Colorado Cannabis Leaders React to Potential Schedule III Classification

On August 30, cannabis advocates and business owners were pleasantly surprised to learn that the U.S. Department of Health and Human Services has recommended that the federal government officially reschedule the plant from a Schedule I controlled substance to Schedule III.

If the Drug Enforcement Administration agrees to make the switch — a very big if — cannabis would be recognized officially by the federal government as having medicinal value, and would be on the same legal level as anabolic steroids, ketamine and hydrocodone-infused aspirin. For owners of cannabis businesses, a move to Schedule III would have big financial benefits, including the ability to finally use tax exemptions.

The medical and recreational cannabis industries and many cannabis-adjacent businesses are banned from filing for tax exemptions with the Internal Revenue Service under code 280E, which targets entities associated with trafficking Schedule I or Schedule II substances. The tax code, written in the ’80s to restrict financial movement of cocaine traffickers, has forced cannabis business owners to pay tax rates as high as 70 percent on their earnings.

Schedule I status also bans the majority of cannabis businesses from banking and financial services, such as debit and credit-card processing, loans and customer accounts. This would also change under Schedule III, according to cannabis business and legal experts.

Colorado's cannabis business owners have been hungry for good news. This year has seen a continued downturn of flower prices and dispensary sales, which have been dropping since the second half of 2021. As cannabis banking reform in Congress continues to stall, the prospect of a new avenue opening more financial services is a welcome development for the pot industry in Colorado and beyond, according to Marijuana Industry Group Executive Director Truman Bradley.

"It's hard to describe the excitement, because this was much needed. The marijuana industry, both in Colorado and nationwide, has been struggling under the crippling nature of unfair taxes. In addition to the possibility of that going away, I expect capital markets to reopen for a much-needed investment," Bradley says. "This is the first meaningful step that the federal government has taken toward inevitable legalization, and this news is being received positively among both licensed business owners and consumers."

The news was indeed praised by the majority of cannabis stakeholders. The Instagram account of Colorado Governor Jared Polis posted a statement that he was "thrilled" at the prospect and looked forward to "seeing the demise of this archaic tax penalty levied against state-regulated businesses."

But much of that optimism is tempered, Bradley notes. Although he recognizes the importance of the development — given how rare the federal government's acknowledgments of the plant's health benefits have been — he says the move is "not good enough" in the long run. Like many others in the cannabis trade, Bradley wants nationwide legalization and worries that Schedule III status could create an unfair playing field.

"While business owners are relieved at the prospect of not having taxation, there are concerns around the viability of small business after this. Marijuana businesses have never operated under Schedule III status, but big pharma definitely has," he cautions. "It's also important to remember that a move to Schedule III still makes marijuana a controlled substance, and one people can still get arrested for."

Organizations representing minority business owners and criminal justice reform were even less excited by the news. The Minority Cannabis Business Association sent out a statement suggesting that rescheduling cannabis "simply re-brands prohibition."

"Although this decision would lead to much-needed tax relief for some cannabis businesses, it would do nothing to remove criminal penalties that still continue to disproportionately impact minority communities," MCBA president Kaliko Castille adds.

The HHS recommendation comes almost a year after President Joe Biden announced that his administration would review the plant's Schedule I status and pardon low-level federal cannabis offenders. If approved by the DEA, a Schedule III label for cannabis would clear research pathways. Because of Schedule I, cannabis research and production for research has been tightly controlled by the DEA, which has blocked and stalled previous attempts to loosen those restrictions.

Cannabis advocates view the DEA's required involvement as much more than a formality, according to VS Strategies partner Mason Tvert, a longtime cannabis legalization consultant who campaigned for Colorado's statewide legalization amendment in 2012.

"This recommendation comes following that review, and so now that goes to the DEA. It's all kind of a tricky web of different agencies and whatnot, which is why ending cannabis prohibition has been so tricky," Tvert explains. "Unfortunately, the DEA is notorious for taking its sweet-ass time."

If the DEA does eventually approve the rescheduling of cannabis, Bradley and Tvert agree that states with established cannabis industries, such as Colorado, would likely see more engagement from investors and workers. Small-business owners, who are more affected by the lack of tax breaks than companies with more starting capital, would also have more financial breathing room, Tvert notes.

But for Tvert, whose cannabis consulting and public relations firm is often denied financial services, going to Schedule III is still too little, too late. He calls the move "significant and much-needed progress," but worries that cannabis reform is being held up for political points.

"Would this be done prior to an election? After an election? What impact might it have for this administration to make a significant change? I'm not saying I know that would drive a decision, but it certainly could be," he says. "Rescheduling to Schedule III does not accomplish all of the goals set out by President Biden when he announced this review last year, but it does make significant and much-needed progress toward those goals. When he made that announcement in 2022, he made a lot of talk about criminal justice, and cannabis would obviously remain federally illegal at Schedule III."