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What’s Happening on Capitol Hill? Part 4: Banking & Tax Reform

By Brian Blumenfeld, J.D., M.A.
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To round out our federal reform review, we look at the bills introduced into the 115th Congress that attempt to resolve the banking and taxation problems faced by state-legal cannabis businesses. As this is perhaps the biggest thorn in the side of the cannabis industry, any movement by the feds on these issues will be welcomed. As it turns out, there are four proposals currently pending for fixing the broken cannabis financial services system, with each proposal comprising a pair of House-Senate companion bills. We look at each pair in turn.

Group 1

S. 1156 – SAFE Act; or, Secure and Fair Enforcement Banking Act

HR. 2215 – SAFE Act; or, Secure and Fair Enforcement Banking Act

Policy: These SAFE Acts would prohibit federal prosecutors and federal regulators from preventing or disciplining in any way a depository institution simply because that depository institution serviced a cannabis-related business.

Impact: The impact of these bills would be widespread for both the cannabis industry and for financial service institutions looking to capitalize on the cannabis industry. For banks, the bills would remove all of the barrier-risks that are now keeping them out of the cannabis business. Currently, the feds have handed down policy guidance to banks stating that as long as they submit what are called “Suspicious Activity Reports, or “SARs” for cannabis-related accounts, and conduct their due diligence to ensure such accounts are complying with state law, then those banks will not be pursued by federal law enforcement. The problem with this guidance is that it is only policy, it is not law, and so it can change on as little as an administrative whim. The protection from cannabis business risk, most banks have determined, is therefore temporary at best and illusory at worst. Passage of the SAFE Act would instantly change all of that and initiate a banking bonanza. Banks will be racing to profit off of what is amounting to a newly minted billion dollar industry. Cannabis businesses will benefit greatly from all of this. Not only will they be able to stop operating strictly in cash and have access to all the traditional financial services that other businesses heavily rely on, but they will also be the beneficiaries of a highly competitive, and therefore affordable and efficient, cannabis banking market.

Procedural Status:

S. 1156

  • Introduced: May 17, 2017 by Senator Jeff Merkley (D-OR)

    Senator Jeff Merkley (D-OR)
    Image: Medill DC, Flickr
  • Cosponsors: 3 Republicans, 7 Democrats, 1 Independent
  • Referred to Senate Committee on:
    • Banking, Housing, and Urban Affairs

HR. 2215

  • Introduced: April 27, 2017 by Representative Ed Perlmutter (D-CO)
  • Cosponsors: 7 Republicans, 44 Democrats
  • Referred to House Committees on:
    • Judiciary
      • Subcommittee on Crime, Terrorism, Homeland Security, and Investigations
    • Financial Services

Group 2

S777 – Small Business Tax Equity Act of 2017

HR 1810 – Small Business Tax Equity Act of 2017

Policy: These bills would carve out an exception to IRC 280E allowing cannabis businesses to deduct ordinary business expenses from their federally taxable revenues.

Impact: If enacted these bills will dramatically ease the tax burden for cannabis businesses. Currently, even when they are in perfect compliance with state law, cannabis businesses are not permitted to deduct ordinary business expenses. This means that net taxable revenues are, and are going to continue to be, substantially higher than net taxable revenues for businesses in any other industry. If enacted, profit margins—and therefore product quality, operational efficiency and innovation—are going to uptick across all states that have legalized.

Procedural Status:

Senator Ron Wyden (D-OR)
Image: JD Lasica, Flickr

S. 777

  • Introduced: March 30, 2017 by Senator Ron Wyden (D-OR)
  • Cosponsors: 1 Republican, 4 Democrats
  • Referred to Senate Committee on:
    • Finance

HR. 1810

  • Introduced: March 30, 2017 by Representative Carlos Curbelo (R-FL)
  • Cosponsors: 10 Republicans, 24 Democrats
  • Referred to House Committee on:
    • Ways and Means

Group 3

S. 780 – Responsibly Addressing the Marijuana Policy Gap Act of 2017

HR. 1824  Responsibly Addressing the Marijuana Policy Gap Act of 2017

Policy: These bills combine to accomplish what each of the foregoing pairs accomplish separately. IRC 280E would no longer apply to state-legal cannabis businesses, and banking would become available for them as well. Additionally, advertising prohibitions in the CSA and the Communications act of 1934 would be removed, with the one exception that advertisements inducing travel from a state where cannabis is not legal to a legal cannabis state would be prohibited. Under Title II of the acts, barriers to federal bankruptcy proceedings would be removed. These bills would also reform the CSA as it relates to criminal liability for individuals, criminal record expungement and medical research for institutions, all of which are noteworthy but neither of which directly impact the legal cannabis industry.

Impact: For the impact of IRC reform, see “Impact” section under S.777/HR.180. For the impact of banking reform, see “Impact” section under S.1156/HR/2215.

By leaving advertising guidelines completely up to the states, we would probably witness the easing of advertising restrictions by the states. Currently, states have tight advertising rules because, after protecting consumers, they do not want their state’s legal cannabis industry to draw attention from the feds in any way. That concern would become moot and we could see more advertising in and across legalized states. This would drive competition across larger markets, in terms of both product and service quality and branding/marketing strategy.

Access to federal bankruptcy proceedings would clarify the landscape for all potential financial scenarios in the lifecycle of cannabis businesses, which in turn will ease uncertainty concerns of potential investors. The bankruptcy provision, combined with the banking provisions will undoubtedly open access to capital for cannabis businesses looking to grow operations and market presence.

Procedural Status:

S. 780

  • Introduced: March 30, 2017 by Senator Ron Wyden (D-OR)
  • Cosponsors: None
  • Referred to Senate Committee on:
    • Finance

HR. 1824

Representative Earl Blumenaur (D-OR)
Photo: Bridget Baker, 92bridges.com
  • Introduced: March 30, 2017 by Representative Earl Blumenaur (D-OR)
  • Cosponsors: 0 Republicans, 8 Democrats
  • Referred to House Committees on:
    • Judiciary
      • Crime, Terrorism, Homeland Security, and Investigations
      • Regulatory Reform, Commercial and Antitrust Law
      • Immigration and Border Security
    • Energy & Commerce
      • Health
    • Ways and Means
    • Financial Services
    • Natural Resources
      • Indian, Insular, and Alaskan Affairs
    • Education and the Workforce
    • Veterans’ Affairs
      • Health
    • Oversight and Government Reform

Group 4

S. 776 – Marijuana Revenue and Regulation Act

HR. 1823 – Marijuana Revenue and Regulation Act

Policy: Subchapters A and B of these bills would impose two additional federal tax requirements on cannabis businesses. The first would be an excise tax on all producers, beginning at a rate of 10%, and growing each year that a producer is in business to a cap of 25% at five years. The second tax would be an occupational tax of $1,000 per year, to be paid by the principals of any cannabis producer or warehouse proprietor. Significantly, these bills would also authorize the federal government to regulate operations in the industry.

Impact: The tax impact of these bills would be a straightforward additional tax that cannabis businesses would have to pay, on top of state and local taxes. The burden of additional taxes will inevitably impact profit margins, initial decisions on whether or not to enter the market and strategies for expansion and innovation. The impacts of federal authorization and regulatory requirements was discussed in the second article of the series, specifically under the “Impact” section of HR1841

Procedural Status:

S. 776

  • Introduced: March 30, 2017 by Senator Ron Wyden (D-OR)
  • Cosponsors: None
  • Referred to Senate Committee on:
    • Finance

HR. 1823

  • Introduced: March 30, 2017 by Representative Earl Blumenaur (D-OR)
  • Cosponsors: 0 Republicans, 8 Democrats
  • Referred to House Committee on:
    • Ways and Means

What’s Happening on Capitol Hill? Part 3: The Medical Bills

By Brian Blumenfeld, J.D., M.A.
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This article continues the bill-by-bill review begun in the August 1st article on cannabis reform legislation proposed in the 115th Congress. In the next article and final piece in this series, we will examine the banking and tax reform bills related to cannabis.

Medical Cannabis Reform Bills 

S. 1008 – Therapeutic Hemp Medical Act of 2017

HR. 2273 – Charlotte’s Web Medical Access Act of 2017

Policy: These bills would amend the CSA to end federal prohibition over all CBD products and all hemp plants with THC content levels of below 0.3%. In other words, people and businesses would be free to grow hemp and/or manufacture CBD products without any fear of federal prosecution. These products would most likely then fall under the regulation of other federal and/or state agencies, but the bills do not specify what agencies they might be or what controls might be put in place.

Impact: The impacts from these bills nationwide have the potential to be massive. Hemp is a plant that can be put to highly effective use in many different industries, from textiles and construction to foodstuffs and seafaring. The efficiency of its growth and the breadth of its utility will make it a highly valuable commodity and a competitor with many other raw materials. For state-legal cannabis businesses, the legalization of CBD and hemp at the federal level could fundamentally change the market for those products. States that legalized cannabis already have provisions in place dealing with hemp and CBD—sometimes alongside their cannabis laws, sometimes handled by a separate state agency—and they could either leave those as they are or open up those markets to interstate activity. In states that have not legalized, CBD and hemp are typically included in the state’s definition of cannabis, and therefore they will remain illegal under state law unless further action is taken. Most likely, if federal prohibition ends on hemp and CBD, state prohibition will follow suit. Because legalization at the federal level will allow for interstate commerce in hemp and CBD, expect the emergence of a nationwide market, driven by online sales and interstate marketing, and developing independently from a cannabis industry still constrained to in-state activities.

Procedural Status:

Senator Cory Gardner (R-CO) Photo: Gage Skidmore, Flickr

S. 1008

  • Introduced: May 2, 2017 by Senator Cory Gardner (R-CO)
  • Cosponsors: 7 Republican, 4 Democrat
  • Referred to Senate Committee on:
    • Judiciary

 HR. 2273

  • Introduced: May 1, 2017 by Representative Scott Perry (R-PA)
  • Cosponsors: 10 Republicans, 10 Democrats
  • Referred to House Committee on:
    • Judiciary
      • Subcommittee on Crime, Terrorism, Homeland Security, and Investigations
    • Energy and Commerce
      • Subcommittee on Health
    • Financial Services

S. 1276 – Cannabidiol Research Expansion Act

Policy: This bill would accomplish two objectives: First, it would open channels for researchers to access and experiment with cannabis and cannabis extracts. Second, it would initiate the process at the end of which the Attorney General must make a determination as to which Schedule of the CSA is most appropriate for cannabidiol (CBD).

Impact: The impact on this legislation to state-legal cannabis businesses is rather remote—in both time and practice. The research access provisions will certainly create an uptick in medical and psychological research activity, the outcomes of which will add to our knowledge of how consuming cannabis in different forms and amounts effects the brain and body. This type of government-regulated research takes many years to process and complete, as both bureaucratic and scientific standards must be met. As for initiating the re/de-scheduling review process for CBD, this is a direct response to the 2016 denial by the DEA to re/de-schedule cannabis. That determination, published in the Federal Registrar on August 12, 2016, was made following a comprehensive study of the medical benefits and harms of cannabis conducted by the Department of Health and Human Services (HHS) and the Food and Drug Administration (FDA). Although such an in-depth study and its resulting negative determination pronounced so recently would normally rule out the chances of success for another re/de-scheduling attempt so soon after, the DEA did leave the door open with its statement that it “did not focus its evaluation on particular strains of marijuana or components or derivatives of marijuana.” It is just this door that S. 1276 seeks to exploit. By focusing the re/de-scheduling process on CBD specifically, the presumption is that the outcome of the scientific CBD studies would have a far better chance at satisfying the re/de-scheduling criteria set forth in the CSA. If such a determination was made, then the impact would come in two potential varieties. One, CBD would be rescheduled and become available for medical use according to FDA rules applicable to other prescription drugs. Two, CBD would be descheduled and would fall under the prerogative of the states, in which case the above analysis for S. 1008 and HR. 2273 would pertain.

Senator Dianne Feinstein (D-CA)
Photo: Daniel Torok

Procedural Status:

S. 1276

  • Introduced: May 25, 2017 by Senator Dianne Feinstein (D-CA)
  • Cosponsors: 3 Republican, 2 Democrat
  • Referred to Senate Committee on:
    • Judiciary

S. 1374 – Compassionate Access, Research Expansion, and Respect States (CARERS) Act of 2017

HR. 2920 – Compassionate Access, Research Expansion, and Respect States (CARERS) Act of 2017

HR. 715 – Compassionate Access Act of 2017

HR. 714 – Legitimate Use of Medical Marijuana Act (LUMMA) of 2017

Policy: All four of these bills would make an exception to the CSA for state medical cannabis laws. Federal prohibition, in other words, would end for medical cannabis in those states that have legalized, and it would be left to those states to devise how it would be regulated. In states that have not legalized, both state and federal prohibition would remain. The companion CARERS Acts in the House and Senate, along with HR. 714, would also amend FDA rules to widen access to cannabis for research purposes.

Impact: The impact of these bills on the rules for state-legal medical cannabis businesses would be relatively minor in terms of functionality. This is so because they leave not only the determination to legalize up to the states, but they leave the design of the regulatory system up to the states as well. In other areas, however, big changes will be seen that benefit the industry: banking will open up for state medical businesses, and so will the opportunity to write-off ordinary business expenses. Investment risks over legality will end, making for easier access to capital. Questions about contract enforcement and risks of federal prosecution will become moot, and when state regulatory bodies make decisions on how to govern the industry, they will no longer have to concern themselves with U.S. DOJ enforcement and/or prosecutorial policies. Enactment of any of these bills would be a big win for medical cannabis.

Senator Cory Booker (D-NJ) Photo: David Shinbone, Flickr

Procedural Status:

S. 1374

  • Introduced: June 15, 2017 by Senator Cory Booker (D-NJ)
  • Cosponsors: None
  • Referred to Senate Committee on:
    • Judiciary

HR. 2920

  • Introduced: June 15, 2017 by Representative Steve Cohen (D-TN)
  • Cosponsors: 1 Republicans
  • Referred to House Committee on:
    • Judiciary
      • Subcommittee on Crime, Terrorism, Homeland Security, and Investigations
    • Energy and Commerce
      • Subcommittee on Health
    • Veterans’ Affairs
      • Subcommittee on Health

HR. 715

  • Introduced: January 27, 2017 by Representative Morgan H. Griffith (R-VA)
  • Cosponsors: 2 Republicans, 1 Democrat
  • Referred to House Committee on:
    • Energy and Commerce
      • Subcommittee on Health
    • Judiciary
      • Subcommittee on Crime, Terrorism, Homeland Security, and Investigations

HR. 714

  • Introduced: January 27, 2017 by Representative Morgan H. Griffith
  • Cosponsors: 1 Democrat
  • Referred to House Committee on:
    • Energy and Commerce
      • Subcommittee on Health

HR. 2020 – To Provide for the Rescheduling of Marijuana into Schedule III of the CSA

Policy: As its wordy title indicates, this bill would bypass the schedule review process and by legislative fiat move cannabis from Schedule I to Schedule III of the CSA.

Representative Matt Gaetz (R-FL)

Impact: Businesses handling drugs in Schedule III must register with the DEA and comply with DEA record keeping and security requirements. Doctors would be permitted to prescribe cannabis products. Importing/exporting will become available by permit, which would bring state businesses into competition with foreign cannabis firms. The biggest impact will be that cannabis sold pursuant to federal law will have to undergo the FDA’s New Drug Application process conducted by the Center for Drug Evaluation and Research, the largest of the FDA’s five centers. This includes clinical testing and a comprehensive chemical/pharmacological review. The drug would then be subject to FDA regulation for marketing and labelling. For states that wanted to maintain their legal medical cannabis systems, a conflict would remain because cannabis cultivators and dispensaries could operate in compliance with state law while simultaneously failing to meet new FDA and DEA requirements. States will then have a choice: bring state laws into line with federal laws, creating all of the advantages of federal legality discussed above, yet causing major disruptions to the industry; or retain the status quo, allowing the industry to grow as is with all of the in-state advantages but without the advantages of federal legalization. This all would of course leave behind recreational cannabis which would remain in the legal gray zone.

  • Introduced: April 4, 2017 by Representative Matt Gaetz (R-FL)
  • Cosponsors:
  • Referred to House Committee on:
    • Energy and Commerce
      • Subcommittee on Health
    • Judiciary

HR. 331 – States’ Medical Marijuana Property Right Protection Act

Policy: Section 881(a)(7) of the CSA subjects to federal forfeiture all property involved with cannabis activities. This bill would make an exception to that provision for all property in compliance with state medical cannabis laws.

Impact: Although not legalizing medical cannabis, this bill would be a strong step in the direction of legitimizing state-legal medical cannabis businesses. As a result of the property forfeiture clause of the CSA, two impediments faced by the medical cannabis industry is that investors are hesitant to invest and land lords are hesitant to lease or otherwise engage the medical cannabis market. By eliminating the risk of such property loss due to the federal-state conflict, this bill would have the very welcomed impact of easing access to capital and expanding opportunities for land use.

  • Introduced: January31, 2017 by Representative Barbara Lee (D-CA)
  • Cosponsors:
  • Referred to the House Committee on:
    • Judiciary
      • Subcommittee on Crime, Terrorism, Homeland Security, and Investigations
    • Energy and Commerce
      • Subcommittee on Health