In a landmark announcement on April 30, 2024, the Drug Enforcement Administration (DEA) officially rescheduled cannabis from the most restrictive Schedule I category to the less restrictive Schedule III under the Controlled Substances Act (CSA). This upheld a previous recommendation from the U.S. Food and Drug Administration (FDA).
This long-awaited rescheduling reflects the shifting attitudes and evidence around the medical benefits and reduced risk profile of cannabis compared to other scheduled drugs.
Dutchie, as a co-chair of the Coalition for Cannabis Scheduling Reform (CCSR), plays a pivotal role in steering the coalition's initiatives. Under Dutchie's leadership, the CCSR launched a thought leadership campaign, assembling a broad coalition of cannabis enterprises, organizations, and experts from the scientific and legal realms, all dedicated to advocating for cannabis scheduling reform. The CCSR also conducted a poll revealing substantial public support for this reform, the results of which were presented to the Biden Administration. Furthermore, Dutchie was instrumental in rallying support from state attorneys general for the scheduling reform, and the CCSR addressed potential conflicts with U.S. obligations under international treaties.
With the reclassification of cannabis to Schedule III, cannabis businesses are no longer subject to the punitive restrictions of Internal Revenue Code Section 280E. This section denies all deductions and credits to businesses trafficking in substances listed under Schedule I or II, which barred cannabis companies from deducting standard business expenses like rent, utilities, and payroll.This severely increased their effective tax rates.
Now that cannabis has been moved to Schedule III, these businesses can take standard business deductions, significantly reducing their taxable income and lowering their effective tax rates. This alignment with the tax treatment of other legal industries allows cannabis companies to deduct ordinary business expenses, freeing up cash that can be reinvested into the business, used for expansion, or distributed to shareholders. The increased liquidity is especially crucial for the cannabis sector, a young industry ripe with growth opportunities but often tight on cash flow.
The ability to utilize the same tax deductions and credits as other industries enables cannabis companies to engage in more predictable and effective business planning. This normalization makes it easier for them to secure financing, as their financial statements become more comparable to those of non-cannabis businesses. The more favorable tax regime also encourages new companies to enter the cannabis market, driving innovation and growth within the industry. Furthermore, the ease of complying with tax laws without the harsh consequences of 280E leads to lower compliance costs and reduces the risk of legal complications.
The reclassification of cannabis to Schedule III has therefore significantly improved the economic and operational landscape for cannabis businesses, aligning their tax treatment with that of other legal industries.
One of the biggest challenges dispensaries currently face is lack of access to banking services due to cannabis' former Schedule I status. With reclassification to Schedule III, banks and other financial institutions may be more open to serving cannabis businesses. Even though federal enforcement of the Controlled Substances Act for state-licensed cannabis businesses was highly unlikely as a Schedule I drug, the move to Schedule III all but ensures financial institutions have no risk under the CSA. Federal banking access would allow dispensaries to accept credit/debit cards, get loans, and generally operate more like standard retailers.
The rescheduling could also impact the SAFE Banking Act, legislation that would protect banks from being punished for working with state-legal cannabis businesses. While rescheduling doesn't entirely remove the need for this bill, it could make members of Congress more amenable to passing SAFE Banking since cannabis is no longer classified in the most restrictive category.
Moving cannabis from Schedule I to Schedule III under the CSA is not just a regulatory adjustment—it's a shift in perspective. Schedule I drugs are classified as having no accepted medical use and a high potential for abuse, a label that has long stigmatized cannabis. Schedule III classification acknowledges its medical benefits and lower potential for abuse, enhancing the legitimacy of cannabis as a valuable health and wellness substance. This reclassification also is likely to diminish social stigma, encouraging more consumers to explore cannabis-based therapies.
By removing cannabis from Schedule I, which defined it as having "no currently accepted medical use," rescheduling will open up additional opportunities for medical research. This could pave the way for FDA-approved cannabis-based medicines and better scientific understanding of the plant's therapeutic properties. Additionally, this anticipated expansion in cannabis research is expected to spur innovation in product development within dispensaries. With the ability to substantiate health claims legally, dispensaries can differentiate their product offerings, tailor customer experiences, and enhance product quality and safety.
However, some key challenges would still remain for dispensary operators even after rescheduling. It's important to note that the rescheduling of cannabis would not necessarily legalize it at the federal level; it would still be a controlled substance subject to federal regulations. Additionally, individual states would still have the authority to maintain their own laws regarding the legality and regulation of cannabis within their borders.
While celebrating this progress, there is still more work to be done to modernize cannabis policies across the board. Dutchie will continue to advocate for the modernization and reform of our outdated cannabis laws, ensuring that cannabis dispensaries not only succeed but also prosper in this new regulatory environment. Our commitment is to pave the way for a sustainable and equitable cannabis industry, where legal frameworks support rather than hinder growth and innovation.
