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On Tuesday, August 29, the U.S. Department of Health and Human Services (HHS) in a historic move officially recommended cannabis’ controlled substance classification be changed from Schedule I to Schedule III. The development was first reported by Bloomberg.
Despite an increasing number of states legalizing cannabis for medical and adult use in recent years, the plant and its primary active compound, THC, remain classified as a Schedule I controlled substance under federal law. If ultimately approved, the HHS rescheduling recommendation could be a catalyst to significant changes as to how cannabis is regulated, researched, and ultimately used by consumers in the United States.
“Following the data and science, HHS has expeditiously responded to President Biden’s directive to HHS Secretary Becerra and provided its scheduling recommendation for marijuana to the DEA on August 29, 2023,” an HHS spokesperson said in a statement to Marijuana Moment on August 30.
A U.S. Drug Enforcement Administration (DEA) spokesperson also confirmed to the website that the agency had received a letter from HHS, “providing its findings and recommendation on marijuana scheduling, pursuant to President Biden’s request for a review.” The spokesperson noted that DEA, which has the final authority on whether to schedule or reschedule a drug under the federal Controlled Substances Act (CSA), “will now initiate its review.”
DEA did not provide a timeline for when a decision would be forthcoming, though many industry observers expect the agency will make an announcement prior to the November 2024 elections. HHS spent about 11 months in completing its review.
For decades cannabis has been a Schedule I drug under the CSA; meaning it has been classified – along with heroin, LSD, peyote, ecstasy, and some other federally prohibited substances – as having “no currently accepted medical use in the United States, a lack of accepted safety for use under medical supervision, and a high potential for abuse.”
Moving cannabis to a Schedule III status would instead place it in the same category as some drugs containing opioids and non-narcotics such as anabolic steroids and ketamine.
Shawn Hauser, a partner at Denver-based Vicente Sederberg and co-chair of the law firm’s Hemp and Cannabinoids Department, called the HHS recommendation a historic step towards the end of cannabis prohibition. “It marks … a departure from cannabis’ inappropriate status as a Schedule I substance,” she told Cannabis Benchmarks. “It’s the first step in modernizing what are very outdated laws that are not consistent with data and science.”
Hauser noted that her law firm helped draft policy for federal stakeholders issued this past June by the Coalition for Cannabis Scheduling Reform, an organization of cannabis companies, legal experts, scientific groups, and others. She is optimistic that the HHS recommendations will have traction with DEA.
“Historically, DEA treats FDA scheduling recommendations as binding,” she said. (FDA is the agency within HHS that was tasked with conducting the recently-completed scientific review.) Hauser continued, “A senior DEA official noted recently that he was not aware of a single instance in the agency’s history that DEA has ever deviated from a scheduling recommendation from HHS.”
“So now it’s on the DEA to determine whether the scheduling recommendation, the scientific and medical evidence, and all of the data presented are enough … to support that the drug should be rescheduled, as recommended,” Hauser noted. She also pointed to DEA’s eight-factor assessment of how drugs should be classified under the CSA, which will guide the agency’s review of the HHS recommendation.
If the HHS rescheduling recommendation is approved, Hauser said moving cannabis to Schedule III status would create positive and seismic changes in the cannabis industry.
In particular, she noted cannabis businesses would no longer be subject to Section 280E of the Internal Revenue Code, a regulation that denies otherwise standard business deductions and credits to companies involved with trafficking certain controlled substances in violation of federal law. Since the state-level legalization of commercial cannabis markets commenced, the industry has complained that 280E has resulted in their businesses shouldering financially “crushing” tax liabilities.
“280E expressly applies to … trafficking in Schedule I or II substances,” Hauser said, “and that 280E release alone [from moving cannabis to Schedule III] would obviously be a game-changer for the cannabis industry, as it stifles and handicaps its growth.”
Freeing the legal cannabis industry from 280E could result in other positive downstream impacts. Attorney Vince Sliwoski, writing for Harris Bricken’s Canna Law Blog, noted, “With 280E gone, many struggling cannabis outfits should begin producing better financial statements,” thus making them more attractive to investors. The legal cannabis industry as a whole has faced an extremely tight capital environment in the last two years, in no small part due to the heavy tax burdens stemming from 280E, which make achieving profitability very difficult.
Rescheduling cannabis as a Schedule III drug would also ease regulatory barriers on research, Hauser added, facilitating more investigations into cannabis’ medical applications and other potential benefits.
Also, “It would reduce criminal penalties for certain cannabis-related violations,” she pointed out, “although a lot of those need to be revised on the state level – and relax other regulatory burdens, like quota requirements, security, and others.”
Looking at the big picture, “it’s a major, incremental step towards normalizing cannabis,” Hauser stated. “If it’s accompanied by an enforcement memo, something like the Cole Memo, that would be ideal” to support the stability and success of state-regulated cannabis markets. (The Cole Memo was an Obama Administration-era guidance document issued by the U.S. Department of Justice that declared enforcing the CSA against state-licensed cannabis businesses would not be a federal priority if certain conditions were met.)
Overall, while some industry stakeholders are apprehensive that rescheduling cannabis to Schedule III would negatively impact state-legal markets, Hauser does not believe that will be the case, an opinion shared by others. Politico quoted John Hudak, Director of Maine’s Office of Cannabis Policy, as stating, “But in terms of administration of a state program, [rescheduling] has very little impact.”
If the HHS recommendation goes ahead, Hauser expects the U.S. cannabis market to operate in a transitional, rule-making period, with input from the public and judicial review. This could potentially be accompanied by Congressional legislation, which will still be necessary to fully end cannabis prohibition and criminalization. She also believes federal lawmakers would be partial to creating cannabis laws along the lines of current regulations regarding alcohol.
“There are many congressional leaders and policy experts who believe marijuana should be regulated like alcohol,” Hauser noted, “[with laws] designed for intoxicants and adult use.” In terms of medical cannabis, however, Hauser expects certain medicinal cannabis formulations will go through the traditional FDA process when it comes to new drugs, with questions regarding those drug’s claims, separate scheduling issues, and considerations as to how the drug should be labeled and sold. Some cannabis advocacy groups, meanwhile, say the potential rescheduling of cannabis simply acknowledges what is already occurring across much of the country. “The vast majority of Americans live in states with laws that depart from federal law on this issue and where thousands of regulated Main Street businesses are serving the legal cannabis market safely and responsibly,” National Cannabis Industry Association CEO Aaron Smith said in a press statement. “It’s long past time for Congress to truly harmonize federal policy with those states.”