After 54 Years, DEA Finally Admits Marijuana has Medical Value: What Does It Mean for the Gray Market Cannabis Industry?
Since the passage of the Controlled Substances Act (CSA) in 1970, marijuana has been federally classified as a Schedule I drug, meaning it has “a high potential for abuse,” “no currently accepted medical use,” and “a lack of accepted safety for use”—and provided for. (Marijuana is legally defined as cannabis with no or negligible amounts of THC, its main psychoactive ingredient.) Notwithstanding this prohibition and accompanying severe felony penalties for its cultivation and sale, many states have allowed medical marijuana industries (starting with California in 1996) and recreational marijuana industries (starting with Washington and Colorado in 2012) to flourish. Today, about half of U.S. states have legalized recreational marijuana sales and about 75% of them have medical marijuana sales—with an estimated market value of nearly $43 billion in 2024.
On May 16, 2024, the U.S. Drug Enforcement Agency formally proposed a new rule that would transfer marijuana from Schedule I to Schedule III, recognizing its “currently acceptable medical use” and lower potential for abuse and physical dependence—and essentially proposing to legalize medical marijuana. This proposal followed an August 29, 2023, rescheduling recommendation from the U.S. Department of Health and Human Services (“HHS”).
Even before this expected rescheduling surrenders ground in the federal government’s longstanding war on marijuana, the industry has already been impacted. Indeed, publicly traded cannabis stocks jumped after both the HHS recommendation and the DEA’s formal announcement. The next industry impacts will be felt after the rescheduling becomes the law of that land. Another stock bump is likely, but the greater effect of the scheduling will be related to federal taxes that have hindered in the gray market industry to date. As a schedule I drug, marijuana commerce is subject to 26 USC § 280E, a provision of the tax code that forbids cannabis companies from claiming tax deductions for most business expenses other than COGS. To date, this provision has substantially reduced after-tax profit for state-legal cannabis businesses and effectively required extensive tax-planning to ensure that high revenue translates to actual profit. This onerous tax provision, however, does not apply to Schedule III drugs—even as applied to non-medical, recreational use. So, if the rescheduling occurs before the end of the year, 2024 is likely to be a more profitable year for most of the industry. Additionally, the rescheduling of marijuana should immediately remove many of the roadblocks that have hampered medical and scientific research into the drug for decades, which may, in turn, entice large pharmaceutical companies to invest in and enter the space.
Beyond this near term impact, it is unclear exactly how the cannabis industry will be affected. While marijuana may be federally legal for medical use as a Schedule III drug, the CSA contemplates that such controlled drug will be distributed by DEA-regulated pharmacies as prescribed by doctors; currently, state-legal medical marijuana is distributed by state-regulated dispensaries to patients that are certified to have a particular medical condition or that have a recommendation from a doctor. Accordingly, it is an open question as to how or if the proposed rescheduling will impact how medical marijuana is provided to patients. Relatedly, it is unclear how the rescheduling may impact marijuana-related banking, which poses legal and financial risks that have, to date, caused most large banking firms to avoid this industry.
While the scope of the full effect of marijuana’s rescheduling remains hazy, one thing is clear: For those working in or around the cannabis industry—or investing in it—the DEA’s move is a welcome development.