The cannabis industry’s hearts, and investors’ dollars, fluttered at last Wednesday’s news that the U.S. Department of Health and Human Services is recommending that cannabis be moved from Schedule I to Schedule III on the Controlled Substances Act list.
The news had been anticipated for almost a year after President Biden announced in a White House briefing that he was asking the HHS to initiate a scheduling review.
“Following the data and science, HHS has expeditiously responded to President Biden’s directive to HHS Secretary [Xavier] Becerra and provided its scheduling recommendation for marijuana to the DEA on August 29, 2023,” the HHS said in an email statement confirming the move. “This administrative process was completed in less than 11 months, reflecting this department’s collaboration and leadership to ensure that a comprehensive scientific evaluation be completed and shared expeditiously.”
However, this is just the first step of a process that will take months to play out. The ball passes to the Drug Enforcement Agency, which has to go through a rulemaking and public comment process before coming to a decision on where cannabis should sit on the schedule.
In the meantime, there is no shortage of commentary on what this could mean for the industry and for state control of the marketplace. Essentially, there is one big plus, business expense deductions. But the cannabis marketplace as it exists now in 38 states, whether for medical or adult use, will remain illegal.
No more 280E with Schedule III
U.S. Tax Code forbids businesses trafficking in Schedule I and Schedule II drugs from deducting ordinary business expenses from their income taxes. Moving cannabis to Schedule III means more operating cash for these businesses large and small.
“If cannabis goes to Schedule III, 280E no longer applies and it’s going to be a huge positive impact on cannabis companies across the U.S.,” said Andrew Hunzicker, CPA, founder of Dope CFO Certified Advisor.
Shawn Hauser, a partner with law firm Vicente LLC, agreed that one of the most significant impacts to a rescheduling would be eliminating the impact of 280E on cannabis operations.
“Businesses could take ordinary deductions and avoid significant tax penalties. I think that the crippling impact of 280E on the cannabis industry is significant,” said Hauser. “This would not only allow state-legal businesses to grow, maintain revenue and have healthy operations, but it would also help incentivize investment and incentivize more businesses to come into the market.”
Investors indeed responded jubilantly.
CRB Monitor Chief Research Officer James Francis said cannabis stocks rallied “across the board” for the second day following the news. Columbia Care jumped a whopping 74%. Canopy Growth and Curaleaf Holdings rallied 40% and 38%, respectively. Tilray Brands saw a 23% rise, and TerrAscend rose 20%.
“Remember that these prices have a long way to go to fully claw back their losses over the last two and a half years, which are in the range of negative 80% to 90% for most names,” Francis noted.
Francis said we saw a similar rally after Biden made his announcement last fall.
Still a long way to go toward progress
Francis and other industry experts noted any change still has a long way to go before the industry will realize any benefits from rescheduling cannabis. And it’s still a far cry from descheduling altogether.
Aaron Smith, CEO of the National Cannabis Industry Association, said there is no precedent for a down-scheduling of a controlled substance. He expects the DEA to “reluctantly” reschedule, but it could take at least a year, although he thinks it will likely be done before the presidential election.
Smith said that while rescheduling will be a net positive for the industry and the country, “By no means are we declaring victory here.”
He said it won’t solve the banking problem, although a few more financial institutions might be more comfortable with the risk.
TD Cowen released a policy note Thursday with the company’s insight into the rescheduling proposal, which included caution that any official change may not happen before the next election, and there is always a possibility that a new presidential administration could decide to bury it.
“This does not solve the banking or capital markets troubles for cannabis as state legalized businesses would still appear to be in violation of federal law as what they sell would not be FDA approved or federally legal” said the policy note.
“There will be businesses that fail between now and then,” Smith said.
Additionally, the change in scheduling would not likely directly allow interstate commerce, but it could embolden legal states to further test the limits of the prohibition.
“There are states like California and Colorado and Oregon already looking at things like interstate compacts, and they believe that can be done within the confines of federal enforcement priorities,” said Hauser. “So we may see further activity among legal states.”
Hunzicker cautioned that even if the DEA signs off on rescheduling, it would likely still be a while before a federal framework could be constructed and implemented to regulate medical cannabis.
“It’s still federally illegal. It’s going to be monitored by the FDA, but it’s going to be a very confusing issue,” he said. “The FDA is still trying to figure out how to monitor CBD. That’s been a huge nightmare.”
Hauser added, “There hopefully will be some sort of federal enforcement guidance that would accompany a final scheduling decision that would preserve the current enforcement status and allow the stability and success of the state markets.”
Still, Smith doesn’t expect the current enforcement landscape, or lack of it, to change. He said the last three administrations have had low priority policies, with the Trump Administration probably being better than the Obama Administration. He said cannabis taxes now support important government infrastructure, and 70% of Americans support legalization.
“If it results in a crackdown, it would be the opposite intent of the president,” Smith said.
“The only way to fully resolve the myriad of issues stemming from the federal conflict with state law is to remove cannabis from the Controlled Substances Act and regulate the product in a manner similar to alcohol,” Smith said in an NCIA statement.
Hauser also noted that a simple change in schedule would be a far cry from the social justice goals that are frequently a part of the legalization campaign — a position echoed by several cannabis justice groups including the NCIA, Drug Policy Alliance and Minority Cannabis Business Association.
“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 [President] Richard Nixon. Reclassification would continue to perpetuate a system that disproportionately affects minority communities, leaving the social justice promise of cannabis reform unfulfilled,” said leaders of the advocacy and business groups in a joint statement.
Hauser added, “A legislative framework with meaningful criminal justice reform provisions and social equity provisions needs to be where the industry goes from here.”