On January 12, 2024, a 252-page memorandum from the U.S. Department of Health & Human Services (“HHS”) was publicly released. This memorandum, dated August 29, 2023, portends a potential monumental shift in the regulation of marijuana under federal law and recommends that marijuana be regulated under schedule III of the Controlled Substances Act (“CSA”). The decision to reschedule marijuana under the CSA has been under U.S. Drug Enforcement Administration (“DEA”) review for a few months now.
If cannabis is moved to schedule III, it would be a seismic transformation of cannabis business operations. Among other things, cannabis businesses will be able to write-off ordinary business expenditure deductions. Under current law, Internal Revenue Code 280E prohibits this tax treatment because marijuana is controlled as a schedule I substance. Upon rescheduling, this provision of the tax code would no longer apply, treating cannabis businesses more similarly to other businesses participating in U.S. the economy. This is because IRC Section 280E only applies in schedules I and II.
By way of background, on October 6, 2023, President Biden issued a statement regarding reforms associated with marijuana, a substance currently controlled in schedule I of the CSA. Among those reforms, he directed his Administration to conduct an “expeditious” review of the current classification of marijuana under the CSA.
In November 2023, Perkins Coie convened the Coalition for Cannabis Scheduling Reform (“CCSR”), including cannabis multi-state operators, brands, and ancillary companies, in addition to doctors and scientists, and legal and policy experts. The team engaged with stakeholders and provided critical analysis about the urgent need for scheduling reform. Among other things, CCSR focused on the fact that marijuana has “medical use in treatment in the United States” and less “abuse potential” than other substances in schedules I and II of the CSA. In a report co-led by Perkins lawyers, CCSR discussed how HHS and FDA could find “currently accepted medical use in the United States” by analyzing the 38 state medical markets, instead of requiring FDA approval for interstate marketing like they have done in the past.
The HHS memorandum to DEA recommending that marijuana be placed in schedule III of the CSA contained a new test for “medical use in the United States,” largely mirroring the coalition’s work.
It is widely expected that DEA will be releasing their final decision in the coming months. CCSR, and Perkins Coie attorneys, will be out in front as the process moves forward. Once DEA releases a draft rule, there will be a public comment period. As with other rulemaking procedures, DEA will consider these public comments and eventually promulgate a final rule. The agency may also hold an Administrative Law Judge (ALJ) hearing. When the rule is finalized, the policy change is expected to dramatically increase the profitability of the state-legal cannabis industry.