WASHINGTON — The federal government’s long-running effort to move marijuana from Schedule I to Schedule III has entered another critical stage — potentially opening the door to major federal tax relief for cannabis businesses in Michigan and Ohio without legalizing recreational marijuana nationwide.

The Drug Enforcement Administration is urging Chief Administrative Law Judge Derek Julius to recommend moving marijuana to Schedule III, arguing in its final brief that evidence presented during an 11-day hearing supports removing cannabis from the nation’s most restrictive drug category.

The government’s final brief was filed Aug. 17. Julius will now consider the testimony and closing arguments before issuing a recommended decision.

There is no deadline for him to act, and his recommendation will not be the final word. The DEA administrator retains final decision-making authority.

For Michigan and Ohio cannabis businesses, however, Schedule III isn’t primarily about legalization.

It’s potentially about taxes — and a federal tax rule that can dramatically increase what marijuana businesses owe the IRS.

Schedule III Could Eliminate A Major Federal Tax Burden

Section 280E of the Internal Revenue Code prevents businesses trafficking in Schedule I or Schedule II controlled substances from deducting many ordinary business expenses.

That can include payroll, rent, advertising and administrative costs that most other legal businesses routinely deduct.

If the broader rescheduling now before DEA ultimately moves adult-use marijuana to Schedule III, marijuana would no longer fall within the Schedule I and II categories covered by 280E.

The potential impact is substantial.

The IRS Taxpayer Advocate Service previously illustrated the problem using a hypothetical marijuana retailer generating $1 million in revenue.

After accounting for cost of goods sold, the business would normally have $50,000 in taxable income after another $200,000 in ordinary business expenses.

But because those expenses could not be deducted under 280E, the hypothetical cannabis company instead had $250,000 in taxable income.

In the federal example, its tax bill jumped from $15,000 to $75,000.

That’s five times as much.

Robin Schneider, executive director of the Michigan Cannabis Industry Association, previously told Bridge Michigan that eliminating the 280E tax liability would be the “biggest impact” of marijuana rescheduling for the association’s members.

That relief could be particularly significant in Michigan, where cannabis companies are fighting for survival in one of America’s most price-competitive marijuana markets.

Michigan Marijuana: Less Than $60 An Ounce

Michigan’s adult-use marijuana market has become enormous — and extraordinarily inexpensive for consumers.

State Cannabis Regulatory Agency data show adult-use flower has recently been selling for roughly $60 an ounce, continuing a dramatic decline from the early years of recreational marijuana sales.

Michigan’s average ounce price was $59.07 in January and $59.85 in February, while the CRA reported $58.18 in June.

The sustained sub-$60 pricing illustrates the extraordinary pressure facing growers, processors and retailers.

Michigan adult-use dispensaries generated about $3.17 billion in sales during 2025, down from $3.27 billion in 2024, the first annual decline in the state’s recreational market.

Operators are now also contending with Michigan’s new 24% wholesale marijuana tax, which took effect Jan. 1.

The tax applies to certain wholesale sales and transfers of adult-use marijuana and comes on top of Michigan’s existing 10% retail marijuana excise tax and 6% sales tax.

But the future of the wholesale tax remains unsettled.

Cannabis industry plaintiffs have challenged the 24% tax in court, arguing that lawmakers improperly changed provisions of the voter-approved 2018 Michigan Regulation and Taxation of Marihuana Act without the legislative supermajority they contend was required.

The dispute has been pushed toward expedited review by the Michigan Supreme Court, meaning the legality and long-term future of the tax remain unresolved.

Michigan cannabis businesses therefore face an unusual combination of tax uncertainty at both the state and federal levels.

They could potentially gain substantial federal tax relief if marijuana moves to Schedule III while simultaneously awaiting the outcome of a court battle over Michigan’s new 24% wholesale tax.

Ohio Consumers Still Pay Far More

Ohio presents a very different cannabis market.

Recreational sales began in August 2024, making Ohio’s adult-use industry considerably younger than Michigan’s.

And marijuana remains much more expensive south of the state line.

Recent Ohio data put the average flower price at roughly $6.60 per gram. At 28.35 grams per ounce, that works out to approximately $187 an ounce if converted directly.

Michigan flower, by comparison, has been averaging around $60 an ounce.

In other words, Ohio’s average per-gram flower price converts to more than three times Michigan’s average ounce price.

The comparison isn’t perfect because Ohio and Michigan package and report cannabis differently. But the price disparity is unmistakable.

And consumers have noticed.

Monroe Has Become Part Of The Ohio Cannabis Market

The enormous price difference has helped turn Monroe and other southeast Michigan communities into shopping destinations for Ohio cannabis consumers.

A shopper who sees flower approaching the equivalent of $190 an ounce in Ohio can cross into Michigan and encounter average prices near $60.

But there’s a catch.

Marijuana purchased legally in Michigan cannot legally be transported across state lines into Ohio under federal law.

Moving marijuana to Schedule III would not suddenly make those border crossings legal.

It could, however, eventually change some of the economics driving them.

Could Schedule III Narrow The Michigan-Ohio Price Gap?

Ending 280E could leave Ohio cannabis companies with significantly more after-tax cash.

Operators could use that money to expand cultivation, add retail locations, invest in equipment — or compete more aggressively on price.

Michigan businesses would receive the same federal tax advantage.

But many Michigan operators could use the savings simply to offset razor-thin margins and the state’s new 24% wholesale tax — assuming that tax survives the ongoing court challenge.

That creates an intriguing competitive question.

Could federal tax relief help Ohio operators narrow their enormous price disadvantage while simultaneously helping Michigan companies survive their own price war?

It won’t happen overnight.

Ohio’s higher prices reflect more than federal taxes, including differences in licensing, supply, market maturity and regulation.

But eliminating one of the cannabis industry’s largest federal tax burdens could change business economics on both sides of the border.

Schedule III Is Not Federal Legalization

One distinction remains critical.

Moving marijuana from Schedule I to Schedule III would not legalize recreational marijuana nationwide.

Marijuana would remain a federally controlled substance, and Schedule III would not automatically eliminate all of the banking, financing, employment and regulatory complications confronting cannabis businesses.

Nor would it authorize consumers to transport recreational marijuana between Michigan and Ohio.

But eliminating 280E for adult-use marijuana businesses could by itself represent one of the biggest financial changes the legal cannabis industry has experienced.

What Happens Next?

With testimony complete and final briefs submitted, attention now shifts to Julius.

He will prepare a recommended decision based on the administrative record. His recommendation is not binding; the DEA administrator ultimately has authority over the final agency decision.

Opponents could then pursue additional legal challenges, meaning the rescheduling battle isn’t necessarily over even after DEA acts.

But a major milestone has been reached: The testimony is finished, DEA has formally made its closing argument for Schedule III, and marijuana rescheduling has moved another step toward a decision. DEA’s Aug. 17 brief specifically asks Julius to recommend Schedule III.

For Michigan and Ohio, the stakes extend well beyond Washington drug policy.

They involve taxes, business survival, consumer prices — and an increasingly fierce cannabis competition developing along the Michigan-Ohio border.