On July 14, 2021, Senate Majority Leader Chuck Schumer, the lead sponsor, proposed the Cannabis Administration and Opportunities Act (the “Act”), which, if passed, will significantly change the landscape of the cannabis industry. Through the Act, the federal government attempts to join the 19 states, which have already legalized both medical and recreational-use marijuana, by proposing to decriminalize, regulate, and tax cannabis as well as establish restorative justice programs and grants for industry participants. A brief summary of the most notable components of the Act are set forth below.
The most notable change under the Act is cannabis will be removed from the federal list of controlled substances under the Controlled Substances Act. This will make cannabis legal to use, possess, and sell at the federal level. The Act also proposes to expunge all federal convictions for non-violent cannabis-related offenses, and it would entitle those who are currently serving sentences for federal nonviolent cannabis-related offenses to a court hearing to reconsider their sentence. In addition, the legalization of cannabis will allow banking institutions to have financial and depository relationships with cannabis-related businesses without penalty, which will have a drastic impact on how these businesses will operate in the future.
However, even if the Act is passed, cannabis would remain illegal in states that have not legalized legal medical or recreational-use marijuana. Despite the differences among states, cannabis-related businesses in states where cannabis is legal would be permitted to transport cannabis through any state, regardless of legal status, as long as the destination was a state where cannabis was also legal.
The Act also proposes to transition the regulatory jurisdiction over cannabis from the Drug Enforcement Agency (“DEA”) to the Food and Drug Administration (“FDA”), the Alcohol and Tobacco Tax Trade Bureau (“TTB”) and the Bureau of Alcohol, Tobacco, Firearms, and Explosives (“ATF”). The FDA would have primary jurisdiction over the industry including control over product standards, business registration, ingredient labeling, manufacturing rules, among others. The TTB would be responsible for tax collection and enforcement relative to cannabis products. Whereas the ATF would have a smaller role, enforcing and investigating aspects of the cannabis industry, such as sales to minors and shipping to prohibited locations. However, the Act directs the agencies to enter into a memorandum of understanding regarding their regulatory authorities and responsibilities.
Additionally, the Act proposes registration and approval requirements for producers and wholesalers of cannabis products. Cannabis-related businesses selling cannabis products would be required to obtain approval from the United States Treasury Department. Cannabis producers would also be required to register with the FDA, which will later establish additional regulations to establish manufacturing and production standards.
The Act, further, proposes to set a minimum age of 21 to purchase cannabis and associated products with a purchase limitation of 10 ounces, at most, at a time. Under the Act, individuals also cannot be denied federal benefits for using cannabis, but federal agencies can still continue to drug test employees for cannabis use.
The Act would establish a federal excise tax at a rate of 10% on the sale of cannabis that would increase over time. The tax rate starts at 10% for the first year after the Act is enacted and would subsequently increase annually until it reached a rate of 25%. Then in year five, the tax would be levied on a per-ounce rate in the case of cannabis flower, or a per-milligram of Tetrahydrocannabinol (“THC”) rate in the case of any cannabis extract. The applicable rate on a per-ounce or per-milligram of THC basis would be equal to 25 percent of the prevailing price of cannabis sold in the United States in the prior year. However, cannabis-related businesses, which generate less than $20 million in revenue per year, would be eligible for tax credits that could cut their tax rate up to 50%.
The Act also contains a number of social equity initiatives similar to those implemented by New York State, and others, which prioritize marginalized communities that have been disproportionately impacted by laws criminalizing the use, sale, and possession of cannabis. The Acts proposes to establish the Cannabis Justice Office (“CJO”), which would assist with employment training for those re-entering the workforce after incarceration for federal cannabis-related offenses. A grant program is also proposed to be established to provide funding to states that offer loans to small businesses in the cannabis industry that are owned by socially and economically disadvantaged individuals. Another grant program would also be established to provide funding to states that offer more simplified cannabis licensing requirements for minorities and low-income applicants.
Although it is still a long way from being enacted, the Act is the first step in aligning federal legislation with the majority view of the cannabis industry with over 60% of Americans now supporting the legalization of cannabis. The passage of this Act would federally legalize cannabis, expunge all non-violent cannabis-related criminal convictions, increase funding opportunities for cannabis-related businesses as well as establish some additional regulation and taxation on the industry.
We will provide a further update on the Act as it moves through the legislative process. In the meantime, please contact us if you have any questions about the potential impacts of this legislation on you or your business.