July 22, 2024, marked the end of the Drug Enforcement Administration’s (DEA public comment period regarding the proposed rescheduling of cannabis from a Schedule I to a Schedule III substance under the Controlled Substances Act (CSA). The cannabis industry is hyper-focused on the process as it has significant implications for the U.S. cannabis industry. Approximately 93% of the 43,000 comments received during the 60-day public comment period on rescheduling were positive, while only 7% of the comments were adversarial. What happens next, and how might upcoming election dynamics influence this process?
Next Steps
With the public comment period now closed, the DEA will review the feedback from various stakeholders, including industry professionals, advocacy groups, medical experts and the public. This review process is crucial, as it will help the DEA determine the viability and impact of rescheduling cannabis to Schedule III.
Here’s a breakdown of the steps involved:
- DEA Review and Analysis: The DEA will thoroughly analyze the comments and any accompanying evidence or arguments. This stage carefully considers scientific research, medical opinions and economic impacts.
- Interagency Consultation: The DEA will collaborate with other federal agencies, such as the Department of Health and Human Services (HHS) and the Food and Drug Administration (FDA). These consultations are vital to ensure that all aspects, including medical and public health implications, are adequately addressed.
- Drafting and Publication of Final Rule: The DEA will draft a final rule after the review and consultation phases. This rule will outline the decision to reschedule and its justifications. It will then be published in the Federal Register. If the final rule constitutes a “major rule” (an economically significant rule that requires the Office of Information and Regulatory Affairs to review, based on the Congressional Review Act). In that case, the DEA will be forced to submit a report to Congress, and this will trigger another 60-day review period before the new rule will be allowed to go into effect.
- Implementation: If the rescheduling is approved, the new regulations will be implemented, leading to substantial changes in how cannabis is regulated, researched and prescribed.
Impact on the Cannabis Industry
For the cannabis industry, the rescheduling of cannabis to Schedule III could bring about several significant changes:
- Taxation: One of the most critical impacts would be Section 280E of the Internal Revenue Code, which prohibits businesses involved in Schedule I or II substances from deducting business expenses or benefiting from income tax credits. Rescheduling to Schedule III would eliminate the application of Section 280E, leading to substantial tax benefits for cannabis businesses, thereby providing additional significant after-tax cash flow.
- Banking and Financing: Cannabis businesses have long struggled with limited access to traditional banking due to federal restrictions. Although rescheduling may indirectly improve access to banking and financial services, it does not make cannabis legal or provide for unrestricted banking. Only de-scheduling would have this immediate impact. Rescheduling would certainly assist with easier access to more private equity.
- Investment and Expansion: The perceived risk of cannabis investments may decrease. Lower risk, coupled with the promise of greater after-tax cash to pay dividends, may attract more investors and enable further industry expansion. This shift could lead to increased mergers and acquisitions, driving growth and consolidation within the market. It is important to note that rescheduling will not immediately allow cannabis companies to list on the public exchanges in the United States.
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Election Dynamics and Their Impact
The upcoming election cycle could significantly influence the rescheduling process and its aftermath.
Here’s how:
- Political Will and Support: The political landscape will heavily influence rescheduling. Elected officials' stances on cannabis reform are crucial for securing votes from independents and undecideds and shaping policy direction. A shift in administration or changes in congressional power could lead to either a rapid acceleration or a significant slowdown in rescheduling efforts. This, in turn, would impact the overall growth and stability of the cannabis industry in the U.S.
- Legislative Priorities: The election could determine how cannabis-related legislation is structured and implemented. If rescheduling is supported, the focus may shift to creating a comprehensive regulatory framework, including potential tax policies and federal oversight mechanisms. Alternatively, if there is opposition, we might see efforts to limit the scope of rescheduling or introduce new barriers. The interplay between rescheduling and other legislative priorities, such as a potential national excise tax, could complicate the regulatory landscape.
- Public Opinion and Advocacy: As cannabis becomes a key election issue, public opinion and grassroots advocacy will gain momentum. This is not just about influencing policymakers; it’s about shaping the broader narrative around cannabis reform. Overwhelming public support could drive elected officials to take more decisive action on rescheduling, while effective advocacy campaigns might pressure candidates to clarify or shift their positions. Additionally, voter referendums at the state level could play a crucial role in pushing the national conversation forward.
The end of the DEA’s public comment period marks a significant step towards potential cannabis rescheduling. Staying informed and prepared for these changes will be essential as the cannabis industry navigates this transformative period.
Authors: Ray Owens, CPA, MST | [email protected] and Steven Monacelli, CPA, MST, Partner | [email protected]
Post-Election Coverage Resources
Donald Trump has won the election, and Republicans have kept the House and won the Senate. Stay updated by following our 2024 Post-Election Coverage Resource Center for crucial insights on tax and legislative developments, helping you navigate the upcoming changes in tax reform and beyond.
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