Now that the dust is starting to settle on the recent news that the U.S. Department of Health and Human Services (HHS) has recommended to the U.S. Drug Enforcement Agency (DEA) that marijuana be moved from Schedule I to Schedule III under federal law, it is important to understand the implications of rescheduling marijuana and whether descheduling marijuana would be a preferred course.

When Budding Trends’ editors first wrote about the topic, we described it as a largely political announcement, rather than a fundamental change in policy from an administration that has never truly championed marijuana reform (something we also predicted before the 2020 presidential election).

I’m not too proud to say I was wrong, and I’m not yet sure if I was. Because let’s be clear: Federal law did not change with the recommendation from HHS. There are a number of hurdles and headwinds standing between that recommendation and a change in the scheduling of marijuana. Just for example, DEA must accept the recommendation and there are treaty obligations impacted by any rescheduling of marijuana. Oh, and if a Republican wins the White House before this gets done, look out. As monumental as the HHS recommendation and recognition that marijuana has medicinal value may be, it is far from certain.

But the point of this post is not to predict whether marijuana will be rescheduled; rather, I want to discuss whether it would be better policy to reschedule or deschedule marijuana.

The Legal Distinctions Between Descheduling and Rescheduling

The consequences between descheduling marijuana and rescheduling are enormous, both legally and practically.

Let’s first discuss the framework of rescheduling marijuana. The rescheduling process is an inter-agency governmental process that normally takes years and is rife with all of the bureaucracy and intra-agency infighting and inter-agency turf battles often associated with the federal government.

In the case of rescheduling a controlled substance under the Controlled Substances Act, HHS was tasked with overseeing a medical and scientific analysis of marijuana. The department coordinated this review with the U.S. Food and Drug Administration (FDA), which considered eight factors before making a control status recommendation.

According to federal statute, these eight factors include:

1. Its actual or relative potential for abuse;
2. Scientific evidence of its pharmacological effect, if known;
3. The state of current scientific knowledge regarding drug and other substances;
4. Its history of current pattern of abuse;
5. The scope, duration and significance of abuse;
6. What, if any, risk there is to the public health;
7. Its psychic or physiological dependence liability; and
8. Whether the substance is an immediate precursor of a substance already controlled.

Once HHS makes a rescheduling recommendation, the DEA is responsible for coming up with a final decision as to whether the substance should be rescheduled.

Although the letter from HHS recommending the rescheduling has not yet been released to the public, most observers believe that HHS is recommending that marijuana be moved to Schedule III.

Banking Marijuana Businesses

It’s not entirely certain how rescheduling marijuana would affect marijuana banking, and likely the effects would depend to some degree on whether marijuana products were compliant with Schedule III regulations. Some have expressed skepticism that a move to Schedule III would open the doors of banks to marijuana operators: 

But Vince Sliwoski, an attorney with Harris Bricken, said rescheduling won’t immediately change how cannabis firms do business or expand the universe of banking partners they can choose from. 

“At Schedule III, marijuana would still be a controlled substance and state-licensed businesses would still be ‘trafficking’ in a controlled substance, contrary to federal law,” he wrote in a recent piece. “The analysis for financial institutions won’t fundamentally change.”

In any event, congressional lawmakers could still take up the SAFE Banking Act later this year, and the rescheduling development would likely be a topic of discussion. SAFE, if passed, would exempt financial institutions from liability and penalties for working with marijuana businesses acting in accordance with state law, regardless of whether they serve medical patients or all adults.

280E and the Taxman

One of the most significant impediments to the growth of marijuana operators, and dispensaries in particular, is 26 U.S.C 280E. That one-sentence provision may be the biggest hurdle to the development of the marijuana industry in the United States. It dictates 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.

280E has crippled the marijuana industry, often exacting an effective tax rate north of 60% for operators. “Within the meaning of schedule I and II of the Controlled Substances Act” is the ballgame. If marijuana is rescheduled to Schedule III, 280E would no longer apply and marijuana operations would be taxed as normal businesses – provided that Congress did not specially enact a marijuana tax.

Obviously, state tax laws may still penalize marijuana businesses akin to 280E, but some states proactively exempted licensed cannabis businesses from those impacts – like Mississippi.

Does Rescheduling Make Existing Marijuana Operations Legal?

One question that I have been asked dozens of times since the announcement of the potential rescheduling is whether rescheduling would make marijuana businesses legal under federal law. When it comes to adult use, the answer is an emphatic no. “Schedule III substances—which include ketamine, anabolic steroids and Tylenol with codeine—are still highly regulated and not permitted to be sold without a DEA license or used by consumers without a doctor’s prescription or other authorization.” When it comes to medical use, the answer is much hazier. “[M]ost states would need to overhaul their systems in order to strictly align with Schedule III restrictions.” Existing laws are a hodgepodge of rules and regulations that often do not meet the strident restrictions of the Controlled Substances Act. This would take time but, if successful, it would bring state and federal marijuana into alignment.

International Treaties

One element of DEA’s analysis will be how a Schedule III decision would play under international drug treaties.

It’s a step that might sound tedious for a country that helped put those prohibition-era agreements in place, but experts acknowledge it’s a possible bottleneck the plan would need to get through in order for HHS’s recommendation to become reality. It also has some past precedent: DEA asserted in its 2016 denial of a marijuana rescheduling petition that “in view of United States obligations under international drug control treaties, marijuana cannot be placed in a schedule less restrictive than schedule II.”

“I think it’s certainly possible and something that the industry needs to be very concerned about happening… In fact, they incorporate flexibility, so that countries like the United States can develop regulatory structures and compliance with activities that promote public health and welfare.”

It is worth noting that Canada has not yet faced sanctions under international treaty law when it legalized marijuana at the federal level in 2017.

The Practical Distinctions Between Descheduling and Rescheduling

Most current marijuana operators would strongly prefer that marijuana be descheduled as opposed to rescheduled. If marijuana was descheduled, those operators likely would be allowed to operate largely as they currently operate and in a scheme resembling that of alcohol regulation. The rules would be primarily a function of existing state laws, and presumably interstate commerce in marijuana would be legal for the first time in half a century. Also, the federal oversight that would likely exist in a new descheduled marijuana industry could bring a welcomed dose of uniformity and certainty across the country for things like advertising limits, labeling, testing requirements, and how food-related products are regulated. Maybe.

Big Pharma

As noted above, if marijuana is rescheduled such that it remains a controlled substance, marijuana companies may have to comply with much more stringent FDA rules, and physicians may still face the question of whether they are permitted to prescribe marijuana or certify patients as being eligible to use marijuana in a medical program. Given the cost of FDA compliance and the attendant costs for research, development, and testing, existing marijuana operators may find themselves priced out of the market (or find themselves as attractive candidates in the marijuana license sales market). If marijuana was listed as a Schedule III substance, it may be that marijuana will be brought to consumers courtesy of Big Pharma. Just imagine Kush Kontrol, brought to you by your friends at AstraZeneca! I can only imagine the commercials airing on primetime TV (snowboarding events seem like good opportunities).

Big Pharma’s influence over the marijuana industry, depending on who you ask, would have its pros and cons. On the upside, large pharmaceutical companies have the resources to conduct sophisticated clinical trials and develop products that are required to be safe and effective for consumers.  On the other hand – and this is the bad news for existing marijuana operators – placing the marijuana industry in the hands of pharmaceutical companies runs counter to how the industry developed and would pose a serious threat to the survival of many existing marijuana operators.

Relationship to Alcohol

Big Pharma won’t be the only major player in a descheduled or rescheduled marijuana industry. Recently, the Wine & Spirits Wholesalers of America (WSWA) released a public statement proclaiming that “the time has come for Congress to comprehensively legalize and regulate adult-use cannabis at the federal level.” In its memo, the WSWA makes the case for federal legalization and regulation by discussing what it dubs as the “Four Principles of Safe and Responsible Adult-use Cannabis Regulation.” Those four principles are:

1. The permitting of marijuana producers, importers, testing facilities, and distributors;
2. The approval and regulation of marijuana products;
3. The efficient and effective collection of federal excise tax; and
4. Effective measures to ensure public safety.

While the WSWA’s paper references a “shared state-federal regulatory structure,” its proposed model places much more of the regulatory oversight of a federally legal marijuana industry in the hands of the federal government over individual states.

And, as we discussed in a recent post, Anheuser-Busch and Tilray Brands Inc., a Canadian cannabis and consumer packaged goods company, announced Tilray’s acquisition of eight Anheuser-Busch beer and beverage brands the first week of August. Rest assured, the alcohol (and tobacco) industry is poised to jump head first into the cannabis world – especially if rescheduling occurs.

FDA Control

Others have expressed concern that a relaxation of marijuana’s controlled status could actually inadvertently upend the marijuana industry by potentially incentivizing and emboldening FDA to assume a more hands-on role with respect to marijuana, despite its largely laissez faire approach to hemp products.

If, for example, FDA is required to begin exercising the type of oversight over marijuana that it performs over existing manufacturers of controlled substances, marijuana operators are likely to face far closer scrutiny than they faced under any state regulation and be subject to far more significant operating costs than they already experience.

Advertising

A less obvious result of rescheduling is that advertisements in newspapers, magazines and other media could also more easily travel across state lines:

While not common, USPS has in the past issued warnings about marijuana mailings, noting in a 2015 letter to a congressman that the CSA prohibits placing in “any newspaper, magazine, handbill, or other publications, any written advertisement knowing that it has the purpose of seeking or offering illegally to receive, buy, or distribute a Schedule I controlled substance” as well as using U.S. mail to facilitate “the commission of any act or acts constituting a felony.” At least one newspaper subsequently pulled marijuana ads in response to a warning it received.

If marijuana were moved into Schedule III, the obstacle to mailing marijuana advertisements would disappear. (Sending actual marijuana through the mail, of course, would still be subject to tight Schedule III restrictions.)

Others have noted the impact of rescheduling on federal employees and contractors, and the distinction may prove a difference:

[T]he use of Schedule I and Schedule II drugs by federal government workers is prohibited under a 1986 executive order from then-President Ronald Reagan that established the Federal Drug-Free Workplace program. While individual agencies have adopted their own policies regarding drug use, many are rooted in the Reagan order. Because that order defines “illegal drugs” as only those in Schedules I and II, some attorneys believe rescheduling to Schedule III could lift marijuana restrictions that currently apply to all federal workers.

Other legal experts weren’t so sure. Shane Pennington, a partner at the law firm Porter Wright Morris & Arthur, cautioned that “various agencies have their own internal policies that would not necessarily change automatically as the result of cannabis being transferred to [S]chedule III.”

People who work as third-party federal contractors or grantees, however, would likely not see a policy shift as the result of rescheduling. Under federal law governing public contracts, contractors may not possess or use a “controlled substance,” defined as any drug “in schedules I through V” of the CSA.

Marijuana Research

Rescheduling would also mean sweeping changes for marijuana research, removing many of the barriers to obtaining and using marijuana for scientific investigation. A key Senate committee recently noted that the drug’s Schedule I designation means scientists face “limited access to sources” of marijuana, further hobbling research. Of course, the newish Marijuana and Cannabidiol Research Expansion Act has its own provisions and requirements specific to marijuana research that must be complied with – separate and apart from other federal statutes applicable to federal marijuana research.

Schedule III rules would also still stand in the way of researchers trying to study the marijuana available on licensed, adult-use retail markets in legal states.

Existing State Marijuana Laws

DEA putting marijuana into Schedule III of the federal CSA could nevertheless trigger changes in some state laws. That’s because, in some cases, state laws themselves follow the federal CSA.

Essentially, some states have triggering laws that make the state’s scheduling correspond with a schedule change automatically, and then others don’t… So it requires a 50-state analysis of which states do it automatically and then making sure that’s implemented. And then for states that don’t, that legislative and administrative process usually has to happen.

In other words, federal rescheduling would likely spark a cascade of changes at the state level, most related to medical marijuana.

The Political Implications of Rescheduling vs. Descheduling

Aside from the array of formal changes that rescheduling would bring about, it could also embolden lawmakers at the state and federal levels to push for further marijuana reforms. With the federal government formally acknowledging that marijuana has medical benefits and is no longer among the class of the most dangerous drugs, the move could lessen stigma toward marijuana use, especially for medical purposes.

The HHS rescheduling memo is momentous largely because, as Hauser pointed out, it represents the U.S. government recognizing that marijuana, contrary to the definition of a Schedule I substance, has “currently accepted medical use.” Though the acknowledgment comes years or decades after many patients, voters and even elected officials arrived at the same conclusion, it’s nevertheless a historic milestone. But it’s also worth keeping in perspective: The HHS recommendation on its face says essentially that marijuana ought to be classified alongside substances like ketamine and testosterone.

Oh, Marijuana Stocks Are Poppin’

Perhaps to the surprise of no one, marijuana stocks skyrocketed on the news of the potential rescheduling. These stocks, which have suffered declines of between 30% to 80% in the past couple of years, are up double digits in the past few weeks and appear ready to go even higher on the expectation that DEA will follow the lead of HHS. Picking stocks is beyond the purview of the Budding Trends blog, but the influx of money into marijuana companies offers – at least in the short term – huge potential for growth in the industry.

Conclusion

When I first wrote about the potential rescheduling of marijuana, my conclusion at that time was that “[t]here does not appear to be an appetite in Congress or in the White House to change the legal status of marijuana.” I also noted that if I was wrong, “the consequences of any change will be hugely consequential.” As I write this, I stand by both predictions. But the HHS recommendation has rightfully caused marijuana observers to at least consider the (slightly paraphrased) words of The Bard:

To reschedule or to deschedule: that is the question.

Whether ’tis nobler in the mind to suffer

The slings and arrows of outrageous fortune,

Or to take arms against a sea of troubles,

And by opposing end them?

Oh yes, Budding Trends is out here quoting Hamlet.