On Dec. 8, Rep. David Joyce (R-Ohio), co-chair of the Congressional Cannabis Caucus, introduced the Strengthening the Tenth Amendment Through Entrusting States (STATES) Act. The legislation would remove from the Controlled Substances Act’s definition of marijuana as “any marijuana manufactured, produced, possessed, distributed, dispensed, administered, or delivered in compliance with State law.”
All other marijuana would remain criminal at the federal level.
This legislation bears the same name as prior legislation from 2018 introduced by then-Sen. Cory Gardner (R-Colo.) and Sen. Elizabeth Warren (D-Mass.). The original STATES Act was introduced in response to then-Attorney General Jeff Sessions’ decision in 2018 to rescind the Cole Memorandum, an important guiding document that discouraged federal attorneys from prosecuting marijuana businesses operating under state law. The original STATES Act broadly declared that marijuana businesses in good standing with state law would not violate the federal Controlled Substances Act.
How is STATES Act 2.0 different from the original STATES Act?
The original STATES Act was extremely limited in scope. Section 2 declared that “any person acting in compliance with State law relating to the manufacture, production, possession, distribution, dispensation, administration, or delivery of marijuana” would be exempt from penalties under the federal Controlled Substances Act. The other sections clarified transportation safety offenses, created criminal offenses for the distribution of marijuana to persons less than 21 years old, and required the Comptroller General of the United States to conduct a study on marijuana legalization and traffic safety.
STATES Act 2.0 retains all these provisions but goes further by outlining a framework for interstate commerce in marijuana. Specifically, Section 3 provides safe passage for marijuana products in transit “if the originating and destination States or territories permit, as applicable, the manufacture, production, possession, distribution, dispensation, administration, or delivery of marijuana.” In other words, local law enforcement could not impound a truck carrying marijuana products even if marijuana is illegal in the state where the truck was pulled over if the driver can demonstrate that the products are legal at both the places of origin and destination.
In addition, Section 6 clarifies federal rulemaking authority to regulate commerce in marijuana products, naming the Food and Drug Administration (FDA) as the primary regulator of these products.
Would there be federal licensing of marijuana companies under STATES Act 2.0?
STATES Act 2.0 does not affirmatively set forth any parameters for the federal licensing of marijuana companies and does not name a lead federal agency to regulate these companies. It describes how marijuana would be regulated at the product level rather than at the enterprise level.
However, STATES Act 2.0 opens with a congressional findings section that should be read as a declaration of congressional intent, even though it does not enact law. Several of the findings are relevant to federal regulation and taxation. The act states, “A Federal regulatory program for marijuana should require a framework that supports critical components such as proper administration and oversight, consumer safety protections, and enforcement.” It later names the Alcohol Tobacco Tax and Trade Bureau (TTB), a division of the Treasury Department, specifically as an agency that should take a lead role in regulating cannabis businesses. The States Reform Act also names TTB as the lead federal regulator of marijuana companies.
Would there be a federal tax on marijuana products under STATES Act 2.0?
STATES Act 2.0 does not directly impose any federal tax on marijuana products.
However, its congressional findings section signals an intent to find a way to impose an excise tax on marijuana that should be collected by TTB. The findings section laments that “[e]xcessive taxation in licensed markets has caused the price of legal marijuana products to exceed that of illegal products by two to three times, contributing to the growth of the illicit market.” It further laments “a punitive tax structure” at the federal level “that harms the ability of licensed operators to sell marijuana products”—a reference to marijuana companies’ inability to deduct ordinary and necessary business expenses from their corporate income tax liabilities under Internal Revenue Code 280E.
These cautions frame the section’s call for a federal excise tax to pay for a federal regulatory program. It calls for a tax that would not be high enough to drive buyers toward illicit sellers, that would allow for timely collection by TTB as the primary regulator of marijuana businesses, and that would “be low enough to not exacerbate the level of taxation set by States, thereby avoiding the pyramid effect of adding Federal taxes on top of high State taxes.”
Nowhere does the act suggest a proposed tax rate nor a specific taxing mechanism for marijuana products or businesses. However, the findings section suggests an intention to ensure any federal tax is simple to administer and carries a low rate.
What powers would the FDA gain over marijuana products?
The FDA already has the authority to regulate cannabis products under the Food, Drug and Cosmetics Act, but has generally deferred enforcement against Schedule I and Schedule II substances to the Drug Enforcement Administration. Since the STATES Act 2.0 would remove marijuana products created in compliance with state law from the scope of the Controlled Substances Act, it also guides the FDA regarding how it should exercise its regulatory authority over marijuana products.
The act instructs the FDA to regulate any product that makes medical claims as a drug, subject to the new drug application process. The FDA would also regulate food or dietary supplements containing marijuana in the same way it regulates foods containing alcohol and would regulate cosmetics containing marijuana or its derivatives in the same way it regulates other cosmetics.
All other product types (including raw marijuana flowers) would not be regulated through these pathways. Instead, the FDA commissioner would have 180 days from passage to promulgate new proposed rules to regulate these products. Those rules must include requirements for contaminant testing, manufacturing processes, marketing practices, and post-market reporting. No premarket approval would be required for these products.
Could people purchase marijuana products across state lines if STATES Act 2.0 passes?
The STATES Act 2.0 makes clear that if a state elects to retain a legal prohibition on marijuana, then federal prohibition will continue to apply within that state. The legislation also stops short of expressly allowing marijuana companies to engage in any form of cross-state commerce, even if their products are legal in both the place of origin and the place of destination. The bill does contain a provision protecting the right of transport of marijuana products in interstate commerce, but it does not expressly state that marijuana can be sold across state lines at either the wholesale or retail levels.
However, the Congressional findings section contains an allusion to the dormant Commerce Clause, which restricts states from erecting barriers to interstate commerce. It says:
While States have the power to determine what happens within their own borders, they cannot make laws permitting or restricting interstate commerce unilaterally. In the absence of Federal movement, the illicit interstate trade in cannabis has persisted even in the face of significant State policy changes. The Federal Government should be responsible for regulating and tracking this interstate trade to ensure cannabis does not end up where it does not belong.
Would STATES Act 2.0 ease banking restrictions for marijuana businesses?
The PATRIOT Act and other anti-money laundering laws specifically intend to prevent people from converting the proceeds of trafficking in a Schedule I or Schedule II substance into a financial instrument. Financial institutions chartered in the United States are responsible for implementing an effective anti-money laundering program to demonstrate compliance with these laws, or they can face significant penalties. In practice, many financial institutions have developed policies even more conservative than required to protect themselves from federal prosecution.
Although the Financial Crimes Enforcement Network promulgated rules in 2014 to ostensibly permit financial institutions to offer accounts to state-licensed marijuana businesses, those rules impose steep administrative costs on financial institutions. As a result, most financial institutions simply choose not to offer these accounts.
The STATES Act 2.0 would remove marijuana produced following state law from the auspices of the Controlled Substances Act. Technically, this means businesses operating in compliance with state law would no longer require extra scrutiny under anti-money laundering provisions. In practice, however, it may be difficult for financial institutions to determine that a business is fully compliant with state law. Moreover, large banks that transact business across multiple states may find it difficult to police their account holders’ status by jurisdiction—an activity that is legal in one state or city may not be legal in the neighboring state or city. This means large financial institutions may be reluctant to relax their policies regarding accounts for marijuana businesses.
Does STATES Act 2.0 expunge prior cannabis convictions?
Unlike the States Reform Act, which expunges practically all nonviolent federal marijuana convictions, the STATES Act 2.0 contains no provisions for expungement of prior convictions. It also contains no mention of social equity programs or other restorative justice efforts.
Conclusion
The STATES Act 2.0 represents an incremental but meaningful improvement over the status quo of federal prohibition or even prospective rescheduling. It also contains some key improvements from the original STATES Act, which gained an impressively bipartisan sponsorship in the U.S. Senate. Reason Foundation was proud to provide feedback on early drafts of both this legislation and the States Reform Act.
Observers should be clear, however, that the STATES Act 2.0 is only an incremental step toward full federal legalization of marijuana. This version signals key intentions of prospective follow-up legislation in its congressional findings section. This bill is not intended to offer a comprehensive solution for federal regulation of cannabis or other related issues. It should be viewed as an incremental change that could garner the bipartisan support needed to move a marijuana bill through a deeply divided Congress.