Cannabis Knowledge & Insights

Cannabis Administration and Opportunity Act: What You Need to Know

On July 14th, Senate Majority Leader Chuck Schumer presented a newly revised proposal for a comprehensive cannabis reform bill in the United States. The Cannabis Administration and Opportunity Act (CAOA) would expunge federal non-violent cannabis convictions crimes, reinvest federal cannabis tax revenue into communities adversely affected by the failed “War on Drugs,” deschedule and ultimately end the federal prohibition of cannabis, while allowing states to continue to determine their own cannabis laws.

Currently in a draft state, the Sen. Schumer and his cohort of policymakers are taking commentary from lawmakers and the general public, including advocates, the cannabis industry, public health experts, and the law enforcement community, until September 1.

In the following we will discuss the core components of the bill, lay out key points of interest for cannabis operators, and offer thoughts on ways to strengthen the legislation. And finally, we’ll provide a status update on the likelihood of the bill ever becoming law. 

Breaking Down The Cannabis Administration and Opportunity Act

At 163 pages, the draft of the CAOA is no small feat to read and understand, despite its tremendous potential impact on the future of cannabis industry operators. In the following we will break down each of the major sections of the bill and provide commentary on the bill’s strengths and weaknesses.

Part 1: Decriminalization of Cannabis, Recognition of State Law Controlling Cannabis

Key components:

  • Sec: 101 – Descheduling Cannabis
    • Remove cannabis from the Controlled Substances Act within 60 days of enactment
    • Establish new federal definition of “cannabis” under the FDA
    • Transfer primary regulatory authority of cannabis from the DEA to the FDA, TTB, and ATF. 
    • Upon transfer, these agencies would perform similar roles as those established for alcohol and tobacco. 

COMMENTARY: Naturally, any cannabis reform must start with legalization at the federal level. The good news here is subtle but important, the CAOA is suggesting cannabis should be “descheduled” and not “rescheduled.” This is important because many other legalization attempts have taken the half-progress of rescheduling. But any sober view of the medical potential and lack of risk related to cannabis should agree that it should be completely removed for the Controlled Substances Act. So that is a big win right out of the gate. 

Reason for concern comes with the breakdown of federal agencies that will take over regulating cannabis. In the alphabet-soup of the FDA, TTB and ATF there will be a lot of crossover, mix ups and general confusion. The fear here is that the ATF could take an aggressive approach to pursuing cannabis-related violations, making them, in effect, a DEA-junior.

  • Sec. 111 – Recognize State Laws Dictating Cannabis
    • Allow individual states to create and enforce laws controlling the possession, production, and distribution of cannabis.
    • Retains criminal penalties in circumstances of unlawful possession, production, distribution, or purchase of 10 pounds or more of cannabis in violation of federal or state law, or the unauthorized possession of 10 pounds or more in any state or local jurisdiction for which tax has not been paid.
    • Authorize regulations to track and trace the manufacture and transport of cannabis products.
    • Establish 21 years of age as the minimum age to purchase cannabis. Moreover, a provision limiting retail transactions to no more than 10 ounces of cannabis is intended to prevent large purchases for illegal trafficking.
    • Authorizes the Secretary of Health and Human Services to continue to include cannabis for purposes of drug testing of Federal employees.

COMMENTARY: Allowing states the right to create and enforce cannabis is another no-brainer we’d be remiss in not acknowledging as the right direction. And a regulatory structure tracking the manufacture and transport of cannabis is also unavoidable. As unlikely as it may be, the best we can hope for is that this new regulatory structure will build on and (ideally) improve on existing state systems. Unfortunately, the federal government doesn’t have the greatest track record of efficiency in regulatory systems. 

One issue that remains is the insistence that the Federal government can continue to test employees for cannabis. Any regulation that distinguishes or further punishes cannabis-use where alcohol and tobacco use is tolerated is a backward policy that will be hard to change. We’ll never have full recognition and normalization of cannabis as long as the Federal government, even if only in policy, considers it a dangerous or illicit substance.

Part 2: Research, Training and Prevention

Key components:

  • Sec. 201 – Comptroller General Conducts Cannabis Research
      • Office to conduct an evaluation and submit a report within two years regarding the societal impact of legalization and in states with adult-use of cannabis.
      • Areas of research to include: traffic-related deaths and injuries, hospitalizations and poison control center calls, violent crime rates, employment statistics, and rates of cannabis use.
  • Sec. 202 – HHS and NIH Conduct Cannabis Research
      • Agencies to conduct or support research on the impacts of cannabis and issue an annual report to Congress.
      • Research may encompass a variety of topics, including the effects of cannabis on the human brain, the impact on various health conditions, and identification of potential medical benefits and uses of cannabis.
  • Sec. 203 – DOT, HHS and CDC to Conduct Cannabis Research
      • DOT and HHS to collect data on cannabis-impaired driving and continue research to enable the development of an impairment standard for driving under the influence of cannabis.
      • HHS and CDC to study public health prevention strategies, develop public education materials, and award up to five grants to states to collect data, raise awareness, and enhance the use of state data linkage systems with respect to impaired driving.

COMMENTARY: One of the lesser-publicized impacts of the War on Drugs has been the nearly complete lack of research into cannabis and its personal and social impacts. Any good faith research into these topics is likely to provide incontrovertible evidence that cannabis is nowhere near as dangerous as Drug War propaganda would have you believe, and in fact, has significant and previously untapped medical benefits. 

Having the Federal government put their considerable resources behind scientific research into the impact of cannabis is likely to only produce positive outcomes. 

Part 3: Restorative Justice and Opportunity Programs

Key components:

  • Sec. 301 – Grant Programs to Address Impact of the War on Drugs
      • Creates Community Reinvestment Grant Program to fund nonprofits that provide services to individuals adversely impacted by the War on Drugs, such as job training, reentry services, and legal aid, among other services.
      • SBA Program: Cannabis Opportunity Program will provide funding to eligible states and localities to make loans to assist small businesses in the cannabis industry owned by socially and economically disadvantaged individuals.
      • SBA Program: Equitable Licensing Grant Program will provide funding to eligible states and localities to implement cannabis licensing programs that minimize barriers for individuals adversely affected by the War on Drugs. 
  • Sec. 304 – Bureau of Labor Statistics
      • The Bureau of Labor Statistics shall regularly compile and publicize data on the demographics (e.g., age, race, educational attainment) of business owners and employees in the cannabis industry.
  • Decriminalization and Expungement
      • Within one year of enactment, each federal district shall expunge any arrests and convictions, as well as juvenile delinquency, for non-violent federal cannabis offenses.
      • Each individual will be notified of their expungement. After the date of enactment, any individual with a prior conviction or juvenile delinquency for a non-violent federal cannabis offense, who is not under a criminal justice sentence, may file a motion for expungement. 
      • Courts shall also seal all records related to a conviction or juvenile delinquency that has been expunged.
      • An individual who received an expungement under this section may treat the arrest, conviction, or adjudication as if it never occurred, and shall be immune from any civil or criminal penalties related to perjury, false statements, etc.
  • No Discrimination in Provision of Federal Public Benefits
      • Prohibits individuals from being denied any federal public benefit on the basis of use or possession of cannabis or on the basis of a conviction or adjudication of juvenile delinquency for a cannabis offense. Additionally, federal agencies are prohibited from using past or present cannabis use as a basis for denying or rescinding a security clearance.
  • No Adverse Effect for Purposes of Immigration Laws
      • Non-citizens cannot be denied any benefit or protection under immigration laws based on events relating to cannabis. 

COMMENTARY: Cannabis advocates and proponents have always maintained that social justice issues must be at the heart of real reform. The steps in this section, including record expungement and access to Federal funding programs represents a major stride forward. 

The only real question will be whether the proposed SBA programs will get the funding and support to be truly effective. After surviving over a year of pandemic economy without access to the same Federal funding mainstream businesses had, clearing the path to future support is a major win for cannabis operators. 

Part 4: Taxation of Cannabis and Establishment of Trust Fund

Key components:

  • Imposition of Tax on Cannabis Products
    • Would impose an excise tax on cannabis products in a manner similar to the tax imposed on alcohol and tobacco

 

Year

Top Rate

Rate on first $20MM

Enactment

10%

5%

Year 1

10%

5%

Year 2

15%

7.5%

Year 3

20%

10%

Year 4

25%

12.5%

Year 5*

25%

12.5%

* For year 5 and after the Secretary sets a rate based on quantity sold or milligram of THC in the case of a product other than flower.
Rates are based on prevailing price of cannabis sold in the US in the prior year.
  • Establishment and Permitting
      • Requires any person selling cannabis products at wholesale to obtain a permit from the Treasury Department.
      • 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.
  • Operations
      • Would establish operational rules for manufacturers of cannabis products, similar to those for alcohol and tobacco.
      • The Secretary of the Treasury would be authorized to enter facilities and inspect books and records of manufacturers of cannabis products, as well as require reporting and tax filing.
      • Proprietors of cannabis manufacturing facilities would be required to maintain such facilities in a manner to prevent tax evasion or diversion. In addition, manufacturers of cannabis products are required to maintain a bond, to ensure cannabis excise taxes are paid. 

COMMENTARY: Perhaps the most controversial aspect of legalization, the imposition of a Federal excise tax on cannabis has potential to undermine progress in the industry. Previous legalization legislation, including the MORE Act, proposed Federal excise taxes in the 5-8% range. The CAOA takes the excise tax level to 25% for large operations, with 12.5% being the max for operators under $20MM in revenue. 

While it is helpful to see that large multi-state operators will take the brunt of the Federal excise tax, there will always be concerns on how Federal taxes will compound with existing state and local tax regimes. 

Part 5: Public Health, Cannabis Administration, and Trade Practices

Key components:

  • Sec. 501 – Establish Center for Cannabis Products in FDA
    • The Center for Cannabis Products would regulate the cannabis aspect of all products containing cannabis, except those products that make claims regarding the treatment or prevention of disease in humans or animals.
    • Medicinal products will continue to be assessed by the Center for Drug Evaluation and Research or Center for Veterinary Medicine.
    • Center for Cannabis Products would be responsible for establishing and implementing requirements related to establishment registration, product listing, good manufacturing practices, product standards, product labeling, and product distribution and recall.
  • Sec. 505 – Create Legal Pathway for CBD
    • Amends the definition of “dietary supplement” to remove the prohibition on marketing CBD as a dietary supplement.
    • Clarifies that the FDA would have the ability to require safety-related labeling or packaging requirements if needed and give the FDA the ability to take enforcement action against any noncompliant CBD-containing products.
    • Provides FDA with more comprehensive enforcement tools over products marketed as dietary supplements that contain substances such as synthetic (i.e. non-hemp derived) cannabidiol.
  • Sec. 112(b) – Establishes Federal Track and Trace Program
    • Establishes federal track and trace regime for cannabis products to prevent diversion as well as federal and state tax evasion.
    • Requires manufactures of cannabis products to place identifiable codes, designs, or devices on the label of cannabis products to monitor movements of such products between the point of production and sale.
    • Requires certain cannabis enterprises other than retailers to maintain records related to cannabis transactions, which would be available for inspection by federal and state agencies.

COMMENTARY: This section provides a great sigh of relief for CBD producers who have long been waiting for definitive guidance from the FDA on the use and marketing of CBD. The creation of a dedicated department in the FDA focused on CBD will certainly fast-track the assessment and regulation of CBD.

Both good and bad news comes in the form of the Federal government’s intent to establish a national Track and Trace system. Currently, each state has a different system, which creates significant confusion and difficulty for multi-state operators. The good news would come if the Federal system is effective and is used as the model for, or replaces, state-specific systems. The bad news would be if that Federal system existed on top of state systems and created even more compliance issues for operators. 

Where the Cannabis Administration and Opportunity Act Stands Today

As of now, the discussions surrounding the bill are still ongoing. The Cannabis Administration and Opportunity Act still requires input from lawmakers and advocacy groups, the cannabis industry as a whole, public health experts, and law enforcement professionals. 

Senator Schumer and the draft bill’s cosponsors, Senators Cory Booker (D-New Jersey) and Ron Wyden (D-Oregon), will be open to feedback and comments through September 1st. At that point, the draft will likely be revisited and revised.

The Path to Becoming a Law

As mentioned, this bill has already been years in the making. Passing it as federal law will be anything but expedient or simple. 

One of the greatest challenges in the journey to federal cannabis legalization has been gaining adequate bipartisan support. To pass, the bill will need unanimous approval from Democratic senators in addition to 10 Republican votes to overcome a filibuster. 

As it stands, Senator Schumer’s challenges are earning the concordant support of his fellow Democrats, including President Biden. Though Senator Schumer said he would continue to push for federal legalization and decriminalization even in the absence of presidential support, two Democratic senators have also openly expressed opposition to the initiative: 

  • Senator Jeanne Shaheen of New Hampshire 
  • Senator Jon Tester of Montana

However, Schumer could potentially rally unexpected support from the GOP. Currently, three out of the 18 states that have embraced adult-use legalization — Alaska, Montana and Maine — are represented by at least one Republican senator. In addition, 36 states have legalized medical cannabis, including deep red states like Alabama and Oklahoma. If South Dakota’s legalization measure finally reaches law, two more Republicans, including Minority Whip John Thune (R-SD), join the list of potential GOP supporters. 

Cynthia Lummis (R-Wyoming) and Rand Paul (R – Kentucky) have already shown openness to descheduling cannabis under the Controlled Substances Act. To gain additional support from the Republicans, Schumer will likely need to make even more compromises on the bill’s current draft. 

Cannabis Business Owners: How to Prepare for Federal Cannabis Legalization

Federal legalization would also involve repealing 280E, a part of the tax code that has been an obstacle for the cannabis industry and a massive revenue generator for the IRS and federal government as a whole. 

If it does ultimately pass, the Cannabis Administration and Opportunity Act will present enormous growth potential for cannabis businesses and MSOs. 

Even then, cannabis operations may still face unique obstacles when opening in or expanding to newly legal state markets. These challenges could include anything from limitations on the number and type of licenses given in a new state, incentives or preferences for in-state vs. out-of-state operators, and other complex or limiting adult-use regulations. 

Regardless, you can start tackling some critical to-do list items now to put yourself in the best possible position for business growth and expansion after cannabis becomes federally legal. 

Now is the perfect time to organize all of your key financial statements, forecasts, and projections. These documents are not only necessary for evaluating the current financial status of your business but also essential for: 

In essence, there is no better time to clean up your books, implement and standardize public controls, dial in your reporting, and work on lowering or optimizing your operating expenses to increase your profitability. Additionally, there’s no better motivation to plan, prepare for, and get caught up on your taxes

In Closing

When (not if) Federal legalization occurs, it will break ground as the single greatest milestone in cannabis industry history. Our cannabis CPA team and financial professionals have years of experience supporting our clients in all areas of the business — from putting together airtight license applications to helping them lower expenses, streamline processes, prepare their taxes, navigate audits, outsource their CFO, and ultimately, grow and expand their businesses.

Contact our team at GreenGrowth CPAs today to learn more about how we can help.

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