Cannabis Legalization Bill | 8 Things You Need to Know About CAOA

After years of anticipation, Senate Democrats finally introduced the Cannabis Administration and Opportunity Act (CAOA). Key sponsors are Schumer (NY), Wydon (OR) and Booker (NJ). The quick summary is that the bill eliminates cannabis from the Controlled Substances Act (CSA) and will create many business opportunities if it is passed.

Schumer introduces CAOA to end Federal Cannabis Prohibition
From left, Sen. Cory Booker, D-N.J.,Senate Majority Leader Chuck Schumer, D-N.Y., and Sen. Ron Wyden, D-Ore., announce a draft bill that would decriminalize marijuana on a federal level Capitol Hill in Washington, on Wednesday, July 14, 2021. The bill, called the Cannabis Administration and Opportunity Act, would not only decriminalize marijuana, but also expunge the records of those with non-violent convictions related to cannabis and invest money into restorative justice programs. (AP Photo/Amanda Andrade-Rhoades)

Here’s a list of 8 topics we believe everyone involved in the American Cannabis industry needs to understand. It’s a list of topics we could subtitle Cannabis Opportunities; What’s in the CAOA for me and my business?

In this article you’ll learn:

  • Cannabis legal history and how past experiences like Vietnam and the War on Drugs shaped the draft CAOA bill, especially for minority groups and people of color.
  • Why Cannabis products can be legal in some states but classified as illegal by the federal government.
  • Changes proposed to the Inland Revenue Code that will drastically reduce taxes paid by Cannabis business owners
  • No more police involvement in marijuana…Why the TTB will be in charge of Cannabis Regulation and Enforcement under CAOA
  • How new regulations for Hemp will boost that product’s chances of major adoption
  • Why medical research into use cases for marijuana will finally receive federal funding
  • Why comprehensive Cannabis legalization has great economic and social benefits
  • What the Safe Banking Act is and why its eventual adoption is inevitable if Cannabis is fully legalized.
  • How consulting with can position your business to thrive when CAOA eventually takes effect

1. 50 Years of Cannabis Legal History

Cannabis was placed on Schedule 1 of the CSA under the belief that marijuana use by college students in the 1970s was the reason that they objected to the war in Vietnam. Schedule 1 declares that there is no known medical use for the substance. Clearly that is out of touch with any current medical understanding.

Moreover, the Nixon and subsequent administrations’ War on Drugs made use of the Schedule 1 designation to detain, arrest and incarcerate many people, disproportionately people of color, in a criminal enforcement scheme that utilized low level cannabis use and possession to put people in jail. The resulting jail time and criminal records served as an impediment to job opportunities for poor, black and brown populations.

The states started to legalize marijuana use in 1996 starting with California followed by Colorado and finally 19 states and the District of Columbia where cannabis use is legal for most purposes, At the time of writing, some form of medical use is permitted in 37 states.

As cannabis became legal in many states, those not suffering from that post conviction status thrived in cannabis related businesses. To redress the balance, social equity is embedded in the CAOA, along with the expungement of criminal records for people with low level federal cannabis convictions. Those currently incarcerated for cannabis offenses will likely be able to petition the courts for relief.

Through all of these changes at the state level, the federal government continued to maintain that cannabis is and belongs on Schedule 1. Through a series of Executive Orders and Congressional budget controls, the Feds stripped themselves of the ability to interfere with most state legal cannabis activities. Nevertheless, cannabis remains illegal under federal law and that stance makes it difficult for legal cannabis businesses to obtain bank accounts, or loans, obtain ordinary tax benefits allowable to other businesses, or to remove the stigma of the substance as an undesirable and illegal drug. The CAOA fixes that in the one sweeping reform that eliminates cannabis not just from Schedule 1, but from the CSA altogether.

2. CAOA Changes to the Internal Revenue Code for Cannabis Businesses

The dreaded section 280e of the Internal Revenue Code ceases to apply to cannabis businesses under the CAOA. IRC 280e essentially makes it impossible for legal cannabis businesses to avail themselves of ordinary business deductions because as far as the IRS is concerned, they are engaged in illegal activities and can’t get their tax benefits for doing so. As such, some legal cannabis businesses are taxed up to 70% of revenue as they are unable to deduct ordinary expenses such as employee salaries, mortgage interest, equipment costs, professional fees and other ordinary business deductions. If the CAOA passes, IRC 280e won’t apply to any suddenly federally legal cannabis business. That’s great news, but of course the Feds don’t want to be without their cut; CAOA applies a 5% federal excise tax on small to mid-sized cannabis producers that would grow to 12.5% after five years. Large growers would start at 10% and increase to a maximum of 25%. This is still a hard and heavy tax hit and would be in addition to state and local taxes, all borne by the consumer.

3. Cannabis Regulation and Enforcement

The CAOA also reorganizes which federal agencies will be involved in cannabis regulation and enforcement, taking the Drug Enforcement Administration out of the picture and moving most of the activities into the FDA and Alcohol and Tobacco Tax and Trade Bureau (TTB); the latter to be renamed to include Cannabis. That’s a positive sign since tobacco and alcohol are relatively well regulated by the TTB. The bill also gives deference to states, including those that still want to consider cannabis illegal within their boundaries. Importantly, the federal law would not require those states to adopt federal legality, but the Interstate transportation of cannabis would be permitted even through states where it might remain illegal. With the ability to transport product grown in one state to another, places like Oregon and California that have an oversupply will be able to sell their products nationwide. Variations in state laws may require product variations from state to state, but if enacted this will still be a huge win for companies and their owners in the cannabis transport and logistics business.

4. The CAOA, CBD and Hemp

The bill also addresses Cannabis Sativa L commonly known as hemp. While hemp was made legal and taken out of the CSA by the 2018 Farm Bill, it was still highly restricted. For example, to be considered legal hemp and not illegal cannabis the hemp could only have 0.3% Delta 9 THC on a dry weight measure. Any higher quantity or variation of THC remained illegal cannabis. The CAOA changes that, allowing 0.7% THC and includes all forms of THC not just Delta 9. Accordingly, Delta 8, Delta 10 and other THC varieties found naturally in the hemp plant will be legal. Other derivatives of THC will also be legal in hemp products.
In their response to the CAOA, The US Hemp Roundtable further encouraged the CAOA authors to amend the statutory definition of hemp with a “limit on finished consumer products capped at 0.3% total THC, including Delta-8, but that the legal limit on the crop and intermediate stages of the products be raised to 1.0%.” If adopted in the final bill, this change would be very significant for the Hemp Growers industry in the USA.

5. Medical Research with Marijuana

An important feature of the CAOA is its provision for significant federal funds devoted to medical cannabis and medical marijuana research. Proponents have long argued that failure to allow federal funding for medical research has been one of the most devastating impacts of the CSA’s adverse scheduling of cannabis. There is much to be learned about how to use the plant and its various cannabinoids, terpenes and flavonoids in combination to cure illnesses or relieve symptoms. Grants are provided to support study by universities and other institutions. Grants to support studies to determine dosing levels, information generally unavailable currently, will also be supplied.

Medical marijuana benefits
Some of the many medical applications for cannabis and marijuana.

6. Economic and Social Benefits of Legalized Cannabis

The current provisions in CAOA will increase both state and federal tax revenue, substantially in some states. Multi billion-dollar savings will be made when police no longer need to enforce currently illegal cannabis activities and states no longer incarcerate for possession or dealing of marijuana. As much as $106 billion could be injected into the economy by 2025 according to a report by research group New Frontier Data.

Social boons include the end to denial of federal benefits for those convicted of a cannabis offense including use or possession of marijuana, and an end to federal drug testing for employment except for certain sensitive positions such as law enforcement or security. Physicians working with the US Department of Veterans Affairs will be able to recommend medical cannabis for veterans who have long been considered candidates for medical marijuana use particularly for PTSD where cannabis has shown to have especially strong benefits.

Grants for public education to prevent youthful consumption of cannabis and studies to determine the impact of cannabis impaired driving will be provided, and there will likely be certain controls on vape delivery systems in the final bill, especially those containing artificial flavors.

7. Comprehensive Legalization of Cannabis

Few people expect the bill to pass as written and while there is bipartisan support there’s also bipartisan opposition. Some Members of Congress are simply not ready to legalize cannabis, even those who come from cannabis legal states. Nevertheless, introduction of the CAOA is a huge step and means that Congress will finally consider a comprehensive legalization of cannabis and the other improvements described.

8. SAFE Banking Act

Far more likely to pass in the near term is the SAFE Banking Act (Secure and Fair Enforcement) which would protect banking institutions from federal enforcement and allow them to open up bank accounts to service the cannabis industry.

The SAFE Banking Act seeks to:

  • Make it illegal for federal banking regulators to discourage, prohibit, or penalize cannabis-oriented organizations
  • Remove the classification of transactions conducted by cannabis businesses operating within state laws as of Proceeds from Unlawful Activity
  • Protect bankers and their employees from prosecution for assisting cannabis businesses
  • Protect vital support businesses providing, for example, legal, logistic and real estate services from the threat of similar prosecution

The proposed legislation has thus far failed to be taken up by the Senate, but key players in the cannabis industry appear to be guardedly optimistic about its prospects in the near term.

The Cannabis Administration and Opportunity Act (CAOA)

Federal legalization of cannabis is coming. The question remains however, when, and will it bring a complicated and unbearable set of federal rules? An end to IRC Section 280e and the expungement of criminal records that come with legalization are going to be welcome. What hopefully is avoided is a comprehensive nationwide regulatory regime that forces states to comply with overarching regulations. The federal government has a tendency to complicate the rules that it makes when trying to apply national standards in any industry. Cannabis is one of those areas of social engagement where states’ rights should be engaged, and even though those rights have been used and abused by both sides of the political spectrum, it is probably still a good approach for cannabis regulations. That means that the states should be the primary regulators of cannabis. Of course, that might continue to maintain the current hodgepodge of rules and regulations, but that’s also true with such things as traffic laws and even tobacco and alcohol use laws. So long as cannabis is legal, can be legally transported and is not hampered by restrictions based on tax code, copyright, patent laws or other nationally enforced rules, the states remain the best determinate of what the people desire for their regulated activities. The CAOA is a huge advancement over current conditions. It takes the federal thumb off the cannabis scale and allows the cannabis industry to thrive under state laws. We are probably at least two or maybe four years away from seeing the CAOA or another federal bill become law. Until then it will be necessary to work with state lawmakers and regulators to continue to develop commonsense cannabis laws.

For a comprehensive examination of how the CAOA will affect you and your cannabis business, call or contact Cannabis Law today and discover how to prepare for the inevitable federal legalization of Cannabis.

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