Earlier this year, US Senate leaders unveiled a long-awaited draft legislation that would remove cannabis from the country’s list of controlled substances. The legislation also formally allows states to determine their own cannabis policies and attempts to combat racial and social inequalities related to cannabis laws from the past.
The draft legislation, which allows stakeholders, the public and others the opportunity to provide feedback, closed for comment on September 1, 2021, and is now back with the Senate leaders who will review submissions and formally introduce revised language later this year.
The Cannabis Administration and Opportunity Act (CAOA) is thought to be the most comprehensive piece of cannabis reform legislation ever introduced into Congress. But what’s actually included in the bill and how does it affect cannabis cultivators and manufacturers? Let’s take a look.
What’s in CAOA?
For mid-level cannabis companies and MSOs, the following considerations found in CAOA are worth noting:
1. Descheduling Cannabis
If approved, CAOA would deschedule cannabis, which is the keystone to cannabis reform. If descheduled, cannabis would then be treated like other legal substances, such as alcohol or tobacco, and would allow states to regulate, prohibit or legalize as they see fit. Descheduling also assures that state-legal cannabis is equally legal under federal law, helping to clear outdated federal restrictions on cannabis banking, medical access, research, etc.
Descheduling would also normalize income tax treatment in legal cannabis markets, meaning existing businesses would no longer be subject to Section 280E of the Internal Revenue Code. Under this code, state-legal operators are limited in the business deductions they can take when calculating their income tax liability. This unfavorable treatment gives illicit operators a competitive advantage in states like California, for example, where the state and local tax burden on legal cannabis products is nearing 40%.
2. Federal Excise Tax
Undoubtedly the most controversial aspect of CAOA, the imposition of a federal tax on cannabis has the potential to undermine progress in the industry. That’s because CAOA would impose a tax rate of 10% for the first full calendar year after enactment, then increase annually to 15%, 20% and 25% in the following years (12.5% is the max for cannabis operators under $20 million).
While most smaller businesses are pleased that the brunt of the excise tax will be on large, multi-state operators, the overall fear throughout the industry is that a new tax would contribute additional complexity to an already convoluted system.
Thus far, federal agencies have not interfered with cannabis markets in the various states. But CAOA changes this by switching regulatory responsibility from the US Drug Enforcement Agency (DEA) to the Alcohol and Tobacco Tax and Trade Bureau (TTB), the Bureau of Alcohol Tobacco Firearms and Explosives (ATF), as well as the Food and Drug Administration (FDA) to protect public health. The requirements and processes put in place by these agencies could dramatically change market conditions.
3. Federal Track and Trace Program
Section 112(b) of CAOA establishes a federal track and trace strategy designed to prevent diversion and evasion of federal and state taxes. The program would require manufacturers of cannabis products to place identifiable codes or devices on cannabis labels to monitor the movements of products between the point of production and sale. This would require cannabis companies to maintain records of cannabis transactions and make them available for inspection by state and federal agencies.
Under current laws, each state has a different track and trace system in place, which makes it extremely difficult for MSOs to operate. If a national track and trace solution is effective and replaces state-specific systems, it could create big opportunities for the industry. If, however, the federal system worked on top of state systems, this could create even more compliance issues for operators.
Preparing for Federalization
The CAOA presents enormous growth opportunities for the cannabis industry. For MSOs, it opens the door for additional growth opportunities and puts federal legalization within arm’s reach.
To prepare for CAOA and to ensure your business is ready for nation-wide legalization, it’s important to begin getting organized. To overcome issues around compliance, quality and efficiency and be truly prepared for new opportunities, leading cannabis companies turn to industry-specific ERP software.
With a solution designed for cannabis cultivators and processors, cannabis companies can put the building blocks in place now to capitalize on expanding national opportunities in the future. An ERP solution helps operators:
- Consolidate finances and get a clear picture of the health of their business
- Track everything and support EU GMP standards and US state reporting
- Ensure efficiency around purchasing, inventory management, distribution and more
CannaBusiness ERP is software purpose-built for cannabis companies. It is built in Sage X3 and configured by NexTec industry experts to deliver a complete cannabis business solution. It includes the features our cultivation and processing customers use to run some of the industry’s most respected cannabis organizations.
To learn more about how CannaBusiness ERP can help your company prepare for the future, reach out to us. We’d love to chat.