Federal Legalization Around the Corner?

Before the holidays, we told you what we’re anticipating for cannabis in California and nationwide this year, including the prospects for federal legalization. This bulletin highlights the MORE Act, a federal legalization bill that made history in the House and that contains a number of consequential elements.

(Note: “MORE” stands for Marijuana Opportunity, Reinvestment, and Expungement.)

Status of the MORE Act / Where the MORE Act Stands

On December 4, 2020, the US House of Representatives passed the MORE Act (H.R. 3884) by a vote of 228-164. It then went to the Senate, where it was referred to the Finance Committee. It did not advance by the end of the 116th Congress and the start of the 117th on January 3. That means the MORE Act – or some version thereof – would need to be (re)introduced in the newly seated Congress.

Then why are we talking about it?

The MORE Act gives us hints about what legislators have in mind for federal cannabis legalization, and its passage in the House is a milestone in the cannabis reform saga. The bill is impactful, complex, and imperfect. Knowing what’s on the table is valuable for the sake of both advocacy and business planning.

Remember: this is all hypothetical for now. We’ll let you know as things develop.

We start by highlighting the sweeping changes proposed in the MORE Act. To help you forecast business considerations, we then drill down further in three areas: banking, taxes, and social equity programs.

Highlights: A Birds Eye View

Deschedules cannabis by removing it from Schedule 1 of the Controlled Substances Act (CSA).
Decriminalizes cannabis at the federal level, but allows states to maintain prohibitions. (Think of this as the state-by-state equivalent of California’s “local control” patchwork.)
Expunges federal cannabis offenses.
Establishes a federal permit system and bond requirement.
Creates a federal tax on cannabis that increases from 5 to 8 percent over 5 years and a flat per-premises “occupational tax.”
Offers guidelines for the taxation of imports and exports.
Signals operational requirements related to inventory, records, packaging, and labeling.
Funds – with cannabis tax revenue – grants and programs to benefit individuals and communities harmed in the War on Drugs.
Removes barriers to accessing federal benefits and programs, such as SBA services and loans.
Prevents discrimination in federal public benefit programs on the basis of cannabis use or possession.
Ends federal security clearance denials (with exceptions) for cannabis use.
Prohibits consideration of cannabis as a controlled substance for purposes of immigration laws.
Provides for the collection of data and mandated analysis in various reports to Congress.
Creates new financial and criminal consequences for noncompliance.

Say Goodbye to 420 Banking Drama

Who in cannabis doesn’t groan when they think of banking? You can hardly blame us, considering the obstacles. However, this could become a worry of the past. Removal of cannabis from the CSA alters the applicability of federal anti-money laundering statutes. Banks would be able to welcome cannabis businesses without the hefty requirement to file suspicious activity reports (SARs) on depositors who might be breaking federal law, since the money would no longer be derived from a federally-illegal activity.

Side note: We’re also seeing action at the state level. California released proposed emergency regulations last week related to AB 1525, which passed last fall. AB 1525 (Cannabis: Financial Institutions, by Jones-Sawyer) offers a mechanism to ease banks’ burdens in conducting federally-required reviews of a cannabis business. Its goal is to increase cannabis industry access to banking services.

Taxable Income

280E prevents businesses from deducting ordinary business expenses from their gross income when such expenses are associated with the “trafficking” of a substance in Schedule 1 or 2 of the CSA.

Descheduling resolves the 280E issue and expands the business expenses you can deduct. In other words (assuming all else equal), taxable income goes down and so does the tax due.

Taxable Obligations

The MORE Act proposes a 5% tax for the first two years, a 6% tax in the third year, 7% in the fourth, and 8% in the fifth (and presumably thereafter). If you’re subject to a local tax, this 5-8% tax becomes the third level of cannabis taxation, in addition to general taxes that all businesses pay at the local, state, and federal levels. Tax liability appears to rest with the business that packages the goods for sale.

An occupational tax of $1,000 per premises would be imposed on producers and export warehouse proprietors.

Helping to Repair Harms from the War on Drugs

The MORE Act is meant to be social justice legislation. With that intent, it would create a number of programs funded by the 5 to 8% tax mentioned above. These programs are designed to benefit individuals, communities, and small businesses owned and controlled by socially and economically disadvantaged individuals. They also incentivize the creation of local and state equity programs.

The Community Reinvestment Grant Program (CRGP): created under the U.S. Justice Department (USDOJ); the CRGP funds entities to administer services such as job training, legal aid, and literacy programs for individuals adversely impacted by the War on Drugs. (50% of tax revenue)

Substance Use Disorder Services: eligible entities would receive funding to administer or connect patients to substance use disorder services, for cannabis or a controlled substance other than cannabis. (10% of tax revenue)

Cannabis Opportunity Program (COP): Ignore the eyebrow-raising acronym. This program isn’t under the USDOJ, like the two above, but rather the Small Business Administration (SBA). COP would fund local and state governments to make loans to benefit small businesses owned and controlled by socially and economically disadvantaged individuals. (20% of tax revenue)

Equitable Licensing Grant Program (ELGP): Another 20% goes to the SBA to disburse to local and state governments to develop and implement cannabis licensing programs that minimize barriers to licensing and employment for individuals adversely impacted by the War on Drugs.

To learn more about how the MORE Act could impact your business, if passed, contact your Clark Howell attorney or call our main line at 877-257-2442. We would also love to hear your thoughts and concerns.

If you have any questions about how the above or would like to discuss how it could impact your business, please contact your attorney directly or call our main line at 877-257-2442.

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