The Hidden Implications of Cannabis Rescheduling

In August 2023, the U.S. Department of Health and Human Services (HHS) formally recommended marijuana be rescheduled from a Schedule I controlled substance to a Schedule III controlled substance in a first move toward federal weed legalization.

In the federal government’s eyes, this would align marijuana with drugs like ketamine and testosterone, make it federally legal to get with a prescription, and define it as having “moderate to low potential for physical and psychological dependence.” As it stands in Schedule I, the plant is currently likened to heroin and viewed as having “no currently accepted medical use and a high potential for abuse.”[1]

Even more momentous than the US federal government finally acknowledging the medical validity of the cannabis plant will be the effects the potential rescheduling has on the country’s 37 legal state cannabis markets (and counting).

Although there are proponents for and against the rescheduling recommendation, one major benefit the cannabis industry has acknowledged is the elimination of the 280E Internal Revenue tax code that’s currently burdening all plant-touching businesses. Under Schedule I, plant-touching businesses can only deduct costs of goods sold from their federal taxes. Other regular business expenses, which can usually be deducted to lower taxable income, like rent, utilities, advertising, and payroll, are specifically excluded under 280E. Depreciation of capital investments, such as facilities and improvements, are also excluded.

Without the ability to deduct business expenses and depreciation, the federal tax rate for plant-touching businesses can sometimes be as high as 80 percent[2], jeopardizing the chances of financial survival.

However, even without rescheduling, several MSOs have successfully challenged the 280E regulation and have begun to receive significant refunds from the IRS for previous tax periods.  Rescheduling would codify the elimination of 280E for good, boosting the bottom line of all operators.

Relieving that tax burden is significant and necessary when considering the other changes that could come with cannabis rescheduling. For example, if the plant were to be rescheduled to Schedule III, medical marijuana goods would become subject to the same medical laws and requirements as other drugs in Schedule III like anabolic steroids and Tylenol with codeine. That means, for medical markets, there would be much greater oversight by the Food and Drug Administration (FDA). With no current FDA involvement or broad standards for the types of testing medical cannabis products must pass before being eligible to sell, regulatory laws across the country are likely to experience major changes.

One potential implication of FDA cannabis regulation could be standards around mold and yeast content, something that currently varies by state. While some states have fairly strict laws around mold and yeast counts, like Massachusetts and Louisiana, others, like Connecticut and Florida, have taken a more lenient approach. Although we don’t yet know how the FDA might change mold and yeast count regulations, businesses should be prepared for change around current state-level standards.

On that topic, the FDA’s potential involvement means eligible cannabis brands may finally be able to claim USDA Organic status under the National Organic Program (NOP). However, it’s important for brands to recognize that, as it currently stands, food products treated with ionizing radiation to reduce yeast and mold counts are ineligible to be USDA Organic by NOP and FDA standards. It’s fair to assume cannabis products treated with ionizing radiation, such as X-ray, will also be ineligible for USDA Organic status, especially medical products.

Instead, the FDA could implement the USDA’s current rule for food products treated with ionizing radiation and require cannabis products treated with that technology to be labeled with the Radura, the international symbol that signifies a product has been irradiated. This label update could have a negative impact on a brand’s consumer trust and loyalty.

Time will tell whether the US federal government decides to reschedule marijuana as a Schedule III substance, but one thing that’s for certain is change at the federal level is coming, and cultivators need to have a plan in place for whenever federal oversight begins. For those concerned about passing regulatory compliance for mold and yeast content but not willing to compromise their product with ionizing radiation, non-ionizing radiation like Radio Frequency could be the answer.

Radio Frequency is already used to remediate foods like nuts and seeds, which are all regulated by the USDA and FDA. The technology is approved for USDA Organic operations as it has no impact on a product’s molecular structure. It simply uses long radio wavelengths to create an oscillating electromagnetic field around and within the product, causing moisture molecules to sync with the vibration and rotate in unison with it. The friction this generates creates enough heat to kill microbial pathogens without getting too hot to degrade or decarb THC, maintaining the chemical integrity of the plant.

Ziel is the cannabis industry’s leader in Radio Frequency remediation, having been granted the first-ever U.S. Patent for processes that include the treatment of cannabis with Radio Frequency in 2020. To learn more about what Ziel can do for your operation in preparation of federal change, contact us today.