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State Senates drop a “Bongshell” – Tax Related Cannabis Bill

Last week, Democrat State Senators introduced a bill related to the legalization of marijuana. Senators motioned to remove cannabis from the federal government’s list of controlled substances. This would ultimately give states the power to make their own laws regarding cannabis legalization.

Regulation of Cannabis

The way cannabis is projected to be regulated is by transferring its federal jurisdiction. This would mean that jurisdiction would be moved from the Drug Enforcement Agency over to the hands of two different government agencies – the Food and Drug Administration (FDA) and the Alcohol and Tobacco Tax and Trade Bureau of the Treasury Department. Once the transfer is complete, regulations are predicted to be very similar to the current regulations of Tobacco and Alcoholic products.

Despite being against the odds at the moment, advocates are hoping this bill will eliminate the current Tax Code’s restriction that doesn’t allow cannabis businesses to claim certain business deductions. So, taxpayers running a marijuana dispensary in a state where it is legal, cannot claim a federal deduction for trade or business expenses (like rent and employee compensation).

An excise tax on marijuana is also discussed in the newly introduced bill, which is a legislated tax on specific goods or services such as fuel, tobacco, and alcohol. The tax for small and midsized producers would begin at 5% and range to 12.5%, while, for larger businesses, these numbers would range from 10% to start, going all the way up to 25%.  An excise tax is ultimately designed to get people to consume less of a product that may cause harm to them or imposes people unnecessary costs.

Schumer’s Statement

A statement made by senate majority leader Chuck Schumer says “The Cannabis Administration and Opportunity Act will be a catalyst for change by removing cannabis from the federal list of controlled substances, protecting public health and safety, and expunging the criminal records of those with low-level cannabis offenses, providing millions with a new lease on life. A majority of Americans now support legalizing cannabis, and Congress must act by working to end decades of over-criminalization. It is time to end the federal prohibition on cannabis.”

Standstill in Divided Senate

Some on capitol hill are optimistic this bill can be passed, but it is also very unlikely due to the current division in the Senate, with only one party (democrats) wanting this bill passed. For this bill to be signed into law, some republican senators will have to flip. “We see little chance that this bill moves forward as is,” Tobin Marcus at Evercore ISI said. “It does not have unified support from Senate Democrats, and Republican leadership does not want a vote on it.”

Wrap Up

The division on Capitol Hill makes this newly introduced bill unlikely to be passed, as it would need 60 votes to be passed. In April however, the U.S. House of Representatives voted on a bill that decriminalized cannabis and expunged federal marijuana convictions while also imposing a tax on cannabis importers, growers, and other producers. If you are in the cannabis business and are unsure of the tax implications, give your accountant or advisor a call so they can help your business bloom.

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