In a boon to the cannabis industry, the federal government is reclassifying cannabis and easing federal restrictions on the drug, according to news reports.

The Drug Enforcement Administration will approve a recommendation from the Department of Health and Human Services that marijuana be reclassified from a Schedule I to a Schedule III drug. While the drug will still be illegal, it will face less-stringent regulations, easing tax restrictions and interstate commerce hurdles.

Currently, marijuana is legal in 39 states for medical use and 24 states for recreational use. Cultivating, producing and selling it remains illegal under federal law.

In New York, which passed the Marijuana Regulation and Tax Act (MRTA) in 2021, the legal market is projected to generate $2 billion annually. Any step to support legal businesses helps thwart the thriving illegal market that has been the target of enforcement activities.

In September, the U.S. Department of Health and Human Services (HHS) officially recommended cannabis be moved from a Schedule I drug to a Schedule III drug under the Controlled Substances Act. HHS conducted a scientific and medical evaluation of the drug. Marijuana has historically been listed alongside heroin and LSD as a Schedule I drug, which includes substances with a “high potential for abuse and no real medical value.” As a Schedule III drug, cannabis would be among alongside drugs like anabolic steroids, having a low risk of abuse and legitimate medical value.

The recommendation came after President Joe Biden said his administration would review the federal scheduling of marijuana, and provided a sign that the top health agency no longer considered cannabis to be a drug with high abuse potential and no medical value.

Benefits to Rescheduling Marijuana

The DEA’s rescheduling would allow the drug to be researched for medical benefits. It would also loosen several restrictions, like allowing cultivators, processors and retailers to write off ordinary business expenses on their federal tax forms – a practice that is currently prohibited and contributes to high tax rates.

The 280E provision has long been a thorn in the side of cannabis companies that operate legally in certain states, but are considered illegal operations at the federal level. As a result, cannabis companies pay taxes on gross income, rather than the significantly lower adjusted amount of income legal businesses must pay.

Cannabis operators also would be able to transport product across state lines for sale. Interstate commerce is illegal for Schedule I substances, but not Schedule III drugs can be transported across state lines with FDA approval.

It could also bring institutional investment in legal cannabis companies, improving cash flow and research and development. As word of the DEA’s action spread, stock prices for legal cannabis companies soared. The MJ PurePlay 100 Index, which tracks the industry globally, rose 22%, and the AdvisorShares Pure US Cannabis ETF surged 25%.

Banking restrictions, however, would remain in place. Cannabis companies still do not have access to traditional banking and financing services.

Other Efforts to Loosen Cannabis Restrictions Underway

For many in the industry, even rescheduling cannabis as a Schedule III drug is insufficient. Industry advocates want the drug descheduled entirely, removing it from the Controlled Substances Act and likening cannabis to alcohol.

While the move by the Drug Enforcement Agency will be open for public comment and the potential for challenge or change, there is strong public will to change marijuana laws and restrictions. According to a Pew Research poll last month, nearly six in 10 say marijuana should be legal for medical and recreational purposes.

Currently, Congress is considering several measures to help legal marijuana businesses in the estimated $34 billion market, including the SAFE Banking Act, which would allow cannabis businesses access to traditional banking and financing.

Harris Beach’s Cannabis lawyers will continue monitoring this development and other related issues. If you have questions for our Cannabis Industry Team or need help on cannabis-related matters, please reach out to attorney Meaghan T. Feenan at (518) 701-2742 and mfeenan@harrisbeach.com; attorney Heidi Schult Gregory at (585) 419-8720 and hgregory@harrisbeach.com; attorney Francis L. Gorman, III at (585) 419-8628 and flgorman@harrisbeach.com; or the Harris Beach attorney with whom you most frequently work.