HHS Finally Recommends Rescheduling Cannabis: What Does It Mean for the Industry?
Published September 1, 2023
On August 29, the U.S. Department of Health and Human Services (HHS) sent a letter to the Drug Enforcement Administration (DEA) recommending that cannabis be rescheduled from Schedule I to Schedule III of the federal Controlled Substances Act (CSA). This is a historic and unprecedented move by the country's top health agency, which has finally acknowledged what cannabis businesses and users have long known: that cannabis has medical value and is not as dangerous as heroin or fentanyl.
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However, this recommendation is not a done deal, and it does not mean that cannabis will be legal (decriminalized and descheduled) at the federal level anytime soon. In this blog post, we will explain what rescheduling cannabis would entail, what the next steps are, and what the potential impacts are for cannabis businesses and consumers.
What is rescheduling and why does it matter?
The CSA classifies drugs into five schedules based on their potential for abuse, medical use, and safety. Schedule I drugs are considered the most harmful and have no accepted medical use, while Schedule V drugs are considered the least harmful and have widely accepted medical use. Cannabis has been classified as a Schedule I drug since 1970, along with heroin, LSD, and ecstasy. This means that the federal government considers cannabis to have no medical value and a high potential for abuse, and prohibits its production, distribution, possession, and use for any purpose.
Rescheduling cannabis would mean moving it to a lower schedule, such as Schedule III, which includes drugs like ketamine, codeine, and anabolic steroids. These drugs are considered to have moderate potential for abuse, accepted medical use, and low to moderate risk of dependence. Rescheduling cannabis would acknowledge its medical value and reduce some of the legal barriers and stigma associated with it. However, rescheduling cannabis would not make it legal at the federal level. It would still be subject to strict regulations and enforcement by the DEA and other federal agencies.
What are the next steps for rescheduling cannabis?
The HHS recommendation is not binding on the DEA or the Attorney General (AG), who have the final authority to schedule or reschedule drugs under the CSA. The DEA has to initiate a rulemaking process to consider the HHS recommendation, which includes publishing a proposed rule in the Federal Register, soliciting public comments, and issuing a final rule. The AG can then approve or reject the final rule. The whole process can take months or even years, depending on the complexity of the issue and the political will of the administration.
The DEA has not yet announced whether it will start the rulemaking process for rescheduling cannabis. However, given that President Biden requested this HHS review as part of his campaign promise to reform federal cannabis policy, it is likely that the DEA will follow through with it. The DEA has previously denied several petitions to reschedule cannabis over the years, but this time it may be different because of the HHS recommendation and the growing public support for cannabis legalization.
What are the implications for cannabis businesses and consumers?
While it be neither the cure-all for the cannabis industry's woes nor the bomb to flatten the cannabis market that some have predicted over the years, rescheduling cannabis would still send shockwaves through the cannabis industry and have significant implications its stakeholders. Here are some of the possible effects:
Taxation: Rescheduling cannabis would eliminate the application of IRC 280(e), which prevents cannabis businesses from deducting ordinary business expenses from their federal income taxes for income related to distribution of cannabis, a Schedule I drug. This would dramatically improve cannabis businesses' profitability, cash flow, and values. However, state-level taxes on cannabis would not change, unless states decide to adjust them in response to federal changes.
Regulation: Rescheduling cannabis would subject it to FDA regulation as a medication, which means that cannabis products would have to meet certain standards for quality, safety, efficacy, labeling, packaging, testing, etc. This could increase compliance costs and barriers to entry for cannabis businesses, but also enhance consumer protection and confidence.
Banking: Rescheduling cannabis would not solve the banking issues that plague the industry. Cannabis businesses would still face challenges in accessing financial services and payment processing because cannabis would still be illegal under federal law. The SAFE Banking Act or similar legislation would be needed to address these issues.
Interstate commerce: Rescheduling cannabis could potentially open up interstate commerce opportunities for cannabis businesses. Currently, state-licensed cannabis businesses can only operate within their own states due to federal prohibition. If cannabis becomes a Schedule III drug, it could be transported across state lines under certain conditions, such as having a valid prescription or registration from a licensed practitioner or facility. This could expand the market size and competition for cannabis businesses, which is a double-edged sword: While it would afford businesses an opportunity to reach a broader market, it would also allow large corporations to enter smaller markets like Maine and directly compete with state industries like Maine's which have been largely dominated by mom and pop shops.
Research: Rescheduling cannabis would facilitate research on its medical benefits and risks by making it easier for researchers to obtain licenses and access to quality-controlled cannabis products. This could lead to more scientific evidence and innovation in the field of cannabinoid medicine.
While rescheduling cannabis is not the ultimate goal of cannabis reform advocates, who prefer descheduling cannabis entirely and removing it from the CSA, it is a significant step forward that could have overall positive impacts for the industry and its consumers. We will continue to monitor the developments and provide updates as they unfold. Stay tuned!