Appeals Court to Rule Soon on Marijuana Rescheduling as Billions in Tax Benefits Hang in Balance

Federal Appellate Decision Expected Within Weeks on DEA Rescheduling Proposal

The U.S. Court of Appeals is preparing to issue a ruling on the Drug Enforcement Administration's notice of proposed rulemaking to move marijuana from Schedule I to Schedule III of the Controlled Substances Act. The decision follows a formal rescheduling recommendation from the Department of Health and Human Services in August 2023 and a DEA notice of proposed rulemaking published in May 2024. Industry analysts expect the appellate court to either affirm the DEA's authority to proceed with rescheduling or remand the matter for additional administrative proceedings.

Timing matters here. If the court affirms the DEA's rescheduling authority, the agency could finalize the rule within 60 to 90 days, triggering immediate changes to federal tax treatment for cannabis businesses. Under the Administrative Procedure Act, the DEA must address all substantive public comments before finalizing the rule—a process that's already consumed more than 18 months.

IRC §280E Disallowance Has Cost Cannabis Operators $5 Billion Annually Since 2018

Internal Revenue Code §280E prohibits businesses trafficking in Schedule I or Schedule II controlled substances from deducting ordinary business expenses on federal tax returns: rent, payroll, marketing, utilities. Cannabis operators can deduct only cost of goods sold under IRC §471. That leaves them with effective tax rates between 40% and 70%, depending on vertical integration and state tax structures.

According to a 2025 analysis by the Marijuana Policy Project, the cannabis industry paid approximately $5.3 billion in federal taxes attributable to §280E disallowances in 2024 alone. Multi-state operators including Curaleaf, Trulieve, and Green Thumb Industries have reported §280E-related tax expenses exceeding $100 million per year in their 10-K filings. Rescheduling to Schedule III would remove cannabis from §280E's scope entirely, as the statute applies only to Schedule I and II substances.

Rescheduling to Schedule III Unlocks Immediate Tax Deductions Under IRC §162

If cannabis is reclassified as Schedule III, operators become eligible for standard business deductions under IRC §162, which permits deductions for all ordinary and necessary expenses paid or incurred in carrying on a trade or business. The tax-code change is automatic. No separate IRS rulemaking is required.

Consider a mid-sized dispensary with $10 million in annual revenue and $6 million in operating expenses currently disallowed under §280E. Rescheduling could reduce federal tax liability by $1.2 million to $2.1 million per year, depending on the entity's state tax posture and whether it operates as a C corporation or pass-through entity. Publicly traded MSOs have disclosed in earnings calls that §280E relief would improve EBITDA margins by 15 to 25 percentage points across their portfolios.

State Tax Conformity Questions Remain Unresolved in 14 Jurisdictions

Not all states automatically conform to federal tax-code changes. Fourteen states, including California, Massachusetts, and Illinois, use modified federal adjusted gross income as the starting point for state tax calculations but have decoupled from specific IRC provisions in the past. California's Franchise Tax Board hasn't issued guidance on whether it would conform to a federal §280E repeal. The state legislature hasn't passed conformity legislation in anticipation of rescheduling.

In states that don't conform, cannabis operators could face a bifurcated tax posture: federal deductions allowed, state deductions denied. This would require dual-basis accounting and increase compliance costs. Tax practitioners are advising clients to model both conforming and non-conforming scenarios for 2027 tax planning. The National Cannabis Industry Association has called on state revenue agencies to issue advance guidance on conformity before the DEA finalizes any rescheduling rule.

Next Signal: Court Docket and DEA Final Rule Timeline

The appellate court hasn't announced a decision date, but oral arguments concluded in July 2026, and the median time to decision for this circuit is 90 days. If the court affirms the DEA's rescheduling authority, the agency must still finalize the rule—a process that includes responding to public comments and coordinating with the Office of Management and Budget. The earliest plausible effective date for Schedule III classification is January 2027, assuming no further legal challenges.

For full background on this story, see the CannIntel topic hub on DEA rescheduling. Operators should consult tax counsel now to prepare amended accounting policies and evaluate state conformity risk in their jurisdictions.