The cannabis industry in the U.S. is on the cusp of a potential transformation. On August 29, the U.S. Department of Health and Human Services (HHS) made a significant recommendation that could reshape the legal and regulatory landscape surrounding cannabis. In this post, we will delve into HHS’s groundbreaking proposal to reschedule cannabis from its current classification as a Schedule I substance to Schedule III under the Controlled Substances Act (CSA), and the effect that rescheduling may have on cannabis industry participants. While this recommendation represents only the first step in the rescheduling processes, it is essential to understand the implications for various stakeholders.
I. Background Information
To comprehend the significance of this recommendation, we must first grasp the existing regulatory framework. The CSA is the cornerstone of drug regulation in the U.S. Under the CSA, drugs are classified into different schedules based on factors such as potential for abuse, accepted medical use, and likelihood for dependence. Currently, cannabis is categorized as a Schedule I drug — the most restricted category of substances — alongside other substances like heroin and LSD. Schedule I is reserved for substances with a high potential for abuse, no accepted medical use for treatment in the U.S., and a lack of accepted safety for use under medical supervision. Substances in Schedule I may not be prescribed to patients by a physician.
The Schedule I classification imposes significant burdens on state-legal cannabis businesses and severe obstacles for researchers. First, federal anti-money laundering laws impose steep penalties for banks who process transactions involving funds derived from drug trafficking activities, including transactions involving cannabis. As a result, cannabis businesses are often forced to operate on a mostly cash basis. While the Financial Crimes Enforcement Network (FinCEN) released guidance for banks on handling cannabis industry customers in 2014, and the number of banks serving the industry has steadily increased since then, the increased due diligence requirements for financial institutions often lead them to conclude that the reward of working with cannabis-industry clients is not worth the risk of federal action. In addition, Internal Revenue Code (IRC) Section 280E prohibits businesses from deducting otherwise ordinary business expenses from gross income tax associated with the “trafficking” of Schedule I or II substances. As a result, some retail cannabis businesses currently pay 70% or higher in income taxes. Finally, researchers who wish to study Schedule I controlled substances must obtain a Schedule I research registration with the Drug Enforcement Administration (DEA), a process that can take more than a year, and which involves navigating a whole host of complex rules and regulations.
Schedule III of the CSA, on the other hand, is reserved for substances with a lower potential for abuse, accepted medical use in treatment in the U.S., and moderate to low physical dependence or high psychological dependence. Some examples of Schedule III-controlled substances listed on the DEA’s website include products containing not more than 90 milligrams of codeine per dosage unit (e.g., Tylenol with Codeine®), buprenorphine (Suboxone®), ketamine, and anabolic steroids such as Depo®-Testosterone. Schedule III substances may be dispensed with a prescription from a licensed physician but are not available over the counter. The HHS recommendation, reportedly based on a review by the Food and Drug Administration (FDA), suggests moving cannabis to Schedule III.
The CSA states that the attorney general may, through a rulemaking proceeding, add, transfer, or remove any drug from any schedule. Such a rulemaking proceeding must be made “on the record after opportunity for a hearing pursuant to” federal administrative rulemaking procedures. After the enactment of the CSA, the attorney general delegated most of their authority under the CSA to the administrator of DEA, meaning that DEA will be responsible for the final rescheduling decision.
II. Implications of Rescheduling
It is important to note that a move to Schedule III would not legalize or decriminalize cannabis at the federal level, nor would it convert cannabis products into consumer-packaged goods that can be purchased over-the-counter at convenience stores, gas stations, or grocery stores — a prescription would be required. The move would also fail to clarify the status of state-legal recreational cannabis systems, as Schedule III substances may not be sold without a DEA registration. The rescheduling of cannabis to Schedule III would, however, have significant legal implications for researchers and industry participants.
A. Taxation Relief
One of the most immediate and significant impacts of rescheduling would be the ability of cannabis retail businesses to deduct ordinary business expenses from their federal income taxes. This change would alleviate the financial burden imposed by IRC Section 280E, providing much-needed relief to businesses that currently face exorbitant tax rates.
IRC Section 280E states that:
“No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.” (Emphasis added)
Based on the express language of IRC Section 280E, the prohibition on deducting normal business expenses applies only to those substances which appear in Schedules I and II of the CSA. While some states have taken measures to ease the tax burdens on cannabis businesses at the state level, this change at the federal level could dramatically improve the financial viability of cannabis retail businesses, some of which currently pay upward of 70% in income taxes. In practice, cultivators and manufacturers are not subject to the same restrictions under 280E, as the provision specifically focuses on the “trafficking” of controlled substances, so a move to Schedule III may not provide much relief to those portions of the industry.
B. Research Advancements
The rescheduling of cannabis to Schedule III could be a game-changer for researchers. The Schedule I classification has stifled scientific exploration of cannabis, making it challenging to study its potential benefits and risks. The shift to Schedule III could unlock new avenues of research, potentially leading to groundbreaking medical treatments and a deeper understanding of cannabinoids.
Researchers embarking on studies involving Schedule I substances must secure a DEA-issued Schedule I research registration. As noted by the National Institute on Drug Abuse (NIDA) in a 2021 report to Congress, navigating the labyrinthine process of obtaining or modifying a Schedule I research registration is an intricate and time-consuming endeavor. The researcher’s protocols are exhaustively scrutinized by several regulatory bodies, including the DEA and FDA. Many researchers have expressed concerns regarding the lack of transparency around Schedule I registration requirements and the many varied interpretations of those requirements among DEA field agents and research institutions. Moreover, some researchers may find themselves compelled to obtain a separate registration from their state licensing authority before their federal application can proceed.
The FDA undertakes a comprehensive review of Schedule I research applications submitted to the DEA, evaluating both the researcher’s qualifications and the protocol’s merits, a process which does not occur for substances in Schedules II-V. Each Schedule I substance involved in the research must be listed on the registration, specifying authorized quantities for research purposes. If any modifications are proposed, including changes in substance quantities, the amended protocol must undergo a reevaluation by both the DEA and FDA. In some cases, researchers have reported that obtaining a new registration can take more than a year.
This lengthy and convoluted regulatory landscape has been a deterrent to scientific exploration in cannabis. In 2021, the director of NIDA spoke about the challenges that researchers face when working with Schedule I substances, and stated that:
“I can testify to it. As a researcher, I always hesitate to go into doing research with Schedule I drugs. I do research in human subjects [and] it’s much more cumbersome. And this is what we hear also from our grantees, that it takes much longer to get the approval in order to initiate the research, and it’s more costly, and that actually delays everyone’s progress.”
Moving cannabis to Schedule III would alleviate the added administrative complexities of obtaining a Schedule I research registration and could accelerate the timeline for registration completion. However, researchers are still required to register with the DEA for research on Schedule II-V substances, meaning that while one layer of complexity may be removed, researchers will still need to go through DEA’s registration process.
In addition, the resources available for researchers to access cannabis for research purposes are very limited. For many years, there was only one DEA-registered supplier of cannabis in the U.S. — the University of Mississippi School of Pharmacy. Although access has increased in recent years with the DEA’s issuance of several new Schedule I supplier registrations since 2021, access for researchers remains limited to DEA-registered suppliers. Moving cannabis to Schedule III would not change that or provide researchers with the ability to automatically study cannabis that is being sold in state-legal dispensaries — that would require a separate legislative solution.
C. Access to Financial Services
As of this publication, it is unclear how a move to Schedule III might impact the industry’s access to traditional financial services. Rescheduling could encourage financial institutions to reconsider their current position on working with some plant-touching cannabis businesses, thereby easing the cash-only predicament plaguing the industry. However, financial institutions would still be required to do their due diligence to ensure that products are compliant with laws and regulations around Schedule III substances. Given the fact that financial institutions would remain liable for violations of federal anti-money laundering laws for noncompliant transactions, an independent legislative solution to provide safe harbor for financial institutions, like the SAFE Banking Act, will likely be required to incentivize mass-industry participation.
III. Potential Challenges and Controversies
While a move to Schedule III could provide some much-needed relief to researchers and industry participants, some potential challenges and controversies remain. The U.S. is, as ever, a politically divided country, and cannabis can be a particularly divisive issue. Politics will surely play a role in what a move to Schedule III might actually look like. In addition, the cannabis industry has a vast array of stakeholders, from industry players (large or small) to state and local governments and activist groups. Finding a one-size-fits-all solution is challenging at best, and while some are applauding the proposed move to Schedule III, others say it does not go far enough.
A. Timeline and Political Challenges
The road to rescheduling cannabis is rife with bureaucratic hurdles and political intricacies. The DEA must engage in administrative rulemaking and allow for public comments, a process that can span anywhere from months to several years. For example, in 2018, a DEA spokesperson considering a request from HHS to make kratom a Schedule I drug said that it could take the agency “months to years” to decide whether or not the drug’s chemicals should be placed on Schedule I. In another example, in December 2013, HHS recommended to DEA that hydrocodone be placed in Schedule II, and the final rule was issued in August 2014, effective October 2014. If these cases, and the added complexities of cannabis, offer any insight, it could be 18 months to several years before we see the DEA’s proposed cannabis rescheduling rule. In addition, DEA is not bound by HHS’s recommendation, so DEA could decide not to reschedule cannabis, or could decide to put cannabis in another schedule, like Schedule II.
Political opposition from various quarters could also slow progress. On September 5, Colorado Governor Jared Polis sent a letter to the Biden administration indicating his support for the rescheduling decision but urging the president to do more. In the letter, Polis asked President Biden to consider additional necessary steps to address issues, including access to financial services, reduced criminal penalties and disparities in enforcement, immigration-related consequences, and FDA’s enforcement discretion over state-legal cannabis products, none of which would be addressed by rescheduling alone.
Cannabis policy reform advocates, however, have been quick to point out that rescheduling cannabis to Schedule III would not fulfill President Biden’s campaign promise to decriminalize the drug at the federal level. Most importantly, advocates mention that a move to Schedule III will not address the conflict between federal and state cannabis laws, meaning the confusion in state markets will continue. These advocates would prefer complete descheduling of cannabis, rather than rescheduling, along with a more holistic approach to federal legalization that also addresses the harms to disproportionately impacted communities and equitable access in the industry.
B. Big Pharma’s Role
The move to Schedule III suggests the potential entry of pharmaceutical giants, often referred to as Big Pharma, into the cannabis industry, which presents a multifaceted set of consequences. On the positive side, their involvement could significantly accelerate cannabis research and development, harnessing their substantial financial resources and research capabilities to uncover novel medical applications and formulations. This infusion of expertise might lead to the creation of standardized, pharmaceutical-grade cannabis products, providing patients with safer and more consistent treatments. However, concerns loom over the potential for market monopolization and price control, where Big Pharma’s dominance could stifle competition, limit consumer choice, and inflate drug prices. Striking a balance between reaping the benefits of pharmaceutical innovation and safeguarding the interest of patients and smaller industry players will be a crucial challenge as the cannabis industry continues to evolve.
The HHS’s recommendation to reschedule cannabis from Schedule I to Schedule III under the CSA carries some profound implications for the cannabis industry and research community. While it is still a journey with uncertain outcomes, this step signifies progress toward a more equitable and informed approach to cannabis regulation in the U.S. As we navigate the potential challenges and opportunities that lie ahead, it is apparent that winds of change are blowing through the cannabis landscape, and stakeholders must be prepared for a dynamic and evolving future. Stay tuned to the Cannabis Communications newsletter for updates.
Our Cannabis Practice provides advice on issues related to applicable federal and state law. Marijuana remains an illegal controlled substance under federal law.
 BSA Expectations Regarding Marijuana-Related Businesses, United States Department of the Treasury Financial Crimes Enforcement Network (2014), available at https://www.fincen.gov/resources/statutes-regulations/guidance/bsa-expectations-regarding-marijuana-related-businesses
 Internal Revenue Code Section 280E: Creating an Impossible Situation for Legitimate Businesses, National Cannabis Industry Association (April 2015), available at https://thecannabisindustry.org/uploads/2015-280E-White-Paper.pdf
 Wadman, New U.S. law promises to light up marijuana research, Science (Dec. 2, 2022), available at https://www.science.org/content/article/new-u-s-law-promises-light-marijuana-research
 Crane, Drug Scheduling & Classifications (List of Schedule I-V Controlled Drugs), American Addiction Centers (2023), available at https://americanaddictioncenters.org/prescription-drugs/classifications
 21 U.S.C.A. Section 811(a)
 28 C.F.R. Section 0.100(b), pursuant to 21 U.S.C.A. Section 871(a)
 See 21 C.F.R. Section 1306.21 – Requirements for Prescribing Controlled Substances in Schedules III, IV and V
 26 U.S. Code Section 280E
 McMaster, 280E Is Harming Legal Cannabis Businesses; These States Are Legislating Change, NORML (2023), available at https://norml.org/blog/2023/06/20/280e-is-harming-legal-cannabis-businesses-these-states-are-legislating-change
 Barriers to Research with Schedule I Substances, National Institute on Drug Abuse (2021), available at https://s3.documentcloud.org/documents/21091382/fr01-nida-schedule-i-research-barriers-rtc_final-to-fc-wf-388997-_-signed.pdf
 Jaeger, Top Federal Drug Official Personally Hesitates To Study Marijuana Because Of Schedule I Research Barriers, Marijuana Moment (Dec. 2, 2021), available at https://www.marijuanamoment.net/top-federal-drug-official-personally-hesitates-to-study-marijuana-because-of-schedule-i-research-barriers/
 “For many years the DEA only authorized one grower, the University of Mississippi, which grows marijuana under contract with the National Institute on Drug Abuse.” See Marijuana Research Frequently Asked Questions, University of Mississippi, available at https://pharmacy.olemiss.edu/marijuana/
 DEA Continues to Prioritize Efforts to Expand Access to Marijuana for Research in the United States, U.S. Department of Justice Drug Enforcement Administration (May 14, 2021), available at https://www.dea.gov/stories/2021/2021-05/2021-05-14/dea-continues-prioritize-efforts-expand-access-marijuana-research; See also Marijuana Growers Information, U.S. Department of Justice Drug Enforcement Administration, Diversion Control Division, available at https://www.deadiversion.usdoj.gov/drugreg/marihuana.htm
 H.R.2891 – SAFE Banking Act of 2023, available at https://www.congress.gov/bill/118th-congress/house-bill/2891
 21 U.S.C.A. Section 811(a)
 Swetlitz, HHS recommended that the DEA make kratom a Schedule I drug, like LSD or heroin, STAT (Nov. 9, 2018) available at https://www.statnews.com/2018/11/09/hhs-recommended-dea-ban-kratom-documents-show/
 79 F.R. 49661 – Schedules of Controlled Substances: Rescheduling of Hydrocodone Combination Products From Schedule III to Schedule II, available at https://www.govinfo.gov/app/details/FR-2014-08-22/2014-19922
 Jaeger, Top Federal Health Agency Says Marijuana Should Be Moved To Schedule III In Historic Recommendation To DEA, Marijuana Moment (Aug. 30, 2023), available at https://www.marijuanamoment.net/top-federal-health-agency-says-marijuana-should-be-moved-to-schedule-iii-in-historic-recommendation-to-dea/
 Letter from Colorado Governor Jared Polis to President Joseph Biden on Cannabis Rescheduling (Sept. 5, 2023), available at https://drive.google.com/file/d/1pHf7hnCihFDamENlV97DY7ps-iOx3mst/view
 Jaeger, Lawmakers, Governor And Advocates Share Mixed Reactions To Federal Marijuana Rescheduling Recommendation From Top Health Agency, Marijuana Moment (Aug. 30, 2023), available at https://www.marijuanamoment.net/lawmakers-governor-and-advocates-share-mixed-reactions-to-federal-marijuana-rescheduling-recommendation-from-top-health-agency/