Unless you’ve been avoiding headlines related to cannabis legalization, chances are you’ve heard of the first draft of federal legislation, The Cannabis Administration & Opportunity Act, submitted earlier this summer by Senators Chuck Schumer (D-N.Y.), Cory Booker (D-N.J.), and Ron Wyden (D-Ore.).
As written, the CAOA would effectively remove cannabis as a controlled substance under federal law, the Controlled Substances Act, and create a taxation structure for sales of cannabis and cannabis products
After submitting their newly penned draft, the bill’s sponsors requested public input on how the proposed legislation should change to be more equitable toward communities impacted by the War On Drugs and account for scenarios for which the contributors had not accounted, among other elements.
Since their submission, the group has received thousands of responses.
The sponsors set a September 1, 2021 deadline to receive comments from stakeholders, and groups around the nation are waiting anxiously to read how those comments might shape the legislation.
Under such revised federal law, cannabis consumers and industry participants would no longer be held to tax code Section 208E.
This bit of tax code strictly prohibits tax deductions and other operational credit activities for businesses dealing in controlled substances. Officially, Section 208E states:
“No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.”
Bill sponsors looked to tobacco and alcohol industries in designing the tax structure for their bill. The proposed structure borrows heavily from those long-established industries. As a result, no distinction would be made between recreational cannabis and medical cannabis. Instead, products would be taxed by sales volume, potency, or as a percentage of the price. These taxes would be levied either upon import or export of products from the producer’s facility. In-bond transfers are allowed to ensure that excise tax is only incurred once.
Tax rates have been outlined to scale upward from the first year onward under the following structure:
That outline may have you asking, “What is the “prevailing price” and who determines that rate?” The answer is that a prevailing price is a price at which a commodity is offered to customers in the current market. That price is determined by the Treasury Department based on the prior year’s sales.
Tax rates would scale based on operation size to minimize the barrier to entry and ensure small operators have opportunities to participate in the marketplace. According to the CAOA, operators with less than $20 million in sales will receive a tax credit equal to a 50% reduction in their annual tax rate. The same tax rate is available to larger producers on their first $20 million in sales. After that threshold is crossed, the tax breaks are reduced.
So, where is all that federal tax revenue going? The CAOA provides for the creation of the Opportunity Trust Fund, which will invest those funds in promoting social equity goals. This includes financial support and equitable licensing for communities and individuals that have been disproportionately impacted by the War on Drugs and wish to participate in the legal cannabis industry.
