Will cannabis become federally legal under the Biden Administration?
Written by our Founder, Matt
Jerry Garcia’s famous saying, “What a long, strange trip it’s been,” perfectly encapsulates cannabis reform in the United States on a state – and now – federal level.
Although there have been several attempts at the federal legalization of cannabis over the years, the potential for major federal cannabis reform has never been more significant than it is today.
During the recent Vice-Presidential debate, Kamala Harris adamantly stated, “We will decriminalize marijuana, and we will expunge the records of those who have been convicted of marijuana.” By far, these are the most transparent remarks to date on cannabis reform that any potential candidate for president or vice president has taken on such a large stage.
While many prominent activists in the cannabis industry push for federal legalization, it is far more likely that reform comes by decriminalization, 280E reform or protection from enforcement, and banking legislation that allows dispensaries much-needed access to banking and financial services.
While it’s easy to get excited at the prospect of federal legalization, we must genuinely evaluate the benefits and ramifications of full legalization instead of the federal decriminalization of cannabis.
We believe that decriminalization coupled with financial and banking reform will be much better for the industry than the full-scale federal legalization of cannabis at this time.
While federal legalization sounds enticing, there will be many immediate challenges and risks that current cannabis operators will experience when this happens.
Most cannabis operators have built their businesses from the ground up with sweat, tears, and minimal financing.
Federal legalization of cannabis would spur an influx of some of the world’s largest companies to the industry. This influx would affect the industry by pushing out some of the smaller cannabis businesses and may commercialize cannabis to provide low-grade products, similar to the tobacco industry’s model.
In all fairness, the brave individuals and organizations that shaped this industry and worked tirelessly to advance the cause for cannabis deserve the first chance to succeed in this industry.
Cannabis as a healing plant needs to be protected as long as possible. Commercialization will entice new consumers of cannabis to be attracted by big household names, possibly at the expense of quality cannabis and its related products.
Compliance in Cannabis
Federal legalization would also introduce an entirely new system of national compliance practices.
With cannabis use consistently becoming more accepted in many states across the U.S., operators are in the infancy of navigating the many different measures of compliance.
This process is very complicated. For instance, Purple Lotus in San Jose, California, currently operates underneath four separate standards of compliance from four different governmental agencies.
Federal legalization would almost certainly provide additional compliance measures that may not coincide with the various city, county, and state regulations across the nation.
Further adding to the complexity may be additional bureaucratic departments of the Federal government regulating the industry. Cannabis operators need more time to firmly establish the procedures to operate under the current multiple exhaustive sets of regulations.
These regulations would be incredibly challenging for cannabis companies that are located in multiple localities and states.
It always comes back to the almighty dollar.
Cannabis is currently one of the highest-taxed items in the nation. In San Jose, customers pay a 10% city tax, 9.25% state sales tax, and a 15% state cannabis excise tax for a total of 34.25%.
Suppose the Biden administration chooses the Federal legalization of cannabis as opposed to decriminalizing it.
In that case, the Federal Government will surely add a substantial amount of tax to this, unquestionably driving up the price of cannabis and pushing customers back into the unregulated black market.
Customers have not had enough time to get used to safe access to cannabis and need more time in this environment to be truly educated and thoroughly convinced of the benefits of regulated marijuana and why it is worth paying more.
The decriminalization of cannabis and the passing of federal banking regulations such as the M.O.R.E Act are much more prudent and appropriate steps at this time. Like federal legalization, decriminalizing cannabis would protect cannabis operators and workers from the possibility of federal intervention as long as they are compliant in the state where they operate.
This, along with the S.A.F.E Act or the M.O.R.E Act being passed, will provide cannabis operators the security and peace of mind that they will not be prosecuted federally. This will also open up so many opportunities for cannabis companies to obtain bank accounts and financial services vital to corporations’ workings and governance. Federal legalization would resolve 280E, but this can be done by eliminating this archaic tax code.
In addition, before cannabis is federally legalized, the IRS must change their tax code regarding 280E. This archaic IRS code prohibits the deduction of all expenses besides the direct cost of the product by companies or individuals involved in federally illegal activities.
This is an existential threat that requires cannabis operators to operate underneath a wide variety of corporate complexities to comply with 280E’s restrictions. Not only does this cause difficulty in record keeping, but it adds a substantial amount of administrative costs for both the company and IRS.
Tax Code 280E was established to prevent high-level drug traffickers from claiming expenses related to the sale of controlled substances. It was established based on a single man’s attempt to deduct expenses from his drug trafficking operation to avoid tax evasion. It was certainly not intended to be used to put legally operating cannabis companies in such jeopardy and at the mercy of the IRS.
Choosing to take these steps instead of moving directly to federal legalization will allow states to refine their state programs.
Most states are still working through the kinks of their program and learning how to manage the compliance, regulations, and monitoring of cannabis businesses. Historically, when the Federal Government gets involved, things tend to get more complex. Giving states time to establish their own cannabis programs will prepare the industry for future federal legalization of cannabis.
It will also encourage states to learn from each other to establish a more “universal” approach to regulations that the Federal Government could mimic. The Federal Government has no previous experience in cannabis regulation and should be sure that the state programs are effective and well-established before full legalization.
Federal Legalization Will Increase the Cost of Cannabis
The number one reason the Biden Administration would consider legalizing cannabis is for the tax revenue.
During the past year, the COVID-19 virus ravaged the entire world, crippling economies like nothing we have seen since The Great Depression.
There are scarce resources for the Federal Government to tax to fund the government’s support of individuals and businesses during the pandemic. However, the Biden Administration could choose to decriminalize cannabis while passing banking reform and taxing the sale of cannabis either directly or through each state’s cannabis authorities.
If this tax was placed at 5%, it is estimated that in the year 2021, cannabis operators would pay $1 billion in taxes to the federal government, with revenue topping $20 billion in total. I know we’re all excited about the possibility of federal cannabis legalization – anyone who loves and believes in this plant would be.
It’s coming, and its momentum is as strong as ever.
As its benefits and effects are becoming more popular and well-known, it’s almost a foregone conclusion that cannabis will be federally legal in the coming years. However, as industry veterans, we must realize that the moment is not quite ripe.
We must first move forward with the push for federal legalization by taking small but substantial steps and not running into a situation that may jeopardize the incredible progress that the cannabis industry has made.
The Federal Government and its states, counties, and cities need to take a cautious approach to federal legalization for cannabis operators, not just for themselves but for all of us in this industry.
May we all experience cannabis excellence!