On April 30, 2024, the U.S. Drug Enforcement Agency (DEA) formally submitted a recommendation to move marijuana from a Schedule I drug to Schedule III. This move, known as reclassification or rescheduling, would officially acknowledge that marijuana has medicinal benefits and a low potential for abuse.

The announcement came after President Biden called for a full federal review of marijuana laws in October 2022. “Too many lives have been upended because of our failed approach to marijuana,” Biden said in December. “It’s time that we right these wrongs.”

There will still be a review by the White House Office of Management and Budget (OMB) and of public commentary before the rescheduling could become official. But it would mark major reform for the cannabis industry—the first substantial change to marijuana’s federal legal status since the Controlled Substances Act was passed in 1971.

“Federal policy on marijuana has essentially been the same since the seventies and this would be a material change,” said Jonathan Havens, a partner and co-chair of cannabis law and food, beverage and agribusiness practices at Saul Ewing. “It is a great first step.”

Meanwhile, the long-overdue draft of the next Farm Bill included no material change to an area where convenience stores play: hemp-derived cannabinoids.

Rescheduling marijuana does not legalize it federally. Only removing marijuana from the Controlled Substances list would accomplish this.

“There are certainly arguments to suggest that certain of these intoxicating hemp cannabinoid products are legal but it’s far from clear,” Havens said. “The legal status is murky.”

Here’s a deeper look at what is—and isn’t—happening with the federal legal statuses of marijuana and hemp, two plants in the cannabis species.

What Marijuana Rescheduling Does

On the surface, marijuana rescheduling is important from both a medical and societal level. Schedule I drugs represent the most serious, most threatening substances on the DEA’s Controlled Substances list and include heroin, ecstasy and quaaludes.

Schedule III drugs, meanwhile, are defined by the DEA as presenting “a moderate to low potential for physical and psychological dependence” and are therefore allowed to be prescribed by physicians. Schedule III substances include anabolic steroids, ketamine and Tylenol with codeine.

What does this mean for retailers? While remaining a Controlled Substance means that mainstream retailers still will not be able to sell marijuana, the formal acknowledgement of cannabis’ possible medical benefits and lower risk of dependence will hopefully further destigmatize not only marijuana, but cannabis products as a whole—including hemp-derived cannabinoids found in some convenience stores.

For businesses, the biggest immediate implication of rescheduling is on the tax side. Section 280E in the Internal Revenue Code prohibits anyone “trafficking” in Schedule I or Schedule II drugs from taking advantage of credits and deductions other than those for costs of goods sold. Havens, and others, have estimated this has resulted in a 70%-plus effective tax rate for cannabis businesses.

“These companies are paying an insane amount of taxes, more than any company should pay,” he said. “The most immediate impact of rescheduling to Schedule III is that 280E no longer applies.”

The taxing savings could be huge for the cannabis industry: a study conducted by the cannabis data and research company Whitney Economics found that only 24.4% of U.S. cannabis businesses were profitable as of June 2023. An infusion of capital would mean more money for advertising, new product development and other investments in growing the market.

I think mainstream retailers have been wanting to get off the sidelines—but it’s currently a complete impossibility from a regulatory and logistics perspective.”

“Time will tell how much better things get and for folks to understand where we go from here,” said Havens. “Unfortunately, Congress is going to need to unravel some of that messy ball of yarn.”

What Rescheduling Marijuana Doesn’t Do

There are a lot of misconceptions about what the DEA’s announcement would and wouldn’t do. To be clear, rescheduling marijuana does not legalize it federally. Only removing marijuana from the Controlled Substances list—declassifying or de-scheduling it—would accomplish this.

Rescheduling marijuana as a Schedule III drug still leaves a lot of challenges on the table: challenges that, as Havens stated, almost certainly need to be solved by Congress.

One such challenge rescheduling doesn’t solve: the issue of interstate commerce, which remains prohibited—meaning even though both states have passed adult use marijuana laws, it’s still illegal to take a marijuana product made in California and sell it in Illinois.

“A lot of people don’t understand that this is not forced federal legalization,” said Havens. “Idaho doesn’t have to allow marijuana to be sold within its borders, for example. Congress would need to create rules to carry forward the regulatory scheme.”

The lack of interstate commerce has limited the cannabis industry thus far. Imagine a brewery that could only sell beer in the state where it brews the beer. To grow, it would have to set up breweries in every single state in which it wished to sell. Growth gets very expensive very quickly.

Which brings up another major issue not solved by rescheduling: banking. Because marijuana remains illegal federally, major financial institutions have been hesitant to allow cannabis businesses to access loans, bankruptcy protections or even bank accounts due to the risk of punishment by federal regulators.

The Secure and Fair Enforcement Regulation Banking Act (SAFER) seeks to provide protections to banks serving state-licensed cannabis businesses, but has failed to pass since it was first proposed in 2019 (it did pass in the House when the Democrats held control, but failed to pass in the Senate).

Advocates hope the rescheduling announcement will fuel long overdue action on banking.

“Now is the time” Rep. Maxine Waters (D-California) told Bloomberg Television in May.

“Upon rescheduling, there would be even more of a need for banking reformation now, frankly, because there are more mainstream capital needs,” Havens said. “I’m cautiously optimistic that will happen.”

Of course, the biggest issue facing convenience retailers is that marijuana remains federally illegal and mainstream retailers are still prohibited from selling it.

Intoxicating cannabinoids have proliferated in a serious way and people assume availability equals legality.”

Jon Taets, NACS’ director of government relations, said NACS is a member of the Coalition for Cannabis Policy, Education and Regulation and supports the STATES ACT 2.0. If passed, the STATES ACT 2.0 would require the DEA to de-schedule cannabis entirely, establish federal regulatory guidelines on cannabis and authorize interstate commerce.

“It would allow for a responsible, regulated market in these products,” Taets said. “That would be the best outcome for the country and the industry.”

Allowing mainstream retailers in the convenience channel to participate in the marijuana market wouldn’t just require an overhaul of federal regulation, but a complete change in how state markets operate as well. Current state marijuana laws require that marijuana operators only allow adults into the store and only sell marijuana products—nothing else.

“I think mainstream, non-cannabis retailers have been curious about the space, wanting to get off the sidelines,” Havens said. “But it’s currently a complete impossibility from a regulatory and logistics perspective.”

The ‘Giant Mess’ of Hemp Cannabinoids

Getting into the cannabis—as opposed to the marijuana—space, however, has become less of an impossibility in the wake of the 2018 Farm Bill.

Much like rescheduling, there was a lot of confusion about what the 2018 Farm Bill did and didn’t do. The 2018 Farm Bill did remove hemp from the DEA’s schedule of Controlled Substances provided the hemp had less than 0.3% THC. But the 2018 Farm Bill also specifically maintained the U.S. Food and Drug Administration’s (FDA) oversight over any ingestible hemp products due to its mandate to regulate the safety of food, drugs, medical devices and cosmetics in the Food, Drug and Cosmetics Act.

The FDA has repeatedly maintained that any cannabinoids—be it CBD or intoxicating cannabinoids like Delta-8—are “unapproved food additives in any human or animal food product.” The agency has also determined that a new regulatory pathway would need to be created by Congress for CBD (or feasibly other cannabinoids) to be approved for use in food or drug products.

Internal communications from the DEA suggest the agency considers synthetic cannabinoids, namely Delta-8, as not exempted by the 2018 Farm Bill. “Any quantity of Delta-8-THC obtained by chemical means is a controlled substance,” DEA drug and chemical evaluation section chief Terrence Boos wrote in 2021.

It seems fairly unlikely we will see much on the cannabis space in the eventual Farm Bill. It would be another contentious provision to include in a bill that is already late."

Despite the stances of the FDA and DEA, a robust market for hemp-derived cannabis products—especially intoxicating or psychoactive hemp products—has developed. Though the FDA has taken some action, mainly in the form of warning letters, Havens said it’s a “drop in the bucket compared to what’s on the market.”

“There’s this big question: why aren’t these agencies being more aggressive?” he said. “Intoxicating cannabinoids have proliferated in a serious way and people assume availability equals legality.”

Havens said he’s cautioned clients about the risk of selling a Delta-8 or Delta-9 hemp beverage at mainstream retail—absent states affirmatively allowing it—because of the potential enforcement risk. Those markets have developed without too much enforcement interruption … but Havens warns that could change.

“If the enforcement priorities shift, or one of these sleeping giants wakes up, there could be a change overnight,” he said.

Hemp Cannabinoids: No Fix on the Horizon

In theory, the next iteration of the Farm Bill could provide some clarity. Many believe that when writing the 2018 Farm Bill, legislators did not anticipate the loophole wherein hemp could be grown with 0.3% THC, but then intoxicating cannabinoids could be extracted or synthesized from that hemp to create psychoactive products—and now hope the new bill will address it.

Some retailers and manufacturers were also hoping for some form of clarity on consumer hemp products: manufacturing, testing and labeling requirements, flavor limitations, any kind of framework for responsible actors to play by.

“Just some regulatory uniformity is what some stakeholders are looking for,” Havens said.

Unfortunately, the reality of divided government suggests little action will take place.

“It seems that it is fairly unlikely we will see much on the cannabis space in the eventual Farm Bill,” Taets said. “It would be another contentious provision to include in a bill that is already late. It has been difficult to come to bipartisan consensus around [hemp regulations].”

Indeed, initial drafts of the 2024 Farm Bill—which was already pushed back a year—made no mention of Delta-8, Delta-9 or any intoxicating cannabinoids.

Though it’s rare that retailers ask for regulations, the gray space in which hemp cannabinoids currently operate has hampered the ability of some risk-averse retailers to participate at all, and has left other retailers that are selling hemp products at possible peril.

“The hemp market remains a largely unregulated space,” said Taets. “Responsible retailers who are participating in the market have put a lot of resources into things like verifying the authenticity and safety of the products. Regulation should make that easier than it [currently] is.”

Only time (and Congress) will tell the regulatory future of these two cannabis plants.