Taxation of cannabis will most likely follow the preexisting structure of taxation of alcohol and tobacco as scaffolding for building this new federal tax system.
Cannabis businesses are subject to federal income taxes, as well as certain state excise taxes, cannabis products are not subject to federal excise tax. Federal alcohol and tobacco taxes currently exist and present a path to that same taxation for cannabis. Taxation can be done in relation to volume, potency, or percentage of price. Small batch producers may be eligible to receive far reduced taxes, for example with small batch brewers, paying $2.70 per gallon for the first 100,000 gallons rather than the standard 13.50.
The Federal Alcohol Administration Act (FAA) requires any person producing or selling alcoholic beverages obtain a permit from the Treasury Department. Manufacturing of tobacco requires registering with the FDA. Both substances require registry with the Treasury Department for tax purposes.
Permits may be revoked if premises are inadequate to prevent tax evasion or diversion, operation of the premises are out of compliance, failure to disclose or falsification of information, or the lack of sufficient business experience or standing. In the case of alcohol and tobacco permits may be revoked due to felony conviction in relation to the relevant substance.
The proposed federal tax on cannabis would start at 10% in the first year, increasing 5% a year for five years. In five years the federal tax would be 25%. In the years after the tax levied would be equal to the prior prevailing cannabis price on a per-ounce rate for flower, and a per THC mg for extracts.
Small producers with less than $20 million in sales annually are eligible for 50% tax reduction via a tax credit. Producers with a sales greater than $20 million would be eligible for the tax credit on their first $20 million in sales.
Limits need to be set for: the limits of the small producer credit, rules relating to substantial processing, proper measurement of potency of a cannabis product, the measurement of prevailing price of cannabis, tax credits for incentivized activity, and cannabis interactions with alcohol and tobacco.
The proposal would require cannabis producers and sellers of cannabis products at wholesale to obtain a permit from the Treasury Department for tax purposes. Producers also have to register with the FDA.
A permit may be denied or revoked if the production premises are inadequate for tax purposes, operations are out of compliance, or failure of disclosure or falsification of information occurs. Permits may be denied or revoked if a cannabis related felony occured after this act is instated. Though this revocation can be challenged on the grounds that the applicant can prove mitigation or rehabilitation to remain in compliance.
Cannabis businesses that exist before the new act will have 90 days to get in compliance and have properly filled paperwork submitted to the TTB.
The proposal seeks to reduce barriers to entry to provide restorative justice. This will be done while staying in compliance within the law. To form this line limits need to be set:
- Balance between reducing barriers to entry, while preventing illegal operations in cannabis diversion, tax evasion, or threatening health and safety.
- Criteria for waving offenses that would prevent permitting.
- Streamlining the government agencies that administer permitting.
- Time for transitioning to federal compliance for state certified producers/retailers.