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February 28, 2024

The Rescheduling of Cannabis

Government Scientists Speak—Will DEA Listen?

By Guilherme Ferrari Faviero and Edgar Asebey

Introduction

In August 2023, the U.S. Department of Health and Human Services (HHS) recommended to the U.S. Drug Enforcement Administration (DEA) that marijuana, also known as cannabis, should be rescheduled to Schedule III of the Controlled Substances Act (CSA). In a 252-page recommendation, HHS concluded that, based on a scientific review by the agency, cannabis is neither as risky or as prone to abuse as other Schedule I substances and that it has potential medical benefits. The importance of this recommendation cannot be overstated and represents a pivotal moment in U.S. federal drug policy.

With 38 states, three territories, and the District of Columbia (D.C.) now recognizing the medical use of cannabis products—and 24 states, alongside two territories and D.C., also legalizing it for recreational usethe landscape of cannabis regulation in the United States has greatly evolved over the past two decades. Cannabis is now the sixth largest cash crop in the country and has generated more than $15 billion of state tax revenue from legal sale. But while cannabis is now a widespread commodity that is used for lawful medical or recreational purposes in most states, it remains a “trafficked” substance at the federal level. This dichotomy exposes lawful state users, growers, distributors, and retailers to serious legal consequences, including prison and forfeiture of private property.

Administrative Rescheduling

At the federal level, cannabis is still classified as a Schedule I controlled substance under the CSA—a classification reserved for substances that have a “high potential for abuse” and “no currently acceptable medical use,” and for which there is a “lack of accepted safety for use… under medical supervision.” This places cannabis in the same category of illicit drugs such as heroin, LSD, and ecstasy. Drugs such as cocaine, oxycodone, and fentanyl, for example, are listed as Schedule II. In light of the growing body of scientific evidence recognizing the medical use of cannabis and the reduced potential for addiction than previously believed, HHS has recommended that DEA reschedule cannabis to Schedule III. Schedule III substances are substances with a moderate to low potential for physical and psychological dependence, such as ketamine, Tylenol with codeine, and anabolic steroids.

The process leading to this recommendation began in October 2022, when President Biden directed HHS and the Department of Justice (DOJ) to initiate an expedited administrative review to reassess cannabis scheduling under federal law. By the end of August 2023, HHS had completed a comprehensive scientific and medical assessment as mandated by the CSA, leading to the formal recommendation to reclassify cannabis from Schedule I to Schedule III. This is significant since it is the first time a U.S. federal agency has officially recognized that there is scientific support for medical uses of cannabis for ailments such as anorexia, pain, and nausea and vomiting related to chemotherapy. While Congress also has the authority to alter the scheduling of a drug through legislation or amendment, the administrative path represents the most realistic way forward for the rescheduling of this substance.

The comprehensive analysis by HHS, which formed the basis of its rescheduling recommendation, was revealed after a Freedom of Information Act request and subsequent lawsuit by Texas attorney Matthew Zorn, co-author of On Drugs, a popular blog about drug regulation. On January 12, 2024, in response to his lawsuit, HHS released an unredacted version of the 252-page document it had sent to the DEA recommending the rescheduling of cannabis to Schedule III. This followed an earlier release of a predominantly redacted document last December. Pursuant to the CSA, the HHS recommendation is based on the consideration of eight factors, which include (i) cannabis’ potential for abuse, (ii) known pharmacological effects, (iii) the current state of scientific knowledge, (iv) history and pattern of abuse, (v) the scope and significance of abuse, (vi) public health risks, (vii) dependence liability, and (viii) whether it is an immediate precursor of an already listed controlled substance.

HHS’s findings and conclusions, which were provided by the U.S. Food and Drug Administration (FDA) with the concurrence of the National Institute on Drug Addiction (NIDA), both agencies within HHS, have been transmitted to the DEA. DEA is now responsible for conducting its own assessment of whether to move forward with the administrative rescheduling. As an agency of the DOJ, the DEA is overseen by the U.S. Attorney General (AG). The CSA grants the AG rulemaking authority to schedule and reschedule substances. Consequently, if the AG, through the DEA, agrees that cannabis should be rescheduled, the agency will then initiate notice-and-comment rulemaking proceedings to finalize the process. Of note is that HHS recommendations are “binding on the Attorney General” as to “scientific and medical matters,” which means that the DEA is expected to abide by the recommendation of HHS. To date, there have been no documented instances where the DEA has taken a position contrary to HHS/FDA regarding a recommendation to reschedule a substance.

Ramifications of the Proposed Rescheduling

Legal

The classification of cannabis as a Schedule I substance has significant negative repercussions for individuals in states where it is legal. For example, cannabis users may face denial of access or eviction from federally assisted housing, ineligibility for immigrant and non-immigrant visas, and the forfeiture of rights to purchase or lawfully possess a firearm. Moreover, cannabis use presently impacts one’s eligibility to serve in the U.S. military or secure employment with the federal government. Moving cannabis to Schedule III is expected to alleviate many of these adverse legal consequences, especially for those who use cannabis for medical purposes.

Banking and Financing

Most cannabis businesses operate as “cash only” enterprises due to federal restrictions that limit their access to basic banking services like checking accounts, debit and credit card systems, and electronic payroll services. Conducting their operations in cash not only makes these businesses more susceptible to employee theft and outside robbery, but also complicates routine operations like payroll and tax compliance, creating additional expenses.

These complications arise from the Schedule I status of cannabis, which imposes significant legal and financial risks to cannabis-related businesses and the financial institutions that might serve them. Federal law aimed at preventing money laundering, for instance, subjects banks and their employees to potential civil and criminal liabilities if they handle proceeds from cannabis-related transactions.  Furthermore, the threat of asset forfeiture—a legal tool typically used in criminal proceedings—looms over the assets of legally operated cannabis businesses. Rescheduling cannabis to Schedule III would pave the way for cannabis businesses to access traditional banking and financial services. This is also likely to attract institutional investors that, to date, have remained out of this sector.

Taxation

Under Section 280E of the Internal Revenue Code, which targets financial activities of “drug traffickers,” businesses involved with Schedule I or II controlled substances—including state-legal cannabis operations—are likened to the illicit drug trade and are consequently prohibited from deducting ordinary business expenses:

No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act which is prohibited by Federal law or the law of any State in which such trade or business is conducted.

This provision imposes a substantial fiscal burden on cannabis businesses, which can face overall tax rates of 70% or higher because they are taxed on gross income rather than on adjusted income after deductions, as is standard for other businesses. In a 2022 report by Whitney Economics, it was reported that cannabis ventures paid $1.8 billion more in excess taxes compared to non-cannabis businesses, with projections suggesting an increase to $2.1 billion in 2023.

It is likely that the most important consequence of rescheduling will be that cannabis businesses will no longer be subject to Section 280E and will be able to deduct, for federal income tax purposes, all “ordinary and necessary” business expenses, the same as any other company. The impact of rescheduling is magnified, as most states rely on a company’s federal tax filings in order to calculate state tax liability, and rescheduling would have the additional effect of lowering state income taxes. A 2021 study of the twelve biggest U.S. cannabis companies concluded that in 2020 they paid an aggregate total $272.28 million in excess taxes attributable solely to 280E. The study concluded that this tax liability was 35.1% higher than what they would have paid if 280E did not apply.

Medical and Scientific Research

Rigorous regulatory approvals, security mandates, institutional hurdles, and drug-supply concerns associated with working with a Schedule I substance present significant challenges for researchers who work with cannabis in the United States. Currently, cannabis researchers are required to register with the DEA and adhere to stringent and expensive storage requirements. They are also highly limited as to the source and quality of the cannabis to be studied.

Navigating the complexities of this regulatory ecosystem not only requires in-depth technical knowledge but also demands a significant amount of time and financial resources, which narrows the field of scientists who are capable of conducting this kind of research. Moreover, the classification of cannabis as an illicit drug with “no accepted medical use” adversely affects the available pool of funding for its research and attaches a stigma that can discourage potential researchers from the field. Another critical issue is that the majority of funds available for cannabis research has traditionally been allocated for the study of its negative effects and misuse rather than basic science or clinical applications. This skews the pool of scientific findings and potentially leads to a biased overall perspective that overshadows potential benefits and broader applications.

The combined effect of these barriers is to unnecessarily delay rigorous scientific advancement and the development of breakthrough cannabis-based medicines and therapeutic interventions. Despite these obstacles, research in the field is increasing. Today, there is already an FDA-approved cannabis-derived therapeutic on the market, Epidiolex, which has “revolutionized the treatment” of adult and pediatric patients who suffer from certain types of seizure disorders. In addition, three synthetic cannabis-related products, Marinol and Cesamet (used to treat nausea and vomiting caused by cancer treatment) and Syndros (used to treat loss of appetite and weight loss in people living with HIV), have also been approved by the FDA to the benefit of many patients.

The full potential of cannabis research and therapeutic innovation remains largely untapped due to its restrictive Schedule I status. Although federal agencies have taken steps to address certain challenges, such as ending NIDA’s monopoly over cannabis for research (which has expanded access to diverse and high-quality strains) and providing resources for clinical study development,  these measures are not sufficiently comprehensive. Reclassifying cannabis to Schedule III would reduce or eliminate many critical regulatory barriers, increase both funding and interest in the field, and streamline the development of new therapeutic applications for cannabis and its derivatives.

The Current Political Context

Despite strong scientific support and over a quarter-century of state-level legalization experiments that support HHS’s recommendation there's significant opposition aimed at swaying the DEA’s ruling. In September 2023, Senator James Lankford (R-OK) and Representative Pete Sessions (R-TX), with 12 other GOP members, wrote to the DEA urging that cannabis remain under Schedule I. This position was echoed in a separate letter to Attorney General Merrick Garland, signed by 29 former U.S. attorneys, who argued that reclassifying cannabis would have serious adverse consequences to public health and safety. On the other side, in separate letters or statements, Congressman Steve Cohen (D-TN), Senator Kirsten Gillibrand (D-NY), and 12 current state attorneys  have urged the DEA to reclassify cannabis to Schedule III. Citing to the devastating impact that the placement of cannabis in the CSA has had on communities and its “increasingly out of step position with state law and public opinion,” 12 Democratic senators have subsequently called for the AG and the DEA to “swiftly deschedule” cannabis from the CSA altogether.

Another significant move by opponents was the House of Representatives’ decision in December 2023 to block an appropriations bill rider that was intended to shield state-legal adult-use (i.e., non-medical) cannabis programs from federal interference. Rider provisions are used to prevent the DOJ from using funds to interfere with the implementation of state cannabis laws. Notwithstanding this decision, the appropriations bill rider known as the Rohrbacher-Farr amendment, which protects state-legal medical-use programs, was successfully renewed again last December 2023, as it has been annually since 2014. Therefore, state-legal medical-use cannabis programs will remain protected by the rider, but state-legal adult-use programs may be subject to federal enforcement.

While ideological sparring appears to fuel controversy in the political spectrum, Pew Research Center reports that “an overwhelming share of U.S. adults (88%) say either that marijuana should be legal for medical and recreational use by adults (59%) or that it should be legal for medical use only (30%). This widespread support by the public often contrasts with the actions of its political representatives, as evidenced by the fact that most state cannabis laws have been enacted through ballot initiatives rather than through legislative processes at the state level. This trend can be observed in states like Ohio, which recently became the 24th state to legalize recreational cannabis, with over 57% voter approval via a ballot initiative. Similarly, in Florida, a state whose legislature has been dominated by Republicans for over twenty years, medical cannabis was approved with 71% of the vote in 2016. This state is now poised to decide on the legalization of recreational use through a ballot initiative in the upcoming election.

Conclusion

HHS’ historic recommendation that cannabis be rescheduled to Schedule III, if accepted by the DEA, will have far-reaching consequences that will permanently alter the regulatory, healthcare, and business landscape of cannabis in the United States. On behalf of HHS, the FDA evaluated “all available preclinical, clinical and epidemiological data” and concluded that cannabis currently has “accepted medical use in treatment in the United States.” It also concluded that cannabis has a “potential for abuse less than the drugs or other substances in Schedule I and II,” making the argument that this plant is erroneously classified in Schedule I. NIDA, an institute within the National Institutes of Health (NIH) whose mission is to advance scientific research on drug use and addiction, has concurred with the FDA’s conclusions. Taking a step back to recognize this historic moment, the HHS recommendation represents the first time a federal agency has validated the therapeutic value of cannabis after more than 50 years of demonization as a “gateway drug.” With the proposed rescheduling, and HHS acknowledgement of its medical utility, the United States is poised for significant changes in how cannabis is regulated, which will impact healthcare, legal frameworks, and industry practices.

Guilherme Ferrari Faviero, Esq., MS, MPH

AHF Global Public Health Institute, Miami, FL

Guilherme Ferrari Faviero, Esq., MS, MPH, is a regulatory attorney and director of the AHF Global Public Health Institute at the University of Miami. He also advises on FDA life-science matters in private practice. Mr. Faviero graduated cum laude from the University of Miami School of Law and holds two master’s degrees, in biomedical sciences and public health. He is licensed to practice in the State of California. The opinions expressed in this piece are his own and do not express the views or opinions of his employer, the AIDS Healthcare Foundation.

Edgar Asebey, Esq.

Keller Asebey Life Science Law, PLLC, Pompano Beach, FL

Edgar J. Asebey, Esq., is a founding partner of Keller Asebey Life Science Law, PLLC, and a life sciences attorney with more than 20 years of experience advising clients in the pharmaceutical, biotechnology, medical device, food, dietary supplement, cannabis, and psychedelic biotech industries on FDA and state regulatory compliance, transactional, licensing, and venture finance matters. He is a co-founder of, partner at, and regulatory and IP advisor for Iter Investments, a psychedelics venture capital fund. He currently serves as an outside advisor to Psilera Bioscience, a psychedelics biotechnology company, and is the former President and CEO of Andes Pharmaceuticals, Inc., a natural products drug discovery company. He is also the co-author of Legal Guide to the Business of Marijuana (PLI Press, 2023).

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