Historic Recommendation by HHS to Reschedule Marijuana to Schedule III

In a momentous announcement, the U.S. Department of Health and Human Services (“HHS”) has recommended that marijuana be rescheduled from Schedule I to Schedule III under the Controlled Substances Act (the “CSA”).

Schedule I is the most restricted tier under the CSA and includes heroin and, for now, marijuana. Substances on Schedule I are those found to have no currently accepted medical value and a high potential for abuse. Schedule III substances, on the other hand, are those found to have a potential for abuse less than Schedule I or II substances and can be obtained with a prescription. Examples include ketamine and anabolic steroids. HHS says it’s time for marijuana to be moved to Schedule III.

HHS shared its conclusions and recommendation with the Drug Enforcement Administration (“DEA”), which has the ultimate authority to schedule, reschedule, or de-schedule substances under the CSA absent an act of Congress. The DEA confirmed receipt of the HHS recommendation and indicated it would now initiate its own review. President Biden directed federal agencies to review the current scheduling of marijuana under the CSA in October 2022, noting that marijuana is currently scheduled alongside heroin and LSD and on a more restrictive tier than fentanyl and methamphetamine. HHS Director Xavier Becerra had publicly stated that his department would conclude its review before the end of 2023.

This is a historic moment for advocates of marijuana reform and for those seeking an end to marijuana prohibition.

For now, however, uncertainty continues for marijuana businesses in state-legal markets. There is no timetable for the DEA to complete its review. The last time the DEA reviewed marijuana’s scheduling under the CSA, it took over two years, required input from the Food and Drug Administration, and ultimately resulted in marijuana remaining on Schedule I.

Even if the DEA reaches the same conclusion as HHS and marijuana is ultimately rescheduled as a Schedule III substance, marijuana regulated by the states will remain federally illegal. Twenty-three states have legalized adult-use marijuana. Fifteen more have legalized marijuana use only for medical purposes. Marijuana businesses in one of those states would continue to exist in limbo; they are legal and regulated by state law but federally illegal. Rescheduling may be a step toward federal decriminalization, but it is not the last stop.

Despite rescheduling marijuana to Schedule III does not amount to decriminalization, it may have tax benefits for marijuana businesses. Section 280E of the U.S. tax code prohibits deductions and credits for businesses trafficking in controlled substances, but this prohibition applies only to Schedule I and II drugs. Additionally, a change to Schedule III could result in greater access to financial services for state-legal operators, including access to more advantageous stock exchanges for publicly-traded companies.

If you have questions about how HHS’s recommendation to change marijuana to Schedule III under the CSA affects your marijuana business, please don’t hesitate to contact Keenan Jones, Tom Haren, or any other member of the Frantz Ward Cannabis Law and Policy team.