State cannabis regulators in South Dakota say federal officials have left them with more questions than answers about how marijuana rescheduling will affect their medical program, despite the potential for major changes to banking access and tax treatment.
Whitney Brunner, a South Dakota cannabis official, told state lawmakers Monday that the federal government has provided minimal guidance on the transition process as the Drug Enforcement Administration moves to reclassify cannabis from Schedule I to Schedule III. "At the state level, we probably have more questions than answers," Brunner said during the legislative briefing.
The comment reflects growing frustration among state regulators who are trying to prepare their cannabis industries for the federal policy shift but lack concrete information about implementation timelines and regulatory changes.
Banking and Tax Changes Expected
Officials told lawmakers that rescheduling should resolve two major pain points for South Dakota's medical cannabis operators. Moving marijuana to Schedule III would allow state-licensed businesses to claim standard federal tax deductions currently prohibited under Internal Revenue Code Section 280E, which bars deductions for businesses trafficking in Schedule I or II controlled substances.
The change would also ease banking restrictions that have forced many cannabis companies to operate on a cash basis. Federal banking regulations currently make most financial institutions reluctant to serve marijuana businesses, but Schedule III classification could open access to traditional banking services and loans.
South Dakota launched its medical marijuana program in 2021 after voters approved a ballot measure. The state currently licenses dispensaries and cultivation facilities but has faced challenges common to state-legal cannabis programs operating under federal prohibition.
Regulatory Uncertainty Persists
But the lack of federal communication has left state officials uncertain about key operational details. Regulators don't know when the rescheduling will take effect, what new federal compliance requirements might apply to state programs, or how existing state regulations might need to change.
The DEA proposed moving marijuana to Schedule III in May 2024 following a recommendation from the Department of Health and Human Services. The agency opened a public comment period and held administrative hearings, but has not announced a final decision timeline.
Other states have reported similar difficulties getting information from federal agencies about the rescheduling process. State cannabis regulators typically operate independently but must navigate federal law when it intersects with banking, taxation, and controlled substances regulations.
What's Next
The rescheduling process remains in administrative review at the DEA, with no clear timeline for a final rule. Once implemented, the change would mark the most significant shift in federal marijuana policy since the Controlled Substances Act classified cannabis as Schedule I in 1970.
State officials said they will continue monitoring federal developments and preparing for potential changes to their regulatory framework. But without direct communication from federal agencies, they told lawmakers, planning remains difficult.
The Monday briefing highlighted the disconnect between state-level cannabis programs operating in 38 states and federal agencies that have provided little guidance on managing the transition to a new regulatory framework.
This article is based on original reporting by www.marijuanamoment.net.
