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The Trump Administration’s order to reclassify state-legal medical marijuana could have broad impacts for Colorado’s cannabis industry. But exactly what those are remains to be seen, legal experts and industry personnel say.
The industry reacted with a mix of optimism and confusion on Thursday, after U.S. Attorney General Todd Blanche signed an order immediately rescheduling medical marijuana from the most restrictive Schedule I classification to the less restrictive Schedule III. The order also put FDA-approved cannabis products into Schedule III.
While industry insiders said formally recognizing the medical value of marijuana marks progress, the effects of rescheduling are not as widespread as cannabis purveyors had hoped they would be after President Donald Trump signed an executive order last December directing the Drug Enforcement Administration to reclassify the plant.
The move also essentially splits the market in states that have legalized weed for both medical and recreational consumers.
Recreational weed, also called “adult use” in Colorado, remains a Schedule I substance in the eyes of the federal government, though the DEA is expected to start discussing whether marijuana should more broadly be reclassified in June.
“Trying to bifurcate a plant — one substance — into two different schedules doesn’t make a lot of sense to me. Cannabis is cannabis, and under the Controlled Substances Act, there are certain criteria that have to be met in order for a substance to be in a particular schedule,” said Rachel Gillette, head of the cannabis and psychedelics group at the Holland & Hart law firm. “What’s clear to me is that, especially by this order, marijuana has medical applications and therefore does not qualify as a Schedule I substance.”
“There are still significant questions about how this policy will work in practice — particularly when it comes to the distinction between cannabis regulated under state medical programs and cannabis sold through adult-use markets,” said Chuck Smith, CEO of trade group Colorado Leads, in a statement. “Clarity on how federal agencies will treat these different segments of the industry will be critical for businesses, regulators, and consumers alike.”
Gov. Jared Polis applauded the order for enabling the expansion of cannabis research and reducing unnecessary barriers for legitimate businesses.
“It’s high time the federal government is finally catching up to states like Colorado that have led on safe, regulated medical and adult-use cannabis,” Polis said in a statement. “There is still more work to be done to fully deschedule cannabis and end the disconnect between federal law and what’s working on the ground in a super-majority of states, but today’s decision is a step in the right direction.”
The most immediate effect of reclassification is expected to bolster the bottom line for cannabis companies that hold medical licenses. Those operators will be permitted to deduct certain operating expenses from taxable gross income that were previously prohibited, such as payroll, rent, utilities and insurance. That’s because the federal tax code, in section 280E, dictates that companies working with Schedule I or Schedule II substances are prohibited from deducting many standard business expenses.
“That sounds very small and arcane, but that has been one of the big stumbling blocks for industry,” said Sam Kamin, law professor at the University of Denver.
Relief from that tax burden would be significant. Most state-licensed marijuana businesses pay an effective tax rate of 70% to 80%, which is approximately twice the rate paid by other legal businesses, according to Colorado Leads.
Still, that relief wouldn’t reach the majority of Colorado companies. Since recreational marijuana sales began in 2014, the number of companies holding medical licenses has steadily declined. As of January, there were 281 licensed medical dispensaries in the state compared to 687 recreational stores, according to the Marijuana Enforcement Division. When looking at the number of cultivations, there were 207 medical compared to 478 recreational.
Complicating matters further is the fact that some companies, like marijuana manufacturer Spherex, hold both medical and recreational licenses. Chief revenue officer Ryan Hunter said it remains unclear how exactly the company would leverage the financial benefits of rescheduling.
“Some brilliant accountant is going to have to tell us how this all goes,” he said.
Beyond the tax breaks, Hunter said it was “disappointing” that rescheduling was limited to medical cannabis because there is nothing that distinguishes the plant from adult-use except having a doctor’s prescription.
“We’re talking about a controlled substance; the substance itself now has three different treatments within the federal government, and none of them are logical,” Hunter said. The third treatment he’s referring to is hemp, which is also a cannabis plant but was removed from the drug schedule and regulated as an agricultural commodity in 2018.
The long-term impacts on the local industry may be determined by the DEA’s next steps. Brian Vicente, partner at Vicente LLP, is optimistic that this week’s rescheduling is an incremental movement toward de-scheduling and maybe even legalizing marijuana altogether.
“It’s certainly a massive step for the federal government to acknowledge the medical value and the inherent effectiveness of state-run medical cannabis programs, so I think the next move after that… will be some sort of move toward acknowledging adult-use and having similar protections there,” Vicente said.
If the agency drags its feet, however, it’s possible Colorado could see a resurgence in the medical market, Kamin said. In 2024, health officials in the Biden administration recommended that the DEA reschedule marijuana, but the issue stalled out in administrative hearings, and reclassification never came to fruition.
Trump reclassifies state-licensed medical marijuana as a less-dangerous drug in a historic shift
“For business people, they have to wonder, is this where we’re going to be for 5 years or 10 years? Or is it a 6-month solution until all marijuana is moved to Schedule III?” Kamin said. “If it’s the former, these businesses are going to scramble, say, ‘We have to convert to medical, we have to emphasize medical, we have to encourage our clients to get medical marijuana cards.’ It will just be so much more financially advantageous to be on the medical side than on the recreational side for as long as these regulations are in place.”
One outstanding question Gillette has is about homegrowers, who don’t need a license to grow personal marijuana plants in Colorado. “Hypothetically, if you’re growing your own marijuana in your basement, you don’t have a state license, you can’t apply under the federal registration program. If you give it to your buddy, are you now a trafficker of Schedule I or Schedule III?” she said. “I don’t know.”
While Gillette and other advocates were encouraged by the rescheduling, they maintained that there are ultimately more questions than answers about the move.
“If they have this expedited hearing related to the broader rescheduling of cannabis, then maybe this problem will be solved in relatively short order, but it is going to create a lot of complications for businesses that either operate solely in the adult use market or businesses that hold dual licenses,” she said. “It’s strange.”
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