Frequently asked questions about the States Reform Act, a proposed marijuana bill

Geoffrey Lawrence

Rep. Nancy Mace (R-SC) unveiled the States Reform Act, a proposal to remove marijuana from the auspices of the federal Controlled Substances Act.

 

Today, Rep. Nancy Mace (R-SC) unveiled the States Reform Act, a proposal to remove marijuana from the auspices of the federal Controlled Substances Act. This fundamental change in U.S. drug policy would effectively remove most federal restrictions against marijuana and state-licensed marijuana businesses.  Rep. Mace’s bill goes on to set up a process whereby marijuana would be regulated at the federal level, like alcohol, and would allow for an interstate marijuana market among states that choose to participate.

The States Reform Act has garnered attention as the first prominent bill sponsored by a House Republican to end the federal prohibition of marijuana, which could help give the proposal some political advantage in its efforts to secure bipartisan support. Congressional Democrats have previously introduced various marijuana legalization proposals, including the Marijuana Opportunity Reinvestment and Expungement (MORE) Act, and currently have draft language for the Cannabis Administration and Opportunity (CAO) Act. At this time, however, many observers believe neither of the proposals being led by congressional Democrats will be able to secure the necessary Republican votes for passage in the Senate. Any marijuana legalization proposal would need to secure the support of at least 10 Senate Republicans in order to overcome a potential filibuster.

The States Reform Act proposed by Rep. Mace already carries at least six Republican co-sponsors, with more support expected. Thus, it’s possible Mace’s Republican-backed States Reform Act may be able to break some of the political gridlock and attract a broad, bipartisan coalition to implement this needed policy.

Below are a number of the frequently asked questions about marijuana legalization and Rep. Mace’s proposed bill:

  • Would the States Reform Act make marijuana legal nationwide?

The States Reform Act would remove marijuana and all cannabinoids from the federal Controlled Substances Act entirely, but marijuana would remain prohibited under many state versions of the Controlled Substances Act. To date, 20 states have removed marijuana from these laws for adult use and an additional 18 allow marijuana to be dispensed to qualified medical patients with a doctor’s recommendation. In states that do not allow commercial marijuana activity or possession for certain individuals, those restrictions would remain in place unless and until those states make their own statutory changes. That means marijuana would remain widely prohibited in states without adult-use marijuana programs. Even if a resident purchases a marijuana product in a state where it is legal to do so, that resident would be prohibited from bringing that marijuana product into a state that retains a legal prohibition against marijuana.

  • What major complications affecting the legal marijuana industry would be changed by the States Reform Act?

Marijuana’s current classification as a Schedule 1 substance under federal law automatically triggers a wide range of limitations even for the state-legal marijuana industry. Federal anti-money laundering statutes and regulations require financial institutions to perform additional scrutiny over entities or transactions they have reason to believe could involve the trafficking or distribution of any Schedule 1 substance. This reporting is time-consuming and costly to perform and any financial institution that offers financial services to a marijuana business could also face aiding and abetting charges. As a result, many financial institutions have chosen not to offer accounts to businesses they believe are involved in the marijuana industry, even if they are fully licensed and compliant under state law. Federal regulation of financial institutions has also prevented new financial institutions from receiving deposit insurance and Federal Reserve accounts when those institutions aim to service the marijuana industry.

Similarly, all businesses that traffic in a Schedule 1 or Schedule 2 substance are precluded from claiming a deduction of their business expenses under the “Ordinary and Necessary” standard generally applicable to entities filing income taxes. Instead, Internal Revenue Code Section 280E allows these entities to deduct only the Cost of Goods Sold from their Gross Income when calculating federal income tax liabilities. The result is that state-legal marijuana businesses are penalized on their federal income tax and must pay that tax on a modified gross receipts basis. Even marijuana businesses that operate at a loss may face substantial income tax liabilities.

Removing marijuana from the Controlled Substances Act entirely, as the States Reform Act would do, automatically solves these issues and allows state-legal marijuana companies to access financial services and calculate federal income taxes just as similarly situated businesses in other legal industries

  • How would marijuana be regulated under the States Reform Act?

The Alcohol and Tobacco Tax and Trade Bureau (TTB), a division of the Treasury Department, is designated as the primary regulatory body for marijuana by the States Reform Act. The TTB would be responsible for tracking all marijuana inventory through a seed-to-sale tracking platform similar to what is currently used by state regulatory systems administering adult-use marijuana programs. Typically, these platforms use radio frequency identification tags affixed to every plant or package containing a marijuana product and record all transfers of inventory at either the wholesale or retail level, and match declarations between buyers and sellers. These platforms are currently monitored by state regulators and allow them to run forensic data analytic programs to inspect for deviations in declared yields or conversions such that regulators can spot potentially illegal diversions of regulated inventory by any licensee. The TTB would track inventory in a fashion similar to existing state regulators and coordinate the transfer of any inventory between state regulatory systems in the event products are wholesaled between licensed marijuana businesses located in different states with marijuana programs in place.

As a partner to the TTB, the Bureau of Alcohol, Tobacco, Firearms and Explosives would be renamed to the Bureau of Alcohol, Tobacco, Cannabis, Firearms and Explosives and would investigate and potentially prosecute illicit trafficking in marijuana.

In sharp contrast to other proposals for federal legalization, the States Reform Act would specifically preclude extensive regulation of most marijuana products by the Food and Drug Administration. Section 201 stipulates that the FDA will have no more authority to regulate marijuana products than it does for alcohol unless a product is marketed as a medical product. These provisions will allow state regulatory systems to continue to address safety concerns, production methods, facility inspections and final product testing for potential impurities.

Sections 202 and 203 designate the federal Department of Agriculture as the appropriate regulator for the raw cannabis plant as it is growing. State licensing and regulations will continue in place for cannabis cultivation facilities, although state programs would additionally need to submit the details of their regulatory plan to the federal Department of Agriculture for approval, as is currently done with state hemp programs.

Finally, Section 206 of the States Reform Act creates a regulatory safe harbor for existing marijuana products so state-licensed businesses can continue selling these products before federal rulemaking is completed without fear of federal prosecution. This important protection even applies to state-licensed entities that engage in interstate commerce of regulated marijuana products, implying that states would be able to begin establishing interstate markets upon passage of the States Reform Act.

  • Could a consumer in one state order marijuana products from another state?

The States Reform Act creates a pathway for consumers in states with adult-use marijuana programs to purchase or order products they like from other states with adult-use marijuana programs. Upon receipt of a federal license from TTB, marijuana companies will gain the ability to engage in interstate commerce. Many specifics of how this interstate commerce will operate are left to the rulemaking process, but it should generally be anticipated that consumers will gain access to marijuana products created in other states.

  • What would the tax rate be under the States Reform Act?

Section 5901 establishes a new federal excise tax on marijuana products at a rate of 3 percent of the products’ value.  This would be assessed at the point of wholesale transfer between a producer and another producer, distributor or direct customer. The excise tax must be based on the fair value of the underlying products in an arms’ length transaction, which the Treasury Secretary will gain the ability to determine through rule. Effectively, this may mean the Treasury Department will determine a prevailing market price per unit of weight for various products based on periodic surveys. Several states, including Colorado and Nevada, follow a similar approach for the administration of marijuana excise taxes.

  • How difficult would it be to get a federal license to produce marijuana under the States Reform Act?

Section 302 clarifies that the TTB “shall issue” a federal license to operate a marijuana business to any applicant that is not specifically excluded by a narrow range of criteria. These criteria include: (1) the likelihood that that applicant will never commence operations based on lack of business experience, financial standing or trade connections; (2) any proposal to operate in a state where marijuana is not legal; (3) a fraudulent misrepresentation of information within the application; or (4) the applicant has been convicted of a felony offense relating to marijuana within three years prior to application or a misdemeanor offense within one year of application unless the underlying action was lawful under state law. This “shall issue” standard makes approval the agency’s default decision for licensing applications unless the agency can prove one of the disqualifying criteria is relevant to a particular case.

Section 302 further clarifies that all existing state-licensed marijuana businesses in good standing shall be issued a federal license through the TTB upon application. This grandfathering provision will ensure continuity of operations and growth opportunities for existing state-licensed marijuana businesses.

The Secretary of the Treasury will be able to charge licensing fees sufficient to cover the cost of the Department’s regulation through the TTB. These amounts will be determined by rule but are restricted within the first three years of the agency’s regulation to no more than $10,000. In addition, the Department must waive these licensing fees for any applicant that meets the Small Business Administration’s definitions for a small business or a socially or economically disadvantaged business.

  • Does the States Reform Act do anything specific to protect veterans’ access to marijuana?

The States Reform Act contains several provisions of particular concern to veterans of the armed forces.  Section 601 precludes any federal agency from denying employment to a veteran based solely on the reason that the veteran consumes or has consumed marijuana. Section 602 expressly allows doctors within the Department of Veterans Affairs to recommend marijuana products to patients who may benefit from the use of these products.

  • If marijuana is legalized federally, what would happen to people who have been convicted of federal marijuana crimes in the past?

Section 101 requires all Federal districts to expunge the records of practically all nonviolent federal marijuana arrests or convictions within one year of passage. This would be accomplished without the need for individuals to retain legal counsel or submit an application to remove the record of their specific offenses.  Instead, all qualifying records would be automatically expunged. The bill provides for only a limited range of exceptions, such as for individuals who are or have been associated with foreign drug cartels or who were convicted of driving under the influence of marijuana on federal property.

  • How would the States Reform Act empower previous victims of the war on drugs?

Various provisions of the States Reform Act would combine to create pathways of restorative justice for victims of the war on drugs. First, all nonviolent criminal records would be expunged for these individuals, removing significant barriers for these individuals to engage in healthy and productive behaviors like attending college, applying for a home or business loan, or securing lucrative employment. Further, these individuals would even gain the ability to pursue a license to operate federally licensed, legal marijuana businesses to make productive use of their knowledge of the marijuana market. Finally, many of these individuals may even be able to qualify for assistance in launching a new marijuana business through a Small Business Administration loan and through a waiver of licensing fees.


This article was originally published at the Reason Foundation website. 

Geoffrey Lawrence

Geoffrey Lawrence

Geoffrey Lawrence is a senior policy fellow at Reason Foundation.

Lawrence has broad experience as a financial executive in the public and private sectors and a decade as a think tank analyst. Lawrence was previously Chief Financial Officer and Chief Compliance Officer at Players Network, Inc, the first fully-reporting, publicly-traded marijuana company to be listed on a U.S. exchange. Lawrence oversaw all aspects of compliance with state and local laws and regulations for the licensed cultivation operations across two states.

Prior to that, Lawrence served as the senior appointee to the Nevada State Controller’s Office, where he oversaw external financial reporting, covering nearly $10 billion in annual transactions, on behalf of the state. During each year of Lawrence’s tenure, the state received the Certificate of Achievement for Excellence in Financial Reporting Award from the Government Finance Officers’ Association.

Lawrence spent a decade developing market-based solutions to challenges facing state governments while working at the Nevada Policy Research Institute and, previously, the John Locke Foundation in North Carolina. Lawrence has also written for the Cato Institute and the Heritage Foundation, with particular expertise in state budgets and labor economics.

Lawrence holds an M.A. in international economics from American University in Washington, D.C., an M.S. and a B.S. in accounting from Western Governors University, and a B.A. in international relations from the University of North Carolina at Pembroke.