What Does the DOJ Reclassification of Cannabis to a Schedule III Drug Mean for Tribes?

Kehl Van Winkle

On Tuesday April 30th, the Department of Justice announced that the Attorney General intends to reclassify marijuana from a Schedule I drug to a Schedule III drug under the Controlled Substances Act (“CSA”). This could be an important change to the way that cannabis is regulated at a federal level, but its effects may not be immediately felt by tribes and the cannabis industry.

Schedule I vs. Schedule III

Currently, marijuana is listed as a Schedule I drug, which is the most serious and highly regulated category, reserved for drugs which have NO accepted medical use and a HIGH potential for abuse. This includes heroin, LSD, DMT, MDMA, and other hard drugs. Schedule III drugs, on the other hand, have less potential for abuse, have currently accepted medical uses, and a moderate to low risk of physical or psychological dependence. Examples of Schedule III drugs include anabolic steroids, Zoletil™, and Tylenol® with Codeine.  From this list, it should be clear that, while a Schedule III drug is more readily available than a Schedule I drug, it is not something just anyone can pick up at a pharmacy without a prescription.

Effects of Rescheduling

What does this rescheduling mean for the cannabis industry and where does it leave tribes in particular? Unfortunately, one of the most immediate benefits to the non-Indian cannabis industry may cause competitive harm for tribes.  Arguably the most significant change from marijuana rescheduling is more favorable tax treatment for non-Indian cannabis businesses.  Under Section 280E of the Internal Revenue Code, the IRS prohibits certain tax deductions for businesses engaged in trafficking Schedule I and Schedule II drugs, but allows those tax deductions for businesses engaged in trafficking Schedule III drugs. As long as cannabis is a Schedule I drug, cannabis businesses cannot take these deductions, which increases operating costs. While the subject of federal income tax on tribal businesses is complicated, under certain circumstances, tribal businesses are not subject to federal income tax. This may give tribal cannabis businesses a significant economic and competitive advantage over non-tribal businesses, which advantage will now be undercut to some degree by the availability of these tax deductions for non-Indian cannabis businesses.

Moving cannabis to Schedule III significantly increases the possibility to conduct studies on its effects and safety. In the long term, this will open the door for cannabis products to potentially achieve FDA approval. However, the form those products take is likely to be significantly different than what is found at a recreational cannabis dispensary today. Furthermore, with FDA approval, dispensaries hoping to sell this now entirely legal, albeit most likely prescription-only, drug, would have to register with the DEA as regular pharmacies and comply with pharmacy reporting requirements.

Without FDA approval, moving to a Schedule III drug also does not affect the ability to transport cannabis across state lines. While rescheduling may make the federal government less likely to interfere with regulated businesses operating under state or tribal law, particularly if those states or tribes have implemented agreements that allow for interstate or inter-tribal commerce, it does not have the effect of actually changing the law.  The bottom line is that even after rescheduling, the possession and use of marijuana will still be illegal under federal law, at least until the FDA approves a cannabis product.

Finally, rescheduling cannabis is also unlikely to alleviate one of the biggest burdens of the industry: banking. Because rescheduling cannabis does not actually change its legal status under federal law, at least not until an FDA-approved product enters the market, the rescheduling is unlikely to offer banks any additional assurances on the financial safety of the cannabis market.

Where do Tribes go from Here?

The recent announcement from the DOJ merely put everyone on notice that the DOJ intends to reschedule marijuana to a Schedule III drug, and that rescheduling is not yet official. First, the agency will publish a proposed rule in the Federal Register, which will open a notice-and-comment period for the public and interested parties to offer their opinions and recommendations on the rescheduling. Tribes should absolutely participate in this process to ensure that their unique experience with cannabis is taken into consideration. If you would like more information about the potential rescheduling or for assistance in drafting comments to the federal government, the team at mctlaw would be happy to help.

Rescheduling marijuana is a worthwhile first step to a healthy, regulated, and profitable industry. However, the long-term goal must remain legalization at the federal level. Other piecemeal efforts, like the Secure and Fair Enforcement Regulation Banking Act (SAFER) to ease banking restrictions on the industry must also remain a priority. Tribes should continue to advocate for congressional action that will move the cannabis industry forward on a national level.

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