The Table is Set on Marijuana Rescheduling
On October 6, 2022, President Biden made a statement in which he asked the Secretary of Health and Human Services (HHS) and the Attorney General to review how marijuana is scheduled under federal law. In his statement, the President appeared to express disappointment that marijuana is listed in the same schedule as “drugs that are driving our overdose epidemic” (Id.). It was highly anticipated that this review would lead to the rescheduling, or even de-scheduling, of marijuana. On August 29, 2023, HHS submitted its recommendation to the Drug Enforcement Administration (DEA) that marijuana be rescheduled from Schedule I to Schedule III.
Most recently, as first reported by Punchbowl News, Michael Miller, the DEA’s lead liaison to Congress, wrote in a December 19, 2023 letter to House lawmakers that “DEA is now conducting its review,” and the DEA “has the final authority to schedule, reschedule, or deschedule a drug under the Controlled Substances Act, after considering the relevant statutory and regulatory criteria and HHS’s scientific and medical evaluation…”
Given the DEA’s most recent communication, we thought it would be helpful to provide a brief background on the scheduling of marijuana, the steps needed to effectively reschedule the substance, and its potential implications.
As you will read below, rescheduling is a complex issue and potentially can take multiple years. As evidence of this, we describe the recent rescheduling of a drug-hydrocodone combination products (HCPs). The DEA received a request to transfer HCPs from Schedule III to Schedule II in 2004 and received HHS’s original recommendation in 2008 and its re-evaluated recommendation in 2013. The DEA’s proposed rulemaking was published in February 2014 and HCPs were ultimately rescheduled in August 2014.
While we are hopeful for a more expedited process with DEA as it relates to marijuana to be rescheduled in 2024, the track record is not supportive.
Background – The Controlled Substances Act & Marijuana
Drugs may be classified into 5 schedules depending on their medical use and drug abuse potential, as determined under the Controlled Substances Act (CSA). To that end, Schedule I drugs are considered to have the highest potential for abuse and the highest potential to create severe dependence. The ascending schedule categories are considered to have progressively lower abuse potentials.
Marijuana is currently listed as a Schedule I substance under the CSA. Along with marijuana, substances categorized as falling under Schedule 1 include heroin, methaqualone, and lysergic acid diethylamide (LSD). Schedule I substances are not federally permitted for medical use. In fact, due to its status, the CSA does not allow for the manufacture, distribution, or possession of marijuana, except when used in federally-approved research studies.
Notably, Schedule I and II substances are subject to Internal Revenue Code 280E, which prohibits tax deduction or credit for any amount that is incurred in carrying on a business if it consists of “trafficking in controlled substances (within the meaning of Schedule I and II of the CSA) which is prohibited by Federal law…” (IRS Tax Code Section 280E – Expenditures In Connection With The Illegal Sale Of Drugs). This means that marijuana businesses effectively pay taxes on their entire gross income. By contrast, non-marijuana businesses may deduct certain business expenses (such as payroll, rent, marketing, and research and development expenses), thereby reducing their taxable income and overall effective tax rate.
Rescheduling a Scheduled Drug Substance
Pursuant to the CSA, there are various ways in which a substance can be added, removed, or moved to a different schedule (see 21 USC § 811 and Congressional Research Service, The Controlled Substances Act (CSA): A Legal Overview for the 118th Congress (Jan. 19, 2023)). Congress may pass legislation to place or remove a substance under control or to move its classification. This method does not require the incorporation of scientific or medical findings and is not subject to the Administrative Procedures Act. This method has been used to respond to urgent drug matters such as the addition of synthetic cathinones and certain cannabimimetic substances to Schedule I, and the placement of fentanyl analogies in Schedule I on a temporary basis.
Alternatively, DEA may make scheduling decisions through the administrative process. This is the process that the potential rescheduling of marijuana is currently undergoing. This avenue may be initiated by DEA, HHS, or any “interested party” (21 USC 811(a)). Upon receiving a scheduling petition, DEA must determine whether there are sufficient grounds for the request and, if so, pass it along to HHS to perform a scientific and medical evaluation and provide a recommendation regarding the status of the drug. Pursuant to Section 201(c) of the CSA, the eight factors to be considered in such a review are as follows:
- Its actual or relative potential for abuse.
- Scientific evidence of its pharmacological effect, if known.
- The state of current scientific knowledge regarding the drug or other substance.
- Its history and current pattern of abuse.
- The scope, duration, and significance of abuse.
- What, if any, risk there is to the public health.
- Its psychic or physiological dependence liability.
- Whether the substance is an immediate precursor of a substance already controlled under this subchapter.
HHS must present its recommendation to the DEA in writing within a “reasonable time.” Note that HHS’s scientific and medical matters are binding. Further, should HHS determine that a substance should not be listed, that decision is binding on DEA as well (21 USC 811(b)).
Once the DEA has received the HHS recommendation, it must evaluate all data and determine what the next steps should be for the substance. DEA must consider the same eight factors that HHS did in its evaluation. DEA’s scheduling decisions must then undergo the notice-and-comment rulemaking process in which the agency will accept public comments (21 USC 811(a)). Note that the traditional formal rulemaking process can take a long time to finalize. With that in mind, the Comprehensive Control Act of 1984 allows DEA to temporarily place a substance in Schedule I when needed to avoid imminent hazards to public safety.
Rescheduling Marijuana (This Time)
HHS presented DEA with its findings and recommendations on rescheduling marijuana on August 29, 2023. DEA is now reviewing that information to determine whether to reject HHS’s rescheduling petition or move forward with rescheduling. Alternatively, the DEA could request that HHS re-evaluate the substance in light of additional information and comments, as the DEA did with hydrocodone combination products (HCPs). DEA received a request to transfer HCPs from Schedule III to Schedule II in 2004 and received HHS’s original recommendation in 2008 and its re-evaluated recommendation in 2013. The DEA’s proposed rulemaking was published in February 2014 and HCPs were ultimately rescheduled in August 2014.
It is not clear how DEA will decide to move forward with marijuana rescheduling. While the agency may be facing tremendous pressure from the public, it has also historically denied rescheduling marijuana. For example, in 2016, the DEA denied a petition to reschedule marijuana from Schedule I of the CSA to Schedule II. Petitioners argued that cannabis has accepted medical use in the U.S., is safe for use under medical supervision, and has a relatively low potential for abuse when used for medical purposes. HHS opined that marijuana had a high potential for abuse, no accepted medical use, and lacked an acceptable level of safety. At the time, HHS recommended that marijuana remain on Schedule I, and DEA agreed, denying the petition and maintaining marijuana’s status as a Schedule I drug.
Since 2016, however, a number of states have permitted the use of recreational and medical marijuana. Some of those states even shared data that they had collected in the hopes of supporting marijuana reform. While many had hoped that marijuana would be removed from the CSA altogether, rescheduling marijuana to a Schedule III substance will still have tremendous benefits for the current cannabis industry – like making it easier for scientists to conduct studies and gather research, as well as removing the burden of 280E tax liabilities and allowing current state-compliant operators to deduct business expenses in the same manner as any other traditional business.
What Comes Next
While many expect that the DEA will adopt HHS’s recommendation and move marijuana to Schedule III early in 2024, it is important to remember the legal and administrative process that remains ahead if that occurs. There will be a public notice-and-comment period in which numerous arguments are likely to be presented both for and against the move. Based on public comments (or the agency’s internal review process), DEA could request a revaluation or reject the petition. Such a decision would, at a minimum, delay reclassification to Schedule III.
Despite timing concerns, the current outlook for a Schedule III classification remains more likely than not. As such, state-regulated operators should be thinking about what Schedule III means for their future. In the short term, Schedule III would mean relief from the current unfair tax burden imposed by 280E. In the long term however, a move to Schedule III will be the starting point of two very different industries: the first being an adult-use industry, producing tested cannabis products for consumption by responsible adults, assuming that the DEA allows that industry to progress and/or that the federal government creates a legal carve out to accomplish the same (either through an enforcement memo or legislation); the second being an FDA-regulated medical industry that will research and develop new prescription medications for the treatment of specific conditions overseen by licensed physicians.
This change will not happen overnight and there will be a great deal of opportunity to craft smart regulations, at both the state and federal levels, to foster the continued development of the cannabis industry while ensuring customer and patient safety. For current operators in the state-regulated cannabis space, it is worth thinking about which of these two industries (adult-use or medical) your business will fall into – as the regulatory path and business model for each will begin to change drastically after a move to Schedule III.
Husch Blackwell will continue to monitor the status of marijuana rescheduling and any communications from the agencies on this matter. In the meantime, if you have any questions, please do not hesitate to contact us.