On December 4, the House of Representatives passed the MORE Act by a vote of 228-164. Although it seems unlikely that the bill will pass the Senate and become law in its current form, this is the first time the federal government has meaningfully moved forward with legislation to legalize cannabis.
Earlier versions of the MORE Act descheduled and decriminalized cannabis, created a cannabis tax, and funded equity and community reinvestment programs based on the revenues raised from that tax. On November 30, however – a week prior to the final vote – large sections of the MORE Act were amended to include a much more detailed federal framework. You can read the most recent full text of the legislation here: https://rules.house.gov/sites/democrats.rules.house.gov/files/BILLS-116HR3884-RCP116-67.pdf
In short, the version of the MORE Act that passed the House of Representatives does the following:
- Deschedules and decriminalizes cannabis – cannabis is removed from Controlled Substances Act, effectively legalizing cannabis, and likely resolving structural barriers such as banking access and IRS 280E. However, criminal penalties for non-compliance with federal cannabis tax requirements are re-established elsewhere in the legislation.
- Expunges criminal records – federal criminal records for cannabis are automatically expunged.
- Makes individuals and cannabis businesses eligible for federal services – businesses are made eligible for SBA loans, and individuals are also made eligible for federal services regardless of their personal cannabis use.
- Establishes a cannabis tax under the Department of Treasury – the tax starts at 5% and increases to 8% over five years. The tax seems to be levied on the last step of production: meaning, in most cases, the businesses that conduct final packaging of the cannabis product. The tax formula is complicated and needs more analysis. Additionally, there is a flat $1,000 annual “occupational tax” that applies to each location where cannabis operations occur. Producers must also obtain a bond designed to ensure payment of the tax.
- Requires cannabis producers to obtain a federal permit for tax compliance, and creates new criminal and civil penalties for non-compliance – producers, including any business that cultivates, manufactures, processes, or packages cannabis, must obtain a federal tax permit from the Secretary of the Treasury. Worryingly, the permit can be denied based on a previous criminal conviction for cannabis or other “business experience or trade connections.” Producing cannabis without the required tax permit incurs significant criminal and civil penalties.
- Establishes a federal framework for international import and export of cannabis – international import and export of cannabis are specifically mentioned multiple times in the legislation. Cannabis imported in the United States is required to pay federal tax; cannabis exported out of the United States is not required to pay tax.
- Reinvests 100% of cannabis tax revenue into businesses and communities impacted by the War on Drugs – cannabis tax revenue is reinvested into several programs, operated by the Department of Justice and Small Business Administration, designed to assist businesses and individuals impacted by the War on Drugs.
- Directs the FDA to hold public hearings to contemplate additional federal regulations – aside from the federal tax permit and its implementing regulations, administered by the Department of Treasury, there are no specific federal regulations on cannabis. However, the FDA is directed to hold a public hearing on “the regulation, safety, manufacturing, product quality, marketing, labeling, and sale” of cannabis products” within one year of the passage of the Act, suggesting that the FDA could eventually take on a more heavy-handed role.
A more detailed summary of the legislation is below:
Findings
The legislation includes several findings – notable findings include:
- The War on Drugs has had disproportionate impacts on racial minorities.
- Currently, there’s only 20% minority ownership in cannabis, and only 4% Black ownership.
- High barriers to entry prevent entry into the legal market, including regulatory costs and fees and federal limitations on banking and capital.
Descheduling and Decriminalization
- Within 180 days, the Attorney General must finalize a rulemaking process to remove cannabis from the Controlled Substances Act.
- Descheduling would apply retroactively to any previous or pending criminal case.
- All federal cannabis offenses must be automatically expunged within one year.
- Small Business Development Centers, and other SBA programs, cannot decline services to cannabis businesses or cannabis-related businesses.
- SBA loans are made available to cannabis businesses.
- “No person may be denied any Federal public benefit… on the basis of any use or possession of cannabis, or on the basis of a conviction or adjudication of juvenile delinquency for a cannabis offense, by that person.”
- Cannabis may not be a reason for denying any benefit or protection in relation to immigration law.
- All references to “marijuana” in federal law are eliminated and replaced with “cannabis.”
Regulation
- Four federal agencies are proposed to be involved in federal cannabis policy.
- The Treasury Department administers the cannabis tax, including a requirement to obtain a federal permit focused on tax compliance.
- The Department of Justice and Small Business Administration administer an equity and community reinvestment grant program funded by revenue from cannabis taxes.
- FDA is required to hold hearings on cannabis regulation. They aren’t given any specific direction to issue regulations for cannabis, but the idea appears to be to prepare them to get involved.
- Within one year, the FDA must hold at least one public hearing on “the regulation, safety, manufacturing, product quality, marketing, labeling, and sale” of cannabis products.
- Producers must keep records as determined by the Secretary of the Treasury. Inventory records must be reported to the Secretary in a frequency and form determined by the Secretary.
- The Secretary of the Treasury may prescribe labeling and packaging requirements.
- Within one year of passage of the Act, the Department of Treasury, Department of Justice, and Small Business Administration must issue or amend rules necessary to carry out implementation of the Act. After that first year, additionally regulations cannot be issued without a 60-day notice to the appropriate congressional committee.
Cannabis Tax
- Taxes are applied to all cannabis produced in, or imported into, the United States.
- Cannabis exported out of the U.S. appears to be exempt from U.S. tax.
- For the first two years, the tax rate is 5%. In year 3, the tax is 6%. In year 4, the tax is 7%. In year 5, the tax is 8%. The wording of this section currently suggests that there is no tax after year 5.
- For the first five years, the tax is based on “the applicable percentage of such product’s removal price.” After the first five years, the tax is calculated based on the “applicable equivalent amount.” This appears to mean that for the first five years, the tax is based on the actual sale price. After that, the Secretary of the Treasury will convert that number to a per-ounce tax rate for “non-THC-measureable products” and a per-mg-THC tax rate for “THC-measureable products.” Those per-ounce and per-mg tax rates are based on the “prevailing sales price of cannabis flowers” and the “prevailing sales price of THC.”
- “The tax under this section shall attach to any cannabis product as soon as such product is in existence as such, whether it be subsequently separated or transferred into any other substance, either in the process of original production or by any subsequent process.”
- When cannabis products are transferred between producers, the producer who received the product becomes liable for the tax (5903a2). Practically, this means the last “producer” in the chain – in most cases, the licensee that packages – will remit the tax.
- Taxes are “paid on the basis of return.”
- Taxes are due semi-monthly (twice per month).
- Illicit production is still liable for tax.
- If a cannabis product is sold at less than fair market price, the tax “shall be computer on the price for which such articles are sold, in the ordinary course of trade, by producers thereof, as determined by the Secretary.”
- The price of packaging and containers are taxable. The cost of transportation is not taxable, but only if the cost is consistent with the Secretary’s understanding of what it should be.
- The Secretary of the Treasury may refund the tax if the cannabis product does not enter the commercial market or is otherwise destroyed (e.g. due to fires). Tax is not due if cannabis products are lost or destroyed.
Occupational Tax
- There is a separate, $1,000/year flat occupational tax applied to each location where a producer or export warehouse carries out business operations.
- The tax is due when a business commences operations, and then on the first day of July in each year.
- “Whenever more than one of the pursuits or occupations described in this subchapter are carried on in the same place by the same person at the same time, except as otherwise provided in this subchapter, the occupational tax shall be paid for each according to the rates severally prescribed.”
- Storage-only facilities appear to be exempt from the occupational tax.
- For purposes of determining what a “single place” is for administration of the occupancy tax, an “area of the business in any one location under the same proprietorship” is a single place. If an area is contiguous, it can be a single place, even if divided by streets, highways, waterways, or partitions.
Permitting and Bonding
- Producers are required to obtain a bond and permit from the Secretary of the Treasury authorizing cannabis activity and affirming tax compliance. Currently this is worded so that this permit must be obtained prior to commencing operation.
- A permit may be denied if “the premises on which it is proposed to conduct the cannabis enterprise are not adequate to protect the revenue.”
- A permit may also be denied if any owner of the business “is, by reason of the business experience, financial standing, or trade connections or by reason of previous or current legal proceedings involving a felony violation of any other provision of Federal or State criminal law relating to cannabis or cannabis products, not likely to maintain compliance with this chapter.”
- Failure to obtain a tax permit, failure to keep compliant records, failure to pay taxes, violation of tax regulations, is punishable by up to $10,000 or five year imprisonment for each offense.
Import and Export
- Import of cannabis is authorized by “importers.”
- Export of cannabis is authorized by “export warehouses.”
- Imported goods are taxed; exported goods are not taxed.
- The Secretary of the Treasury is required to prescribe specific labeling/marking requirements for cannabis goods that will be exported.
Equity and Community Reinvestment
- All federal cannabis taxes are allocated to an Opportunity Trust Fund.
- 60% of the Opportunity Trust Fund goes to a new Cannabis Justice Office established within DOJ.
- 50% of total cannabis tax revenue goes to a “Community Reinvestment Grant Program” that provides services for people impacted by the War on Drugs, including job training, re-entry services, legal aid, literacy programs, youth programs, and health education programs.
- 10% of total revenue goes to “substance use disorder services for individuals adversely impacted by the War on Drugs.”
- These funds are granted to “eligible entities.” Eligible entities are defined as “a non-profit organization… that is representative of a community or a significant segment of a community with experience in providing relevant services to individuals adversely impacted by the War on Drugs in that community.”
- 40% of the Opportunity Trust Fund goes to the Small Business Administration.
- These funds are directed towards “eligible state and local governments.” State and local governments are eligible if they’ve taken steps to 1) develop a process for automatic expungement of cannabis offenses, and 2) “eliminate violations or other penalties for persons under parole, probation, pre-trial, or other State or local criminal supervision for a cannabis offense.”
- 20% of total revenue goes to the “Cannabis Opportunity Program.” These funds are directed towards eligible state and local governments to make loans for “small business concerns owned and controlled by socially and economically disadvantaged individuals” operating in the cannabis industry.
- 20% of total revenue goes to the “Equitable Licensing Grant Program.” These funds are directed towards eligible state and local governments to “develop and implement equitable cannabis licensing programs that minimize barriers to cannabis licensing and employment for individuals adversely impacted by the War on Drugs.”
- In order to qualify for funds, the local government must administer a licensing program with at least four of the following characteristics: 1) a waiver of licensing fees for individuals below 250% of the federal poverty line for 5 of the past 10 years and who are first-time applicants, 2) a prohibition on license denial based on a previous cannabis conviction 3) a prohibition on criminal conviction restrictions for licensing 4) a prohibition on suspicionless cannabis drug testing of employees by cannabis businesses 5) the establishment of a cannabis licensing board reflective of the racial, ethnic, economic, and gender composition of the State or locality to oversee the equitable licensing program.
- The Bureau of Labor Statistics is required to compile data on the demographics of ownership within the cannabis industry.
Definitions
Cannabis product: “any article which contains (or consists of) cannabis. The term ‘cannabis product’ shall not include an FDA-approved article or industrial hemp.”
THC-measurable cannabis product: “any cannabis product (A) with respect to which the Secretary has made a determination that the amount of tetrahydrocannabinol in such product can be measured with a high degree of accuracy, or (B) which is not cannabis flower and the concentration of tetrahydrocannabinol in which is significantly higher than the average such concentration in cannabis flower.”
Cannabis enterprise: “a producer, importer, or export warehouse proprietor.”
Producer: “any person who plants, cultivates, harvests, grows, manufactures, produces, compounds, converts, processes, prepares, or packages any cannabis product.”
Cannabis production facility: “an establishment which is qualified under subchapter C to perform any operation for which such qualification is required under such subchapter.”
“Remove” or “removal”: “(A) the transfer of cannabis products from the premises of a producer or the transfer of such products from the bonded premises of a producer to a non-bonded premises of such producer,” or “(B) release of such products from customs custody,” or ‘‘(C) smuggling or other unlawful importation of such products into the United States.”
Removal price: ‘‘(A) except as otherwise provided in this paragraph, the price for which the cannabis product is sold in the sale which occurs in connection with the removal of such product, (B) in the case of any such sale which is described in section 5903(c), the price determined under such section, and (C) if there is no sale which occurs in connection with such removal, the price which would be determined under section 5903(c) if such product were sold at a price which cannot be determined.”
