UPDATE: Federal Rescheduling: The Impact on Michigan Cannabis Businesses
Updated: Oct 25
UPDATE: October 25, 2023: It appears that HHS has responded to a number of FOIA requests for its August 2023 letter relating to potential rescheduling of cannabis. Citing an exemption that "protects inter-agency or intra-agency memoranda or letters which would not be available by law to a party other than an agency in litigation with the agency," HHS has produced a highly redacted copy of the August 29, 2023 Letter to DEA, a copy of which is available here.
October 23, 2023: Recent news reports have suggested that the federal government may be considering "rescheduling" cannabis under the Controlled Substances Act, something long championed by the cannabis industry. But, what is happening and how will it affect cannabis businesses here in Michigan?
Is Cannabis being Federally Rescheduled?
In November 2022, the Biden administration released a statement requesting that Health and Human Services initiate the review process of marijuana scheduling under the Controlled Substances Act. In August 2023, Bloomberg News reported that it has seen a copy of a letter from a “high ranking” HHS official to DEA (Drug Enforcement Administration) recommending the rescheduling of cannabis from Schedule I to Schedule III. No copy of that letter was made available. In September 2023, the DEA confirmed that it received a letter from HHS containing its review and recommendation regarding scheduling per Biden’s request but did not clarify precisely what the “recommendation” was. Again, no copy of the letter was produced.
What does this Mean?
You may already know that cannabis is currently scheduled as a Schedule I drug under the Controlled Substances Act, meaning it has no recognized medical use and a high potential for abuse and addiction. Schedule I includes serious and dangerous narcotics like heroin, ecstasy, and LSD. In contrast, Schedule III drugs have a recognized medical use, but some potential for addiction and abuse (anabolic steroids, ketamine, etc). They are still highly regulated, highly controlled substances, but with some legal pathways for distribution.
Why does this matter?
Any move that brings cannabis scheduling more in line with the scientific evidence is a good thing, as the current Schedule I designation gives it no viable legal path. Moving this to schedule III would also open up significant research resources, including federal research funding into cannabis, its medicinal properties, health effects, agricultural methodologies, etc.
But, most important for state operators is that Section 280e of the Internal Revenue Code only applies to Schedule I and II drugs. Under 280e, cannabis operators are not permitted to take the types of typical business expense deductions allowed for other businesses (such as marketing, rent, supplies, employee wages, etc.). The result is that cannabis operators are taxed on a portion of their gross revenue rather than their net profits. Relief from 280e would mean immediate relief for operators from a huge tax burden, with retailers likely benefiting the most compared to the current structure. The need for tax relief for the cannabis industry cannot be overstated.
So it is all sunshine and rainbows and we should look forward to Schedule III, right?
No. Simply put, the rescheduling to Schedule III comes with own unique set of complications, including a likelihood that those prescribing or distributing cannabis would need to obtain a federal DEA license to do so. Those licenses have significant regulatory requirements, including background checks, certain criminal history/substance abuse restrictions, 3-year renewals, records audit requirements, and control and storage requirements.
While there is some prediction that the DEA would leave states with their own cannabis programs in place, the devil is in the details and nothing from the Fed has indicated that they would not impose a federal regulatory scheme across all 50 states. If the current DEA structure were imposed across the board, it is likely that cannabis businesses as you know them would cease to exist:
Adult use retail stores would not be permitted.
Medical dispensaries would have to function like pharmacies, with prescriptions and controlled access to produce.
Customers (patients) would only be able to obtain cannabis with a prescription and only for the product prescribed.
Cultivators and processors may need to meet ISMA standards for pharmaceutical production.
Products may need to go through peer reviewed and blind studies regarding efficacy and effects (like other pharmaceutical products).
Many state licensed operators would probably be disallowed from obtaining a DEA license due to criminal histories relating to controlled substances.
Finally, we have seen time and time again how big money groups are able to shape federal regulations to protect and benefit themselves. Until additional details are provided about how the states would be treated, there are significant and legitimate concerns that any federal regulations would force smaller operators out of business by trading an onerous federal tax scheme for an onerous federal regulatory scheme.
Is the proposal to reschedule cannabis a good thing the cannabis industry?
Absolutely. Cannabis’s currently scheduling is the result of a racist political history and absolute ignorance of the scientific evidence behind cannabis. Anything that changes that paradigm and make policy more science and reason based, is a good thing.
Is this a legalization bill?
No. Schedule III drugs are highly regulated and are not available over the counter or without a prescription.
Would rescheduling to Schedule III provide immediate tax relief for operators?
Yes, as 280e only applies to Schedule I and II.
How will the Fed apply this to the states?
Unknown and there has been no clarity from DEA or HHS.
Will your business be able to continue to operate as is under a Schedule III designation?
Is this going to happen tomorrow?
No. Probably at least 6 months to a year, if not more, as DEA rescheduling requires an eight-factor analysis and period of public comment.
Are there other ways to achieve these same goals? Yes.
Descheduling (i.e., removing cannabis from the list of controlled substances entirely) would eliminate the problems associated with Schedule III and the conflict with the current state license programs. Under a descheduling approach, cannabis would probably fall under the authority of the ATF or a similar agency, and would have jurisdiction over the interstate commerce of cannabis. However, states would still be free to design their cannabis programs as they want, charge excise taxes, require licensing, etc.
Congress could also amend 280e to allow state licensed cannabis companies to take regular business deductions.
Would rescheduling erase my criminal conviction for cannabis?
No. Proposed rescheduling does nothing to address prior convictions, either at the federal or state level. Other bills introduced by Sen. Cory Booker (D-NJ) and Rep. Nancy Mace (R-SC) would provide for a federal expungement process, coupled with descheduling of cannabis and implementation of a federal excise tax.