By Rachel Wright CPA and Simon Menkes CPA
In Part 1 of this 2-part series on Cannabis and Hemp, 420CPA looks at the growth of psychoactive hemp and how it has put an additional burden on an already beleaguered cannabis industry. Part 2 examines the cannabis industry’s attempts to force the genie back into the bottle. Stay tuned for Part 2 here at Beard Bros Pharms!
I have yet to see any problem, however complicated, which, when looked at in the right way did not become still more complicated.
Legal Cannabis Beset by Challenges as Psychoactive Hemp Gains Ground
The above quote, attributed to the prolific science fiction author Poul Anderson, could very well be said of the current state of cannabis, hemp and THC consumption in America. From a status of total illegality, cannabis in the U.S. has crawled upward, hand-over-hand, until recreational usage is now allowed in half of the fifty states with another thirteen allowing some form of medicinal use. Additionally, a recent report by cannabis job platform Vangst showed a 5.4 percent increase in industry jobs from 2023, while annual sales of legal marijuana, recreational and medical, increased by 10.3 percent to $28.8 billion last year.
The cannabis industry faces further challenges at both the federal and state level, however. Still a Schedule I substance and illegal under federal law, cannabis owners are generally disallowed under Internal Revenue Code 280E from deducting normal operating expenses, creating an excessive federal tax burden. The industry also has difficulty obtaining bank loans, and credit card processing is generally not available. Almost half of the fifty states don’t allow adult-use and in many of those, cannabis possession is still illegal. In those states that have legalized cannabis, ineffective government support has allowed a rampant illicit industry to overrun legitimate cannabis businesses. This, combined with exorbitant taxation and license fees, has forced a lot of legal enterprises out of business.
Legal Psychoactive Hemp – Perhaps the Biggest Challenge of All
Then there’s the 2018 Farm Bill, signed into law by President Donald Trump as the Agriculture Improvement Act of 2018, which legalized “the plant Cannabis sativa L. and any part of that plant, including the seeds thereof and all derivatives, extracts, cannabinoids, isomers, acids, salts, and salts of isomers, whether growing or not, with a delta-9 tetrahydrocannabinol (THC) concentration of not more than 0.3 per-cent”, this being the Act’s definition of hemp.
While the intent of this portion of the bill may have just been to revitalize the hemp industry in the United States, the result has been the creation of a massive alternative psychoactive cannabinoid industry. While published numbers vary widely, retail sales from psychoactive hemp – hemp-derived cannabinoids (including CBD and THC variants) – are projected to bring in $4.5 billion in 2024, according to data from Chicago-based analytics firm Brightfield Group published in the 2023 MJBiz Factbook.
MSO’s are taking notice. According to Bret Worley, CEO of MC Nutraceuticals, one of the largest global suppliers of hemp cannabinoids, “we’re seeing a lot of MSOs either start the conversations or already getting in…we expect about 50% of MSOs will enter the market next year.”
Red States and Red State Weed
Attorney Robert Hoban, hemp and cannabis industry expert, styles psychoactive hemp as “Red State Weed” because “much of this hemp derivative activity has become popular in so-called red states,” whereas Democratic-majority blue states are more likely to have avenues for legal marijuana through medical dispensaries or recreational shops. In his five-part series for Forbes, Hoban argues that IHDs (Intoxicating Hemp Derivatives) are no loophole, but are exactly what Congress intended when it stated that hemp and all its derivatives were no longer subject to the Controlled Substances Act.
Hemp can be a powerful economic force in states without a legal cannabis market. As we noted in our article on Texas’s hemp industry, “a 2023 study revealed that the Texas hemp industry currently employs more than 50,000 workers and generates more the $8 billion in annual revenue. Also, between $19.1 and $22.4 billion in economic activity is generated by the 5,033 hemp, CBD and cannabinoid retailers, manufacturers and distributors in Texas.”
“It is vital that Texas continues to support the hemp industry, which has become a key component of the state’s overall economy,” says Cynthia Cabrera, chair of the cannabinoids council of the Hemp Industries Association and chief strategy officer at Austin-based Hometown Hero CBD. “The results of this study demonstrate the positive economic and social impact of hemp in Texas, and that its small businesses and farmers need to be protected to continue to thrive, providing jobs and tax revenue.”
And that’s just one state.
Closeup on a Red State Hemp Business
420CPA recently spoke to Matthew Nathaniel, CEO of Chattanooga, Tennessee hemp business Atmosphere and former Director of Retail Expansion for Stiiizy. Atmosphere currently distributes hemp drinks, edibles and other hemp products and is in the process of building a coffee shop with a “psychedelic hemp speakeasy” above it. There, customers will be able to smoke hemp flower while drinking and eating hemp items.
Having been in the cannabis industry (Nathaniel is currently on the board of the national Cannabis Chamber of Commerce), Nathaniel has been strategic in the development of his business. Cannabis is illegal in Tennessee for most uses, except for limited medical, so there’s no organized cannabis infrastructure to run afoul of. In addition, Tennessee has put in hemp-friendly guiderails with its recent law, SB 0378, making it less likely that law-abiding hemp businesses will be targeted by government. SB 0378 requires hemp manufacturers and sellers to be licensed and their products tested. Additionally, the bill prohibits food or drink with a “a serving that contains more than 25 milligrams, in the aggregate, of one or more hemp-derived cannabinoids.” (Nathaniel’s business sells products with 5-10 milligrams Delta-9 THC.)
Tennessee’s Department of Agriculture has come out with more stringent regulations which are set to go into effect July 1, 2024 and if unaltered, will eliminate hemp flower and possibly other products. “We hope to serve flower,” says Nathaniel. “For most sellers, flower is 50%-75% of their revenue. I’m reaching out now to legislators to try to prevent that. But no matter what, we can’t afford to lose our other products even if we do lose flower.”
2 Important Court Cases
Hemp advocates have appeared in court a lot these last few years, but two important cases stand out as supporting the position that hemp cannabinoids be treated differently from cannabis and not subject to Schedule I of the Controlled Substance Act.
In AK Futures LLC v. Boyd St. Distro, LLC, the Ninth Circuit Court of Appeals stood by the 2018 Farm Bill’s definition of legally allowable hemp to include “all derivatives, extracts, [and] cannabinoids” containing less than 0.3% Delta-9 THC by weight. Attorney Hoban commented that, since the Delta-8 THC products in question were derived from hemp that had only 0.3% Delta-9 THC, “the Ninth Circuit found that AK Future’s Delta-8 products ‘fit comfortably’ within the statutory definition of hemp … To date, the Ninth Circuit is the highest court to rule on the legality of Delta-8.”
In Atlanta, the Georgia State Court of Appeals recently ruled that products with Delta-8 THC, Delta-10 THC, and other hemp-derived cannabinoids are not controlled substances. Gwinnett County’s Gwinnett Metro Task Force will now have to return seized products and $300,000 cash taken from Elements Distribution, and hemp businesses in Georgia are feeling far more optimistic about their future.
Where are Hemp and Cannabis Headed?
Atmosphere’s Nathaniel and other hemp business owners look forward to a time when the industry will no longer be in a state of conflict. Says Nathaniel, “Ultimately the two sides are going to come under uniform regulations. Maybe not as quick [as everyone] wants. I don’t think federal rescheduling or legalization of cannabis is going to happen right away, but we’re going to have to play in the sandbox together at some point.”
Stay Tuned for Continued Industry Perspectives on Psychoactive Hemp in Part 2
Part 2 of our 2-part series will examine the steps many in the cannabis industry are taking to control hemp and prevent hemp intoxicants from supplanting legal cannabis.
This article presents analysis which might not be appropriate for every tax situation. 420CPA recommends consulting with a tax professional about your company’s specific circumstances.
About Rachel Wright and 420CPA
420CPA provides accounting, tax, and consulting to small to medium sized cannabis and hemp companies along the vertical and in varying stages of maturity in their business growth. Rachel Wright CPA and her team guide founders, their management team, investors, and adjacent professionals to successfully navigate the complexities of the tax landscape and to achieve their financial objectives.
