How cannabis business should navigate marijuana rescheduling after the DEA hearings

Devoy Dubuque (Courtesy photo)

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The U.S. Drug Enforcement Administration’s historic marijuana rescheduling hearings are now over, but adult-use cannabis operators are still waiting for the results.

Though the exact path forward is uncertain, operators can take concrete actions – and should do so promptly, as benefits decrease over time.

What does cannabis rescheduling mean for legal operators now?

Schedule 3 made two big and immediate changes for qualifying medical operators.

The first is the end of Internal Revenue Code Section 280E, which bars anyone engaging in the sale or manufacture of Schedule 1 and 2 businesses from deducting ordinary expenses on their federal tax returns.

While Acting Attorney General Todd Blanche’s order also encouraged further, still-pending guidance from the Treasury, it’s generally understood that 280E no longer applies to medical operators. They can now deduct ordinary expenses — often the difference between profitability and running at a loss.

The second change is DEA registration. While not yet required except in Oklahoma, state medical-license holders may register with the DEA.

Many did so before a sixty-day window for expedited registration ended June 26. The DEA has begun inspecting some operators, with recent site visits at retailers in Virginia, MJBizDaily has learned.

We believe those who registered are considered federally legal, pending the processing of their DEA applications. Operators that did not apply should talk to attorneys now, mindful that DEA may visit.

What happened at the DEA marijuana rescheduling hearings?

DEA Chief Administrative Law Judge Derek Julius further narrowed the scope of the hearing to a single question: whether marijuana as defined under federal law has a currently accepted medical use in the United States.

The DEA’s opening witness was Dr. Dominic Chiapperino, of the U.S. Food and Drug Administration Center for Drug Evaluation and Research, who defended the new method used to justify rescheduling. The government also presented Dr. Corey Burchman, a retired pain specialist who drew on clinical opioid-dependency experience to affirm marijuana’s accepted medical use.

DEA also declined to cross-examine a number of opposition witnesses. Interpretations are varied: is rescheduling already certain, or is a fundamentally opposed DEA participating solely due to orders from the White House? Advocates are hopeful.

“The scheduling process doesn’t ask how a substance is sold — it asks what the substance is,” said Michael Bronstein, President, American Trade Association for Cannabis & Hemp (ATACH). “Now that (medical) marijuana is Schedule 3, whether a sale happens under a medical license or not should be irrelevant.”

“Marijuana is marijuana.”

What should cannabis operators do after marijuana rescheduling?

For now, the clear winners are state-licensed medical operators. Beyond 280E relief, Schedule 3 encourages research as well as capital investments that Schedule 1 status discouraged. However, medical cannabis rescheduling doesn’t authorize interstate commerce.

We believe that will likely require DEA approval and occur first via state “trigger laws.” California, Oregon, and Washington have such laws to allow for interstate commerce should federal law allow it. And none of those states have moved on their trigger laws yet.

But in a national market now bifurcated between federal legally medical cannabis operators looking forward to massive tax windfall and an adult-use sector still waiting for reform, there are major questions.

How does marijuana rescheduling change capital plans?

The clearest near-term effect has been increased M&A. Simply put, a medical license is a meaningfully different asset than an adult-use license.

Rescheduling also invites new entrants like pharmaceutical, agricultural, and consumer companies that during Schedule 1 steered clear.

For banking reform, don’t wait for Congress to pass the SAFER Banking Act: operators who can refinance now into lower-cost debt can reset their valuation.

“The winners won’t necessarily be the largest operators,” said Bob Hoban, an attorney and international cannabis business advisor.

“They’ll be the companies with institutional-grade governance, financial controls, compliance systems, and supply-chain discipline,” he added. “Federal reform rewards operational maturity far more than market share.”

Tax strategy and 280E – before and after marijuana rescheduling

Medical licenses now outvalue adult-use permits. But due diligence should assess operators who hold both medical and adult-use permits category by category.

Meanwhile, any joint venture should be structured around federal registration. A partner’s DEA registration depends on an active state license, so state suspension/revocation can imperil it, making both parties’ compliance a federal diligence item.

Up until now, being tax efficient meant pushing every possible cost into deductible cost of goods sold (COGS). Finance teams built cost-accounting methodologies around minimizing taxable income. That structure is now wrong.

Now, a medical operator claiming 280E relief needs accounts and a cost methodology built for a business that deducts normally. Public companies restating their tax methodology, perhaps in preparation for uplisting, will face questions, from investors as well as regulators: is the margin “improvement” genuine or relabeled cost?

280E refunds may require filing amended past-year returns. That means having accounting ledgers that survive DEA inspection and IRS scrutiny. Many private operators’ books can’t.

Multi-year refunds means rebuilding for a federal evidentiary standard: inventory chain-of-custody, defensible cost allocation, and documentation that withstands scrutiny. It’s unlikely the IRS will allow retroactive refunds. But if they do, it will require forensic accounting. “Good enough” isn’t.

What should dual-license operators do?

States spent years erasing the medical/adult-use bifurcation, giving operators with a foot in both worlds unified inventory tracking, licensing, and point-of-sale solutions. Good policy then, but a serious liability now.

Operators must allocate taxable income between medical and adult-use, and need a defensible legal theory and an accounting system to produce the numbers.

Retroactive designation may be nearly impossible. A methodology invented after the fact invites audit.

How marijuana rescheduling affects your business now

Rescheduling creates significant opportunities.

Operators who can supply research-grade product or partner with research institutions or pharmaceutical companies stand to gain a market that Schedule 1 status forbade.

Companies with DEA registration are seeking import/export permits – and at least one is already shipping product overseas.

Some operators may be compelled to hold and hedge – to await the outcome of the hearing before committing capital. If the next step is across-the-board rescheduling, the industry could benefit to the tune of billions. But consider the downside. Schedule 2 or the status quo could be the recommendation. And any recommendation is non-binding, while litigation is assured.

Waiting without a contingency plan is not a strategy. Operators should model financial for every outcome and choose a path. First-mover advantage is real.

Devoy Dubuque is a member of Mountain West Legal and Consulting and John Moynan is senior director at Scidan Consulting and Operating Partner at Capitan Consulting.