Impact of HHS Recommendation To Reschedule Cannabis

After the groundbreaking recommendation by the U.S. Department of Health and Human Services (HHS) to reschedule cannabis to Schedule III, Accounting Buds is here to provide you with an insightful outlook and a comprehensive analysis of what lies ahead. Let’s dive in!

1) What happened?

The U.S. Department of Health and Human Services has officially recommended to the U.S. Drug Enforcement Administration (DEA) that cannabis should be reclassified from a Schedule I Controlled Substance to a Schedule III Controlled Substance under the federal Controlled Substances Act. Substances on Schedule I are considered to have “no currently accepted medical use and a high potential for abuse”, while substances in Schedule III are seen as having “a moderate to low potential for physical and psychological dependence.” It’s important to note that both Schedule I and Schedule III drugs are illegal to possess, distribute, and manufacture without a prescription or DEA registration.

2) This Is So Exciting! No More 280e!

Hold on a second!

While the authority to recommend scheduling decisions and reschedule drugs rests with HHS, the final say on rescheduling cannabis lies with the Attorney General and the DEA. When the DEA makes its decision, it takes into account the same 8 factors as HHS, like the potential for abuse, scientific evidence of its effects, current scientific knowledge, history of abuse, scope of abuse, public health risks, dependence, and whether it’s a precursor to a regulated substance.

Here’s the thing: unlike HHS, the DEA can consider “all other relevant data,” which gives it the flexibility to go beyond HHS’ analysis. This means the DEA can come to different conclusions based on its own assessment. When the DEA disagrees with HSS recommendations, it usually takes a stricter stance rather than a more lenient one.

3) If The DEA Decides To Reschedule Cannabis, What Is The Process?

If the DEA decides to reschedule cannabis to Schedule III or another category, it’s expected that they’ll start a complex administrative rulemaking process under the Administrative Procedure Act (“APA”). This process is quite different from the usual way regulatory rules are made by agencies in the US. According to the APA, the DEA has to hold a public hearing, similar to a courtroom proceeding, where evidence is presented. The agency’s administrative law judge(s) will then make a decision about whether to adopt the regulation. Finally, the decisions made by these agency “judges” will be published in the Federal Register as the final regulation. Keep in mind that all final regulations can be reviewed and challenged in federal court.

4) So If The DEA Agrees, Cannabis Will Immediately Move Schedules, Right?

Unfortunately, we have to say it again, but not so fast!

Here’s the thing: the DEA has an issue when it comes to rescheduling cannabis, and it has to do with an international treaty called the Single Convention on Narcotic Drugs. Now, the US is a signatory to this treaty, and since 1975, the DEA has been interpreting our obligations under it to limit cannabis to either Schedule I or Schedule II. While this might not seem like a big deal, considering that many other countries involved in the treaty have legalized cannabis, the real issue lies in the fact that the Controlled Substances Act is US law. And according to the CSA, the Attorney General is required to place drugs “under the schedule he deems most appropriate to carry out [the United States’ treaty] obligations,” regardless of the Act’s criteria or any recommendation from the HHS. Therefore, both the HHS and the DEA could recommend moving cannabis to Schedule III, but the Attorney General could still deem that it’s unlawful to do so based on their requirements under the CSA.

And to make matters even more complicated, there was a court decision in 1971 that stated that placing cannabis on Schedule III, IV, or V of the CSA wouldn’t meet several requirements imposed by the treaty. There is an ongoing legal debate about the Attorney General’s treaty obligations when it comes to rescheduling cannabis, and this debate only serves to complicate things and likely prolong the timing (thanks to court injunctions) of any potential rescheduling.

But wait, there’s more! In 2016, the DEA and the HHS conducted a scientific review of cannabis using the same eight factors we mentioned earlier, and guess what? They determined that cannabis should remain classified as a Schedule I drug. Now, agencies can change their stance on things, sure, but they need to provide a reasonable basis for doing so. For the HHS and DEA to justify this shift in position based on the data they reviewed just seven years ago, they’ll need to show changes in scientific literature and present compelling data evidence that significantly differs from what they presented less than a decade ago. So, we’ll have to wait and see if there’s enough new evidence in the past seven years to withstand any challenges in the courtroom.

5) Will a court actually uphold a rescheduling order if the DEA adopts one?

In the past, courts have generally given a lot of deference to agency decisions, especially when the agency relies on its specialized scientific or technical expertise. The Attorney General’s interpretation of the U.S.’ treaty obligations would also typically receive significant deference. But, in 2019, the Supreme Court voted to limit the deference agencies receive. At that time, the court was divided along party lines. The conservative judges voted to completely abolish the long-standing tradition of agency deference, while the liberal judges voted to limit it but not abolish it. Chief Justice Roberts made the deciding vote to limit it. The final decision mentioned that this issue could be revisited in the future. Since then, the political makeup of the court has changed to have 5 conservatives and 3 liberals, with Chief Justice Roberts typically being in the middle. It’s impossible to predict whether the current court would use the rescheduling of cannabis to abolish agency deference. Therefore, it’s also impossible to predict whether courts would uphold the rescheduling order, especially if it’s moved to Schedule III.

6) After discussing the complexities of moving Cannabis to Schedule III, what changes would occur if it’s rescheduled? 280E would go away!

Businesses would be able to claim business the same deductions as every other business in the US and significantly lower their taxes. The burden of “280E” (26 U.S. Code § 280E) would immediately disappear.

7) Here’s what won’t change:

• • Cannabis will not be legalized at the federal level.

• • Consequently, states that have not already legalized it through state law will not see an automatic legalization.

• • Due to the federal illegality of cannabis, interstate commerce will remain illegal.

• • Banking and merchant processing will not be accessible to cannabis businesses, as federal illegality will continue to pose risks to banks.

• • Major U.S. Exchanges will not allow listing of plant touching companies.

8) What could potentially change?

In the long run, there are some big implications. But in the short term, the impact is not that significant. Of course, we can’t predict the future, but changing the schedule can lead to a few interesting consequences:

• • Investment: Rescheduling has the potential to attract a significant influx of capital into the industry, as investors may perceive it as less risky. Additionally, it could prompt the Nasdaq and NYSE to reevaluate their position on the prohibition of listing plant-touching U.S. companies.

• • Increase Pressure For Federal Legalization. Reclassifying cannabis to Schedule III (or other Schedules) has the potential to bolster progress towards federal legalization. This strategic move could enhance the political feasibility of enacting legislation like the Safe Banking Act, paving the way for significant developments in the cannabis industry.

• • FDA. The FDA has the authority to assert its jurisdiction and establish guidelines regarding state-licensed cannabis. This subject holds great significance for the industry, although it falls outside the expertise of Accounting Buds. Therefore, we defer to the insights of Foley Hoag, a prominent cannabis law firm:

Foley Hoag’s FDA specialists caution this is likely to be a slow, incremental process, in the absence of legislation. Some commenters have addressed a fear that FDA regulation will preempt state regulation of cannabis once rescheduling occurs because cannabis will now have accepted medical uses, making it a “drug” within FDA’s authority. There are many issues with this line of reasoning. First, FDA has authority today to regulate cannabis and assert jurisdiction. A Schedule I listing is not a bar to FDA enforcement. Second, some intervening action by FDA or Congress will likely occur before FDA exercises meaningful enforcement oversight with regard to state-legal cannabis. The most likely, as we have seen with hemp-derived cannabidiol (CBD) under the 2018 Farm Bill, could be against state-legal actors that make unproven health claims. Eventually FDA could impose a number of regulatory requirements, such as: labeling restrictions (which could include the requirement of a prescription), identity, purity, and composition standards, establishment registration and product listing, and good manufacturing practices (GMPs) for certain drugs. But there are some important caveats here: FDA regulates drugs in a specific manner, i.e., for specific formulations, specific indications and specific populations. There are countless cannabis formulations and doses being marketed today, and a small body of peer-reviewed research. Regulation of nationwide state-legal cannabis just doesn’t fit FDA’s drug regulation model. FDA will likely be methodical in asserting its jurisdiction, and if it does, it would probably do so through rulemaking. The more likely scenario (as we’ve seen with CBD and hemp-derived cannabinoids) is that FDA determines it needs additional authorization and funding from Congress, such as for a cannabis “Center” similar to its “Center for Tobacco Products,” before it engages in any comprehensive regulation. Third, FDA preemption is a complex area of law. It is certainly not a foregone conclusion that FDA regulation will entirely preempt state regulation or even many areas of state regulation. Preemptive effect – in the absence of new comprehensive cannabis legislation passed by Congress – is likely to be piecemeal. One thing is for sure: there is no FDA playbook for this. It is unchartered territory, and if past is prologue, the agency will be incremental and careful in any assertion of jurisdiction in the absence of new federal legislation.

 

Conclusion

Our founder & CEO, Rick LaNeve, has issued the following statement:

The recommendation by the HHS to reclassify cannabis to Schedule III marks a significant milestone for the cannabis industry and reflects the evolving attitude towards its acceptance in our country. However, I remain skeptical about the direct transition of cannabis from Schedule I to Schedule III. Given the legal complexities associated with the international treaty, long-standing precedents, and the previous decision by the HHS and DEA in 2016 to maintain cannabis on Schedule I, the hurdle of moving it to Schedule III may prove formidable. From my perspective, it is more likely that cannabis will be reclassified to Schedule II.

The reclassification to Schedule II would facilitate scientific research, thereby enabling the HHS and DEA to gather substantial data for future scheduling decisions. Moreover, it would provide Congress with additional scientific evidence to potentially support the legalization of cannabis.While this shift may not fully satisfy the industry, it would certainly be viewed favorably by the general public as another step towards legalization. It is worth noting that the current administration’s directive to review cannabis scheduling was initially announced in close proximity to the mid-term elections. A reclassification to Schedule II during the 2024 election cycle would allow the administration to claim a victory while emphasizing the need for continued progress in cannabis reform. Given the highly politicized nature of the cannabis issue, I recognize the potential political motivations on both sides of the aisle to keep cannabis a political issue in order to exploit it as a tool for their respective agendas.

Furthermore, it is important to consider that recent legalization bills in Congress have proposed the implementation of a national sales tax on cannabis. The immediate elimination of 280e could pose a challenge for the government in terms of tax revenue. By transitioning to Schedule II, 280e and its associated tax income would be preserved, while the government develops a revised tax structure for cannabis.

I am genuinely excited and intrigued by the implications of this recommendation for the cannabis industry. This initial recommendation is just the beginning and signifies a positive outlook for the future of the industry!”