(South Dakota Searchlight)- A federal change in medical marijuana’s legal classification should help South Dakota’s medical cannabis industry claim business tax deductions and gain access to banking, officials told state lawmakers Monday (Aug. 17, 2026), but questions remain about the broader impact.
Whitney Brunner, administrator of the state’s medical cannabis program, told the legislative Medical Marijuana Oversight Committee during a meeting at the Capitol in Pierre that the federal government has shared little information about the change with the state — other than to request data.
“At the state level, we probably have more questions than answers,” Brunner said.
In April, the federal government moved medical marijuana from Schedule I to Schedule III under federal drug law. Schedule I drugs are considered to have no accepted medical use and a high potential for abuse. Schedule III drugs are recognized as having accepted medical uses and a lower potential for abuse.
Recreational marijuana remains a Schedule I drug under federal policy, even though 24 states and the District of Columbia allow recreational cannabis in various forms. South Dakota does not allow recreational marijuana use.
Medical marijuana has been legal in South Dakota since 2021, after voters approved it through a citizen-led ballot measure in 2020. Since then, South Dakota has built a regulatory framework — including licensing systems, testing requirements and oversight.
Brunner did not say whether South Dakota businesses will be required to register with the Drug Enforcement Administration to participate in the state program or what new compliance requirements they might face. Kittrick Jeffries, chairman of the Cannabis Industry Association of South Dakota and owner of Puffy’s Dispensary in Rapid City, said some businesses are taking the initiative.
“A lot of our establishments within our association are currently going through the DEA inspection process to become licensed under the DEA,” Jeffries said.
Cannabis businesses have long been blocked from taking certain federal tax deductions because marijuana was classified as a Schedule I substance — meaning they couldn’t deduct ordinary business expenses the way other businesses can. Banks have also largely avoided working with cannabis businesses because marijuana remains broadly illegal under federal law, exposing financial institutions to regulatory penalties even in states where it’s legal.
The reclassification will allow medical cannabis businesses to claim deductions, said Nicole Ezeh, a presenter with the National Conference of State Legislatures. It should also ease banking access for the industry.
The federal changes come as South Dakota’s program is in transition. Brunner told lawmakers the department overhauled its medical cannabis inspection program over the last year, after inspectors were missing violations and citing establishments inconsistently.
“We realized last year, and it wasn’t a difficult realization to make, that we had a lot of work to do on inspections and our processes,” Brunner said.
The department created new procedures and training, reorganized its supervisor structure and added a formal process for businesses to challenge citations, Brunner said.
Rob Krogstad, who operates Bad River Cannabis in Fort Pierre, told lawmakers his business was fined $3,000 for two “clerical errors” that were corrected before inspectors left the building.
“There will be human error,” Krogstad said, adding that the fine forced the business to delay other operational expenses. He suggested a three-strikes approach for minor clerical errors, with immediate fines reserved for more serious violations.
A rules package moving through administrative review would “make this a little easier on establishments,” Brunner said. The package would simplify language around inventory tracking training and reduce how long businesses must store security camera footage — changes Brunner said would be less expensive and less “cumbersome.”
The rules package would also restructure the fines system, making first-offense minor violations result in a corrective action plan rather than an immediate fine.
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