Dept. of Health and Human Services (HHS) Recommends Rescheduling Cannabis

In late August, the U.S. Drug Enforcement Administration (DEA) confirmed it had received a recommendation from the Dept. of Health and Human Services (HHS) that marijuana be rescheduled to a Schedule III controlled substance from a Schedule I. The recommendation comes as a result from a formal review of the scheduling that was requested by President Biden in 2021. If this recommendation is adopted, it will be a game changer for the industry – pure and simple.?

According to Mara Sheldon, a Principal at Squire Patton Boggs and a member of the Advisory Board for KEY Investment Partners, the rescheduling of cannabis to Schedule III would have immediate positive impacts on the industry. First and foremost, cannabis businesses would not be subject to 280e, which Sheldon has described as a “noose around the industry’s neck.” Once the rescheduling is approved, every cannabis business would be able to take advantage of tax exemptions and other tax advantages available to every other business. Therefore, cannabis companies will no longer pay federal taxes on gross margins but will pay on net income (like most every other business in the United States). The result is that plant-touching cannabis companies currently paying 70% tax rates (or higher) will enjoy normalized tax rates under rescheduling.

The announcement that HHS had made this recommendation took many in the industry by surprise – albeit a pleasant and hopeful surprise. However, Sheldon warns that businesses should not base decisions on this recommendation alone. Although the HHS recommendation is a very positive development, cannabis rescheduling is far from a done deal. The letter with the recommendation that was delivered from HHS to the U.S. Department of Justice merely triggered the process for a review of the rescheduling to begin. Now the DEA will conduct an independent evaluation of the recommendation through a careful review process that will include opportunities for the public to comment. DEA will have the final authority but no decision will be made until this evaluation has been completed. There is no timetable or deadline and according to Sheldon the process could take as little as a few weeks or it could take many months.?

It’s important to note that any rescheduling is not “descheduling,” which would remove marijuana completely from the list of controlled substances. While moving to Schedule III would not “legalize” cannabis by any means, criminal offenses and penalties will be different and much less severe. The rescheduling has the potential to radically change the perception of marijuana, as it moves from a substance grouped with heroin to one grouped with considerably more benign substances like testosterone and Tylenol with codeine.