HHS Rescheduling, SAFER Banking Act May Change The Marijuana Landscape –

In late August 2023, the Department of Health and Human Services
(HHS) recommended rescheduling marijuana from a Schedule I
substance to a Schedule III substance under the Controlled
Substances Act (CSA), signaling the potential for drastic change in
the marijuana market. The recommendation comes seven years after
the Drug Enforcement Administration (DEA) declined to initiate rulemaking to reschedule
marijuana.

Currently, marijuana is classified as a Schedule I drug under
the CSA, defined to have no “accepted medical use and high
potential for abuse,” like lysergic acid diethylamide (LSD)
and heroin. Schedule III drugs, however, are defined as those
“with a moderate to lower potential for physical and
psychological dependence,” and include ketamine, certain
over-the-counter pain relievers and anabolic steroids. The DEA will
conduct its own review to evaluate marijuana’s safety and
proceed through the formal rulemaking process; however, under the
CSA, HHS’ recommendations “shall be binding … as to []
scientific and medical matters.”

Rescheduling marijuana would have a critical impact on medical
marijuana programs and products. If marijuana is rescheduled as a
Schedule III drug, businesses that “manufacture, distribute,
dispense, and possess medical marijuana” would be able to do
so legally under the CSA, subject to state and federal licensing
and manufacturer registration schemes. Further, such rescheduling
would render certain manufacturers subject to increased U.S. Food
and Drug Administration (FDA) oversight, including requiring
manufacturer registration and compliance with current good
manufacturing practices. The FDA likely would release additional
regulations regarding composition, labeling and advertising.
Research limitations also may decrease, which could further
encourage innovation in the industry.

Rescheduling likely would have downstream effects on marijuana
business tax burdens. Under Section 280E of the Internal Revenue Code, the
Internal Revenue Service limits tax deductions claimed by
businesses that “traffic” in Schedule I and II
substances. Marijuana businesses cannot deduct rent, utilities or
marketing expenses that other businesses are permitted to deduct.
The rescheduling of marijuana would allow producers and retailers
to “deduct the costs of selling their product for the purposes
of federal income tax filings.” Rescheduling would be a boon
to their bottom line.

Until marijuana is rescheduled, having a safe place to deposit
revenue remains a concern for marijuana businesses. Since marijuana
is still federally illegal, most commercial banks refuse to open
deposit accounts or provide financing. Seeking to reduce banking
burdens in states where marijuana is legalized, the Senate
Committee on Banking, Housing, and Urban Affairs has pushed through
an amended version of the Secure and Fair Enforcement Regulation
(SAFER) Banking Act, a bipartisan marijuana banking bill. The SAFER
Banking Act would create federal safe harbors for financial
institutions to accept deposits from state-sanctioned marijuana
business operators, potentially mitigating some dangers of running
a cash-only business and permitting banks and marijuana businesses
to grow. Although the SAFER Banking Act is now on the Senate floor,
it’s unclear whether it will become law this legislative
session, given past failures to pass similar versions of the
bill.

The federal government’s changing views on the benefits and
harms of marijuana may reinvigorate investment and growth in this
sector. Rescheduling and changes in the banking regulations are
signs that broader acceptance may present greater business
opportunities at all phases of marijuana and marijuana-related
business.

McGuireWoods attorneys are experienced in representing and
advising investors in the marijuana and marijuana-related
industry.

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