U.S. Health Officials Recommend Schedule III for Cannabis

WASHINGTON – The U.S. Department of Health and Human Services (HHS) has recommended reclassifying cannabis from Schedule I to a less restrictive Schedule III under the Controlled Substances Act, following President Biden’s request last year for the Department of Justice (DOJ) and HHS to “expeditiously” reconsider the plant’s classification.

In a letter dated Aug. 29, HHS Assistant Secretary for Health Rachel Levine submitted the department’s rescheduling recommendation to Drug Enforcement Administration (DEA) Administrator Anne Milgram, according to Bloomberg News. A DEA spokesperson confirmed the department received the letter and will initiate a review. After the review is complete, the nation’s top drug enforcement agency will forward its recommendation to U.S. Attorney General Merrick Garland for action.

On Wednesday, White House Press Secretary Karine Jean-Pierre said the DOJ and HHS were working through an independent process guided by evidence.

“We’re going to let that process move forward,” said Jean-Pierre.

While there’s no formal timeline for the DEA’s review, a former FDA official believes rescheduling likely will take place during the current presidential term, which ends January 20, 2025. He does not, however, expect cannabis to be removed from the Controlled Substances Act.

“If I were a betting man, I think the most likely outcome will be Schedule III,” Howard Sklamberg, an attorney who held a variety of oversight roles at the FDA from 2010-2017, said during a Mindset Capital podcast last week. “To deschedule, it [the FDA] would basically have to say that there’s no abuse potential, and for a host of reasons, it’s just extremely unlikely to do that. I think Schedule II is also a possible outcome. If I had to rank the outcomes, I would say Schedule III is the most likely, Schedule II is the second most likely, and then the probabilities get much smaller after that.”

Schedule III drugs, which include anabolic steroids, testosterone, and ketamine, may be abused but are commonly prescribed medications. Schedule I is the most restrictive classification, containing drugs like cannabis, heroin, PCP, and crack cocaine. They carry a high risk of abuse and are not considered safe for medical use.

Moving cannabis from Schedule I to Schedule III would have a significant impact on the way the substance is treated under law and in commerce. In addition, Internal Revenue Code Section 280E no longer would bedevil the industry, as cannabis would no longer be a strictly prohibited substance.

“This action has the potential to significantly transform the landscape for all legal operators across the country,” said Matt Hawkins, founder and managing partner at Entourage Effect Capital. “The HHS recommendation to reclassify cannabis under Schedule III would remove the 280E tax burden, which currently prohibits businesses from deducting necessary business expenses on their federal tax returns.”

Nevertheless, not everyone is entirely satisfied with the potential shift.

“Moving cannabis to Schedule III could have some limited benefit but does nothing to align federal law with the thirty-eight U.S. states which have already effectively regulated cannabis for medical or adult use,” National Cannabis Industry Association Chief Executive Officer Aaron 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.”

The stock markets, on the other hand, seemed ecstatic about the news. Shares of publicly traded cannabis companies including Columbia Care Inc., Green Thumb Industries Inc., Verano Holdings Corp., Ayr Wellness Inc., and Cresco Labs Inc. soared by as much as 29 percent after the news broke Wednesday afternoon. The BI Global Cannabis Competitive Peers Index, a list of fifty-four industry stocks, was up 11 percent.

“This is a historic day, and we are cautiously optimistic for the changes this will bring to the legal cannabis industry and legalization movement,” said Poseidon Garden Ventures Managing Director Patrick Rea. “Certainly moving cannabis off Schedule I is the right decision and long overdue… With cannabis moving to Schedule III, the industry expects IRS Code 280E to no longer apply to marijuana businesses, resulting in much lower effective tax rates for businesses across the industry.”

What is a Schedule III controlled substance?

According to the DEA’s Researcher’s Manual, “Substances in this schedule [III] have a potential for abuse less than substances in Schedules I or II, have a currently accepted medical use in treatment in the United States, and abuse may lead to moderate or low physical dependence or high psychological dependence.” Examples of Schedule III substances include anabolic steroids, testosterone, ketamine, products containing moderate levels of morphine and codeine, and some products used to treat opiate addiction.