Federal ruling advances proceedings that could eventually allow recreational marijuana businesses to deduct ordinary operating expenses and reduce federal income tax

WASHINGTON DC  — A federal Drug Enforcement Administration judge Thursday rejected an attempt to reopen marijuana rescheduling hearings, removing a potential procedural obstacle to a decision that could deliver significant federal income tax relief to cannabis businesses in Michigan and Ohio.

DEA Chief Administrative Law Judge Derek C. Julius denied a request from opponents of rescheduling to reopen hearings for additional testimony and document discovery. However, he allowed supplemental written arguments concerning a federal watchdog report that raised questions about federal drug-scheduling procedures.

The ruling does not immediately change marijuana’s federal classification or eliminate tax restrictions on recreational cannabis businesses. It does allow the administrative process to continue without another round of testimony.

According to NORML’s October 22 report, the judge concluded that further testimony was unnecessary, although the parties could address the watchdog report through written briefs.

Section 280E: The Financial Stakes For Cannabis Businesses

For Michigan and Ohio cannabis operators, one of the most consequential issues is Section 280E of the Internal Revenue Code.

The provision generally prohibits businesses trafficking in Schedule I or II controlled substances from deducting ordinary operating expenses when calculating federal taxable income.

Unlike most retailers, recreational marijuana dispensaries generally cannot deduct employee wages, building rent, utilities, advertising, insurance and other ordinary operating expenses.

Although cannabis businesses can still account for the cost of goods sold, the inability to deduct other expenses can produce substantially higher federal tax liabilities than comparable businesses face.

Moving recreational marijuana from Schedule I to Schedule III would remove the Section 280E restriction for qualifying operations, potentially allowing companies to retain more earnings, improve cash flow, hire employees and reinvest in their businesses.

However, rescheduling would not automatically legalize recreational marijuana nationwide or eliminate other federal restrictions.

Michigan’s Medical Cannabis Market Has Nearly Disappeared

The distinction between medical and recreational marijuana is particularly important in Michigan, where medical cannabis now accounts for barely one-tenth of 1% of regulated marijuana sales.

According to September 2026 figures from the Michigan Cannabis Regulatory Agency reported by MITechNews, recreational marijuana generated approximately $242.26 million in sales, compared with just $264,549 for medical marijuana.

Recreational marijuana represented approximately 99.89% of Michigan’s regulated cannabis market, while medical sales accounted for only 0.11%.

Medical marijuana sales also declined 34.4% from September 2025, when the state recorded $403,124.

The figures demonstrate why broader federal rescheduling is particularly important to Michigan businesses. Nearly all regulated marijuana sales occur in the recreational market, where Section 280E remains a significant federal tax burden.

Michigan operators also face a 24% state wholesale marijuana tax that took effect January 1, 2026, in addition to the existing 10% retail excise tax and applicable sales taxes.

That additional wholesale tax remains the subject of litigation. Federal rescheduling would not automatically eliminate Michigan’s state marijuana taxes.

Ohio’s Recreational Market Now Accounts For 86% Of Sales

Ohio’s cannabis industry is also increasingly dominated by recreational marijuana, although its medical market remains substantially larger than Michigan’s.

According to the Ohio Division of Cannabis Control’s October 10 sales update, Ohio generated an estimated $1.05 billion in combined medical and recreational marijuana sales during 2026 through October 10.

Approximately $904.3 million came from recreational purchases, representing 86.1% of sales. Medical marijuana generated an estimated $146.4 million, or 13.9%.

These calendar-year estimates are derived from the state’s cumulative sales records rather than published directly as year-to-date totals.

Ohio’s medical marijuana market therefore remains much larger than Michigan’s as a share of total sales. But recreational purchases dominate both states.

That means broader federal rescheduling could have substantial financial implications for Ohio dispensaries as well.

Businesses holding both medical and recreational licenses may also face questions about how federal tax rules apply to their different operations.

DEA Judge Rejects Request For Additional Hearings

The latest legal dispute centers on a September report from the U.S. Government Accountability Office examining federal procedures for evaluating and scheduling controlled substances.

The report identified gaps in written policies used by the DEA and Food and Drug Administration when reviewing controlled substances.

Opponents of rescheduling argued that those findings justified additional testimony and document discovery.

Julius agreed to admit the GAO report into the administrative record but rejected the request for further hearings.

Instead, he authorized limited written arguments addressing the report’s relevance and whether its findings could affect the marijuana rescheduling proposal.

According to the DEA’s official rescheduling docket, the next deadlines are:

  • October 29: Optional initial supplemental briefs.
  • November 5: Optional reply briefs.

The proceedings remain stayed until the briefing period closes. The judge has not announced a date for his recommended decision.

Medical Marijuana Already Received Different Federal Treatment

An April 2026 federal action moved qualifying state-authorized medical marijuana and FDA-approved marijuana products into Schedule III.

However, broader recreational marijuana rescheduling remains unresolved.

This distinction is particularly significant in Michigan, where nearly all cannabis sales are recreational, and Ohio, where adult-use purchases account for approximately 86% of recent sales.

The potential federal tax benefits for businesses serving both markets may depend on how their activities are structured, documented and treated under applicable federal guidance.

What Happens Next?

After the November 5 briefing deadline, Julius can review the supplemental arguments and proceed toward a recommended decision.

That recommendation would not itself finalize broader marijuana rescheduling. Additional federal administrative action would still be required, and litigation could affect implementation.

For Michigan and Ohio cannabis companies, the central financial question is whether broader rescheduling will ultimately eliminate Section 280E restrictions and permit recreational operators to deduct ordinary business expenses.

The potential savings could be substantial, but the timing and scope of any relief remain uncertain.

Coming Friday: How Much Could Cannabis Companies Save?

In a special follow-up report Friday, October 23, MITechNews will examine how eliminating Section 280E could change federal income taxes for Michigan and Ohio cannabis businesses. The analysis will include a hypothetical dispensary financial comparison, explore the differences between the two state markets and examine whether federal tax relief could eventually affect consumer prices.