Challenging 280E: HHS's Authority and the Collapse of Drug Scheduling Powers

A recent article published in the Yale Law Journal Forum by Mason Marks provides what may be the most compelling legal framework yet for challenging the application of IRC Section 280E to cannabis businesses. The article's central argument is straightforward but powerful: HHS has exclusive authority over scientific and medical scheduling determinations, and its recommendations are binding on the DEA.

HHS's Binding Authority

Under the Controlled Substances Act, the scheduling process involves two agencies: HHS conducts the scientific and medical evaluation, and the DEA handles the administrative and regulatory aspects. But the statute is clear that HHS's scientific and medical findings are binding. The DEA cannot override HHS on questions of medical utility, abuse potential, or safety profile.

When HHS recommended in August 2023 that cannabis be moved to Schedule III, that recommendation carried the force of the agency's statutory authority. The DEA's delay in acting on the recommendation does not diminish the legal significance of HHS's determination.

What This Means for 280E

If HHS has determined that cannabis meets the criteria for Schedule III - meaning it has accepted medical use and a lower abuse potential than Schedule I - then the basis for applying 280E to cannabis businesses is fundamentally undermined. Section 280E applies only to substances in Schedule I or II. If the substance no longer meets the scientific criteria for those schedules, the statute's applicability is an open question regardless of the DEA's formal action.

Cannabis operators now have a defensible rationale to file amended returns recovering taxes paid under 280E, use alternative accounting methods to maximize deductions going forward, and exclude 280E adjustments from current and future filings.

Leading MSOs Are Already Acting

This is not a theoretical exercise. Leading multi-state operators have already begun adopting this strategy. Major publicly traded cannabis companies have adjusted their tax positions based on the HHS recommendation and the legal arguments supporting reclassification. They are filing amended returns, claiming refunds, and adjusting their go-forward tax positions.

The question for smaller operators is whether they can afford to wait. Every quarter that passes without taking action is a quarter of deductions left on the table - deductions that may be recoverable if the legal arguments succeed.

The Marks article adds significant academic weight to a position that Calyx has been advancing for our clients. We encourage every cannabis operator to discuss these developments with their tax advisor.