Cannabis, Hemp and THC

Psychoactive Hemp Gains Ground as States and Others Push Back

BY SIMON MENKES CPA AND RACHEL WRIGHT CPA

Reprinted with permission of Beard Bros

Menkes and Wright look at the growth of psychoactive hemp and how it has put an additional burden on an already beleaguered cannabis industry. They examine the cannabis industry’s attempts to force the genie back into the bottle.

I have yet to see any problem, however complicated, which, when looked at in the right way

did not become still more complicated.

--Poul Anderson

Legal Cannabis – Beset by Challenges

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.

But the cannabis industry faces further challenges at both the federal and state level. 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 many states, ineffective government support allows a rampant illicit industry to overrun legitimate cannabis businesses. This, combined with exorbitant taxation and license fees, has forced many legal enterprises out of business.

Legal 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 massive alternative psychoactive cannabinoid industry. While published numbers vary widely, retail sales from 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 supplier of 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 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 IHD’s (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 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 already put in hemp-friendly guiderails with its recent law, SB 0378, making it less likely that law-abiding hemp businesses will be targeted. SB 0378 requires hemp manufacturers and sellers 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 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.”

Nathaniel sees a future where hemp and cannabis come together. “Ultimately the two sides are going to come under uniform regulations. Maybe not as quick as a 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.”

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.

Legal Cannabis Pushes Back

While some cannabis operators embrace hemp to capture new market share, others are pushing back against hemp’s lack of restrictions and view it as a loophole. Hemp-derived THC has been banned by Arkansas, Alabama, Virginia, Wyoming, and Arizona. Laws have recently been proposed in California, Nebraska, Florida, South Dakota, and Tennessee.

On March 10, 2024, the attorney generals from twenty states and the District of Columbia sent a joint letter to Congress regarding the Five-Year Reauthorization of the Farm Bill urging “your committees to address the glaring vagueness created in the 2018 Farm Bill that has led to the proliferation of intoxicating hemp products across the nation and challenges to the ability for states and localities to respond to the resulting health and safety crisis” and estimating this “gray market” at $28 billion. Of the twenty states, nineteen have either medical or recreational cannabis markets – only Kansas is fully illegal.

The Liquor Industry Responds

Total Wine & More responded to the 21 attorneys general. With $6 billion in sales in 2023, Total Wine is the largest alcohol retailer in the U.S. and began selling THC-infused hemp drinks in November 2023 (max dosage per can: 10mg Delta-9 THC). According to Atmosphere owner Matthew Nathaniel, “Total Wine is prepared to defend their right to sell these products. The Wine and Spirits Wholesalers of America is behind hemp as well.”

Georgia and California Trying to Corral Hemp

Georgia, a medical cannabis state, is in the process of passing a new law (SB 494) which would put strong guardrails around Georgia’s hemp industry. Manufacturers and sellers of consumable hemp products would need to be licensed, and most significantly, hemp flower would be required to be measured for Delta-9 THC after it has “undergone decarboxylation [heating] “such that all delta-9-THCA in the sample has been converted to delta-9-THC or 2) by identifying the amount of delta-9-THCA multiplied by 0.877 plus the percentage by weight…of delta-9-THC.” Passage of SB 494 would effectively eliminate most hemp flower but should leave drinks and other low-THC products available for sale.

California, with AB 2223, is attempting to have all hemp consumables incorporated into the state’s METRC Trace and Trace system, to be manufactured and sold only by businesses with cannabis licenses. Like Georgia’s SB 494, AB 2223 moves beyond the 0.3% amount of Delta-9 THC in the dry weight product and instead focuses in on the much higher “level of total THC that can be in an industrial hemp final form product, and prohibit the manufacture, distribution, or sale of an industrial hemp product that contains a synthetically derived cannabinoid.” [emphasis ours]

The Cannabis Council Weighs In

While some MSO’s have begun selling hemp, or are at least considering it, many are working to pressure state and federal legislators to have psychoactive hemp products removed from the market. According to Forbes, many “large cannabis companies that operate legal dispensaries across the country want to see hemp products removed from the market. In early April, Edward Conklin, the executive director of the U.S. Cannabis Council, a trade organization whose members include publicly traded marijuana companies such as Ayr, Green Thumb Industries, Curaleaf, Cresco Labs, and Verano, sent a letter to Congress calling on lawmakers to treat intoxicating hemp products as controlled substances, the same as marijuana. Conklin describes the legalization of hemp-derived cannabinoids as a “national crisis.”

The Council is recommending that an additional definition of hemp be included in the Farm Bill when voted on in September: that “products in final form intended for human or animal consumption which … contain detectable quantities of total THC … shall be excluded from the current definition of hemp and considered marijuana …”

“This proposal protects the allowances granted to farmers, allowing legitimate agricultural and industrial hemp producers the flexibility they need to navigate the changing plant characteristics when growing in the field, while taking away the loopholes that have created the current gray market environment for unregulated hemp-derived intoxicants,” Conklin wrote. “The recommendation makes clear that products containing intoxicants which are derived from the Cannabis sativa L. plant cannot be defined as ‘hemp.’”

2 Friends on Opposite Sides of the Fence

420CPA recently talked with two friends on opposite sides of the hemp fence. Jeff Koz co-owns iconic cannabis cookie company Dr. Norm’s. Attorney Ethan Feffer, former general counsel for Weedmaps, owns national hemp drinks brand DrinkSprig.com.

“I know Ethan will say otherwise,” Koz said, “but synthesizing psychoactive cannabinoids from hemp is a loophole. It’s not what congress intended. The public’s getting untested products with unknown potencies, possible pesticides, heavy metals, solvents - you name it. We’re talking about highly potent products that aren’t regulated that even kids can buy. Not only that, but the good actors in the cannabis industry must abide by tax and licensing requirements and safety regulations that are very costly compared to whomever is selling this to unlicensed storefronts. This really has nothing to do with legalizing hemp, and it’s certainly not fair to legal cannabis!

Feffer acknowledges his friend’s frustration, and that there are bad actors out there. “Although pretty much all hemp’s tested,” Feffer said, “some companies do create high-potency products and then ship them all over the country. They can fall into the hands of under-age kids.”

However, with proper safeguards, Feffer sees a way for cannabis and hemp to co-exist where low-potency hemp products are sold throughout the country in liquor stores. “This would be a much safer, more controlled environment,” Feffer says. “Liquor stores are very good at making sure purchasers are age appropriate. Minnesota has done this.”

Minnesota requires all businesses that sell hemp products be registered with the state and check purchasers’ ID’s to confirm 21 years of age or older. Hemp products must only be in the form of a beverage or edible, must be tested, and may only be 5mg THC per serving and 10mg total.

“At 0.3%, Congress intended for hemp to be light,” says Feffer. “The peacemakers are saying the legit hemp stuff isn’t competing with the stronger dispensary stuff.” (DrinkSprig.com sells 2-serving cans with 10mg and 20mg of Delta-9 THC per can, while Dr. Norm’s cookies and other products start at 10mg of Delta-9 THC per serving and go up to servings with 100mg.)

Hemp’s Uncertain Future

The courts have chosen a relatively “hands-off” approach to hemp so far, but many states are looking to muzzle it or eliminate its psychoactive usage altogether.

The five-year 2018 Farm Bill was supposed to be re-upped by Congress in 2023. However, due to wrangling around hemp, as well as other issues, that decision has been put off until September 2024. Whether arguments from the twenty states’ attorneys general and other cannabis industry supporters will cause the hemp portion of the 2018 Farm Bill to be altered to exclude IHDs remains to be seen.

For now, we have a largely unregulated national psychoactive hemp industry putting an already embattled state-level cannabis industry under further strain. Time will tell if the two related “siblings” will figure out how to work together in peace or whether some sort of resolution ends up being forced upon them which is anathema to one or the other.