In recognition of its medical benefits, the federal government is on track to move cannabis out of the most restrictive drug category — one that includes heroin, LSD and MDMA — and into a lower one.
The Biden administration took steps in April to remove cannabis from the list of Schedule I drugs, which have a high potential for abuse and no accepted medical use. Instead, cannabis would be a Schedule III drug, along with such drugs as testosterone, anabolic steroids and Tylenol with codeine, drugs with moderate or low potential for physical and psychological dependence.
The change is still winding its way along the government’s regulatory maze and could take a few months to be finalized, according to reports.
Rescheduling would not legalize marijuana. Under Schedule III, the manufacture, distribution and possession of recreational marijuana would remain illegal under federal law and potentially subject to federal prosecution regardless of the drug’s status under state law, according to the Congressional Research Service.
Under Schedule III, state-legal medical marijuana programs like Arkansas’s would remain shielded from federal prosecution unless Congress acts to change how cannabis is treated under the law, the Congressional Research Service said.
Nate Steel, the chief compliance and government relations officer at multistate cannabis operator Good Day Farm, said the Schedule III classification won’t impact the state’s medical marijuana production. But, he said, it will have significant impacts on how the industry is taxed.
The IRS limits how cannabis businesses can deduct business expenses from their taxes. The tax prohibition stems from provision 280E of the Internal Revenue Code, requiring companies working with Schedule I or II drugs to calculate their taxes based on gross income rather than net income.
The prohibition on business expense deductions has applied to state-legal cannabis businesses like Arkansas medical marijuana dispensaries, but would not apply to businesses working with Schedule III drugs.
An analysis of 2022 taxes by cannabis research firm Whitney Economics found that cannabis businesses paid $1.8 billion more in taxes under the 280E provision than they would have if they’d been allowed the deductions. That number was expected to rise to $2.1 billion more in taxes in 2023, the report said.
In addition to changes to taxable income, Steel said, rescheduling would also ease requirements that have limited cannabis research, which has required state and federal licenses and has been highly restricted. Steel said Congress may be able to fund cannabis research under Schedule III.
Melissa Fults, a marijuana advocate with the Arkansas chapter of the National Organization for the Reform of Marijuana Laws, said she’s “thrilled” about the change and pleased with the tax implications for the industry. Some wished the change had gone farther, but Fults believes it is a move in the right direction — “the first step to either decriminalization or just legalization,” she said.
Fults said she’s hopeful that lightening the tax burden on the industry will lower the cost of medical marijuana products for patients in Arkansas. Bill Paschall, executive director of the Arkansas Cannabis Industry Association, said that’s a possibility. “If they can lower their expenses on the business side, that could be passed along to the consumers in the form of a lower price,” he said.
In addition to the practical implications of the change, the move to Schedule III will have a symbolic effect in terms of how marijuana is thought of. The federal government’s recognition of the medical uses for marijuana lends credibility to the industry and boosts the confidence of consumers in the products they are buying, he said.
“It sends a signal to [consumers] that medical marijuana is not the gateway drug they’ve been told that it is for their entire lives,” he said. “It’s something that can be managed and used properly to treat many, many maladies.”
Steel noted that a proposed constitutional amendment to expand the state medical marijuana program contains a trigger provision that would legalize cannabis for adult use in Arkansas if the federal government legalizes the drug. The change to Schedule III would not trigger the provision.
Opponents of legal marijuana are unhappy with the Biden administration’s decision. Smart Approaches to Marijuana, a national organization, said the decision was impacted by “politics and industry influence.”
“A drug isn’t medicine because it’s popular,” former White House drug policy adviser and Smart Approaches president Kevin Sabet said in a statement. Cannabis is a psychoactive drug with “many serious health and mental health consequences,” he said.
The group, which was a leading opponent of a 2022 amendment that would have legalized recreational marijuana in Arkansas, vowed to challenge the rescheduling decision during the administrative process and in court. As a public comment period on the scheduling change was reportedly set to begin in May, President Joe Biden posted a video on X, formerly known as Twitter, to promote the decision. Biden called it an “important move toward reversing long standing inequities” and said that “far too many lives have been upended because of a failed approach to marijuana.”