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It’s been 47 years since cannabis enthusiast Peter Tosh released “Legalize It,” and while the federal government seems not yet ready to do that, it may reclassify it by grouping it with less restricted drugs.
While reclassifying the substance stops short of making it legal under federal law, it would potentially remove some of the myriad hurdles cannabis retailers and growers face, including finally allowing them to write off business expenses.
High definition: Bloomberg reported the development, namely that the Department of Health and Human Services had recommended that the Drug Enforcement Administration (DEA) reclassify cannabis from a Schedule I to a Schedule III drug.
As a Schedule I substance, cannabis is considered among what the DEA calls “drugs with no currently accepted medical use and a high potential for abuse,” including heroin, LSD, and ecstasy. If reclassified as Schedule III, cannabis would join “drugs with a moderate to low potential for physical and psychological dependence,” including Tylenol with codeine, ketamine, anabolic steroids, and testosterone.
In a note to clients cited by CNBC, Roth MKM analyst Scott Fortune predicted a decision before the 2024 election and noted the DEA has followed such HHS suggestions in the past.
“Historically, the DEA has never gone against a scheduling recommendation from the HHS,” Fortune wrote.
Tax to grind: The reclassification would still classify cannabis as an illegal drug under federal law, albeit a less addictive one, so cannabis retail stores in the ~22 states where it’s legal will most likely continue to face challenges, as Retail Brew has reported, lining up banks, credit card companies, and point-of-sale systems.
But there are ways that after reclassification, fittingly, the grass will be greener. Under IRS code 280E, cannabis retailers and cultivators who sell Schedule I or II drugs cannot write off expenses like most other businesses. But—accountants, sharpen your pencils!—as a Schedule III drug, cannabis purveyors could claim write-offs.
“The removal of 280E will have a widespread material impact on the financial performance of every company in the industry, large and small, public and private,” Jeff Schultz, a cannabis industry attorney at Foley Hoag, told CNBC.
One toke over the state line: The new classification also could throw a rope (made of hemp, of course) to cannabis growers, who face a glut of supply in states including New York, California, and Oregon.
Under current law, farmers are prohibited from interstate commerce, meaning they can’t ship their oversupply to states with a smaller bounty, but if reclassified, the product could potentially cross state lines.
Brady Cobb, the founder and CEO of Florida-based Sunburn Cannabis, told Forbes that if the tax code and interstate restrictions went up in smoke, it would be good news.
“The move will…allow for interstate commerce while removing the draconian effects of section 280E of the tax code,” Cobb said.