Updated: Oct 9
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Updated September 13.
On August 29, the U.S. Department of Health & Human Services (HHS) made the pioneering move of recommending to the Drug Enforcement Agency (DEA) at the Department of Justice that cannabis be migrated from Schedule I to III under the Controlled Substances Act (CSA; there are five federal drug schedules in total).
According to Boston-based international law firm Foley Hoag, the CSA "gives HHS the authority to make recommendations to DEA on scheduling decisions and moving drugs from one schedule to another based on data, including a scientific and medical evaluation." Reported the Washington Post on August 31: "Reclassifying a drug is a complicated administrative process."
This recommendation is significant for a number of reasons and includes support from the U.S. Food and Drug Administration (FDA; the organization that conducted the "scientific and medical evaluation" noted above) and the National Institute on Drug Abuse. As a Schedule I drug, cannabis is controlled at the federal level by the DEA. A move to Schedule III would shift this responsibility to the FDA. Politico reported that such a policy update—if it were to actually occur—would be "the biggest change in federal drug policy in decades."
HHS Recommends Rescheduling Cannabis
There is a dramatic difference between Schedule I and Schedule III. One major change would be the elimination of IRS code 280E, something that currently prevents cannabis businesses from writing off operating expenses (tax deductions) that has a tremendously negative impact on profitability and economic sustainability. Its elimination would effectively lower pot company tax rates from about 80 percent to the standard 28 percent (although these rates vary from company to company).
"If marijuana goes to Schedule III, the margins-crushing statute known as 280E would not apply, and the cannabis industry would change forever. That said, state-level taxation of cannabis will not change. Or, it may change for the worse, as states feel emboldened to raise cannabis-related taxes in the absence of 280E," wrote Vince Sliwoski, a Portland, Oregon-based business attorney and managing partner at cannabis-centric law firm Harris Bricken.
"If marijuana goes to Schedule III, the margins-crushing statute known as 280E would not apply, and the cannabis industry would change forever."
Sliwoski continued: "Do states tax cannabis heavily? Yes they do. Although several states have passed laws designed to mute the effects of 280E at the state return level, most states (and many cities and counties) levy significant taxes on cannabis in some form or other. These taxes usually accrue at the point of sale and are borne by the consumer. They are designed to raise prices, however, and place downward pressure on sales. For that reason, cannabis businesses tend to oppose them."
A migration of marijuana to Schedule III "almost immediately overnight turns good operators into profitable businesses, whereas before they were fighting and scratching for every bit of revenue they could get," Jason Blanchette, president of the Virginia Cannabis Association, told the Washington Post on August 31.
In addition, Schedule I (which covers drugs such as heroin, psilocybin, MDMA, peyote, LSD, and bath salts), the most strict and limiting classification at the federal level, declares such drugs to have zero medical value and a strong probability of addiction and abuse. Schedule III drugs, on the contrary, are defined as merely possessing a "moderate to low potential for physical and psychological dependence." Substances on this schedule are much more widely available to patients and consumers and include relatively common drugs such as anabolic steroids, codeine, buprenorphine, testosterone, and ketamine.
"Schedule III is much more widely available to patients and includes relatively common drugs such as steroids, testosterone, codeine, and ketamine."
The HHS recommendation is the result of an October 6, 2022 announcement by the Biden Administration during which it said that it was directing HHS Secretary Xavier Becerra and Attorney General Merrick Garland to perform an administrative review into how cannabis is scheduled and regulated under federal law.
The recommendation for rescheduling came in the form of a letter from HHS Assistant Secretary for Health Rachel Levine to Anne Milgram, the chief at the DEA. The letter stated that the FDA considered a number of characteristics (listed below) of cannabis in determining that it makes more sense for the herb to fall within Schedule III. The recommendation letter and the FDA report have not yet been made available to the public.
An HHS spokesperson told the Cannabis Business Times, "This administrative process was completed in less than 11 months, reflecting this department's collaboration and leadership to ensure that a comprehensive scientific evaluation be completed and shared expeditiously."
Advantages: IRS 280E Death & Potential U.S. Stock Listings
In addition to the impactful effect of eliminating 280E, classifying cannabis as Schedule III would also potentially allow pot companies to be listed on major stock exchanges in the United States, such as the Nasdaq and NYSE—something that is currently not permitted under Schedule I (that would also be prohibited under Schedule II). This is a major reason that many publicly traded companies have been critical of the Biden Administration's lack of progress in terms of supporting the American cannabis industry.
However, some prominent legal experts warn that the placement of cannabis at any level on the CSA will necessarily continue to scare away major financial institutions and will not result in the listing of American pot companies on stock exchanges such as Nasdaq and NYSE.
"A positive outcome resulting from a shift to Schedule III would be removal of many research barriers—particularly at institutions and for studies with ties to federal dollars."
"The Banks of America or the Nasdaqs of the world are still going to see this as a violation of the [CSA]. It's not going to give them enough comfort, would be my guess. I don't think [a move to Schedule III is] going to unleash that kind of progress," said Denver-based cannabis attorney Andrew Kline from law firm Perkins Coie during a sobering interview with Green Market Report.
A positive outcome resulting from a shift to Schedule III would be removal of many research barriers—particularly at institutions and for studies with ties to federal dollars. Such a move could, potentially, expand funding for and the sheer number of peer-reviewed cannabis research studies.
"The biggest obstacle, at least historically, to doing research on marijuana to prove its medical benefit is that it's in Schedule I," Dan Riffle, then director of federal policies at the Marijuana Policy Project, told Jacob Sullum from Reason in 2014. "So you had that Catch-22, where marijuana is a Schedule I drug because there's no evidence, and there's no evidence because marijuana is a Schedule I drug," he added.
Interstate Trade Rumor Untrue
While several advantages would be gained by the cannabis industry if the herb was placed in Schedule III—most notably the elimination of 280E and the potential ability for cannabis companies to be listed on the Nasdaq and NYSE—the rumor about gaining interstate trade is not among them.
Cannabis companies would be forced to spend "years and huge sums of money" to gain FDA approval for interstate commerce.
With regulatory responsibility changing from the DEA under Schedule I to the FDA under Schedule III, cannabis companies would be forced to spend "years and huge sums of money" to gain FDA approval for this, according to Jason Horst, president of the International Cannabis Bar Association and managing partner at Horst Legal Counsel in San Francisco.
Horst claims that Schedule III would change nothing for current cannabis companies. "Schedule III does not open the floodgates to interstate commerce for existing operators," he told Green Market Report. "The most likely response from operators in the states is to thank the federal government for the tax break and to go on about their business," said Horst.
Cannabis Characteristics Investigated by FDA
According to Washington, D.C.-based advocacy group Americans For Safe Access, the characteristics investigated in the FDA report cited by the HHS recommendation letter include the following (note that more than half of these factors regard potential for abuse and other risks).
Foley Hoag notes that these same factors will also drive the DEA's upcoming internal review of rescheduling cannabis under the CSA.
Actual or relative potential for abuse.
Scientific evidence of its pharmacological effect.
State of current scientific knowledge regarding drug and other substances.
History of current pattern of abuse.
Scope, duration, and significance of abuse.
What, if any, risk there is to the public health.
Psychic or physiological dependence liability.
Whether the substance is an immediate precursor of a substance already controlled.
Pot Rescheduling: Praise & Condemnation
HHS Recommends Rescheduling Cannabis. The move on the part of HHS was both applauded and heavily criticized by C-suite executives, company founders, and other stakeholders throughout the cannabis industry.
Ricardo Baca, Grasslands
Ricardo Baca, former Marijuana Editor at the Denver Post and CEO of Denver-based communications firm Grasslands, has been critical of the rescheduling move on the part of the Biden-backed HHS recommendation.
"The U.S. deserves drug policy rooted in truth, reason, and science."
"It's encouraging that President Biden and HHS have taken the initiative to recommend reclassifying cannabis, but the U.S. deserves drug policy rooted in truth, reason, and science," Baca wrote in a September 1 article for Salon. "Reclassifying cannabis doesn't do that," he added.
Cat Packer, Drug Policy Alliance
Silver Spring, Maryland-based Cat Packer, director of drug markets and regulation at the Drug Policy Alliance, a New York City-based non-profit advocacy group, in early August Tweeted, "Rescheduling isn't 'legalization'—if anything its the continuation of prohibition and criminalization with a specific carve out for highly controlled and federally regulated pharmaceutical cannabis products. For some that's progress, but it's definitely not legalization."
Shane Pennington, Porter Wright Morris & Arthur
"It goes without saying that this is the most significant development in cannabis law for sure. It's one of the biggest events in the history of American drug law. It's hard to overstate what a big deal it is," said Shane Pennington, a Washington, D.C.-based cannabis policy advocate and partner at law firm Porter Wright Morris & Arthur.
Kim Prince, Proven Media
Arizona-based PR and marketing communications expert Kim Prince (featured below) labeled the recommendation announcement political theater and called it "posturing." She believes the Biden Administration is doing nothing more than attempting to lure youthful voters by appearing to support a topic that resonates with them.
Kim Rivers, Trulieve
Kim Rivers is CEO of Tallahassee, Florida-based Trulieve, one of the largest cannabis companies in the United States. Trulieve controls nearly half of the market (40 percent) for medical cannabis in the state of Florida (the third most populous state with 22 million residents) and operates 186 dispensaries in 10 states.
"There is some legitimacy being brought to our industry and, frankly, for the millions of people who use cannabis as part of the their personal health journey," Rivers told the Washington Post in an August 31 article.
Jacob Sullum, Reason
Jacob Sullum is a respected Dallas, Texas-based journalist who writes for Reason. The following is an excerpt from his August 31 article.
"Way back in 1985, the Food and Drug Administration (FDA) approved Marinol (a.k.a. dronabinol)—a synthetic version of THC, marijuana's main active ingredient—as a treatment for the nausea and vomiting caused by cancer chemotherapy. It later expanded that approval to include AIDS wasting syndrome. Five years ago, the FDA approved Epidiolex, which contains cannabis-derived CBD, as a treatment for two forms of severe, drug-resistant epilepsy.
"Many studies indicate that marijuana is effective at relieving various symptoms, including neuropathic pain and muscle spasms, as well as nausea and epileptic seizures. Based on such findings, 38 states allow medical use of cannabis."
U.S. Cannabis Council
"Rescheduling to Schedule III will mark the most significant federal cannabis reform in modern history," reported the U.S. Cannabis Council. "President Biden is effectively declaring an end to Nixon's failed war on cannabis and placing the nation on a trajectory to end prohibition," noted the Washington, D.C.-based advocacy and trade organization.
DEA Under No Obligation to Reschedule
HHS Recommends Rescheduling Cannabis. The DEA has acknowledged receipt of the letter from HHS, but refused to confirm the Schedule III recommendation. In addition, the DEA is under no deadline to conduct its own review based on the HHS recommendation and, overall, is in no way obligated to reschedule marijuana.
That said, the DEA cannot merely ignore the HHS recommendation. "It's very important," wrote law firm Foley Hoag in a recent blog article. "Under the Controlled Substances Act, HHS' recommendations 'shall be binding...as to scientific and medical matters." How stakeholders and the legal system will interpret "binding" remains to be seen.
Complications: Single Convention on Narcotic Drugs Treaty
Unfortunately for industry advocates, the situation is not as straightforward as the DEA simply deciding to reschedule cannabis to Schedule III. While Schedule III would be better for the industry and its growth, it would also put U.S. policy at odds with existing international drug treaties (particularly the Single Convention on Narcotic Drugs treaty of 1961).
"While Schedule III would be better for the industry, it would also put U.S. policy at odds with existing international drug treaties."
Despite its historical opposition to cannabis, the DEA has never opposed a recommendation from HHS. "Historically, DEA has never overridden an HHS recommendation, other than to ensure treaty compliance," said Pennington.
This fact may influence the DEA to reschedule marijuana to Schedule II as a political compromise that maintains compliance with international treaties while simultaneously demonstrating a progressive response to the FDA report and HHS recommendation.
According to Foley Hoag, Schedule II rescheduling, however, would require the DEA to conduct a "formal rulemaking procedure under the federal Administrative Procedure Act, which is a lengthy process requiring, among other things, notice of proposed rulemaking and acceptance of public comments. [In addition], any final rule would be subject to challenge in court."
However, some legal experts say they do not believe that the DEA will choose to nuke the gameboard and use decades-old international treaty obligations as an excuse to prevent cannabis from shifting to Schedule III. Why?
In 2018, Canada—also part of the 1961 drug treaty—introduced federal-level adult-use cannabis legalization. Thus far, the nation has not suffered negative repercussions from the international community following its move to nationally legalize pot.
"It's not just the treaty that applies, but U.S. law incorporating the terms of the treaty."
Despite this fact, the waters of American drug policy and oversight are even murkier. The DEA reports to the Attorney General, who is under legal obligation to follow the CSA. The Attorney General is also legally bound to follow the 1961 international drug treaty.
The issue, according to Foley Hoag, is that "the Controlled Substances Act itself (which is a statute) binds the Attorney General to follow that treaty. In other words, it's not just the treaty that applies, but U.S. law incorporating the terms of the treaty." Given the state of cannabis regulation at the federal level in the U.S., nearly any path leading the nation out of pot prohibition is tainted by complexity and sometimes significant hurdles.
More Cannabis Industry Responses
HHS Recommends Rescheduling Cannabis. News of this move on the part of HHS has spurred a range of responses from thought leaders within the cannabis industry, with many labeling it "historic" and a "significant step." However, some have been advocating descheduling (complete removal from the CSA) to fully and rationally legalize the herb in America—something that seems unlikely at the time given the political climate and relative conservatism toward cannabis in Washington, D.C.
According to the U.S. Cannabis Council, via a September 2 social media post: "The path to descheduling runs through rescheduling."
Alana Armstrong, Alan Aldous
Alana Armstrong is Head Publicist and Content Strategist at Toronto-based PR firm and digital marketing agency Alan Aldous. In her exclusive comments below, she provides a view of the cannabis developments in Washington, D.C. from a Canadian perspective.
"[The HHS announcement is] an intriguing move indeed! As a cannabis professional in Canada, it's fascinating to witness the ripple effects of regulatory changes south of the border. The Biden Administration's push to reevaluate the classification of cannabis is bound to resonate beyond U.S. borders, impacting global perceptions of cannabis.
"It doesn't appear that it will do much to alleviate the financial and banking stress that operators are experiencing. But it does sparks questions about international collaboration and research advancements."
"This potential shift to Schedule III holds promise not only for the medical cannabis sector, but also for those of us navigating the intricate landscape of all legal cannabis in general.
"It doesn't appear that [a shift to Schedule III] will do much to alleviate the financial and banking stress that operators are experiencing. But it does spark questions about international collaboration, research advancements, and the potential for harmonized regulations. Exciting times ahead for the industry as we continue to witness the evolution of cannabis on a global scale."
Graham Farrar, Glass House Brands
Graham Farrar is President of Glass House Brands, a California-based cannabis brand known for operating the world's largest greenhouse-based cultivation facility in Santa Barbara. Below, Farrar talked to Higher Learning LV about his feelings regarding the Schedule III recommendation.
"While we applaud that HHS recommendation to remove cannabis from Schedule I, which clearly has no basis in science or in fact—and are excited to see the first tangible glimmer of progress on the federal front—we continue to believe that the appropriate path is not rescheduling, but descheduling.
"Rescheduling has many positive implications, notably the removal of 280E taxation. However, it does not get any of the 2,700 non-violent cannabis POWs out of prison."
"Rescheduling has many positive implications for the industry and consumers, notably the removal of 280E taxation. However, it does not get any of the 2,700 non-violent cannabis POWs out of prison.
"We are happy to see the incremental process that moving to Schedule III represents. But at the same time we feel strongly that society needs to continue to advocate for a complete removal of cannabis from the Controlled Substances Act. Cannabis is nature and nature should not be illegal."
Tim Johnson, Cannabis Safety First
"When the news from the federal agency Health & Human Services was released, it seemed to have awakened a giant. The cannabis community and industry responded with unforeseen togetherness in the masses. Both those for and against the recommendation to place cannabis on the CSA Schedule III jumped on social media to share their input.
"Should a Schedule VI, Nutraceuticals, be created as a DEA scheduled class?"
"From a CSA Schedule III medical point, cannabis doesn't justify the warning level of harm of other drugs in this class. Should a Schedule VI, Nutraceuticals, be created as a DEA scheduled class? A shift to Schedule III would result in criminal justice reform and some relief in conviction sentencing. Penalties from Schedule I differ from that of III. I don't see an impact in the illicit market.
"The rescheduling of cannabis presents valid points from either viewpoint. There will be no happiness cookie for all. However, in the end, this event has brought us out and together for a plant...."
Kim Prince, Proven Media
Kim Prince, founder and president of Proven Media, a leading cannabis-centric PR firm, was among the many critics of the move by the HHS. She said she believes that the HHS recommendation is intended not to help the cannabis industry or patients, but is merely political posturing intended to sway youthful voters in the 2024 election.
The HHS recommendation "is a compromise that ultimately may end up hurting the industry by putting cannabis into the hands of big pharma and, thereby, making it less accessible and more expensive for consumers," said Prince.
"The move is a lame and all too transparent attempt by the Biden Administration to gain the support of young voters," said Prince in an exclusive interview with Higher Learning LV for this article. "It is a compromise that ultimately may end up hurting the industry by putting cannabis into the hands of big pharma and, thereby, making it less accessible and more expensive for consumers," said Prince.
Dena Putnam, Leafwize Naturals
According to Dena Putnam, founder and president at California-based Leafwize Naturals, a CBD and alt cannabinoid online retail vendor, Schedule III brings multiple benefits, despite the fact that it is not, in her opinion, "the grand prize for which we've been hoping."
"Schedule III status would remove the stranglehold of the 280E tax rule which has been a major drain on the balance sheet of every legally-operating cannabis entity in the country," Putnam told Higher Learning LV in an exclusive interview.
Putnam pointed out that the downsides of Schedule III include a preservation of criminalization and severe restrictions on use of cannabis "by those who need it most."
Putnam pointed out that the downsides of Schedule III include a preservation of criminalization and severe restrictions on use of cannabis "by those who need it most." "The other bummer is that it gets put under the purview of the FDA. Yes, the same folks who've declined to regulate CBD for several years now," said Putnam.
"This could also potentially negate the need for the SAFE banking legislation and allow cannabis cash to be put into the banking system, opening up financial services like business loans. This would be a big win for cannabis business security and solvency," concluded the company founder.
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