New Kid on the Block: States Reform Act

16 Nov New Kid on the Block: States Reform Act

I feel like we’re living in an upside down world when it comes to cannabis legalization at the federal level. The main reason being that Dems, despite in being in full control of Congress and the White House, just can’t get the ball across the line on a number of cannabis reform bills. This includes bills on banking (see the SAFE Banking Act, which has passed the House no less than five times) and overall federal legalization (see the MORE Act as well as its sister Senate legislation, the Cannabis Administration Opportunity Act (“CAOA”)).

A lot of this gridlock is due to political jockeying over other issues that take priority, like COVID recovery, infrastructure, etc., and because, as Senate Majority Leader Chuck Schumer admits, there aren’t enough votes in the Senate to get anything done around the issue. To add to the feeling we may be living in the Twilight Zone, a Republican Congresswoman, Nancy Mace, out of South Carolina, just introduced a cannabis legalization bill called the States Reform Act (“SRA”). Why is Rep. Mace’s cannabis bill significant? Because she’s a junior Republican representative in the House (from the southeast, no less). The SRA is probably also the most significant reach “across the aisle” we’ve seen between our two (leading) very polarized political parties. It’s possible that this bill has a better chance of making it through the Senate.

The 131-page bill is essentially focused on preserving state’s rights while implementing a much lower federal excise tax than we’ve seen in either the MORE Act or the CAOA. The SFA would also expunge the criminal records of non-violent, non-cartel, non-DUI cannabis offenders. Mace’s bill, while decriminalizing cannabis completely and getting it off of schedule I, would also have the Feds regulate cannabis like alcohol while deferring ultimately to the states on licensing and other commercial regulations. That part isn’t surprising in the least.

If you want the quick and dirty overview of the bill, here’s the one page summary from Mace’s office. Here are the other main business and regulatory highlights as we see them:

Role of the FDA and USDA

If this bill passes, the Food and Drug Administration (“FDA”) won’t have much of anything to do with cannabis outside of legitimate medical applications. The United States Department of Agriculture (“USDA”), on the other hand, will have a major role in providing the federal regulatory framework for cannabis farmers (and for “raw cannabis” as opposed to final commercial cannabis products). The USDA role will be similar to how its oversight of “. . . other traditional agricultural commodities, such as grain, hops, and barley”.

The bill goes on to describe how Tribes and States will submit cultivation plans for raw cannabis to USDA for approval, (and which will essentially contain their regulatory, licensing, and compliance oversight programs). In the event a Tribe or State doesn’t develop a plan or the plan is rejected by USDA, then growers will just follow the overall system put together by USDA (these directives are very similar to the standards set out in the 2018 Farm Bill, legalizing hemp).

State prohibition is OK

If states want to prohibit commercial cannabis activity within their borders, they are free to do so.

TTB will permit and regulate interstate commerce

Interstate commerce of cannabis and cannabis operations will be permitted and regulated by the Alcohol and Tobacco Tax and Trade Bureau of the Department of Treasury (“TTB”). The Secretary of Treasury, acting through TTB, will be in charge of the federal track and trace system for cannabis products in interstate commerce. And a safe harbor is in place for pretty much all interstate commercial cannabis activity after passage of the bill and until the Secretary promulgates all final regulations under the SRA (of course, that commercial cannabis activity must still be in line with applicable state cannabis regulations).

As to the permit itself, there are conditions on its receipt. A permit will be denied if an applicant:

(i) has been convicted of a disqualifying offense, (ii) by reason of business experience, financial standing, or trade connections, not likely to commence operations within a reasonable period or to maintain such operations in conformity with Federal law; or (iii)
that the operations proposed would violate state cannabis laws; or (iv) the applicant “failed to disclose any material information required or made any material false statement in the application,” they’re not getting a permit.

The list of “disqualifying offenses” includes a felony conviction anytime in the three years before permit application or a misdemeanor conviction within one year before permit application. There are a couple of exceptions to this list, probably the most important one being that the offenses won’t qualify if a state is examining the issue and still willing to give a state license regardless of the offense. Plus, any state licensed cannabis business that’s operative before the bill passes will be grandfathered in when they apply to TTB to do business under the federal permit (and so will any cannabis businesses licensed by a state after the bill’s passage).

Note that on the TTB permit fee, for the first three years after the bill’s passage, cannot exceed $10,000 per permit (and fee waivers apply for certain kinds of businesses under the Small Business Act). Also, rules around changes of ownership of these permits don’t look too onerous (yet).

The enforcement role moves from DEA to ATF

When it comes to enforcing federal cannabis regulations, the Drug Enforcement Administration (“DEA”) is out and the Bureau of Alcohol, Tobacco, Firearms, and Explosives (“ATF”) is in (in addition to TTB as the primary overseer). And “Cannabis” would even get added to the agency’s name.

Advertising and promotion

There are call outs in the bill specifically regarding advertising and promoting cannabis products and protecting minors (I imagine that the Feds will borrow heavily from state regulations that already well cover this topic).

Age limits (21)

The federal age limit for cannabis use will be 21 with certain exceptions made for those individuals under 21 using medical cannabis in line with applicable state laws that allow it.

Federal Alcohol Administration Act control

Both ATF and TTB will adhere to the Federal Alcohol Administration Act (“AAA”) when it comes to enforcement of future cannabis regulations (which, the AAA will be changed to add cannabis and harmonize technical amendments between alcohol and cannabis). Regarding this Section 208 of the bill, the SRA policy brief states that:

“Mirroring the policy success of Congress’ Blaine Act with transitioning alcohol bootleggers to a safe, regulated legal market, the new Federal Alcohol Act provisions regarding cannabis grandfather existing state licensees into the new federal scheme and the barriers to entry for businesses are low to incentivize transition into a legal market.”

“Designated State Medical Products” and the FDA

“Designated State Medical Products” (which, per the bill, are to be used for specifically enumerated ailments under federal law) are getting added to the Food Drug & Cosmetic Act through the Designated State Medical Cannabis Product Safety Act. This piece of law “. . . ensures the continued access of medical patients and state medical cannabis programs—that serve millions of Americans with severe conditions such as epilepsy and seizure disorders without disruption to patient access” whereby such products will also be instantly grandfathered into lawful interstate commerce.

Per the policy brief, “[t]he FDA may still prescribe serving sizes, certify designated state medical cannabis products as a ministerial duty, and authorize new drugs or approved news uses of drug applications to create new pharmaceutical grade products, but may not prohibit the use of cannabis or its derivates in non-drug applications, such as in designated state medical cannabis products, dietary supplements, foods, beverages, non-drug topical solutions, or cosmetics.”

SBA fairness

The Small Business Administration will now have to treat cannabis businesses like any other business, which means government loans should be available. The SRA again seems to contemplate cannabis businesses being treated like hemp businesses in this respect.

Taxes

The bill established the Cannabis Revenue Act, which imposes an excise tax of 3% on cannabis products along with a ten-year moratorium on any increases to “ensure competitive footing in the market”. Congress can waive the moratorium, but the vote to do so is pretty high. The tax attaches as soon as the cannabis comes into existence, and the bill contains various “removal price categories” (similar to alcohol and tobacco, which are taxed on quantities and pre-defined categories).

Provisions for Veterans

The bill does a great job of supporting military veterans in that they can’t be discriminated against in federal hiring for having consumed cannabis, and finally the Veterans Administration will actually have to help vets gain access to state medical cannabis information and can openly discuss with them treatments with medical cannabis without legal consequence from the military when it comes to veteran medical benefits.

International law and treaties

International trade of cannabis could certainly open up under this bill where it mandates that “The President . .  . and the United States Trade Representative shall send trade missions and engage in treaty-making with foreign jurisdictions that have legalized the import and export of cannabis to provide for the legal trade between the United States and foreign jurisdictions.” Translation, domestic and international barriers to the cannabis trade need to come down.

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Everyone in the cannabis world and their mother is reporting on or talking about this bill. I’m glad to see that. It will definitely get worked over in the House for a variety of issues, I have no doubt. The SRA’s chance of passing are unknown right now, but the buzz around it is enough to warrant legitimate attention as a serious contender for real reform. Stay tuned!