Recently, the House once again moved forward with proposed cannabis legislation. The Marijuana Opportunity Reinvestment and Expungement (“MORE”) Act (H.R. 3617) passed the House on April 1, 2022. The proposed legislation, if enacted, would decriminalize cannabis and impose two new taxes: an excise tax on cannabis products produced in or imported into the United States and an occupational tax on cannabis production facilities and export warehouses .
The MORE Act would also remove cannabis from the Controlled Substances Act (“CSA”), provide an avenue for the expungement of federal cannabis arrest and convictions, and require the Bureau of Labor Statistics to regularly publish demographic data on cannabis business owners and employees.
As described above, the MORE Act proposes an excise tax on cannabis products. The excise tax would be based on the product’s sale price and start at a base level of 5% for the first two years. For each year thereafter up until year five, the rate would increase 1% annually. From year five and beyond the tax would be 8% of the Treasury Department’s established prevailing sales price.
A commonly cited concern with the planned excise proposed in the MORE Act is the tax, in combination with state and local sales taxes, will make cannabis sold through nonlicensed retailers less expensive thereby bolstering the black-market economy.
Currently, cannabis businesses, even those operating legally, are hindered by restrictions outlined in IRC section 280E, which prohibits businesses that sell controlled substances from deducting expenses related to those sales. Passage of the MORE Act would resolve this issue with the removal of cannabis from the CSA.
Another key concern facing the cannabis industry, not included in the proposed legislation, is access to banking in states where cannabis sales are legal. Congress has previously attempted to address this issue via the Secure and Fair Enforcement (SAFE) Banking Act (H.R. 1996) to no avail. Both the House and Senate have agreed to go to conference to discuss the America COMPETES Act of 2022 (H.R. 4521) which include provisions of the SAFE Banking Act.
Until congress addresses the inability to access the financial system, the cannabis industry will continue to operate as a largely cash-based business. The products being sold and the accessibility to large volumes of cash help foster an environment ripe with opportunity for “bad actors,” which significantly elevates the risk for a multitude of crimes which include fraud and money laundering.
The MORE Act passed the House with a vote of 219-202 along party lines, carried by Democrats. Unfortunately, with no Republican support on record the prospects for the MORE Act are not promising. Previous House-passed cannabis legislation has effectively died in the Senate, where 60 votes are needed to overcome a filibuster and bring legislation to a vote.
The Senate is preparing its own cannabis legalization bill, titled the Cannabis Administration and Opportunity Act. A discussion draft was released in July 2021 and an updated bill is expected to be released before the August recess. Prospects for the passage of this proposed legislation will depend on whether it garners any Republican support.
If you have questions about proposed legislation, preventing fraud or would like to learn how Baker Tilly can help, please contact our team.
1. The Controlled Substance Abuse Act list marijuana, DEA No. 7360 as the controlled substance and lists cannabis and marijuana as “other names.”
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