Update on the Legal Consequences of Rescheduling Marijuana
by Omar Figueroa & Lauren Mendelsohn
May 1, 2024
Yesterday, we wrote that the Drug Enforcement Administration is anticipated to support the reclassification of marijuana from a Schedule I to a Schedule III controlled substance. Today, the Congressional Research Service issued an updated report on the Legal Consequences of Rescheduling Marijuana. As the report noted, any “change to the status of marijuana via the DEA rulemaking process would not take effect immediately.” It is anticipated that “the proposal will be reviewed by the White House Office of Management and Budget” and subsequently be subject to extensive public comment as part of the rulemaking process. This could take months to complete.
The report elaborates on the legal consequences if marijuana is moved to Schedule III, starting with the obvious point that reclassification by itself will not automatically bring state-regulated cannabis industries into compliance with federal law:
Moving marijuana from Schedule I to Schedule III, without other legal changes, would not bring the state-legal medical or recreational marijuana industry into compliance with federal controlled substances law. With respect to medical marijuana, a key difference between placement in Schedule I and Schedule III is that substances in Schedule III have an accepted medical use and may lawfully be dispensed by prescription, while substances in Schedule I cannot. However, prescription drugs must be approved by the Food and Drug Administration (FDA). Although FDA has approved some drugs derived from or related to cannabis, marijuana itself is not an FDA-approved drug. Moreover, if one or more marijuana products obtained FDA approval, manufacturers and distributors would need to register with DEA and comply with regulatory requirements that apply to Schedule III substances in order to handle those products. Users of medical marijuana would need to obtain valid prescriptions for the substance from medical providers, subject to federal legal requirements that differ from existing state regulatory requirements for medical marijuana.
Additionally, reclassification would not affect the appropriations rider which protects the state-legal medical cannabis industry:
Rescheduling marijuana would not affect the medical marijuana appropriations rider. Thus, so long as the current rider remains in effect, participants in the state-legal medical marijuana industry who comply with state law would be shielded from federal prosecution. If the rider were to lapse or be repealed, these persons would again be subject to prosecution at the discretion of DOJ.
In particular, the Consolidated Appropriations Act of 2024, at Section 531, specifically states that, “None of the funds made available under this Act to the Department of Justice may be used, with respect to any of the States of Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin, and Wyoming, or with respect to the District of Columbia, the Commonwealth of the Northern Mariana Islands, the United States Virgin Islands, Guam, or Puerto Rico, to prevent any of them from implementing their own laws that authorize the use, distribution, possession, or cultivation of medical marijuana.” (emphasis added). This means that rescheduling would not result in a federal crackdown on medical cannabis, at least as long as the medical marijuana appropriations rider remains in effect.
By its terms, the medical marijuana appropriations rider does not apply to the adult-use cannabis industry.
With respect to the manufacture, distribution, and possession of recreational marijuana, if marijuana were moved to Schedule III, such activities would remain illegal under federal law and potentially subject to federal prosecution regardless of their status under state law.
Yet, rescheduling would result in less severe penalties under federal law once the mandatory minimums are repealed.
Some criminal penalties for CSA violations depend on the schedule in which a substance is classified. If marijuana were moved to Schedule III, applicable penalties for some offenses would be reduced. However, CSA penalties that apply to activities involving marijuana specifically, such as the quantity-based mandatory minimum sentences discussed above, would not change as a result of rescheduling. DEA is not required to set annual production quotas for Schedule III controlled substances.
It is important to keep in mind that the draconian federal mandatory minimums for cannabis are still on the books: a mandatory minimum sentence of five years in federal prison for 100 or more kilograms of cannabis or 100 or more cannabis plants, and a mandatory minimum of ten years in federal prison for 1,000 or more kilograms of cannabis or 1,000 or more cannabis plants.
Rescheduling is predicted to result in significant federal tax relief to cannabis businesses, who will be able to deduct their ordinary and usual business expenses such as rent and wages:
The prohibition on business deductions in Section 280E of the Internal Revenue Code applies to any trade or business that “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.” Because the provision applies only to activities involving substances in Schedule I or II, moving marijuana from Schedule I to Schedule III would allow marijuana businesses to deduct business expenses on federal tax filings. Other collateral legal consequences would continue to attach to unauthorized marijuana-related activities.
While cannabis remains a Schedule I controlled substance, business expenses cannot be deducted; however, as the Internal Revenue Service notes in its Cannabis Industry Frequently Asked Questions, “Section 280E does not, however, prohibit a participant in the marijuana industry from reducing its gross receipts by its properly calculated cost of goods sold to determine its gross income.”
Once cannabis is no longer a Schedule I controlled substance, Section 280E of the Internal Revenue Code will be inapplicable and complicated Cost of Goods Sold (COGS) calculations will no longer be necessary; accounting for cannabis businesses will be streamlined, cannabis businesses will be more profitable, and ancillary organizations (such as trade groups, marketing firms, advertising agencies, law firms, accountants, and consultants) will benefit from payments to said ancillary organizations qualifying as business deductions.
The updated Congressional Research Service report can be downloaded here and viewed below:
CRS Legal Consequences of Rescheduling
This information is intended as a public educational service and is not intended, nor should be construed, as legal advice. For specific questions about the reclassification of cannabis under the Controlled Substances Act (CSA), please contact the Law Offices of Omar Figueroa at 707-829-0215 or info@omarfigueroa.com to schedule a confidential legal consultation.