The US Drug Enforcement Administration’s move to reclassify cannabis from a Schedule I substance to a Schedule III substance has broad implications, from paving the way for more informed research on cannabis and its effects to providing significant tax benefits for companies in the cannabis industry to opening up financial services for the cannabis industry. In this week’s Policy Deep Dive, Conduit Street examines some of the broad implications of reclassification on the cannabis industry.
Since 1971, cannabis has been in the same category as heroin, methamphetamines, and LSD under federal law. Each substance under the Schedule I classification is defined as a drug with no accepted medical use and a high potential for abuse. However, to date, adult-use cannabis is legal in 24 states, three US territories, and Washington, DC. In addition, 38 states have laws authorizing cannabis for medicinal use.
As previously reported on Conduit Street, after completing an almost year-long evaluation of cannabis’s current status as a Schedule 1 substance, the US Department of Health and Human Services this year recommended to the DEA that cannabis be moved from Schedule I to Schedule III substance. The DEA concurs with the HHS recommendations and has formally requested to reclassify cannabis under federal law.
The White House Office of Management and Budget must first review the proposal for reclassification. Following OMB’s approval, the DEA will take public comment before publishing a final rule.
Reclassifying cannabis is a step short of legalizing the drug entirely. Still, it marks a critical shift away from cannabis’s status as a Schedule I substance, which includes drugs with a high risk of abuse. Schedule III substances, like Tylenol with codeine, are seen as less dangerous and are available legally with a prescription.
Tax Implications
Maryland law allows for deductions against the State individual and corporate income tax for ordinary and necessary expenses, including a reasonable allowance for salaries or compensation paid or incurred during the taxable year in carrying on a trade or business as a licensed medical cannabis grower, processor, dispensary, or registered independent testing laboratory. Still, Maryland cannabis businesses carry a significant federal tax burden compared to other industries across the state.
Rescheduling cannabis as a Schedule III substance would place cannabis on a level playing field with other businesses regarding tax policy, as current federal law treats state-licensed cannabis businesses as drug traffickers and prohibits these businesses from claiming standard business deductions available to every other company in America. Section 280E of the Internal Revenue Code — arguably the single most significant financial drain on the cannabis industry — prohibits businesses from deducting business expenses, other than the cost of goods sold, from income if the company engages in the trafficking of Schedule I or II substances.
Accordingly, cannabis companies cannot deduct specified business expenses like rent, payroll, advertising, and other miscellaneous expenses. As a result, except for reducing gross income for certain costs, including the cost of goods sold, cannabis companies have generally been subject to federal income tax on their gross income.
More Research Opportunities
Reclassifying cannabis as a Schedule III substance could help unlock its research potential by reducing barriers, expanding opportunities, and promoting a more evidence-based understanding of its medical properties and therapeutic applications.
Currently, cannabis’s Schedule I classification under federal law poses significant barriers to research due to stringent regulations and bureaucratic hurdles. Reclassifying it to Schedule 3 would likely relax these restrictions, making it easier for researchers to obtain the required permits, licenses, and funding to conduct studies. In turn, reclassification could open the door to a broader range of research studies exploring cannabis’s potential medical benefits, safety profile, dosing regimens, and interactions with other medications.
With cannabis more accessible for research purposes, scientists could conduct more rigorous clinical trials to evaluate its efficacy in treating various medical ailments. As such, reclassification could lead to the development of new cannabis-based medications and treatment protocols, particularly for conditions where conventional therapies have been ineffective or have significant side effects.
Further, more research means more data, which could help inform healthcare professionals, policymakers, and the public about the potential risks and benefits of cannabis use, helping to guide evidence-based decision-making.
Access to Traditional Banking Services
Reclassifying cannabis could lead to greater integration of cannabis businesses into the mainstream economy, providing them with access to essential banking tools and financial services that are currently unavailable or limited. In turn, reclassification could promote the growth and legitimacy of the cannabis industry while enhancing financial transparency and regulatory compliance.
Currently, cannabis businesses face numerous hurdles in accessing traditional banking services because cannabis is illegal under federal law. Banks, fearing federal prosecution or regulatory repercussions, often refuse to provide accounts or loans to cannabis-related businesses. Reclassifying cannabis to a lower schedule could reduce the perceived risk for banks, encouraging them to offer banking services to cannabis businesses.
Additionally, cannabis businesses often operate on a cash basis because they lack access to traditional bank services, which poses security risks and logistical challenges. Opening up banking tools would allow these businesses to receive electronic payments, access lines of credit, and manage their finances more efficiently, reducing their dependence on cash transactions.
Further, the move to reclassify cannabis could lead to the availability of merchant services and payment processing solutions tailored to the needs of cannabis businesses. These services would enable businesses to accept debit and credit card payments, implement online payment systems, and track transactions more efficiently — enhancing customer convenience and improving financial transparency.
Access to banking services could also facilitate investment in the cannabis industry by providing a more secure and regulated environment for financial transactions. Accordingly, reclassification can help address concerns about diversion to the black market and ensure that cannabis businesses operate transparently and lawfully.
Maryland’s Cannabis Industry
As previously reported on Conduit Street, as of July 1, adult-use cannabis is legal under Maryland law. All existing medical dispensaries (approximately 100 locations statewide) have converted their licenses and can sell medical and adult-use cannabis products to adults 21+ with valid government identification.
In addition, the Maryland Cannabis Administration recently conducted a lottery for 174 social equity business licenses across micro and standard grower, processor, and dispensary categories. This was the first application round in the nation designated exclusively for social equity applicants across all license types and categories.
As previously reported on Conduit Street, the Maryland Cannabis Administration launched a Medical and Adult-Use Data Dashboard. The data dashboard provides site visitors with interactive maps, sales and volume figures, and graphs that allow users to explore a wide range of data formatted in aggregate sales, licensing, and patient data.
Stay tuned to Conduit Street for more information.
Click here for previous cannabis-related Conduit Street coverage.
This article is part of MACo’s Policy Deep Dive series, where expert policy analysts explore and explain the top county policy issues of the day. New articles are added weekly – read all of MACo’s Policy Deep Dives.
