U.S. DEA proposes marijuana reclassification to Schedule III

On April 30, 2024 the Associated Press reported that the U.S. Drug Enforcement Administration (DEA) submitted a proposal to the White House Office of Management and Budget (OMB) suggesting marijuana be reclassified as a Schedule III substance under the Controlled Substances Act (CSA). While the news has unleashed a torrent of analysis and comments from cannabis industry experts regarding rescheduling’s ultimate impact on existing cannabis businesses, it is unclear how the change may affect state licensed businesses that are still federally illegal, particularly ones that currently operate under the auspice of a medical program.

Reclassifying marijuana to Schedule III

Marijuana and other drugs are regulated by the federal government through the CSA. The CSA places substances into one of five categories, called schedules, depending on the drug’s acceptable medical use and abuse or dependency potential. Marijuana is currently classified as a Schedule I substance alongside other drugs like heroin and LSD. Schedule I substances have a high potential for abuse with no accepted medical use in the U.S., even under medical supervision. Reclassifying marijuana to Schedule III would put it alongside other drugs like ketamine and testosterone that have moderate to low potential for dependence and accepted medical uses. The change would align federal law more closely with state laws concerning the medical use of marijuana, of which a majority of the states have legally approved in some form or another.

Regulations and compliance standards for Schedule III compounds

Businesses that produce products containing compounds that are classified as Schedule III under the CSA are subject to onerous regulations and compliance standards, including requirements to register with the DEA and submit to their oversight.

Should the DEA reclassify marijuana as Schedule III, businesses that currently engage in the production or sale of marijuana for medical use under state-sanctioned programs may need to contend with new operational requirements. Businesses engaged in the production or sale of marijuana for recreational or adult use face even greater uncertainty. It remains unclear how the reclassification would impact federal enforcement policies that have historically deferred to state laws that are in direct conflict with the CSA.

Changes for businesses and consumers

If approved, the reclassification of marijuana will create unprecedented change for both businesses and consumers in the US. While many of those changes’ impacts are not clear at this time, there are some consequences of reclassification that provide welcome relief to existing marijuana businesses.

• Businesses that engage in the trafficking of Schedule I and II controlled substances are subject to Section 280E of the Internal Revenue Code. Under 280E, those businesses are unable to deduct expenses like any other business and are taxed at effective rates that are much higher than other businesses.
•  Increased profits will allow businesses to invest in research, education, and product development in ways they have not been able to date. Increased profits also make businesses more attractive investment vehicles and could increase the amount of capital being invested into marijuana businesses.
•  A move to Schedule III will also allow marijuana businesses greater flexibility in working with certain service providers – namely banks – that have historically shied away from servicing them because of federal regulations prohibiting servicing criminal enterprises.

While the reclassification process may be underway, there are a number of administrative requirements that stand between the April 30 announcement and marijuana’s formal move to Schedule III of the CSA. As reported initially by the AP, the DEA’s proposal must be reviewed by the OMB. If approved by OMB, then the proposal will be published on the Federal Register for a public comment period and to solicit requests for administrative hearings. The DEA would then review all information provided through public comments and administrative hearings to issue a final rule. The final rule may be subjected to additional judicial review if aggrieved parties take issue with it.

All in all, the process could take multiple years to resolve.

The DEA’s proposal marks an important step towards recognizing the full medical potential of marijuana. While the impact of the change on existing businesses is unclear, McDonald Hopkins’ cannabis attorneys are actively monitoring the OMB response closely and are prepared to help businesses navigate the unknown in the coming years.

For more information or to speak with one of our attorneys, please reach out to cannabis practice lead Kevin Washburn.

Xavier Jaillet, a law clerk at McDonald Hopkins, assisted with the writing of this article.