The US Department of Justice (DOJ) has formally moved to reclassify cannabis as a less harmful Schedule III drug in a move that could have a significant economic impact on the cannabis industry.
The Attorney General has submitted a notice of proposed rulemaking which – if given final approval by Drug Enforcement Agency (DEA) – would ultimately shift marijuana to a Schedule III drug from a Schedule I drug under the Controlled Substances Act. The rescheduling of a controlled substance follows a formal process that requires notice to the public, a comment period, and an administrative hearing.
Until the new rule goes into effect, marijuana remains a Schedule I controlled substance.
If (and when) the federal reclassification does take effect, it will make it easier for cannabis operators to do business and, as a result, will likely boost further expansion of the industry. In the US alone, cannabis sales are projected to reach $71.8 billion by 2028.
While the decision would not legalize marijuana for recreational use on the federal level, the potentially historic move would recognize the medical applications of the substance and the growing public acceptance of cannabis.
Historically, cannabis was categorized under Schedule I of the Controlled Substances Act, along with heroin, fentanyl, LSD, and methamphetamines – making it a federal crime to grow, possess, or sell cannabis. In October 2022, the White House announced that it was asking the Secretary of Health and Human Services (HHS) and the Attorney General to review expeditiously how marijuana is scheduled under federal law. In August 2023, HHS recommended that marijuana be reclassified as a Schedule III drug, which means it has a lower potential for abuse, a currently accepted medical use in treatment in the US, and its abuse may lead to moderate or physical dependence or high psychological dependence.
Drugs controlled under Schedule III include products containing less than 90 milligrams of codeine per dosage unit, ketamine, and anabolic steroids.
However, the gradual public approval of cannabis has pushed several states to temper their laws on the criminal status of marijuana. According to the DEA, 38 states, the District of Columbia, and four federal territories have legalized the use of medical marijuana since 1996. Those laws permit the cultivation, sale, and use of marijuana by patients, or their caregivers, to treat certain health conditions. Additionally, several states have legalized small amounts of marijuana for recreational use as well. But the patchwork of state laws, and conflict with the federal law, has led to confusion among cannabis companies. Their operations are subject to a complicated regulatory framework that varies by state as well as by type of legalization – medicinal as opposed to recreational. Furthermore, several states levy taxes on legal purchases of marijuana, but different states resort to different taxes.
In our 2023 Cannabis Industry Report, we had examined the market expansion of the cannabis industry and stabilization occurring in the US and Canada, as well as its impact on the job market. Additionally, we explored the increase in sales of both recreational and medicinal marijuana and explained the ramifications of policy and regulatory changes.
The potential rescheduling of cannabis will make a major difference to the industry as it pertains to federal taxes. As a Schedule I substance, Section 280E of the IRS Code applied, preventing cannabis operators from taking ordinary business expense deductions. Under 280E, marijuana business owners were allowed to deduct their cost of goods sold, which is basically the cost of their inventory. What was not deductible were the normal overhead expenses, such as advertising expenses, wages and salaries, and travel expenses, among others. If marijuana becomes a Schedule III drug Section 280E would no longer apply, leveling the playing field for marijuana operators. In addition, small marijuana research companies may fall under different research protocols if the research is conducted on a Schedule III substance.
Demand for cannabis products is being spurred by those in the Gen Z and Millennial demographic who support recreational use. Older age groups, such as Gen X and Boomers, back medical marijuana usage and are slowly coming around to recreational use.
As both types of use increase, edible products and vape pens as alternatives to traditional cannabis consumption are expected to drive growth. Additionally, as personal income per capita rises, so will demand for products with consumers paying for recreational marijuana directly out of pocket.
More legislation is being considered by Congress to alleviate the financial burden placed on cannabis businesses by the federal classification of marijuana as a Schedule I drug. Among the bills being debated are the SAFER Banking Act which provides protections for federally regulated financial institutions that serve state-sanctioned marijuana businesses.
We will be staying on top of the latest industry developments and publishing these updates in our 2024 Cannabis Industry Report, due out in the month of June.
