Moving Marijuana To Schedule III Could Have Sweeping Impacts For Businesses, Federal Employees, Research And More

September 1, 2023 ·

If the U.S. government moves marijuana to Schedule III of the Controlled Substance Act (CSA)—as the Department of Health and Human Services (HHS) has now formally recommended—the shift could have profound implications for all sorts of cannabis-related issues, ranging from research to business taxes to U.S. Postal Service (USPS) mailing rules.

In the aftermath of the HHS announcement, some of the proposal’s would-be consequences are clearer than others. For instance, it’s evident that cannabis businesses could, for the first time, claim standard business deductions on their federal tax returns, freed from the restrictions of IRS Tax Code Section 280E. But other matters, such as what exactly the shift would mean for federal workers, are still a bit murky.

One takeaway is immediately clear: Rescheduling would not make adult-use cannabis businesses legal under federal law, regardless of whether they comply with their own state laws. Schedule III substances—which include ketamine, anabolic steroids and Tylenol with codeine—are still highly regulated and not permitted to be sold without a Drug Enforcement Administration (DEA) license or used  by consumers without a doctor’s prescription or other authorization. And while medical marijuana might become broadly legal if the change goes through, most states would need to overhaul their systems in order to strictly align with Schedule III restrictions.

On the more dire side, some observers even worry the shift could even inadvertently upend the marijuana industry by potentially incentivizing the Food and Drug Administration (FDA) to asume a more hands-on role with respect to cannabis.

At this point, nearly everyone who watches the cannabis space agrees the changes will be historic, but there are different takes on what, exactly, the change could mean various aspects of the law.

“This will have lots of effects across a wide range of activities,” Mary Cheh, a professor at George Washington University (GWU) Law School, told Marijuana Moment. “What it requires is that government officials have to take into account each and every one of them.”

Cheh cautioned the process could be a slow one. “The federal government is probably worse than state governments in terms of bureaucracy and slowness,” she said. “I think there’s probably going to be a lot of lag time, even if the government is acting appropriately.”

Taxes and Banking

Assuming businesses stay open—after all, they’ll be no more illegal federally than they currently are with marijuana in Schedule I—rescheduling would bring at least one massive win for the existing cannabis industry. The shift would allow businesses to take standard tax deductions, which they’re currently prevented from doing under 280E. The provision applies only to substances classified in schedules I and II, which means cannabis would be off the hook.

It’s less certain how such a change would affect cannabis banking, and likely the effects would depend to some degree on whether cannabis products were compliant with Schedule III regulations. In any event, congressional lawmakers could still take up the SAFE Banking Act later this year, and the rescheduling development would likely be a topic of discussion. The bill, if passed, would exempt financial institutions from liability and penalties for working with cannabis businesses acting in accordance with state law, regardless of whether they serve medical patients or all adults.

Advertising and Mailing Rules

A less obvious result of rescheduling is that advertisements in newspapers, magazines and other media could also more easily travel across state lines. While not common, USPS has in the past issued warnings about marijuana mailings, noting in a 2015 letter to a congressman that the CSA prohibits placing in “any newspaper, magazine, handbill, or other publications, any written advertisement knowing that it has the purpose of seeking or offering illegally to receive, buy, or distribute a Schedule I controlled substance” as well as using U.S. mail to facilitate “the commission of any act or acts constituting a felony.” At least one newspaper subsequently pulled marijuana ads in response to a warning it received.

If marijuana were moved into Schedule III, the obstacle to mailing cannabis advertisements would disappear. (Sending actual marijuana through the mail, of course, would still be subject to tight Schedule III restrictions.)

Federal Workers

But what about postal workers themselves—or other government employees? As it stands, the use of Schedule I and Schedule II drugs by federal government workers is prohibited under a 1986 executive order from then-President Ronald Reagan that established the Federal Drug-Free Workplace program. While individual agencies have adopted their own policies regarding drug use, many are rooted in the Reagan order.

Because that order defines “illegal drugs” as only those in Schedules I and II, some attorneys believe rescheduling to Schedule III could lift marijuana restrictions that currently apply to all federal workers.

“Given that Reagan’s EO [executive order] specifically references Schedule I-II drugs, and assuming that EO has not since been amended, I agree there would no longer be a prohibition on federal employees using marijuana,” Robert Mikos, a professor at Vanderbilt University Law School who focuses on drug law and federalism, told Marijuana Moment. He left room, however, for certain agency exceptions.

Other legal experts weren’t so sure. Shane Pennington, a partner at the law firm Porter Wright Morris & Arthur, cautioned that “various agencies have their own internal policies that would not necessarily change automatically as the result of cannabis being transferred to schedule III.”

“Unless and until they change, I’d hesitate to advise any particular federal employee to whom they apply to ignore them—even if they were based on the Reagan-era EO,” he said in an email.

Still, Pennington speculated that rescheduling would prompt significant changes. “If a particular agency’s policy is based on an EO that no longer applies to cannabis post-scheduling,” he said, “I think it’s reasonable to assume that the agency will eventually change the policy post-rescheduling.”

Cheh, at GWU Law, noted that agencies can still prohibit alcohol use by employees, at least while on the job. She doubted that federal agencies would be compelled to change their marijuana policies to allow broad use merely as the result of rescheduling. “They’re behaving as an employer and not as a government per se,” she said. “Employers of all kinds are allowed to have reasonable limitations on what their employees do.”

People who work as third-party federal contractors or grantees, however, would likely not see a policy shift as the result of rescheduling. Under federal law governing public contracts, contractors may not possess or use a “controlled substance,” defined as any drug “in schedules I through V” of the CSA.


Rescheduling would also mean sweeping changes for cannabis research, removing many of the barriers to obtaining and using cannabis for scientific investigation. A key Senate committee recently noted that the drug’s Schedule I designation means scientists face “limited access to sources” of marijuana, further hobbling research.

The committee also expressed appreciation to the National Institute on Drug Abuse (NIDA) for completing a report that outlines study obstacles posed by the scheduling complications.

Nora Volkow, NIDA’s director, raised her own concerns about Schedule I research barriers in an opinion piece about psychedelics that was published by the American Medical Association. As for marijuana, Volkow said in 2021, she personally hesitates to study the substance because of its Schedule I status.

But obstacles aren’t necessarily over for researchers if marijuana’s moved to Schedule III.

Shawn Hauser, the attorney who co-chairs cannabis-focused law firm Vicente LLP’s hemp and cannabinoids department, warned that procedural hurdles at DEA might still bog down the research process, even if regulatory requirements were eased slightly.

“Research is still very limited by the DEA’s ability to not proceed with licensure, no matter what the schedule,” Hauser said. “It’s not necessarily the schedule; it’s the DEA’s process.”

Schedule III rules would also still stand in the way of researchers trying to study the cannabis available on licensed, adult-use retail markets in legal states.

State Cannabis Laws

As the past decade has shown, state and federal cannabis laws often say two very different things. But DEA putting marijuana into Schedule III of the federal CSA could nevertheless trigger changes in state laws. That’s because, in some cases, state laws themselves follow the federal CSA.

“Essentially, some states have triggering laws that make the state’s scheduling correspond with a schedule change automatically, and then others don’t,” explained Hauser at Vicente. “So it requires a 50-state analysis of which states do it automatically and then making sure that’s implemented. And then for states that don’t, that legislative and administrative process usually has to happen.” She likened the process to the one seen after FDA approved Epidiolex, a purified version of the cannabinoid CBD.

In other words, federal rescheduling would likely spark a cascade of changes at the state level, most related to medical marijuana.

One state-level matter that could become relevant on the West Coast is how the federal government’s shifting posture on cannabis might change the math on interstate trade. CaliforniaWashington and Oregon have all adopted laws that, under certain conditions, allow the states to enter into agreements to allow marijuana commerce across state lines. Washington’s and Oregon’s laws both require a change at the federal level that would allow such cross-border trade—which, in appropriately regulated medical contexts, rescheduling might be.

Under California’s policy, however, the state attorney general could also trigger the implementation regardless of federal considerations. In January, state regulators requested that Attorney General Rob Bonta (D) prepare that guidance.

Political Implications

Aside from the array of formal changes that rescheduling would bring about, it could also embolden lawmakers at the state and federal levels to push for further marijuana reforms. With the federal government formally acknowledging that cannabis has medical benefits and is no longer among the class of the most dangerous drugs, the move could lessen stigma toward marijuana use, especially for medical purposes.

The HHS rescheduling memo is momentous largely because, as Hauser pointed out, it represents the U.S. government recognizing that cannabis, contrary to the definition of a Schedule I substance, has “currently accepted medical use.” Though the acknowledgment comes years or decades after many patients, voters and even elected officials arrived at the same conclusion, it’s nevertheless a historic milestone. But it’s also worth keeping in perspective: The HHS recommendation on its face says essentially that marijuana ought to be classified alongside substances like ketamine and testosterone.

International Treaties

The next step of the rescheduling process is an evaluation by DEA, not historically a friend of cannabis reform. And one element of the agency’s analysis will be how a Schedule III decision would play under international drug treaties.

It’s a step that might sound tedious for a country that helped put those prohibition-era agreements in place, but experts acknowledge it’s a possible bottleneck the plan would need to get through in order for HHS’s recommendation to become reality. It also has some past precedent: DEA asserted in its 2016 denial of a marijuana rescheduling petition that “in view of United States obligations under international drug control treaties, marijuana cannot be placed in a schedule less restrictive than schedule II.”

“I think it’s certainly possible and something that the industry needs to be very concerned about happening,” Hauser said of the possibility DEA might repeat its 2016 refrain. But she insisted that there’s an winning argument that the treaties don’t actually bar a Schedule III classification. “In fact, they incorporate flexibility, so that countries like the United States can develop regulatory structures and compliance with activities that promote public health and welfare.”

Asked whether other countries, such as Canada, have suffered sanctions as the result of legalizing marijuana nationally, Hauser replied: “No. You know, there’s been debate and discussion, but there’s been no real impact.”

Wednesday’s rescheduling recommendation from HHS is an early step in the rescheduling process—and it’s nonbinding. DEA has the final say, and that agency is now tasked with determining how to proceed.

What Rescheduling Would Not Do

Moving marijuana to Schedule III would not broadly legalize, or even merely decriminalize the drug—a key campaign pledge that Joe Biden made when running for president. As such, several drug policy reform groups say the step doesn’t go far enough.

The Drug Policy Alliance, Minority Cannabis Business Association, National Cannabis Industry Association, Parabola Center for Law and Policy, Better Organizing to Win Legalization/BOWL PAC, Students for Sensible Drug Policy and Marijuana Justice released a joint statement on Thursday pointing out what they see as Schedule III’s shortcomings:

“While our organizations acknowledge that HHS’s recommendation will appear as a step forward, it would fail to decriminalize cannabis, lawfully permit the existence of the medical and adult-use programs and businesses that now operate in 38 states, or rectify decades of injustice associated with more than 25 million arrests and related collateral consequences since the creation of the CSA by Richard Nixon. Reclassification would continue to perpetuate a system that disproportionately affects minority communities, leaving the social justice promise of cannabis reform unfulfilled.”

“Rescheduling marijuana will not release anyone currently incarcerated for a marijuana conviction or expunge any marijuana-related records,” reads a fact sheet distributed by the groups. “Nor would it address the immigration related consequences which are a leading cause of deportation of immigrants to the U.S. or restore eligibility for public benefits such as housing and nutritional assistance for people with marijuana convictions.”

“Rescheduling marijuana does not qualify as the Biden Administration keeping its campaign promise to decriminalize marijuana,” they said.

As for the White House itself, a spokesperson told Marijuana Moment on Wednesday that the “administrative process is an independent process led by HHS and DOJ and guided by the evidence.” Biden’s team did not comment on the agency’s recommendation itself.

But dozens of other elected officials, advocates and even cannabis prohibitionists have since weighed in. Reactions were mixed: Many were encouraged by the improved prospects for cannabis research and the ability to make federal tax deductions, but others said Schedule III could in fact have negative implications for the industry, as cannabis itself would remain federally illegal, potentially allowed only for narrow purposes.

The new HHS rescheduling recommendation was predicted by a former FDA official who chaired the agency’s Marijuana Working Group. Even if rescheduling occurs, he said he thinks its unlikely FDA would approach marijuana any differently than it does today.

Howard Sklamberg, who previously served as chair of FDA’s Marijuana Working Group from 2014 to 2017, noted that FDA and the Justice Department have taken a hands-off approach to the legalization movement even as cannabis is considered a Schedule I drug. It “defies logic,” he said, to think the agencies would suddenly enforce criminalization if it’s moved to a less restrictive category.” (Full Story)

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