and Richard Blau

Recently, the Drug Enforcement Administration (DEA) took a significant step in the ongoing dialogue about marijuana regulation in the United States by publishing a Notice of Proposed Rulemaking to reschedule marijuana from a Schedule I controlled substance to Schedule III under the Controlled Substances Act (CSA). This proposed change marks a monumental shift in federal drug policy, reflecting evolving perspectives on marijuana’s medical utility and safety profile.

As part and parcel of the notice of proposed rulemaking process, the language of the proposed rule was released along with a call for public comments by the U.S. Department of Justice (DOJ). This routine procedure includes gathering facts and expert opinions on various topics, such as different forms, formulations, and delivery methods of marijuana; dosage and concentration information; data on constituents, routes of administration, and impact of Delta-9 THC potency; and the scope, duration, and significance of marijuana abuse. Additionally, stakeholders are invited to comment on the practical consequences of rescheduling marijuana to Schedule III under the relevant statutory frameworks, the economic impact of the proposed rule, and how rescheduling may impact “small entities.”

In this article, we will explore the remaining regulatory hurdles before this change can be finalized, examine the potential implications for marijuana-related businesses, and discuss other relevant developments.

Understanding the Scheduling System

The CSA classifies drugs and other substances into five schedules based on their potential for abuse, medical use, and safety or dependence liability. Currently, marijuana sits in Schedule I, a category reserved for substances with high potential for abuse, no accepted medical use, and a lack of accepted safety for use under medical supervision. Moving marijuana to Schedule III would signify recognition of its medical benefits, lower potential for abuse, and established medical application.

The Rulemaking Process and Next Steps

1. Public Comment Period: As mentioned, the notice of proposed rulemaking includes a call for public comments on various aspects of the proposed rescheduling. During this period, which lasts for 60 days, stakeholders—including researchers, healthcare professionals, public interest groups, and the general public—can submit their views, scientific evidence, and relevant information in response to the DOJs specific requests. These requests cover a range of topics, from different forms, formulations, and delivery methods of marijuana to the economic impact of the proposed rule and its effects on small entities. The current public comment period will conclude on July 22.
2. Review of Comments and Evidence: Following the public comment period, the DEA, along with the U.S. Department of Health and Human Services (HHS) and the U.S. Food and Drug Administration (FDA), will review the comments and any new scientific data submitted. This comprehensive assessment ensures that all perspectives and potential impacts are thoroughly considered.
3. Final Rule Issuance: If the DEA, in consultation with the HHS, determines that rescheduling is justified based on the evidence and public input, it will proceed with issuing a final rule. This rule will be published in the Federal Register and will include the DEA’s responses to significant comments and the rationale behind the decision.
4. Congressional Review Period: The final rule is subject to a congressional review period. During this time (generally 60 legislative days), Congress could disapprove the rule under the Congressional Review Act. If Congress does not act to overturn the rule, it will go into effect at the end of the review period.

Implications for Marijuana-Related Businesses

If the rescheduling of marijuana to Schedule III is finalized, the impact on marijuana-related businesses could be transformative, affecting several key areas:

• Research and Development: Rescheduling would ease some regulatory barriers that currently hinder research into marijuana’s medical benefits. Pharmaceutical companies and other research institutions could conduct studies more freely, potentially leading to new marijuana-based treatments and products.
• Federal Taxation: Under current law, marijuana businesses are subject to Section 280E of the Internal Revenue Code, which prohibits businesses from deducting common business expenses from gross income if their business involves trafficking in Schedule I or II substances. Such expenses include advertising, wages and salaries, and travel, to name a few. This prohibition often results in a substantial tax liability for a marijuana-related business, even if they would otherwise be operating at a loss. Moving marijuana to Schedule III would lift this restriction, allowing businesses to take these deductions and potentially increase profitability.
• Banking and Financial Services: Marijuana’s current Schedule I status creates significant challenges in accessing banking services, leading many businesses to operate on a cash-only basis. Rescheduling to Schedule III would likely mitigate some of these issues, as financial institutions would perceive less risk in serving these businesses.
• Interstate Commerce: While rescheduling could positively impact research, taxation, and banking, it is important to note that state laws regarding marijuana will still play a significant role. Interstate commerce involving marijuana will remain complex, as individual states maintain their own regulatory frameworks.
• Insurance and Investment: The reclassification could also make marijuana businesses more attractive to insurers and investors. Reduced regulatory risk and increased acceptance of marijuana-related activities could lead to more favorable insurance premiums and greater investment opportunities, fostering industry growth and innovation.

What Does This Mean for Recreational Use?

It is crucial to understand that rescheduling marijuana to Schedule III would not equate to federal legalization of recreational marijuana use. The CSA would still classify marijuana as a controlled substance, albeit under a lower schedule, which means recreational use would remain illegal at the federal level.

Implications for Legal Framework

• Federal vs. State Law: Many states have legalized marijuana for recreational use independently of federal law. Rescheduling may influence state regulations, but it will not automatically alter the legal status of recreational marijuana in states where it is not yet legal. One state where the legalization of recreational marijuana is in the spotlight is Florida, particularly with Amendment 3, the Marijuana Legalization Initiative, set to appear on the November ballot as an initiated constitutional amendment. The initiative would permit adults over the age of 21 in Florida to legally possess up to three ounces of marijuana or up to five grams of marijuana concentrate for recreational use. Additionally, existing Medical Marijuana Treatment Centers (MMTCs) would be authorized to sell marijuana to adults for personal use. Furthermore, the initiative would allow the Florida Legislature to provide by state law for the licensure of entities other than existing MMTCs to cultivate and sell marijuana products.
• Interstate Commerce: Transportation of marijuana across state lines remains illegal if it involves moving from a state where it is legal to a state where it is not.
• Possession and Use: Federal laws would still prohibit recreational use, possession, and distribution, even if not actively enforced in states with legal recreational use.

Other Recent Developments: The 2024 Farm Bill

In addition to the proposed rescheduling rule, the U.S. House Agriculture Committee released the overdue 2024 Farm Bill (the bill’s original deadline was September 30, 2023), officially named “The Farm, Food, and National Security Act of 2024.” The 2018 Farm Bill legalized hemp by authorizing its production and removing hemp and hemp seeds from the CSA. The proliferation of hemp-derived products, containing various cannabinoids like CBD and Delta-8, has become commonplace. Concerns regarding these products’ intoxicating effects have led to significant legislative scrutiny. The 2018 Farm Bill was set to expire on September 20, 2023, but was extended by the President on November 16, 2023, under the Further Continuing Appropriations and Other Extensions Act, 2024, to “allow authorized programs to continue through Sept. 30, 2024.”

During the Committee markup of the 2024 Farm Bill, an amendment offered by Rep. Mary Miller (R-IL) to change “the definition of hemp in the Agricultural Marketing Act of 1946 to only include naturally occurring naturally derived, and nonintoxicating cannabinoids” (which would essentially constitute a federal ban on all ingestible hemp products with any level of THC) was grouped en bloc with several other amendments and passed via voice vote. The bill as presently constituted passed the Committee with 33 votes for and 21 against on May 24.

The timeline and certainty of when the 2024 Farm Bill will be presented for a vote in the U.S. House remain unclear, influenced by both substantive and logistical considerations. Additionally, leaders of the U.S. Senate Committee on Agriculture, Nutrition, and Forestry have announced plans to release their draft text, which will shed more light on the obstacles that need to be navigated to achieve final passage of the 2024 Farm Bill.

Marijuana-related Businesses Should Prepare Now

The DEA’s proposal to reschedule marijuana from Schedule I to Schedule III represents a major shift in federal drug policy, with far-reaching implications for the marijuana industry. This change could lead to significant benefits, particularly in research, taxation, banking, insurance, and investment. However, businesses should remain vigilant and engaged throughout the rulemaking process to adapt to the evolving regulatory landscape.

In addition to the proposed rescheduling, the developments surrounding the 2024 Farm Bill also play a critical role in shaping the future of cannabis and hemp regulation. The 2024 Farm Bill’s impact on hemp-derived products and its potential restrictions underscore the need for informed and proactive engagement from stakeholders.

Moreover, state-level initiatives like Florida Amendment 3, the Marijuana Legalization Initiative, highlight the ongoing evolution of cannabis regulation at the local level.

These concurrent developments in federal and state regulations underline the dynamic nature of the cannabis industry. As we closely monitor these changes, marijuana-related businesses should consider consulting with legal experts to navigate the shifting regulatory environment effectively. Embracing the opportunities presented by federal rescheduling, staying informed about state initiatives like Florida Amendment 3, and preparing for the implications of the 2024 Farm Bill is crucial for future success in this evolving industry.

Brendan M. Hobbs is an associate at GrayRobinson, specializing in corporate law, federal income taxation, and the design and implementation of both qualified and non-qualified retirement plans. In addition to offering his clients tax-efficient solutions for corporate formations, mergers, acquisitions, and dissolutions, Brendan advises marijuana-related businesses on the implications of Internal Revenue Code Section 280E and the related regulations and caselaw. Before joining GrayRobinson, Brendan was a judicial law clerk on the U.S. Tax Court, gaining significant experience in IRS procedures and tax disputes.

Richard M. Blau leads the GrayRobinson Cannabis Law Team, focusing on the laws and regulations that govern the cultivation and production, processing, distribution, sale, and dispensing of medical marijuana, hemp, Cannabidiol (CBD), and related cannabis products. Richard has been rated by Chambers USA since 2007, was among the first lawyers in America to be rated Band 1 Nationwide for Cannabis Law, and is listed in Best Lawyers® in America. Richard has been involved extensively with the legalization of cannabis in Florida since its outset, with the passage of the Compassionate Medical Cannabis Act of 2014 (SB 1030) into law on June 6, 2014. Richard also has represented several investors in the cannabis industry, advising principals on compliance issues associated with Florida Medical Marijuana Treatment Center (MMTC) license acquisitions.