Schedule III – Squinting Through the Haze of Rescheduling

The cannabis world has been abuzz over the recommendation from Health & Human Services to reschedule cannabis from Schedule I to Schedule III. Will this be a good thing? Well, as I am fond of saying, “It depends”. Many people argue that incremental progress is better than no progress. I’m not so sure. 

The current presidential administration fiercely advocated on the campaign trail for marijuana reform. Alas, a few people who were serving federal prison sentences on nonviolent marijuana-related charges were released, but if you pay attention to the work at the Last Prisoner Project you know that we have a long way to go until the last prisoner is freed. Full disclosure on my position: on the criminal justice issues alone, unless it is matched with a more substantive pathway to freedom for those who are behind bars, rescheduling is short-sighted, in my humble opinion. We need genuine reform through full federal legalization. 

There are some pros with rescheduling. Without a doubt, we look forward to getting relief from the onerous burdens of Internal Revenue Code (IRC) 280e, which states that “no deduction or credit” may be taken for a business that is “trafficking” in Schedule I or II substances. Whew! So we squeaked through that one to end up on the positive side of the balance sheet. 

But the thousands of dollars you save might be more than eaten up by other costs. For example, rescheduling cannabis from Schedule I to Schedule III may mean migrating much of the policy-making and enforcement from the Drug Enforcement Agency (DEA) to the Food and Drug Administration (FDA). Think about how over-the-counter drugs are overseen. Basically anything that one ingests or that will be absorbed into the system (such as a topical) comes under the oversight of FDA. 

But wait – doesn’t Big Pharma rationalize its big bills by pointing out how costly the process of getting FDA approval is? You got it. Every small gummy maker, beverage barista, and farmer may be forced to incur these types of expenses. Notice the term “may be forced”. These are uncharted waters. We honestly don’t know how any of this will be implemented yet. 

There has been some talk that rescheduling will allow cannabis to be sold across state lines. In some ways, we are already contemplating this after a few court cases challenged the dormant commerce clause. Witness how California, Oregon, and Washington state are seeking to develop trade agreements to enact as soon as the attorneys general get comfortable with what all of that means. 

Before you envision your products on shelves in Cheyenne, Wyoming, think about the cost of scaling your operation for that type of distribution. Do you have capacity to comply with shipping requirements, state-level taxes, and packaging rules? Can you securely transport those products to exotic, state-side destinations. Remember: weed will still be illegal, so you will likely still need some form of seed-to-sale tracking, only now you will need to comply with two (or more) state tracking systems. Yeah – the farmers’ market and the local dispensary look pretty good right about now. 

But some brand, somewhere is eyeing the shelf in your local dispensary, and they are ready to give you a run for your money. The potential is high that large-scale operations will be able to squash the moms-and-pops right out of business. Not good. 

Without a doubt, rescheduling will result in consolidation, mergers, and acquisitions. And for that you need strong financial statements, including your Profit & Loss and Balance Sheet. And for great financial statements, you need great accountants on the case to make sure that you are putting yourself in the best possible light, without over-stating or misrepresenting (which would be fraud, and leads to all sorts of problems, so that’s no good!). 

If we went with full-blown legalization, the pink cloud still brings stormy weather. The most recent legalization bill that went through congressional committees, the Cannabis Opportunity and Administration Act (COAA) included a whopping 12% federal excise tax. Yikes. And your accountant will need to run those totals, and get the tax payments sent in, just like they do now for your state and local taxes.

So, squinting through the haze on rescheduling, the details spell trouble. If for no other reason, change is always expensive, and re-positioning your team to track the new compliance and reporting requirements of FDA and any other type of federal oversight will be challenging. 

But relax. Things in government move slowly. The news of rescheduling cannabis from Schedule I to Schedule III is just a recommendation right now, and it will take at least a year for the DEA and other relevant agencies to sort it all out. 

Unfortunately, other than scaling your business as efficiently as possible (which you should always be trying to do, regardless of rescheduling or descheduling), there isn’t a lot to change right now in order to get ready. We just don’t know a lot about how all of this is going to work – or whether the proposed rescheduling from Schedule I to Schedule III will actually happen. 

A lot can happen in the cannabis industry in a year, so stay tuned for nuances on this topic.