Long-shot bill would also allow states to set own laws, make FDA lead regulator, address impact of War on Drugs, impose excise tax, and create CBD dietary supplement pathway.

More than five months after first previewing their sweeping cannabis reform proposal, Senate Majority Leader Chuck Schumer (D-N.Y.), Senate Finance Committee Chair Ron Wyden (D-Ore.), and Senator Cory Booker (D-N.J.) finally released Wednesday a discussion draft of the Cannabis Administration and Opportunity Act (CAOA). 

The comprehensive measure would, among other things:

• Deschedule cannabis: End the federal prohibition on cannabis by removing it from the Controlled Substances Act (CSA);
• States still set own policies: Allow states to continue to set their own cannabis laws, but clarify that states cannot prohibit the interstate commerce of cannabis transported through its borders for lawful delivery into another state if that other state permits the delivery, or importation, of cannabis from another state;
• FDA as lead federal regulator, TTB and ATF also have oversight: Designate the U.S. Food and Drug Administration (FDA or the Agency) as the lead federal regulator of the manufacture and marketing of cannabis products, with the Alcohol and Tobacco Tax and Trade Bureau (TTB) and the Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF) also having regulatory oversight;
• War on Drugs restorative measures: Address the impact of the War on Drugs through expungement, resentencing, opportunity trust fund programs, and Small Business Administration (SBA) programs;
• Federal benefit protection: Prohibit individuals from being denied any federal public benefit because of cannabis use or possession of cannabis, or on the basis of a conviction or adjudication of juvenile delinquency for a cannabis offense;
• Security clearance protection: Prohibit federal agencies from using past or present cannabis use as a basis for denying or rescinding a security clearance;
• Impose excise tax: Impose excise tax on cannabis products, starting at 10 percent in year one, and increasing to 15, 20, and 25 percent in successive years, with a per-ounce tax on cannabis flower or a per-milligram of delta-9 tetrahydrocannabinol (THC) tax beginning in year five; and
• Establish CBD supplement pathway: Create a legal pathway for cannabidiol (CBD) in dietary supplements.

Assuming Sens. Schumer, Wyden and Booker formally introduce the bill – they are only circulating it as a discussion draft, at present – it will face an uphill battle in the U.S. Senate, where 60 votes would be required to overcome a Republican filibuster. It is not yet clear if all 50 Senate Democrats support the measure, let alone that 10 Republican Senators would also support the same.

Schumer, in a press conference on Wednesday, acknowledged the work ahead, indicating that “We don't have the votes necessary at this point…But we have a large majority of our caucus for it. We're going to show it to the others and say, ‘Well, what don't you like? What do you like? And we'll see if we can get the support.’ We're going to put our muscle behind it, all our effort behind it, and we're going to get this done ASAP.” On Thursday, Schumer doubled down and announced in a Senate-floor speech that legislation to end the federal prohibition on cannabis is a top priority.

Although most acknowledge that the current version of the bill is unlikely to pass the Senate, Schumer’s statement reveals his intentions: To let the Democratic caucus know where he, Booker and Wyden stand on these issues, to start the conversation and gauge where their colleagues are on the myriad issues in the proposal, and to hopefully pave the way for meaningful reform, even if the legislation that is eventually introduced looks different than the CAOA.

Given the anticipated difficulty of reaching at least a 60-vote consensus on comprehensive cannabis reform, some are advocating for more incremental change, like the Secure and Fair Enforcement (SAFE) Banking Act,^[1] which the U.S. House of Representatives has passed a few times, most recently on April 19, 2021. However, Sen. Booker said emphatically during a Wednesday press conference that “I don’t know about others members of the Senate but I will lay myself down to do everything I can to stop an easy banking bill…as opposed to focusing on the restorative justice aspects.” Despite Booker’s warning, it might be that targeted efforts like the SAFE Banking Act are the only viable, near-term path for cannabis reform, at least given the current 50-50 makeup of the Senate and the current filibuster rule. 

With the seemingly low prospects of the CAOA becoming law anytime soon, some stakeholders are choosing to ignore it and move on. It is worth evaluating the proposal, however, as some aspects of it could very well become parts of other legislative vehicles. Said differently, we expect at least parts of the CAOA to advance, eventually.

As noted above, the 163-page CAOA discussion draft addresses a range of topics, including the below.

Ending of Federal Cannabis Prohibition

The most notable feature of the proposal is that it would, if enacted, end the federal prohibition on cannabis. More specifically, the bill would remove cannabis (marihuana) from the CSA and direct the Attorney General to, within 60 days of enactment, remove cannabis from the list of controlled substances in regulation. In addition, the bill would amend the Federal Food, Drug, and Cosmetic Act (FD&C Act) to include and define the term “cannabis.”

Given the removal of cannabis from the CSA, the bill would address many of the cannabis industry’s current challenges that emanate from cannabis’s Schedule I status. Ability to take tax deductions (Internal Revue Code § 280E), access to banking, capital markets participation, and intellectual property protection would all be available once the federal prohibition on cannabis is ended.

States Would Set Own Policies but Could Not Prohibit Interstate Cannabis Movement

While the bill would not legalize cannabis in every state – and thus it is more appropriate to say that the bill would end the federal prohibition on cannabis, rather than federally legalize it – states would not be able to stop transportation of cannabis through their borders (e.g., from one legal state to another legal state, via a state where it is illegal). This is similar to the approach taken by the 2018 Farm Bill with respect to hemp.

To be sure, states would need to pass follow-on laws if and when CAOA becomes law. The bill would pave the way for interstate commerce, but true interstate commerce would occur only upon states amending their cannabis laws and regulations to allow for the same. At present, every state cannabis program – 37 states and the District of Columbia (D.C.) have authorized medical cannabis use, with 18 of those states and D.C. also authorizing adult-use – is restricted to intrastate commerce, only.

Under the proposal, no state would, for example, have to allow cannabis from another state to be sold in their state (e.g., Illinois could say that only Illinois cannabis could be sold within its borders). In order for cannabis from outside of a state to be sold in a state, both the exporting state and the importing state would have to amend their laws and regulations. Said differently, the bill sets the groundwork for interstate commerce, but interstate commerce will occur only if states take action to allow it.

FDA as Primary Regulator of Manufacture and Marketing of Cannabis Products; TTB and ATF to Also Have Oversight

Under the proposal, FDA would be the primary federal regulatory authority with respect to the manufacture and marketing of cannabis products, including requirements related to minimum national good manufacturing practice (GMP), product standards, registration and listing, and labeling information related to ingredients and directions for use. Per the CAOA, cannabis products would need to be registered with FDA.

The bill would also amend the FD&C Act to make it a prohibited act to sell or distribute cannabis products to any person younger than 21 years of age, prevent single transactions involving the sale of more than 10 ounces of cannabis, and prevent the sale of cannabis products that contain alcohol, caffeine, or nicotine. All states that have adult-use cannabis programs have already established 21 as the minimum purchase age. However, at least some state medical cannabis programs permit cardholders to be under 21 years old, so one issue to be resolved is whether the CAOA would permit medical cardholders under 21 to continue to purchase medical cannabis.

While the bill calls for a tremendously expanded role for the Agency, including the establishment of a Center for Cannabis Products 90 days post-enactment, consider that FDA already regulates cannabis, albeit not as much as the Agency would if the drug was federally legal. While some think of the Agency as only having a role regarding CBD, FDA has said and done much more than that (e.g., approval of Epidiolex, Marinol, Syndros, and Cesamet, issuance of cannabis-derived drug product research and development guidance documents, and holding of cannabis and cannabis-derived product hearings, to name a few).

TTB would be the primary federal regulatory authority with respect to the taxation of cannabis products and trade practices of cannabis enterprises, including: the collection of federal excise taxes and enforcement of tax laws; tracking and tracing of cannabis products; and prohibitions on unfair competition and commercial bribery.

One significant issue to be resolved is the jurisdictional split between FDA and TTB, given that the proposal contemplates dual jurisdiction related to certain aspects of cannabis product labeling and packaging, advertising, and other consumer-facing information.

The bill is somewhat thin on ATF’s regulatory role; the agency would be renamed the “Bureau of Alcohol, Tobacco, Cannabis, Firearms and Explosives” (ATCFE). ATCFE would, not later than one year after enactment, work with the Department of the Treasury and FDA to issue regulations relating to the tracking and tracing of cannabis products. Of note is that Sens. Schumer, Wyden, and Booker are asking for comment on whether and how a single federal track and trace regime could replace the various, complex, state-based seed-to-sale tracking systems.

Yet another key aspect of implementation of the bill would be the interplay between federal and state regulatory regimes. Given the Schedule I status of cannabis, states have been the primary regulators of the space, and operators have expended considerable time and resources complying with state regimes. The interplay between federal and state requirements will have a considerable impact on both existing and prospective cannabis operators, and details regarding the same have yet to emerge.

Restorative Justice and Opportunity Programs

Beyond simply ending the federal prohibition on cannabis, the bill seeks to address the impact of the War on Drugs in a few key ways.

The proposal would:

• Require expungement of arrests and convictions, as well as adjudications of juvenile delinquency, for non-violent federal cannabis offenses;
• Allow any individual who is under a criminal justice sentence for a non-violent federal cannabis offense to obtain a sentencing review hearing;
• Prohibit individuals from being denied any federal public benefit on the basis of use or possession of cannabis or on the basis of a conviction or adjudication of juvenile delinquency for a cannabis offense;
• Prohibit federal agencies from using past or present cannabis use as a basis for denying or rescinding a security clearance;
• Ensure that a non-citizen cannot be denied any benefit or protection under the immigration laws based on events relating to cannabis;
• Require the appropriate federal agencies to authorize physicians and other health care workers employed by the Department of Veterans Affairs (VA) and Indian Health Service (IHS) to provide recommendations and opinions regarding the use of cannabis or drugs containing cannabis;
• Create new grant programs to fund nonprofits that provide services to those adversely impacted by the War on Drugs; and
• Aid state and local efforts to create equitable licensing programs and make loans to small businesses in the cannabis industry.

Imposition of Cannabis Excise Tax

One aspect of the proposal, concerning the imposition of excise tax on cannabis products, is already raising eyebrows. While Sens. Schumer, Wyden and Booker indicate that the tax on cannabis products would function in a manner similar to the tax imposed on alcohol and tobacco, the tax amounts are somewhat astounding.

• The general rate of tax would be 10 percent for the year of enactment and the first full calendar year after enactment.
• The tax rate would increase annually to 15 percent, 20 percent, and 25 percent in the following years.
• Beginning in year five and thereafter, the tax would be levied on a per-ounce rate in the case of cannabis flower, or a per-milligram of THC rate in the case of any cannabis extract.
• The applicable rate for year five and thereafter would be a per-ounce or per-milligram of THC amount equal to 25 percent of the prevailing price of cannabis sold in the United States in the prior year.

In considering the appropriate tax amount, policymakers should understand that legal cannabis operators compete with the black market, and that price-sensitive consumers will continue to choose to leverage the black market if legal product prices far exceed black market ones. This excise tax, in addition to the high taxes imposed by each individual state, would likely drastically increase the cost of products for medical cannabis patients and adult-use consumers.

Under the bill, any person producing taxable cannabis products would have to obtain a Treasury Department permit and register for tax purposes. A cannabis permit application may be denied if the applicant has been convicted of a disqualifying offense (e.g., a felony criminal offense that occurred after enactment of the CAOA, and within the preceding three years).

Establishment of CBD Supplement Marketing Pathway

Some have overlooked the proposal’s inclusion of a marketing pathway for CBD dietary supplements. Even if the CAOA fails to advance, many stakeholders are hopeful that at least some of the measure’s CBD provisions survive and get taken up elsewhere. The hemp industry’s inability to legally market CBD ingestibles has meant that the 2018 Farm Bill’s legalization of hemp was only a partial victory.

The bill would amend the FD&C Act to permit CBD as a dietary supplement. However, under the current proposal, dietary supplements would be adulterated if they contain more than a level of CBD per recommended daily serving set by FDA. What these limits are, how long the Agency would take to establish them, and whether products could be legally marketed in the interim are all unknowns. Moreover, certain dietary supplements would be required to be the subject of New Dietary Ingredient (NDI) notifications to FDA.

While the proposal, if adopted, would provide more certainty to the hemp/CBD industry, there are still many regulatory and timeline unknowns, and it is not clear that bill passage would necessarily result in immediately-marketable CBD supplements.

Comments

Interestingly, Schumer, Booker and Wyden are formally soliciting comments from the public on their proposal, something far more common in the federal regulatory process than in the federal legislative one. More specifically, they have asked for comments from “stakeholders and members of the public, including social and criminal justice advocates, industry stakeholders, members of the public health and law enforcement communities, members of Congress, federal officials, state and local officials, and others.”

While comments will be accepted at any time, stakeholders are encouraged to submit feedback by September 1, 2021 in order to ensure time for comments to be considered before introduction of a final legislative draft. Comments may be submitted to Cannabis_Reform@finance.senate.gov.

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We are continuing to monitor discussions surrounding the CAOA, as well as other cannabis reform proposals, and will issue further analyses regarding the same, as appropriate.

1. The SAFE Banking Act would prohibit a federal banking regulator from penalizing a depository institution for providing banking services to a legitimate cannabis-related business. It would also ensure that proceeds from a transaction involving activities of a legitimate cannabis-related business are not considered proceeds from unlawful activity, and that a depository institution is not liable or subject to asset forfeiture for providing a loan or other financial services to a legitimate cannabis-related business.