Same jar. Same batch. Same licensed supply chain. A patient buys some. Another adult buys some.
Since April 28, 2026, federal law puts marijuana “subject to a state medical marijuana license” in Schedule III. So what puts the adult’s half of that jar back in Schedule I? The cash register? If the answer is “nothing,” Schedule III medical license coverage follows the batch, and a dual-licensed dispensary may be out from under § 280E, the tax rule that bars deductions for rent and payroll.
We broke it down on Cannabis Legalization News. Watch it, then read on for what’s happened since and what a formal 280E opinion on your own licenses actually tests.
Want this applied to your own licenses? We review the licenses, suppliers and batch records behind the position and tell you what they actually support. Request a 280E review
What the Schedule III medical license rule actually says
The new Schedule III entry covers marijuana “in a U.S. Food and Drug Administration approved product or subject to a state medical marijuana license.” The rule defines that license as one “authorizing the licensee to manufacture, distribute, and/or dispense marijuana or products that contain marijuana for medical purposes.”
Notice what isn’t there. The listing doesn’t say “sold to a patient.” It doesn’t say “after you register with DEA.” And the Schedule I entry where marijuana used to live opens with “Unless specifically excepted or unless listed in another schedule.” If the batch still qualifies for Schedule III, Schedule I yields.
The order even talks taxes. It says state licensees “will no longer be subject to the deduction disallowance imposed by Section 280E.” Then comes the limit: “Nothing in this rule constitutes a determination regarding federal tax liability.” Real support, real limit. The work is proving what the medical license covers.
Follow the batch
Take a batch that starts out covered: grown by a medical-licensed cultivator and shipped to a dispensary that holds a medical license. Missouri’s comprehensive licenses serve patients and adult-use customers alike. Illinois gets there from the supply side, because its cultivation centers, craft growers and infusers can all sell into medical dispensaries.
Now ask where Schedule III medical license coverage ends. At the transfer? At the dispensary door? When the buyer shows an ID instead of a patient card? A state-permitted adult-use sale doesn’t, by itself, prove the federal medical-license coverage ended. Somebody has to point to the legal change.
GHB already answered this: a bad sale changes the penalty, not the schedule
Federal law has split one drug across schedules before. In the Date-Rape Drug Prohibition Act of 2000, Congress directed DEA to put GHB in Schedule I and approved GHB drug products in Schedule III. When the approved product gets sold unlawfully, it doesn’t jump schedules. DEA’s own fact sheet says Xyrem is a Schedule III drug and that Xyrem trafficking gets Schedule I penalties.
Unlawful selling changed the punishment. It didn’t change the schedule. And § 280E runs on the schedule.
The April order also admits its line wasn’t forced. DEA wrote that there were “several legally viable scheduling options” that would satisfy the treaty. The treaty gets enforced through registrations, crop purchases and criminal law. Those can make an adult sale unlawful. They don’t move the product to Schedule I.
The government’s best arguments, and our answers
“It’s a medical exception.” The license definition says “for medical purposes,” and the rule says DEA registrations “do not authorize” activity “for non-medical purposes.” That’s the strongest version of their case. But the registration line answers whether an activity is lawful, not which schedule the product is in. The listing still says “subject to a state medical marijuana license.” In a Tax Court brief this year, the IRS paraphrased it as marijuana “sold pursuant to” a medical license. That’s not what the rule says. The same brief concedes § 280E follows what’s actually listed. Hold them to it.
Medpharm. DEA’s Medpharm decision calls manufacturing for the recreational market diversion. It’s also a default order: the applicant didn’t timely request a hearing, so DEA’s allegations were taken as admitted. It denies a bulk-manufacturer registration, takes effect November 6, 2026, and never mentions § 280E.
Hello Farms. The Sixth Circuit said April’s rescheduling covers only medical marijuana, and the IRS will quote that. But it’s a contract-enforcement case about a 2020 deal. It never applied the words “subject to a state medical marijuana license,” and it doesn’t bind the Tax Court for a business in Illinois or Missouri, which sit in other circuits.
New since we filmed: DEA’s Minnesota order. In late October, DEA told a Minneapolis dispensary that Minnesota’s dual-purpose license “falls outside” the definition of a state medical license. This is the government’s best new argument, so take it seriously. Then read the definition again. It requires a license “authorizing” medical activity. It doesn’t say “only.” The order’s own treaty footnote uses the word “exclusively”; the definition DEA actually adopted leaves it out. It’s also an order to show cause, a charging document rather than a decision, and it never mentions § 280E. Illinois, which issues medical and adult-use licenses separately, is a different structure from the single Minnesota license DEA went after.
Notice, too, that the government’s readings don’t line up. DEA’s order looks at the license. The IRS brief looks at the sale. Treasury expects to apportion expenses by activity. Those can’t all be the test.
Why the 280E answer turns on the schedule
Section 280E denies deductions to a business trafficking in Schedule I or II substances. Schedule III isn’t on the list. If the marijuana stays in Schedule III, selling it without federal authorization may be illegal, but it doesn’t drag the business back under § 280E. That would take Congress.
Here’s the example from the video. A store has $1 million in sales and $600,000 in cost of goods sold. Another $300,000 goes to rent, payroll and other ordinary expenses. Real profit: $100,000. Disallow those expenses and taxable income is $400,000. That’s what the schedule question is worth.
Two more pieces matter. Treasury announced that guidance is expected to treat the change as applying for a business’s full taxable year that includes the order’s effective date, which for a calendar-year business reaches back to January 1, 2026. That’s expected guidance, not a rule yet. And winning for one batch doesn’t exempt a mixed business: inventory that doesn’t qualify still gets apportioned.
What a 280E opinion on your Schedule III medical license tests
No court has decided this yet. That’s exactly why the position needs a written legal opinion on your actual facts, not a screenshot of a YouTube video. Ours work through:
- Your licenses and dates. When your medical coverage started, and how the periods before and after it differ.
- Your suppliers. Which licensee shipped each package, from your state tracking records, and whether that license counts as a Schedule III medical license under the federal definition.
- The adverse authority. Medpharm, Hello Farms, DEA’s Minnesota order and the IRS’s Tax Court briefs, with our answer to each.
- The filing standard. What standard the position meets, and how to disclose it on Form 8275.
- The full-year question. How Treasury’s announced transition rule applies to your tax year.
- The downside plan. How to size a cash reserve, which records to keep, and what would change the answer.
Does disclosing on Form 8275 mean an audit? Not automatically. The IRS describes the form as a way to disclose a position to avoid certain penalties, and its instructions say nothing about selecting returns. It does put the position on the record, so build the file as if an examiner will read it.
What an opinion isn’t: it doesn’t bind the IRS, and nobody can promise you the result. Request a review below.
For the operations side, Collateral Base covers how dispensaries keep 280E books while the dual-license question is open. For the longer legal read, see Does § 280E still apply to shared medical and adult-use inventory?, our Schedule III legal challenge breakdown and the Schedule III hub. CLN is tracking the first DEA registrations for medical dispensaries.
Request a 280E License & Supply-Chain Review
At Howard East, we read the law, examine your licenses and follow your actual supply chain, batch by batch, with your tax professionals. Tell us only enough to route the inquiry, and we’ll discuss whether a scoped review or a formal opinion fits your operation. Prefer the phone? Call (833) 952-3111.
Open the consultation form in a new tab
Submitting a request does not create an attorney-client relationship. Don’t send tax returns, license scans, patient data or confidential facts through the form.
Attorney Advertising. General information about federal tax and controlled-substance rules, not legal or tax advice for your return. State licensing rules vary. No outcome is promised. Reading this post or contacting us does not create an attorney-client relationship. Keep confidential records and patient information out of comments and your first inquiry.
