Landmark Ruling: Cannabis Reclassification

The Biden administration appears poised to move forward with a recommendation from The Department of Health and Human Services (DHHS) to reclassify cannabis from a Schedule I drug to a Schedule III from October 2023. An interim rule that officially reclassifies cannabis as a Schedule III drug similar to anabolic steroids, ketamine, and testosterone, which can be obtained with a prescription, is expected in the near future.

The landmark ruling will be the first reclassification since the Controlled Substances Act was enacted more than 50 years ago. The DEA is expected to approve the DHHS opinion that it should be reclassified and submit the rescheduling proposal to the White House Office of Management and Budget.

Immediate impact for the cannabis industry

The reclassification would lead to studies on the drug to identify benefits and facilitate the sale and distribution of medical marijuana by pharmaceutical companies in states where it is legal. The rescheduling could also help shrink the black market that has fluctuated cannabis prices in all markets and hit high-taxed markets like California and New York especially hard.

Perhaps the most important result of reclassification would be the elimination of significant tax burdens for businesses in states where the drug is legal, eliminating the Internal Revenue Services code Section 280E, which currently prohibits legal cannabis companies from deducting what would otherwise be ordinary business expenses.

Once again, there is hope that an official rescheduling would create even more momentum and improve access to critical resources for the cannabis industry. Congress is said to be considering its own measures to help the cannabis industry thrive. The Secure and Fair Enforcement Regulation Banking Act (SAFER Banking Act) was introduced in September 2023 and would allow legal marijuana businesses to use major financial and banking institutions. Congress is also considering the HOPE Act, a bipartisan bill that would provide states and local governments resources to expunge criminal records for petty, non-violent cannabis offenses automatically.

The expected reclass is a welcome sight for anyone in the cannabis industry, but it may not come without legal challenges.

Overturn is possible, not likely

Once the DEA makes a formal announcement, the proposed rule would be subject to a public review period that could lead to a challenge or even a change to the rescheduling proposal. After the public comment period ends, Congress could overturn the rule under the Congressional Review Act. Even if a CRA were made, it would require two-thirds of the House and Senate to support it, and given the bipartisan support, the rescheduling would likely stand.

What would the reclassification mean for your business?

The potential reclassification could be a huge win for owners of cannabis companies, and our team of cannabis tax and accounting professionals has been following all updates related to the cannabis reclassification and other cannabis industry news in all our regional markets.

UHY has a dedicated team of cannabis tax and accounting professionals with cannabis industry experience to help companies navigate this heavily regulated and dynamic landscape. If you have questions, please fill out the form on this page to speak with a member of our National Cannabis Practice.

05/01/2024