One of the biggest issues in the cannabis industry is taxation. While in some cases marijuana is federally illegal, in many other cases, it is federally legal. The problem is that the taxation schemes that are in place are often outdated and insufficient to cover the rapidly growing industry. The new federal tax bill recently introduced in the US Congress attempts to address this issue by modernizing the current system.
In the context of the current political climate, the question of federal taxation of cannabis has been a heated topic of discussion lately. Various federal proposals have been made to legalize the recreational use of cannabis in the United States, and in some cases, to heavily tax the drug’s use. In a recent press conference, US Senator Elizabeth Warren (D-MA) spoke in favor of a proposed bill that would remove cannabis from the Controlled Substances Act and place it under a new category of federally legal substances. However, in a recent CNN poll, only 46% of respondents supported the legalization of cannabis, and this number has been declining steadily since 2010.
On September 1st, the federal government will enact a new law to regulate cannabis. The proposed legislation, House Bill 1055, is an interesting one, as it will create a 25% excise tax on dry cannabis for recreational use, and a 10% excise tax on all cannabis for non-medical purposes.. Read more about federal legalization bill 2021 and let us know what you think.
Senators Chuck Schumer (D-New York), Cory Booker (D-New Jersey), and Ron Wyden (D-Oregon) unveiled a long-awaited bill on July 14, 2021, that would allow for complete federal cannabis legislation.
The Cannabis Administration & Opportunity Act (CAOA or the Act) is a discussion draft rather than legislation that has been formally introduced. The sponsors seek comment from stakeholders about the discussion draft by Sept. 1, 2021. The Act, in its current form, would legalize and regulate cannabis federally, similarly to the way alcohol and tobacco are currently regulated.
It’s a broad plan that addresses social fairness, restorative justice, research, and taxes while keeping current state cannabis laws intact. Cannabis would no longer be classified as a prohibited drug at the federal level or for the purposes of interstate trade under the Controlled Substances Act. Cannabis possession, manufacturing, and distribution would be regulated under state law. States may keep cannabis illegal, but they wouldn’t be able to impose restrictions on cannabis being moved over state lines. While there is much to discuss and debate in the CAOA, legislators, industry players, and consumers should pay careful attention to the proposed tax system.
Industry participants would be liberated from the crippling financial consequences of tax code Section 280E if cannabis was no longer classified as a controlled drug on the federal level. The following is taken from Section 280E:
“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 that trade or business (or the activities that comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) that is prohibited by Federal or State law.
In reality, state-level legal cannabis companies cannot deduct regular business costs when calculating gross revenue from inventory sales under Section 280E. While deductions for cost of products sold are allowed, cannabis merchants and processors face a significant tax burden since they cannot deduct real estate or staff costs, for example. Cultivators likewise lose out on normal business deductions and credits, but because of the nature of their company, they profit more from allowable cost of goods sold deductions. Cannabis companies have proved to be reliable income producers, but earnings may be significantly harmed when revenues are subjected to effective municipal, state, and federal tax rates of up to 90%.
The proposed tax system is largely influenced by federal excise taxes on alcohol and tobacco products, which are based on volume, potency, or a percentage of price (with no difference made between medicinal and recreational cannabis). Cannabis goods are subject to all taxes at the time of importation or removal from the producer’s premises. In-bond transfers are permitted under the Act, ensuring that the excise tax is only paid once.
The tax rate would be 10% of the total sales price for the implementation year and first year, then rise by 5% each year over the next three years, eventually reaching 25% in year four. After the fifth year, the excise tax is applied based on a hybrid prevailing price and per-ounce or per-milligram of THC model, rather on the product’s actual sales price. Cannabis would be taxed at a rate of 25% of the current per-ounce price for cannabis flower and per-milligram of THC for any cannabis preparations.
The Treasury Department would calculate the previous year’s prevailing price of cannabis sold in the United States. Small producers with less than $20 million in sales would get a 50 percent decrease in the yearly tax rate in the form of a tax credit as part of an effort to reduce entry barriers. A comparable credit would be available to larger manufacturers only on their first $20 million in yearly sales. The Opportunity Trust Fund would receive all tax revenue. The fund aims to achieve social equity objectives by providing fair licensing and financial assistance to industry players and communities disproportionately affected by the War on Drugs.
The proposed tax system under the CAOA presents a number of significant practical and policy issues that the Act’s authors should address. The first question is whether the graduated excise tax rate is excessively high, encouraging the illicit market to continue operating unlawfully and without oversight or taxes. In addition to the worry that the regulated market’s tax cost may allow the illegal market to undercut legal market players, policymakers must evaluate whether the proposed federal excise taxes would impose an excessive tax burden on the sector. State excise taxes, coupled with state and municipal sales taxes, as well as the proposed federal excise tax, would impose tax rates on cannabis goods of more than 50% in several jurisdictions.
Industry participants should examine the tax implications for producers, as defined by the Act, if the Section 280E burden is eliminated and the proposed federal excise duties are implemented. It would be interesting to know whether or whether existing industry players would have been financially better off under this new system in the past, and if so, by how much. Furthermore, how much of this extra tax burden will be passed on to consumers in the form of higher retail prices, as well as the impact that higher prices may have on the market, should be considered. Perhaps this study can assist to determine what fair and acceptable tax rates should be for sector participants who have long been harmed by Section 280E’s negative impacts, while also balancing the Act’s revenue-generating objectives and disincentivizing the illegal market’s continuance.
The CAOA is silent on how the Treasury Department would calculate the current national price of cannabis flower per ounce or extracts per milligram of THC. Because cannabis comes in so many kinds at such various price points and is taxed differently from state to state, settling on a single national pricing, especially for cannabis flower, may be challenging and possibly arbitrary if not properly considered.
For example, cannabis flower producer rates in California have varied from $35 per ounce to $210 per ounce, depending on the quality of the product and the growing circumstances. Furthermore, if revenue creation is the objective, legislators should examine whether pricing is the appropriate metric by which to tax. As the cannabis market develops on a national scale, prices are expected to fall, resulting in reduced tax income unless demand rises at the rates required to counterbalance the impact of lower pricing.
Senators Schumer, Booker, and Wyden should be applauded for their efforts to change the nation’s cannabis laws and regulations in a comprehensive way. To tackle so much in one fell swoop, releasing the CAOA in draft form and soliciting feedback from different stakeholders is a sensible strategy. The tax status of cannabis and cannabis products should be carefully considered.
If Congress can thread the needle on tax rates that support their revenue generation objectives without suffocating the development of a new interstate sector or leaving a gap for the illegal market to exploit, it will be a success. Current industry participants have firsthand knowledge of the current state and federal tax systems, as well as data that should be utilized to influence this debate. History has shown that changing the tax system via legislation is difficult, so it’s critical for Congress to do it right the first time.
In an effort to deal with the country’s burgeoning medical cannabis industry, the U.S. Congress is considering a number of bills that would severely limit or ban cannabis research in the United States.. Read more about what do taxes pay for and let us know what you think.
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