DOJ Reschedules State-Licensed Medical Cannabis to Schedule III

April 23, 2026

DOJ Immediately Reschedules State-Licensed Medical Cannabis to Schedule III — and Restarts the Clock on Broader Rescheduling

Jesse Harlan Alderman, Christopher (Kip) Cawley, Kevin Conroy, Michael McQueeny, Ryan Rourke Reed, Jeffrey Schultz Foley Hoag LLP + Follow Contact LinkedIn Facebook X ;) Embed

After years of false starts, the federal government has finally moved on cannabis rescheduling — at least partially. On April 23, 2026, the Department of Justice issued an Order immediately placing cannabis “subject to a state medical marijuana license” in Schedule III of the Controlled Substances Act (CSA). Simultaneously, the DEA announced an expedited administrative hearing — set to begin June 29, 2026 — to address the broader rescheduling of all cannabis from Schedule I to Schedule III.

Key Takeaways

• The Order applies only to state-licensed medical cannabis (and FDA-approved products containing cannabis, of which there are few).
• Separately, the Department of Justice has ordered the DEA to restart the formal administrative rulemaking proceedings begun in 2024 to consider the rescheduling of all cannabis under the Controlled Substances Act.
• As of April 22, 2026, medical cannabis subject to a state license is no longer subject to Section 280E of the Internal Revenue Code.
• The Order encourages Treasury to consider “retrospective relief” from Section 280E for state-licensed medical marijuana companies.
• The tax implications invite a host of questions, but at minimum tax filers with medical operations may wish to consider:
  • Filing amended returns and/or protective claims for allowable tax years; and/or
  • Implementing systems to segregate deductible costs attributable to state-licensed medical cannabis operations prospectively and/or retrospectively.
• Medical operators may file for DEA registration for all medical cannabis facilities within 60 days of publication of the final order in the Federal Register, to qualify under an expedited application process. While DEA registration is not necessarily a prerequisite for tax relief, there may be other benefits such as:
  • An ability to transact and transport medical cannabis between DEA-registered facilities in interstate commerce; and
  • Ability to utilize and/or transport cannabis for medical research purposes.
• The immediate impact of the Order on federal bankruptcy protection and listing on U.S. stock exchanges (NYSE, NASDAQ) is unclear, but this development should materially improve the financial profile of a number of operators.
• The registration, tax and other implications of this Order are broad. The Order: What It Does

The Order places two categories of cannabis products in Schedule III of the CSA, effective immediately. The first category is FDA-approved drug products containing marijuana, marijuana extracts, and marijuana-derived compounds (including delta-9 THC). The second — and far more consequential for the industry — covers cannabis and cannabis-containing products subject to a qualifying state-issued license to manufacture, distribute, or dispense cannabis for medical purposes.  This Client Update addresses state-licensed medical cannabis.

The legal authority for this action is Section 811(d)(1) of the CSA, which directs the Attorney General to control a substance under the schedule "most appropriate to carry out" U.S. treaty obligations under the Single Convention on Narcotic Drugs. As we discussed previously, this treaty-based pathway — the same mechanism DEA used in 2018 to place certain FDA-approved CBD drugs in Schedule V of the CSA — permits expedited rescheduling without the standard notice-and-comment procedures or evidentiary hearings required under Sections 811(a) and (b). The Order acknowledges the August 2023 HHS recommendation that cannabis be placed in Schedule III, finding abuse potential lower than Schedules I and II and dependence characteristics consistent with Schedule III criteria, though it notes that these scientific findings are not legally required under the treaty exception pathway.

Critically, the Order is tightly cabined. Any form of cannabis not included in an FDA-approved product or not subject to a qualifying state medical license remains a Schedule I controlled substance. Synthetic tetrahydrocannabinols remain in Schedule I. Hemp excluded from the definition of marijuana under 7 U.S.C. § 1639o is unaffected. Unlicensed bulk cannabis, marijuana extract, and delta-9 THC used to manufacture FDA-approved drugs remain Schedule I controlled substances, preserving quota controls and DEA's government-monopolization mechanism under the Single Convention. Adult-use recreational cannabis — regardless of its status under state law — is not covered.

Section 280E: The Headline for Medical Operators

For state-licensed medical cannabis businesses (or combined businesses with separable medical lines of business), the most immediate and economically significant impact of the Order is relief from Section 280E. Section 280E has long prohibited cannabis companies from deducting ordinary and necessary business expenses because cannabis was classified as a Schedule I or II substance. The result has been effective tax rates for some operators approaching or exceeding 75%. Now that state-licensed medical cannabis sits in Schedule III, qualifying businesses should be able to claim standard business deductions — an overnight transformation of the economics of medical cannabis operations. For unitary businesses that contain both adult-use and medical lines of business, the questions quickly become complex.

The Order also directs Treasury to consider retroactive relief for medical operators for prior tax years. While the precise contours of any such relief remain to be seen, affected businesses should consult with their tax counsel immediately to evaluate amended return and protective claim opportunities and begin monitoring Treasury guidance closely. The window for strategic tax planning is open now, and stakeholders should not wait for formal Treasury guidance before engaging their lawyers and tax professionals.

Registration, Compliance, and Operational Changes

For state-licensed medical cannabis entities, the Order creates an expedited DEA registration pathway that leverages existing state licensing and oversight infrastructure. The Order requires that state credentials serve as conclusive evidence of state authorization; federal registration will track state licensure status; and early applicants may continue operating under state licenses during the federal review period.

Under the standard Schedule III framework, dispensing typically requires a prescription from a DEA-registered practitioner for an FDA-approved drug. But the Order carves out state-licensed medical cannabis products from that requirement by accepting the existing state-level "recommendation" or "certification" model. In other words, the current physician-recommendation process used by state medical cannabis programs is preserved — patients will not need a traditional federal prescription, and dispensaries will not need to convert into pharmacies. This is one of the ways the Order is designed to build on, rather than displace, existing state frameworks.

The Broader Rescheduling: Resetting the Hearing Process

The second half of today's announcement addresses the broader question of rescheduling all cannabis from Schedule I to Schedule III. This is where the procedural history matters.

As we have discussed in prior posts, the rescheduling process had been effectively frozen for well over a year. The original notice of proposed rulemaking (NPRM) was published on May 21, 2024, and received approximately 43,000 public comments. The DEA issued a notice of hearing on August 29, 2024, but the proceedings stalled almost immediately. Chief Administrative Law Judge John J. Mulrooney II granted an interlocutory appeal in January 2025 after raising concerns about alleged improper ex parte communications between DEA leadership and opponents of rescheduling, including Smart Approaches to Marijuana (SAM). Judge Mulrooney canceled the scheduled hearing and stayed all proceedings pending resolution of the appeal. He then retired in August 2025, leaving the DEA with no administrative law judge to hear any matter — not just the rescheduling case, but any enforcement proceeding. Multiple joint status reports filed throughout 2025 and into early 2026 confirmed that no briefing schedule had been set and no progress had been made.

Today, the DEA formally withdrew the prior notice of hearing and terminated those proceedings. In their place, a new administrative hearing will begin on June 29, 2026, with firm procedural deadlines designed to prevent the kind of stalling that characterized the prior process. A new notice of hearing is being published in the Federal Register. DEA Administrator Terry Cole stated that the agency is "expeditiously moving forward with the administrative hearing process — bringing consistency and oversight to an area that has lacked both."

The practical significance of this reset extends well beyond medical cannabis. If the broader rescheduling is completed through this hearing process, the resulting final rule would extend Schedule III status to the adult-use cannabis market as well — with all of the Section 280E, research, banking, and capital markets implications that entails. A second final rule emerging from these proceedings would represent the capstone of the federal rescheduling process that began under the Biden Administration in 2022.

What This Does Not Do

It is important to note the limits of today's action. The Order does not legalize cannabis for recreational purposes or decriminalize cannabis possession. It does not — at least immediately — resolve the uplisting, banking, and anti-money laundering challenges facing cannabis businesses; financial institutions will continue to evaluate risk under the Bank Secrecy Act and applicable FinCEN guidance, although these risks have been at least optically mitigated. Cannabis-specific criminal penalties under 21 U.S.C. § 841, including quantity-based mandatory minimums, are unaffected by rescheduling.

For operators, investors, and other stakeholders, the clarified federal framework and reduced tax burden will improve margins, capital formation, and diligence certainty, but non-medical adult-use operations remain in limbo pending the conclusion of the hearing process.

Litigation Ahead

This Order will be challenged. Opposition to rescheduling has been organized and vocal: 22 Republican senators and 26 House Republicans formally urged the Administration to abandon rescheduling prior to the December 2025 Executive Order, and SAM has reportedly retained former Attorney General Bill Barr to litigate against any final rescheduling action. The immediate rescheduling via the Section 811(d)(1) treaty exception — while legally permissible and grounded in DEA precedent — is likely to face challenges on Administrative Procedure Act grounds. Opponents may argue that the treaty exception pathway was improperly invoked or that the evidentiary record is insufficient. Courts may be asked for stays or injunctions that could delay implementation, both with respect to the immediate Order and any final rule that emerges from the June 29 hearing process.

The Order's express severability provision signals that DOJ anticipates partial challenges and intends for unaffected provisions to survive any judicial narrowing.

What to Watch

The next several months will be critical. Market participants and their counsel should focus on the following:

May–June 2026: The Federal Register notice governing the new hearing will set deadlines for participation, pre-hearing briefing, and evidence submission. Companies with an interest in the outcome — whether medical or adult-use — should evaluate whether to participate directly or through industry associations. Simultaneously, monitor IRS and Treasury guidance on Section 280E treatment and potential retroactive relief with your tax professionals.

June 29, 2026 and beyond: The administrative hearing will compile a new evidentiary record on the broader rescheduling of all cannabis. If the process proceeds on the DOJ's timeline, a final rule could be published as soon as late 2026 — though litigation could extend that horizon.

Ongoing: Congress may act on related fronts, including the SAFER Banking Act and adjustments to the statutory definition of hemp following November 2025 legislation that changes hemp-derived THC thresholds effective November 2026. DOT-regulated employers should watch for guidance on whether rescheduling affects the authority to test safety-sensitive employees for THC under current HHS Mandatory Guidelines.

Conclusion

Today's Order is both consequential and calibrated. It normalizes FDA-approved and state-licensed medical cannabis within a Schedule III framework, relieves the crushing Section 280E tax burden on qualifying medical operators — with the prospect of retroactive relief — and operationalizes treaty compliance through tailored registration and permit rules. At the same time, it launches a fresh hearing process that could ultimately bring the adult-use market within Schedule III as well. For cannabis businesses, investors, and their counsel, the action items are immediate: reassess tax positions, prepare for DEA registration under the new pathway, align compliance programs with the Order's treatment of state documentation and security standards, and engage with the upcoming hearing process. The federal cannabis landscape has shifted significantly — and the next phase is already underway.

;) ;) Report

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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