Cannabis Rescheduling: DOJ Announces Rescheduling of Certain Products

More than four months after President Donald Trump issued an executive order directing the U.S. Department of Justice (DOJ) to swiftly complete the process of reclassifying cannabis from a Schedule I drug to Schedule III of the Controlled Substance Act (CSA), the DOJ and U.S. Drug Enforcement Administration (DEA) on April 23, 2026, issued an order (Order) "immediately placing both FDA-approved products containing marijuana and marijuana products regulated by a state medical marijuana license in Schedule III of the Controlled Substances Act." A Notice of Proposed Rulemaking (NPRM) also accompanied the announcement and Order, setting forth the broader goal of rescheduling marijuana from Schedule I to Schedule III. This is the biggest federal shift on cannabis regulation since 1970.

The Order

The Order reschedules FDA‑approved products and marijuana subject to a qualifying state‑issued license from Schedule I to Schedule III. The Order relies on the U.S. Attorney General's treaty‑based obligation to enforce the CSA and authority to unilaterally reschedule these products to comply with international obligations.

FDA-Approved Drugs and State Medical Marijuana Licenses

Under the Order, all FDA‑approved products containing marijuana are federally classified as Schedule III substances. As a result, the full range of Schedule III requirements under the CSA applies to these products, including obligations related to registration, disposal, fees, recordkeeping and reporting, labeling and security. It remains unclear how many products or sponsors are captured by the Order, particularly given that certain cannabis‑containing FDA‑approved drugs had previously been rescheduled from Schedule I under the CSA and placed in other schedules. In addition, many states have their own schedules, meaning that federal rescheduling does not immediately change state scheduling.

Additionally, under the Order, marijuana and marijuana‑containing products intended for medical use that are subject to a qualifying state‑issued license to manufacture, distribute or dispense marijuana are classified as Schedule III substances. The Order points out that in 2023, the U.S. Department of Health and Human Services performed a scientific evaluation and scheduling recommendation that marijuana be controlled in Schedule III.

The Order notes that 40 U.S. states have legalized marijuana for medical purposes under state law and, in doing so, have established licensing regimes that restrict the cultivation, manufacture and distribution of marijuana to entities approved by designated state agencies.

To effectuate the rescheduling of state‑licensed medical cannabis while maintaining federal oversight, the Order establishes a new DEA registration requirement for state‑licensed medical marijuana entities.

Under this registration framework, applicants must "submit their existing state credentials as conclusive evidence of compliance with state-law," and DEA is directed to grant registration unless doing so would be inconsistent with the public interest. DEA is further instructed to "process applications submitted within 60 days of publication within six months" and permit early applicants to continue operating under their state‑issued licenses while their applications are under review.

The Order does not apply to recreational cannabis. The Order specifically states that synthetic cannabis and hemp are excluded and does not change the federal definition of hemp. It also maintains unlicensed bulk marijuana as a Schedule I drug.

Taxes

Under current law, all cannabis operators can offset revenue with cost of goods sold, but they cannot deduct ordinary and necessary business expenses related to the sales of Schedule I or II drugs. Though Schedule I drugs are subject to Internal Revenue Code Section 280E, moving to a Schedule III allows medical cannabis operators to deduct ordinary and necessary business expenses, e.g., rent, payroll, marketing, accessories, merchandise and operating expenses.

This will apply starting in tax year 2026, but the Order also directs the IRS "to consider providing retrospective relief from Section 280E liability for taxable years in which a state licensee operated under a state medical marijuana license." Mixed operators (medical and recreational) will need expense allocation guidance from the IRS.

Banking and Financial Services

The Order represents an important step in facilitating access to financial services for a subset of the cannabis industry, including access to deposit accounts and loans. Because the Order does not apply to recreational or synthetic cannabis products, the immediate effect of the Order may be a two-tier status, where pure-play medically licensed cannabis businesses see material benefits, while businesses offering any recreational or synthetic products (even if they also offer licensed medical cannabis products) operate under the status quo.

Since 2014, the Financial Crimes Enforcement Network (FinCEN) has established a compliance framework outlining its expectations of financial institutions regarding the Bank Secrecy Act/Anti-Money Laundering (BSA/AML) requirements as they relate to marijuana. The framework has three main elements: customer due diligence, mandatory filing of three types of marijuana-specific Suspicious Activity Reports (SARs) and ongoing monitoring of red flags.

FinCEN has delineated three types of suspicious activity reports (SARs) that must be filed when a financial institution engages with a marijuana-related business:

• "Marijuana Limited": Filed when the financial institution determines that the cannabis-related business does not implicate a DOJ enforcement priority and does not violate state law.
• "Marijuana Priority": Filed when the financial institution reasonably believes the business implicates a DOJ enforcement priority or violates state law.
• "Marijuana Termination": Filed if deemed necessary to terminate relationship to comply with its AML program.

The rescheduling of certain marijuana products should not fundamentally alter the existing framework because marijuana remains a Schedule III drug subject to SAR reporting. However, the AML risks associated with Schedule III products are lower than those associated with Schedule I products, which may encourage more financial institutions to consider providing services to marijuana-related businesses. The compliance challenges will include assessing often-complex factual circumstances to determine whether transactions processed by the financial institution involve proceeds from compliant Schedule III products, Schedule I products or a mix of both.

Payments

Currently, cannabis businesses are unable to access most payment card network services, and this is likely to remain true in the near term. Card transactions are governed by network operating rules. Network rules are contracts, often thousands of pages long, that generally fall under the sole control of the networks themselves. With very limited exceptions, these rules prohibit marijuana product sales from being processed. Though compliance with law (which will be affected by the Order) is one factor under network rules, the rules are sometimes more specific as they relate to cannabis products. Expect the payment networks to examine their operating rules in light of the Order, though this will likely take months and the outcome is unpredictable.

By contrast, cannabis businesses are currently able to access account-to-account automated clearing house (ACH) transactions under the operating rules of Nacha (formerly NACHA, the National Automated Clearing House Association). Because every ACH transaction must be originated by an originating depository financial institution (ODFI), financial institutions still serve as gatekeepers, and few have been willing to serve in that role. The Order seems likely to increase the number of financial institutions willing to serve as ODFIs for medical cannabis operators.

Finally, at least one owner of independent debit networks (debit card networks not operated by large credit card networks) has signaled its intent to allow cannabis transactions to run on its card rails. As with ACH transactions, debit cards involve sponsoring financial institutions, and the gatekeeper role of these institutions has been a rate-limiting factor on adoption of PIN debit transactions. The Order is likely to increase the number of financial institutions willing to sponsor transactions on these PIN debit networks, but the impact on card processing will not be immediate.

The NPRM

Though the Order does not reschedule cannabis that is neither in an FDA-approved product nor subject to a qualifying state-issued license, the DOJ intends to reschedule cannabis at large. To reschedule cannabis at large, the CSA generally requires notice and comment rulemaking to occur, including written comments and a hearing before the DEA's Administrative Law Judges (ALJs).

The DOJ is terminating an earlier administrative hearing on the rescheduling process that was tabled near the end of the Biden Administration due to litigation from reform advocates alleging improper agency communications and flawed witness selection.

Next Steps

The proposed hearing date for the rescheduling under the Order is currently set for June 29, 2026. All "interested persons" – those adversely affected or aggrieved by the proposed rule – who wish to participate in the ALJ hearing must provide written notice of their intent to participate by May 20, 2026, if filing via mail or May 24, 2026, if filing via email.

Based on the anticipated volume of interested persons and responses to the NPRM, it remains in question if a hearing can be held as quickly as June 29, 2026. The Federal Register filing on the hearing says it "will conclude not later than July 15."

The DOJ's intent is to move quickly to reschedule cannabis, including cannabis not covered under the Order.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.