Cannabis businesses could soon see their tax burdens drop dramatically if the Drug Enforcement Agency (DEA) changes the plant’s classification from Schedule I to Schedule III. 

The change, recommended by the Biden administration last week, would remove cannabis from the federal drug list’s most scrutinized category — which includes heroin, LSD, peyote, methylenedioxy-methamphetamine and ecstasy — down to a classification with substances that have been accepted as medicinal and are deemed less likely to be abused, such as ketamine, anabolic steroids, testosterone and products containing less than 90 milligrams of codeine per dosage unit. 

President Joe Biden initiated the review of cannabis scheduling last October, seeking to end what he called a “failed approach” to cannabis regulation that had “upended too many lives” while its recreational use is legal in 23 states.

Rescheduling would mean a historic shift in drug policy, but criminal penalties could remain for illegal possession under the proposed recommendation.

The news prompted a variety of responses from the Nevada cannabis community last Friday at a Cannabis Advisory Commission (CAC) subcommittee meeting on federal rescheduling — where commenters questioned the effects the possible change would have on the industry and whether rescheduling goes far enough. 

“When the committee was created — it was due to the lawsuit that the ACLU (American Civil Liberties Union) made against the pharmaceutical board to have it descheduled completely,” said Abad A. Piza, a medical cannabis patient, in response to the subcommittee’s decision to mainly focus on rescheduling in the coming meetings. “It was to ensure that no one would go to jail, that no one would be prosecuted, that no one will continue to suffer harm due to this plant.”

Last fall, a Clark County judge declared that the Nevada Board of Pharmacy must remove cannabis from the Schedule 1 category in Nevada after the ACLU of Nevada, representing the Cannabis, Equity and Inclusion Community (CEIC), brought forth a lawsuit against the pharmacy board. The complaint was brought on behalf of Antoine Poole, a Las Vegas resident who was convicted of felony possession of a controlled substance for marijuana in 2017. The conviction happened the same year voters legalized recreational cannabis use in Nevada.

In the 2023 session, lawmakers passed SB277, which requires the CAC to conduct “a study concerning the potential effects on the cannabis industry in this state if cannabis were to be removed from the list of controlled substances included in Schedule I pursuant to … the federal Controlled Substances Act.” It states that the study must include an examination of federal and state laws and regulations concerning the removal of cannabis from Schedule I.

The advisory subcommittee decided that a state-level examination focused on descheduling, or full decriminalization, would follow a study of the potential effects of cannabis becoming a Schedule III drug in Nevada. 

“We should be myopically focused on rescheduling given that's where we are, both in the state and the federal level,” said CAC subcommittee member Andrew Kline, a former crime and drug policy adviser for then-Vice President Joe Biden. “The focus should be on what could happen, what might happen, what will happen at the federal level and how it might impact the state.”

According to Layke Martin, the executive director of the Nevada Cannabis Association, cannabis businesses currently pay an effective tax rate of as much as 74 percent, compared to alcohol businesses, which pay 21 percent or less. If the drug is rescheduled, cannabis businesses would likely see a drop in their federal tax burden, which could lead to lower prices for cannabis.

The effective tax rate is the average percentage of a person or company's income that is paid in taxes.

“Cannabis businesses can't deduct ordinary business expenses,” Martin said in an interview with The Nevada Independent on Tuesday. “So any of the … business expenses that any other business can deduct — payroll, rent, marketing — cannabis businesses can't. So they're essentially taxed on gross income.”

According to the IRS, cannabis businesses can deduct inventory but not other expenses because the business itself is federally illegal and tax policies do not allow illegal businesses to deduct expenses including but not limited to advertising, wages and salaries, and travel.

Martin said rescheduling could also open up research opportunities at universities, which face obstacles to study cannabis because it is federally illegal.

Many who testified before the advisory committee shared concerns that moving cannabis to Schedule III would retain certain regulations, such as the need for a prescription, a lack of insurance coverage for medicinal cannabis products and continued criminalization. They argued that medical patients need more access and that descheduling should be the main focus despite the recent recommendations to federal regulators.

However, Martin, whose organization represents the majority of licensed dispensaries in the state as well as cultivation and production facilities and affiliate businesses, said “I think the conversation has shifted from focusing on potential descheduling or federal legalization to just looking at what's in front of us because it's very likely that the DEA will accept DHHS’s recommendation.” 

She said federal decriminalization or descheduling would open up interstate commerce, although the current recommendation would not, and rescheduling mainly affects tax structure. Martin said further political action is required to open up access to traditional banking institutions but that “smaller banks might feel more comfortable getting into the cannabis space” if the drug is downgraded on the controlled substances list.

At the next CAC subcommittee meeting, which is set for Sept. 15, members plan to bring in an expert from the Federal Drug Administration who could inform the group on what will happen if the DEA accepts the recommendation. The rescheduling subcommittee decided to meet every two weeks with hopes to present their findings in January to the CAC board.

This story was updated on Friday, Sept. 15, 2023, at 9:07 AM to correct information about the potential decrease in taxes expected through rescheduling.