on Tax Burdens
While not equivalent to full legalization, rescheduling could have far-reaching effects, potentially alleviating the tax burdens imposed by tax provision § 280E, which prevents cannabis businesses from deducting certain expenses because their operations are deemed illegal. If approved, this historic change could carry profound implications, including easing restrictions on research and offering tax relief for cannabis businesses. However, it falls short of addressing issues such as decriminalization or permitting interstate commerce.
Section 280E of the Internal Revenue Code prohibits businesses from deducting typical business expenses from their gross income if those expenses are related to the “trafficking” of substances listed under Schedule I or II of the Controlled Substances Act (“CSA”). This restriction translates into higher taxes, reduced profitability, and cash flow challenges, all of which impede competitiveness. While some states permit 280E deductions on state taxes, federal reclassification to Schedule III could establish consistency across states, potentially alleviating financial burdens on cannabis businesses.
Moving cannabis to Schedule III also carries significant financial implications for state-regulated cannabis businesses, especially concerning taxes. They would no longer fall under the purview of Section 280E, enabling them to deduct standard business expenses and potentially saving them substantial sums in taxes. This change would facilitate reinvestment, higher employee compensation, and expansion without the weight of heavy tax burdens as it is estimated that it will save the industry nearly $2 billion in taxes.
Despite the tax benefits, Schedule III classification alone will not entirely resolve the cannabis industry’s banking issues. Challenges such as difficulty in obtaining business accounts and limited access to loans persist. Nevertheless, it could signify reduced legal risks for financial institutions engaging with state-licensed cannabis businesses, potentially enhancing access to capital and financial services. Despite its positive trajectory, achieving full industry legitimacy necessitates congressional action, such as passing legislation like the SAFE Banking Act.
Impacts on Medical Research[1]
Conducting clinical research with cannabis-derived substances, classified as controlled substances under the CSA, typically involves engagement with various federal agencies. Researchers must adhere to protocols specified by the DEA particularly for substances listed in Schedule I, necessitating site-specific DEA investigator registration. Rescheduling could streamline interactions with federal agencies like the DEA for obtaining research-grade cannabis. Additionally, the National Institute on Drug Abuse (“NIDA”) oversees the supply of research-grade cannabis, collaborating with registered growers, such as the University of Mississippi, to cultivate cannabis for scientific study. NIDA supplies cannabis for scientific study, and declassification may reduce bureaucratic hurdles for growers.
Researchers also collaborate with the Food and Drug Administration (“FDA”), submitting Investigational New Drug (“IND”) or Investigational New Animal Drug (“INAD”) applications to the appropriate FDA divisions. These applications are crucial for obtaining FDA approval for clinical trials. Based on the outcomes of studies conducted under these applications, sponsors may proceed to submit marketing applications for formal drug approval.
Rescheduling cannabis to Schedule III could catalyze further medical research, particularly into its therapeutic applications. The FDA acknowledges the increasing interest in cannabis’s potential for medical use and the ongoing research on its health effects. While the FDA hasn’t endorsed any cannabis-based treatments, it has approved Epidiolex, containing purified CBD, for seizures associated with Lennox-Gastaut syndrome or Dravet syndrome. Additionally, the FDA has approved synthetic cannabis-related drugs like Marinol, Syndros, and Cesamet for various therapeutic uses, including nausea and appetite loss associated with cancer chemotherapy and AIDS.
These drugs, available only with a prescription, offer options for patients with specific medical conditions. While unapproved cannabis products are used for various medical purposes, the FDA emphasizes the safety and efficacy of approved drugs. To address unmet medical needs, the FDA facilitates drug development through programs like Fast Track and expanded access provisions. Through these efforts, the FDA supports scientifically rigorous research into cannabis and its derivatives to bring safe, effective, and quality treatments to the market. Rescheduling to Schedule III would simplify the research process, encouraging more studies into cannabis-derived drugs. Researchers would still need to obtain FDA approval through the IND or INAD application process, ensuring patient safety and adherence to regulatory standards.
Impacts on Social Justice
While declassification would notably alleviate the tax burdens imposed by Section 280E of the Internal Revenue Code and potentially lower insurance costs for cannabis businesses, it would also pave the way for increased corporatization. This could pose challenges for small, locally owned businesses and home growers, often comprising social equity applicants and minority business owners, as they may find it increasingly difficult to compete in a more corporate-dominated landscape.
Moving cannabis to Schedule III of the CSA would result in reduced penalties for certain offenses, as penalties are often linked to the substance’s schedule.[2] However, penalties specific to cannabis, such as quantity-based mandatory minimum sentences, would remain unaffected by rescheduling. Furthermore, the DEA would not be obligated to set annual production quotas for Schedule III substances.
Despite these changes, there are concerns regarding the broader impacts on individuals affected by the “War on Drugs.” The Last Prisoner Project reports that over 40,000 individuals are currently incarcerated for cannabis-related offenses in the U.S. This rescheduling does not address the issue of potential pardons for those incarcerated for non-violent cannabis offenses or reparations for those adversely affected by the “War on Drugs,” nor does it address potential expungements for those facing hardships due to their criminal record for cannabis related offenses.
Reclassification of cannabis could have implications for public housing policies and residents. Currently, federal regulations governing housing assistance programs, such as public housing and Section 8 vouchers, consider cannabis use illegal, potentially risking the housing benefits of individuals in states where cannabis is legalized. However, if cannabis were to be reclassified at the federal level, it might prompt changes in how housing authorities interpret and enforce drug policies. This could potentially allow individuals with past cannabis-related offenses to qualify for housing assistance and could lead to revisions in tenant conduct policies regarding cannabis use on the premises. Nevertheless, landlords in federally subsidized housing may still retain discretion over whether to permit cannabis use on their properties, regardless of reclassification. Overall, while reclassification could influence public housing dynamics, the extent of its impact would depend on how federal agencies and local housing authorities choose to navigate the evolving legal landscape surrounding cannabis.
[1] https://www.fda.gov/news-events/public-health-focus/fda-and-cannabis-research-and-drug-approval-process
[2] Joanna R. Lampe, Legal Consequences of Rescheduling Marijuana, CRS Report LSB11105 (May 1, 2024), https://crsreports.congress.gov.
https://www.jdsupra.com/legalnews/reclassifying-cannabis-as-schedule-iii-8081357/
