What Does the Reclassification of Marijuana Mean for the U.S. Cannabis Industry?

Last May, in a historic move which is potentially the most significant change in federal drug policy in nearly half a century, the U.S. Drug Enforcement Administration (DEA) accepted a recommendation from the U.S. Department of Health to reclassify marijuana from a Schedule I to a Schedule III controlled substance. This change would place marijuana among other Schedule III controlled substances, such as acetaminophen with codeine, ketamine, and testosterone, removing it from the Schedule I category, which includes heroin, LSD, and ecstasy.

The DEA's decision represents a major advance following last year's request from President Joe Biden and the Food and Drug Administration (FDA) for a review of how cannabis is classified, which could help Biden shore up wavering support among younger voters in an election year. However, it will take several months for this reclassification to take effect. The proposal must now be reviewed by the White House Office of Management and Budget. If accepted, it will be published in the Federal Register, initiating a 60-day public comment period. Afterwards, an administrative law judge will review the proposal, and the final rule will be published to officially enact the reclassification, making it a potentially lengthy process.

What Are the Tax Implications of this Reclassification?

While this proposal does not fully legalize marijuana at federal level (possession and/or sale of cannabis will remain illegal), cannabis will now be classified as having currently accepted medical use and a relatively low potential for abuse. However, this proposal does not change any state marijuana laws in the 24 states, two territories, and Washington D.C. (which have already legalized cannabis for adult recreational use), nor in the 38 states that allow medical use of cannabis products.

Nonetheless, the change would result in significant tax relief for businesses that grow and sell marijuana. Currently, businesses selling Schedule I substances cannot deduct business expenses such as rent, payroll, and other various expenses that other businesses can offset, resulting in an effective tax rate often exceeding 70% for cannabis companies.

With the reclassification, businesses would become eligible for significant tax deductions, saving millions of dollars in excessive taxes. The reclassification could also pave the way for cannabis companies to list on major stock exchanges, providing investment capital that could stimulate further growth.

More importantly, if marijuana is reclassified as a Schedule III narcotic, there would immediately be more opportunities for businesses to invest in research and development, making the industry more attractive to institutional investors and pharmaceutical companies. Due to marijuana's Schedule I status, it has been extremely difficult to conduct authorized clinical studies involving this substance. This has created a catch-22 situation: more research is required, but there are many barriers to conducting it, as scientists must rely on self-reports of marijuana use. Schedule III drugs are easier to study, though reclassification would not immediately remove all these barriers.

What About Banking?

Reclassification could also help normalize banking practices within the marijuana industry, providing access to loans and ending operations as a cash-only business. This could help small and minority-owned businesses continue to grow.

As many in the industry know, the SAFER Banking Act has repeatedly passed the House of Representatives but stalled in the Senate, so reclassification would open up access to deposits, insurance, and other financial services.

This would level the playing field in banking and, more importantly, allow for the acceptance of credit cards, reducing the need for large amounts of cash on hand, which makes these businesses targets for theft (as most banks are unwilling to handle cannabis business money due to legal concerns).

What Remains Unresolved?

However, the reclassification of marijuana from the Schedule I to the Schedule III category also raises potential regulatory concerns. The scope and demand for the FDA oversight of medical marijuana and related products could grow significantly, increasing the possibility that cannabis might no longer be sold through dispensaries, as regulatory agencies have strictly defined "medical use" in the United States, potentially leading to regulatory changes affecting licensing and distribution.

Reclassification does not resolve issues related to bankruptcy as an option for cannabis businesses (cannabis businesses are not currently entitled to federal bankruptcy protection), or the protection of a "fresh start" which is available to other businesses. Indeed, as long as cannabis use remains illegal at federal level, regardless of its Schedule status, cannabis companies will still be unable to comply with the reorganization requirements of bankruptcy.

Additionally, reclassification does not solve the lack of availability of federal trademark registrations for state cannabis businesses due to the federal illegality of cannabis. Since reclassifying cannabis from the Schedule I to the Schedule III category has no impact on the federal legality of cannabis, state cannabis businesses will still lack access to federal trademark protection.

What Message Does This Send to Society?

In light of this, many legalization advocates argue that reclassifying marijuana is too gradual. They want to focus on removing it entirely from the list of controlled substances, which does not include items like alcohol or tobacco (these are regulated but not in the same way).

However, any step forward like this certainly helps to normalize cannabis and shows lawmakers that there is widespread support, approaching 70% acceptance among the public. While this is certainly a different process from cannabis banking reform and other legislative actions, it absolutely sends a signal that there is widespread support for marijuana, that the federal government recognizes the medicinal benefits of cannabis, and that it should ultimately be regulated similarly to other industries, which is undoubtedly good news from any perspective. ---