Cannabis Legislation Advances in Congress

February 13, 2019

By Melissa Dardani

On February 7, 2019, The Marijuana Revenue and Regulation Act was introduced in the United States Senate.  It is one part of a three-part initiative to push Federal cannabis legalization, and integration of the industry in the US.  The new legislation begins to address the federal legal status of cannabis, existing and possible future tax code and banking.  The initiative is packaged as “The Path to Marijuana Reform” and is comprised of three separate bills.  The bills’ primary sponsors are Democratic Senator Ron Wyden (S.777, S.780, S.420); Democrat Congressman Earl Blumenauer (H.R.1824); and Republican Congressman Carlos Curbelo (H.R.1810).

Included in the three proposed bills is S.777, titled “Small Business Tax Equity Act”, introduced in March of 2017.  The Act would amend Federal Code Section 280E to read “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 such trade or business consists of trafficking in controlled substances which is prohibited by Federal law or the law of any State in which such trade or business is conducted, unless such trade or business consists of marijuana sales conducted in compliance with State law.”  This bill maintains the application of 280E, which allows the Internal Revenue Service to tax illicit business operations such as drug cartels, while granting the benefit of ordinary and necessary deductions to State-regulated cannabis businesses.

Simultaneously, bill S.780, titled “Responsibly Addressing the Marijuana Policy Gap Act” was introduced and would affect several cannabis policy changes on the Federal level.  It amends the Controlled Substances Act to defer to State law as it relates to cannabis provisions.  The bill seeks to remove restrictions on financial institutions serving cannabis clients.  It would restore FDIC insurance to cannabis customers and further open the industry to a full spectrum of banking services.  In addition, bankruptcy protection would be awarded to these businesses when necessary. 

The newest addition to the initiative is S.420, titled “Marijuana Revenue and Regulation Act” which provides a number of changes to the current landscape, including de-scheduling cannabis from the Controlled Substances Act.  S.420 also proposes the enactment of a progressive tax rate on sales price, which would ramp up over a five year period from 10% to 25%.  Cannabis sold for scientific research purposes is not to be assessed with tax under the proposed bill.  The Act also calls for accurate recording and reporting of inventory and ease of audit for Internal Revenue Agents and other regulatory agencies.  In addition, the Marijuana Revenue and Regulation Act establishes permit requirements for producers, wholesalers and importers.  Jurisdiction over cannabis would be transferred from the Drug Enforcement Administration to the Bureau of Alcohol, Tobacco, Firearms and Explosives, which is to be referred to as Bureau of Alcohol, Tobacco, Marijuana, Firearms and Explosives upon enactment.  The Bureau is to receive an additional $10M per year in 2019 and 2020 to carry out the provisions of the Act.

The anticipated bills are a step towards Federal legalization and if passed, will provide a new level of security and legal clarity to operators, financial institutions and ancillary service providers, among others.  Currently, those in the cannabis space have been operating under the uncomfortable uncertainty of potential Federal repercussions. 

About Melissa Dardani

Melissa Dardani is a Senior Accountant in the Financial Advisory Services Group providing accounting, litigation support, and forensic services to clients through the dispute and restructuring processes, as well as in bankruptcy cases.

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