The reclassification of state-licensed medical cannabis to Schedule III under the Controlled Substances Act by the Trump administration has initiated a period of potential regulatory reform across U.S. states, aiming to facilitate medical cannabis expansion. This federal policy shift, signed by Acting Attorney General Todd Blanche, allows state-licensed medical cannabis businesses to deduct standard business expenses as of Q1 2026, with possibilities for retrospective relief. This contrasts with adult-use cannabis businesses, which remain subject to punitive tax burdens under Section 280E of the Internal Revenue Code, pending an expedited administrative hearing scheduled from June 29 to July 15.
Industry data and analytics provider Headset estimates this federal policy change represents approximately US$268,000 in annual tax savings for a typical dispensary across 24 analyzed state markets, potentially improving the financial viability of numerous storefronts under the Schedule III classification, as reported by Cannabis Business Times.
State-Level Regulatory Adjustments for Medical Cannabis Expansion
In response to the federal reclassification, some state regulators are already implementing or considering actions that could influence medical cannabis expansion, particularly in markets with established adult-use programs.
California’s Licensing Streamlining
The California Department of Cannabis Control (DCC) announced on April 30 a streamlined process for businesses to modify their license designations. Cultivation licensees are no longer required to wait until renewal to request changes to their adult-use (A) or medicinal-use (M) designation. Furthermore, the DCC has removed the requirement for new local authorization for requests that:
- Change a license to M-designation only.
- Add an M-designation to an existing A-designation license.
These adjustments are intended to simplify and expedite the review process, with the DCC indicating a connection to the federal rescheduling. The department has requested a meeting with the U.S. Drug Enforcement Administration (DEA) to discuss these changes, though the DEA has stated it will release information publicly and comprehensively rather than through state-specific briefings.
California’s medical cannabis market, which peaked at over US$2.5 billion in sales in 2017, saw sales decline to less than US$185 million in 2025. This decline has been attributed to factors such as high taxes, registration fees, and limited product availability for specific conditions, a trend observed in other states following adult-use legalization.
New Jersey and Washington D.C. Approaches
New Jersey, which commenced adult-use sales in 2022 through existing medical operators, may see its Cannabis Regulatory Commission (CRC) consider pathways for new adult-use entrepreneurs to enter the medical market. Susanna Puntel, a cannabis and hemp consultant and national council member for the American Trade Association for Cannabis and Hemp, noted on LinkedIn that discussions are underway regarding processes for adult-use dispensaries to expand into medical operations.
Washington, D.C., presents a unique case. Despite voters legalizing adult-use cannabis in 2014, all licensed cannabis sales in the district are considered medical due to a congressional rider, orchestrated by U.S. Rep. Andy Harris, R-Md., which has restricted the district’s ability to regulate an adult-use retail industry since 2015. In 2022, Mayor Muriel Bowser and city council members introduced a measure allowing adults aged 21 and older, including tourists, to self-certify as medical cannabis patients without a doctor’s recommendation to purchase cannabis at licensed dispensaries. This framework could serve as a model for other states seeking to ease federal restrictions for their adult-use businesses, particularly given the uncertain outcome of the upcoming administrative hearing.
Future Outlook and Challenges
The upcoming administrative hearing will involve interested parties debating the merits of the U.S. Department of Health and Human Services’ recommendation for rescheduling. Rep. Andy Harris, R-Md., has expressed opposition to the rescheduling, stating in a 2024 letter to the DEA that the HHS recommendation lacks substantive data. The outcome of this hearing will further shape the regulatory landscape and the trajectory of medical cannabis expansion across the United States.
Disclaimer: This article is for informational purposes only and does not constitute medical advice. Hemp Gazette does not provide medical recommendations, diagnoses, or treatment plans. Always consult a qualified healthcare practitioner before making any decisions regarding your health or any medical condition. Statements concerning the therapeutic uses of hemp, cannabis, or cannabinoid-derived products have not been evaluated by Australia’s Therapeutic Goods Administration (TGA). Medicinal cannabis products in Australia are accessed via prescription pathways under TGA regulation.
