The Impact of Rescheduling Cannabis—Things to Prepare for Now

Published on: June 3, 2024

The proposed rescheduling of cannabis holds profound implications for the industry, affecting everything from research and taxation to banking and market dynamics.

The proposed rescheduling of cannabis from a Schedule I drug to a Schedule III drug under the Controlled Substances Act (CSA) marks a historic shift in the legal landscape surrounding cannabis (1). For the first time since the passage of the CSA in 1970, cannabis is now recognized by the United States government as having accepted medicinal use and a generally low abuse potential (2,3).

Regardless, this change holds profound implications for the industry, affecting everything from research and taxation to banking and market dynamics. While this represents significant incremental change toward fully legalizing the plant, there are many aspects to rescheduling that fall short of the ultimate goal many advocates have been fighting toward for decades—descheduling. While we wait for the lengthy process of rulemaking to solidify this move to Schedule III, it’s important that we explore the key impacts of this potential rescheduling on the cannabis industry.

1. Taxation and Financial Relief

Currently, cannabis businesses face significant financial burdens due to Section 280E of the Internal Revenue Code, which prohibits businesses dealing in Schedule I or II substances from deducting ordinary business expenses. This restriction has led to disproportionately high tax rates for cannabis businesses, sometimes up to 70% of their income.

Rescheduling cannabis to Schedule III would exempt these businesses from Section 280E, allowing them to deduct expenses such as rent, utilities, and employee salaries. This change could substantially improve the profitability and financial stability of cannabis companies, fostering growth and encouraging investment in the sector.

As Section 280E has stifled cannabis operators’ bottom line, a surprise to those outside of the industry who assumed it was abundantly profitable, this change to the tax code will finally allow businesses to invest that profit back into their companies, which could mean expanding their businesses, buying new equipment, hiring more employees, and offering more competitive wages, as just a few examples. All of these opportunities will be a boost to the overall economy.

2. Enhance Research Opportunities

Under Schedule I, cannabis is classified alongside drugs deemed to have no accepted medical use and a high potential for abuse. This classification has severely restricted research, requiring stringent approvals and compliance with numerous regulatory hurdles.

As a Schedule III substance, cannabis would be recognized for its medical utility and lower potential for abuse, similar to drugs like anabolic steroids and ketamine. Researchers will still be required to hold a Drug Enforcement Administration (DEA) Registration via Form 225, and state regulated cannabis products would not automatically be allowed for use in federal research. However, the level of controls for Schedule III substances are less stringent than Schedule I, which will lower the barriers to conduct approved research by streamlining the approval process for research studies, allowing scientists to more easily obtain cannabis for clinical trials. The resulting increase in research could lead to a better understanding of cannabis' therapeutic benefits, potential side effects, and long-term impacts, ultimately guiding safer and more effective medical use.

3. Improved Banking and Financial Services

The classification of cannabis as a Schedule I drug has made it challenging for cannabis businesses to access banking and financial services. Many banks are reluctant to serve the industry due to the legal risks and regulatory complexities involved, leading to a predominantly cash-based market which poses security and logistical challenges.

An industry with limited access to banking has posed a myriad of problems. Cannabis companies have faced complex struggles in various ways including paying their employees, sometimes in cash, as well as paying their bills to vendors, and, ironically, to the Internal Revenue Service (IRS). The public safety concerns of a cash-heavy industry also mean cannabis companies have been subject to break-ins where cash and product inventory were stolen, and in the most tragic cases, employees were injured or killed in the process.

Rescheduling to Schedule III will alleviate but not eliminate these concerns. Financial institutions are constantly evaluating the risks of the clientele. Just as a consumer with a high FICO score is viewed as less risky and can get a lower interest rate than a consumer with a low FICO score, banking a business producing a Schedule III drug is objectively less risky than one producing a Schedule I drug, all things being equal. Improved access to banking services would enhance operational efficiency, reduce security risks associated with cash handling, and enable cannabis businesses to secure loans and investments more easily.

4. Market Expansion and Investment Opportunities

With the rescheduling of cannabis, the industry could see a surge in market expansion and investment. As regulatory barriers are lowered and the stigma associated with cannabis decreases, more entrepreneurs and investors might enter the market. This influx of capital could drive innovation, expand product offerings, and improve overall market competitiveness. This will allow businesses of all sizes, big and small, the opportunity to not only survive in the marketplace but also thrive in profitability.

Moreover, mainstream pharmaceutical companies might become more involved in the cannabis market, developing new cannabis-based medications and therapies. This involvement could lead to partnerships, mergers, and acquisitions, further consolidating and legitimizing the industry.

5. Regulatory and Compliance Adjustments

While rescheduling cannabis to Schedule III brings many benefits, it also necessitates adjustments in regulatory and compliance frameworks. Rescheduling does not make cannabis an approved drug, and state businesses will still technically be operating illegally in the eyes of federal law (4). Many advocates are seeking a Cole Memo version 2.0 to provide continued certainty that there will be no disruptions in the cannabis marketplace under a Schedule III status (5). Businesses will need to be prepared to navigate any new regulations that a Cole Memo 2.0 or other guidance from federal agencies may generate, including record-keeping, reporting requirements, and potential changes in state-level regulations. The best way to protect your cannabis business is to ensure you are meeting minimum requirements by OSHA and being compliant with current Good Manufacturing Practices (cGMP) standards that are most applicable to your product type.

While we wait for Congress to address the gap between the legal status of cannabis at the State and Federal level, rescheduling is an incremental step forward towards a harmonized marketplace that will require clear guidelines (6). Collaboration between federal and state authorities, as well as industry stakeholders, will be crucial to create an interstate marketplace. The cannabis standards that exist already will most likely be the path forward for the government. ASTM International is a globally recognized standards body that has been developing cannabis cGMPs since 2017 (7). Thanks to the foresight of Congress in the 1990s, federal agencies are required to utilize such standards, rather than expending significant taxpayer dollars to create their own (8). This creates a unique opportunity for industry stakeholders to have an active role in shaping the future interstate marketplace, much like more than 90 multi-billion dollar industries have successfully done through the standards development process (9).

The reality is, we take the role of standards in our everyday life for granted—from seatbelts, bicycle helmets, to aircraft parts and more—standards are embedded in the fabric of our society. The best way to be prepared for this compliance shift is to start now in becoming compliant with minimum standards that create a cGMP compliant program within your company and demonstrating your compliance with a third-party accredited cGMP Certification company and becoming compliant with already existing OSHA standards (10,11). Being proactive is the most important thing you can do to protect your business.

6. Public Perception and Social Impact

Rescheduling cannabis will continue to positively influence public perception and social attitudes around cannabis use. Recognizing cannabis as a substance with accepted medical use will help reduce existing stigmas and encourage more people to consider its benefits for various health conditions. This shift in perception might lead to increased acceptance of cannabis in both medical and recreational contexts.

Rescheduling will not address much needed criminal justice reform, although penalties for possession would be reduced. According to a recent Pew Research Poll, 88% of Americans believe the plant should be legal for medical or adult-use purposes, and more than half agree that legalization has a positive impact on local economies (12). Decades-old stigmas about cannabis and cannabis consumers have been largely replaced by mainstream images of athletes, mothers, senior citizens, and entertainers.

Conclusion

The proposed rule to reschedule cannabis to a Schedule III drug represents a landmark change with far-reaching implications for the cannabis industry, patients, and consumers alike. From the potential for reduced barriers to research, and significant financial relief, this reclassification is a step in the right direction towards comprehensive reform and access to valuable medicine at a national level. While challenges remain in regulatory adjustments and compliance, the overall impact promises to be a positive step toward a more mature, equitable, and scientifically informed cannabis industry.

References

About the Co-Authors

Kim Stuck is the CEO and founder of Allay Consulting. Direct correspondence to: kim.stuck@allayconsulting.com.

David Vaillencourt is the founder and CEO of The GMP Collective, Chairman of the Board for S3 Collective, and Vice-Chair of ASTM International Committee D37 on Cannabis Standards.