Sponsors of Federal Cannabis Legalization Bill Flooded With Feedback

While most are applauding Senate Majority Leader Chuck Schumer (D-NY) for his work to legalize cannabis on the federal level, there is a growing consensus that he and his co-sponsors still have a lot of work to do.

While most are applauding Senate Majority Leader Chuck Schumer (D-NY) for his work to legalize cannabis on the federal level, there is a growing consensus that he and his co-sponsors still have a lot of work to do. In providing feedback regarding the Cannabis Administration and Opportunity Act (CAOA), commenters have raised concerns about how the legislation addresses taxation, licensing and social equity, among other issues.

Cannabis Administration and Opportunity Act

As discussed in greater detail in a prior article, on July 14, 2021, Senate Majority Leader Chuck Schumer (D-NY), Senate Finance Committee Chairman Ron Wyden (D-OR), and Sen. Cory Booker (D-NJ) introduced draft legislation that would end the federal prohibition of cannabis and remove cannabis from the Controlled Substances Act (CSA). The comprehensive legislation decriminalizes cannabis, establishes a regulatory structure for overseeing the legal cannabis industry, imposes a federal tax on cannabis products, enacts criminal justice reforms, and establishes opportunity programs.

The CAOA would remove cannabis (marijuana) from the CSA and direct the Attorney General to remove cannabis from the list of controlled substances in regulation within 60 days of enactment. A new definition of “cannabis” would be established within the Federal Food Drug and Cosmetic Act (FFDCA), which establishes requirements for food, dietary supplements, drugs (including biologics), devices, cosmetics, and other substances such as tobacco. Regulatory responsibility would be moved from the U.S. Drug Enforcement Agency (DEA) to the Alcohol and Tobacco Tax and Trade Bureau (TTB), the Bureau of Alcohol Tobacco Firearms and Explosives (ATF), as well as the Food and Drug Administration (FDA) to protect public health.

The legislation would preserve the integrity of state cannabis laws and impose an excise tax on cannabis products in a manner similar to the tax imposed on alcohol and tobacco. The general rate of tax would be 10 percent for the year of enactment and the first full calendar year after enactment. The tax rate would increase annually to 15 percent, 20 percent, and 25 percent in the following years. Beginning in year five and thereafter, the tax would be levied on a per-ounce rate in the case of cannabis flower, or a per-milligram of THC rate in the case of any cannabis extract. The applicable rate for year five and thereafter would be a per-ounce or per-milligram of THC amount determined by the Secretary of the Treasury equal to 25 percent of the prevailing price of cannabis sold in the United States in the prior year. In order to remove barriers to entry, small cannabis producers with less than $20 million in sales annually would be eligible for a 50 percent reduction in their tax rate, via a tax credit. Producers with more than $20 million in sales would be eligible for a tax credit on their first $20 million of cannabis sold annually, with sales above that amount subject to tax at the full rate.

Under the draft bill, any person selling cannabis products at wholesale to obtain a permit from the Treasury Department. In addition, any person producing taxable cannabis products must obtain a Treasury Department permit and register for tax purposes. A producer of cannabis products would also be required to register with the FDA.

Under the bill, within a year of its enactment, each federal district will expunge any arrests and convictions for nonviolent federal cannabis offenses. With regard to social equity, the CAOA would create three grant programs aimed at creating opportunities for those harmed by the War on Drugs. The proposed bill also amends relevant sections of the Small Business Act and Small Business Investment Act to explicitly make SBA programs and services available to cannabis-related legitimate businesses and service providers.

Will CAOA Be Fine-Tuned or Rewritten?

With the public comment period now over, COAO’s sponsors have a lot to consider as they prepare a final draft. While supporters of legalization applauded the lawmakers’ efforts, many called for significant changes to the regulatory structure outlined in the draft bill.

In August, cannabis analytics firm New Frontier Data released a report analyzing the CAOA. It concluded that the bill “lacks clarity, leaves critical issues unaddressed and could very well restrict the growth and vitality of a burgeoning, complex industry.” Below are several key criticisms of the legislation addressed in the report:

• Efforts to address criminal justice reform, while significant first steps, are limited, and issues such as police reform are entirely unaddressed.
• The taxation plan is unnecessarily complicated, and problematic for industry growth.
• The legislation does not provide enough clarity either about FDA regulation of cannabis, or the scope of the FDA’s power to regulate the industry as a whole.
• The draft bill does not address how cannabis derivatives or synthetic compounds will be regulated, and fails to account for rapid innovations within the industry.
• Elements of the draft legislation are likely to support the continued persistence of the illicit cannabis market by creating burdensome regulations to make legal operators less competitive.
• The legislation fails to adequately distinguish between medical or recreational cannabis operations.
• The federal business license requirement could be used to restrict industry growth.

Several other cannabis interest groups that commented on the federal legalization legislation raised similar concerns. The Marijuana Justice Coalition argued that the “regulatory approach taken by the CAOA is generally modeled on the federal approach taken to regulate alcohol and tobacco,” and while the draft bill “includes critical elements to end federal criminalization and to undo and repair many of the harms resulting from criminalization, it seeks to regulate cannabis like a vice, meaning a consumer product with potential harms to public health and huge economic potential.”

In its comment letter, the Marijuana Policy Project called for greater protections for existing state recreational and medical cannabis regulatory schemes and a slow transition to federal oversight. “While we are enthusiastic about the goals of the CAO Act Discussion Draft, we believe the regulatory aspects need significant clarification and revision to avoid unintended consequences,” Karen O’Keefe, state policies director for MPP, wrote. “Our two major areas of concern are: the possible upending of state licensing and regulatory systems—driving sales underground—and the impact on medical cannabis access, including for those under the age of 21.”

In his letter, Colorado Gov. Jared Polis (D) suggested that Congress should enact incremental reforms before moving forward with federal legalization. “I am thrilled that you are bringing forward a long-term, comprehensive solution that deschedules cannabis while enhancing social equity pathways,” he wrote. “I hope that you will first focus your efforts on the two biggest barriers to the success of the cannabis industry: banking and IRS Code Section 280E.”

Key Takeaway

The extent of the public comments on the Cannabis Administration and Opportunity Act confirms that federal cannabis legalization will likely be a long and complicated process.  Those interested in the cannabis industry and the change in federal treatment of the industry should stay well attuned and contact a Scarinci Hollenbeck attorney with any questions.

If you have questions, please contact us

If you have any questions or if you would like to discuss the matter further, please contact Dan McKillop, or the Scarinci Hollenbeck attorney with whom you work, at 201-896-4100.

This article is a part of a series pertaining to cannabis legalization in New Jersey and the United States at large. Prior articles in this series are below:

• The Cannabis Regulatory Commission’s Initial Rules Are Here, Now What?
• Breaking Down the New Federal Cannabis Legalization Bill
• Cannabis Industry Finds Unlikely Ally in Justice Clarence Thomas

Disclaimer: Possession, use, distribution, and/or sale of cannabis is a Federal crime and is subject to related Federal policy. Legal advice provided by Scarinci Hollenbeck, LLC is designed to counsel clients regarding the validity, scope, meaning, and application of existing and/or proposed cannabis law. Scarinci Hollenbeck, LLC will not provide assistance in circumventing Federal or state cannabis law or policy, and advice provided by our office should not be construed as such.