What Would Federal Rescheduling Mean For Cannabis?

Last year brought another wave of states that legalized cannabis either for medical consumption or adult use. Most states now support legal cannabis in some form, and public opinion is strongly in favor of both legal medical and adult-use cannabis programs.?

Senate Majority Leader Chuck Schumer (D-NY) proclaimed he believes an end to the federal prohibition is finally within reach. However, outside of Congress, federal agencies are deliberating not whether cannabis should be legalized federally, but whether it should be rescheduled under the U.S. Controlled Substances Act (CSA) of 1970. But what exactly would federal rescheduling mean, and are we likely to see it anytime soon???

How did we get here??

Cannabis is considered a Schedule I substance under the CSA, meaning it is considered by the federal government to carry a “high potential for abuse, no currently accepted medical use in treatment in the United States, and a lack of accepted safety for use under medical supervision.” However, its status as a Schedule I substance is hotly debated — and currently under review.

A reconsideration of cannabis’s scheduling status began in October 2022, when President Joseph R. Biden, Jr. issued an executive order to federal health regulators, requiring them to “expeditiously” reevaluate the way the country regulates cannabis on the federal level and describing Prohibition as a “failed approach.”?

In August 2023, as part of that review, the Department of Health and Human Services (HHS) delivered a recommendation to the Drug Enforcement Agency (DEA) that they should reconsider the current classification of cannabis as a Schedule I substance. The letter, sent to Attorney General Merrick Garland and DEA Administrator Anne Milgram, advised that moving cannabis to Schedule III would “supersize” the industry by providing tax relief and further normalizing the market.

In January 2024, the DEA announced it would take HHS recommendations under advisement as the agency conducted its own review of cannabis’s current scheduling under the Controlled Substances Act. The agency noted that it held “final authority” on any rescheduling decision, not HHS or Congress. The agency is reportedly using a five criteria test to determine whether cannabis should be rescheduled.

While the DEA deliberates, the HHS released more than 250 pages explaining their rationale behind the recommendation to reschedule cannabis. Among those reasons are the fact that cannabis is currently used for medical purposes in the U.S. and has a lower potential for abuse than other drugs currently listed as Schedule I or Schedule II under the CSA.

A decision regarding cannabis’s scheduling under the Controlled Substances Act is expected from the DEA in the coming months. Until a decision is made, cannabis remains a Schedule I substance.

What would descheduling mean for cannabis businesses??

There are two potential routes that legislators could take in regard to rescheduling cannabis. Descheduling would mean removing cannabis from the list of controlled substances altogether, a process that can happen either through legislation or through the executive branch. Rescheduling, on the other hand, would mean cannabis is moved from Schedule I to a lower schedule. In the HHS recommendation, this would be Schedule III.

If either descheduling or rescheduling takes effect, perhaps the biggest impact is that IRS Section 280E would no longer apply to cannabis businesses in the U.S. Section 280E prohibits businesses that deal in Schedule I and Schedule II substances from deducting typical business expenses from gross income, which can seriously impact profitability. Descheduling or rescheduling cannabis to Schedule III would mean cannabis businesses could finally deduct normal business expenses, a matter that New York has already moved to address on the state level.?

Sen. Kirsten Gillibrand (D-NY) sent a letter to the DEA, stating that while she remains “under the strong conviction that marijuana should be descheduled entirely,” the agency should, “at a minimum,” move cannabis from Schedule I to Schedule III under the CSA.

Cannabis advocacy groups like the National Organization for the Reform of Marijuana Laws (NORML) believe that reclassifying cannabis to a lower schedule continues to misrepresent the plant’s safety relative to other controlled substances such as anabolic steroids and ketamine (Schedule III), benzodiazepines (Schedule IV), or even alcohol, which is not classified under the CSA. This is why NORML and many other advocates are pushing to deschedule cannabis entirely, providing state governments the ability to regulate cannabis as they see fit.?

How would rescheduling cannabis affect New York??

While rescheduling cannabis would help legitimize the New York cannabis industry and reduce the stigma around consumers, without federal legalization, it’s uncertain exactly how it would affect the state. Although some are hopeful that rescheduling would allow for the transportation of products across state lines, interstate commerce would remain illegal for non-FDA-approved cannabis products. In other words, regardless of rescheduling, cannabis products would need to obtain FDA approval to cross state borders.?

Rescheduling cannabis could also improve access to banking and financial services, as some institutions might feel more confident about working within the industry. However, many payment processors have suggested they won’t support cannabis transactions until federal legalization. Additional legislation may help assuage those concerns, though, and it’s something that has been on Schumer’s radar.?

What does the SAFER Banking Act have to do with descheduling cannabis??

A bipartisan piece of legislation known as the Secure and Fair Enforcement Regulation (SAFER) Banking Act could be the push the industry needs to make federal descheduling a reality, according to Schumer. The SAFER Banking Act, which passed in late September by a bipartisan majority in the Senate Banking Committee, would protect financial institutions that wish to work with cannabis retailers and give out more small business loans.?

While cannabis would remain federally illegal under the SAFER Banking Act, the law would resolve the tension between federal and state law concerning banking. Supporters of the act say that, if passed, it will have an almost immediate effect on public safety by reducing the number of burglaries that have plagued cash-heavy businesses.

Although earlier versions of the bill passed in the House seven times, they failed to make it through the Senate. Schumer plans to move the current bill, reintroduced in September 2023, forward to the Senate floor once they have enough Republican support. He did not specify a date.

Navigating the future with CWCBexpo?

The prospect of federally descheduling cannabis is not merely a shift in policy but a transformative catalyst for the entire industry. As we continue to follow changes, allow CWCBExpo to serve as your hub for staying up-to-date in New York and beyond. Stay informed, stay connected, and let’s shape the future of cannabis together!?

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