Senate Majority Leader Chuck Schumer officially filed his long-awaited Cannabis Administration and Opportunity Act (CAOA) July 21, and while it remains to be seen whether the 296-page bill has the support it needs to become law, this sort of broad federal decriminalization measure would ultimately open up interstate commerce in the cannabis industry.
What does this mean for existing cannabis operators and business hopefuls in state-legal markets?
Jonathan Robbins, chair of the cannabis practice at Akerman LLP, says cannabis will likely be regulated like alcohol at the federal level, and that “refreshing is an understatement” to describe the impact of interstate commerce opportunities on the industry.
“It will be fantastic to be able to negotiate license agreements or distribution agreements where product can actually be sold across state lines,” he says. “If I represent a multistate operator and they want to do a distribution agreement [now] … with a big brand out West, you can’t just drop a pallet from California and ship it to Florida. Especially with edibles, it makes it so impossible because you … have to get the genetics from the operator, then you have to have a team come in and teach them how to cultivate it properly and … how to manufacture these edibles.”
But, according to Robbins and Robert DiPisa, co-chair of the Cannabis Law Group at Cole Schotz, a reasonable tax rate and a uniform approach to regulations are key to the long-term success of the industry when interstate commerce becomes a reality.
The CAOA aims to levy an excise tax on cannabis products, starting at 5% for small and mid-sized producers and gradually increasing to a maximum rate of 12.5% five years from enactment. The excise tax would begin at 10% and gradually increase to a maximum rate of 25% for larger cannabis operators.
This level of federal taxation could be an obstacle for cannabis businesses, DiPisa says, especially when combined with existing state and local tax rates and licensing fees.
“Just the cost alone to comply with the regs—the fees and the taxes—really puts a strain on these operators,” he says. “You’re adding to that already large [state] tax and the local tax, and you’re just putting a further squeeze on these operators.”
The CAOA—and any other measure that would federally decriminalize cannabis—would also layer a set of federal regulations on top of the state-level rules that cannabis businesses already contend with. Companies that have been operating in compliance with their state’s cannabis program may have to change several facets of their operations to comply with forthcoming federal regulations, as well as pay additional fees to register their businesses on a federal level.
“I think if we’re ever going to get to the point where we have interstate commerce, there needs to be some sort of uniform regulatory approach,” DiPisa says. “What we ended up with is a lot of different states with a lot of different regulations, and in order for us to get to a place where product can go from one state to another like the bill contemplates, we need to see a more uniform approach to regulations not only at a federal level, but also on a state level, as well.”
In order for retailers in New York to sell cannabis products from California, for example, those products would have to comply with regulations in each state, as well as any applicable federal rules.
“I think that’s going to be very challenging for states to achieve,” DiPisa says, adding that it will likely be many years before regulatory structures align to allow for this kind of interstate commerce.
The CAOA proposes that the U.S. Food and Drug Administration (FDA), Alcohol and Tobacco Tax and Trade Bureau (TTB) and other regulatory bodies work together to govern the cannabis market, which DiPisa says could lead to varying guidance between the agencies.
DiPisa also has concerns about the federal government’s ability to effectuate cannabis regulations in a timely manner, especially as the FDA continues to delay a regulatory framework for hemp-derived CBD products that were legalized through the 2018 Farm Bill.
“They haven’t addressed the issue of incorporating CBD products into dietary supplements,” DiPisa says. “We’ve been waiting years and years for that to occur. … It creates a lack of confidence in how long it’s going to take for the federal government to actually come out with those regulations.”
And as the industry continues to wait on federal regulations, more states legalize cannabis and establish their own regulatory structures.
“And all that means is that more and more operators will have to do an about-face to eventually comply with the federal regulations, whenever those are actually rolled out and put in place,” DiPisa says.