For CFOs dealing with a competitor who has less regulatory scrutiny because of a technicality or slight difference in product, the current challenge for cannabis companies competing against hemp-derived cannabis products will sound like familiar territory.
Hemp (cannabis containing less than 0.3% delta-9 THC) is federally legal under the 2018 Farm Bill. Officially called the Agriculture Improvement Act of 2018, the Farm Bill was a major piece of U.S. legislation that continues to govern agriculture and food policy. It removed hemp from the Controlled Substances Act. It also allowed for hemp cultivation, production and interstate transport, giving regulatory oversight to the USDA while permitting states and tribes to develop their own hemp programs.
Unlike hemp-derived cannabis, regular cannabis, derived from cannabis sativa or cannabis indica, colloquially known as marijuana, is a Schedule I narcotic and federally illegal despite many states legalizing it and creating large state-run cannabis programs. Though rollout success has varied, these state-run programs have led to businesses operating under tight regulatory pressure. Because of cannabis’ federal scheduling, they cannot benefit from multi-state operations at scale and qualify for far fewer tax deductions.
This legal change for hemp-derived cannabis opened the door for a booming market in hemp-derived cannabinoids including hemp-derived CBD, delta-8 THC and delta-9 THC products — now dubbed intoxicating hemp. Despite the booming business, hemp-derived cannabis products are controversial and operate in a legal gray area, as many products are indiscernible from marijuana-based cannabis that comes with far more regulatory oversight. Experts say this has resulted in dangerous incidents across the country, an environment that is creating unfair competition for those who remain compliant with law and has also created a bit of a public relations issue for cannabis businesses.
What the accountants think
Though the business sector around hemp-derived cannabis products is growing because of the lesser regulatory standards around these products, Mike Goral, a tax professional and CPA who leads the cannabis practice at Armanino, says he is telling his clients that this is going to be a short-lived reality.
“Products like [hemp-based] delta-9 have become a real challenge,” said Goral. “Cannabis companies went through all the red tape to get licenses, pay taxes and follow regulations. Meanwhile, hemp-based companies are producing delta-9 THC products from hemp under the Farm Bill with none of the oversight.”
Goral says multi-state cannabis operators are running out of energy to fight these producers and have joined the competition in offering hemp-based cannabis products.
“Larger MSOs are starting to join them rather than fight — launching their own hemp-derived lines,” Goral said. “But it’s a major issue, and we’re seeing it well because we have clients on both sides. Long-term, I think hemp-based products will face tighter regulations. No one in this business should be able to bypass cannabis laws with a hemp workaround.”
Brenda Bader, who is the owner of the cannabis-centric firm Gold Leaf Accounting in Missouri, says her local markets have taken the hemp-based cannabis challenge head on. Though she didn’t go as far as to say that these types of products have no place in the cannabis market, she credited the lack of legal oversight in the space to dangerous incidents, client frustration and a bit of an image crisis for cannabis in more traditional areas.
“I’ve been to panels where attorneys shared stories about how unregulated these products really are,” said Bader. “One attorney said he went into a convenience store and scanned the QR code on a Delta-9 product. It was supposed to link to lab results and ingredient info, but what he found was shocking: the lab report was for a completely different flavor, and it was dated over 20 years ago on a product that clearly isn’t 20 years old.”
This has resulted in frustration for Bader’s clients. She noted how legal cannabis operators in Missouri are navigating strict packaging laws, having to follow protocols similar to pharmaceutical packaging with pamphlets, disclaimers and sealed containers. However, despite the unfair competition, she says those selling regulated cannabis products aren’t looking to eliminate this product line completely.
“Licensed operators are not fighting to ban those products, but to require regulation across the board,” she said. “If the legal industry has to follow these strict rules, then so should everyone else. The issue isn’t that hemp-derived Delta-9 is inherently bad — it’s that there are no guardrails, and people think it’s the same thing as regulated cannabis.”
She brought up how the image crisis caused by unregulated cannabis can help resurrect old narratives around cannabis that companies and activists have spent lots of time and money trying to redefine.
“Especially here in Missouri, a very conservative state, there’s still a lot of stigma,” Bader said. “To many people, a drug is a drug, it doesn’t matter if it’s cannabis or cocaine, it’s all the same in their minds, so this push isn’t just about protecting the business, it’s also about educating the public and keeping dangerous and unregulated products out of the hands of kids.”
What legal thinks
Jeffrey Hoffman, who operates one of the largest cannabis-centric legal practices in New York, said hemp-derived cannabis products are facing a major legal challenge in many states, but advised keeping an eye on Texas, where he said it’s the biggest market for the product “by far.” Hoffman added that the most powerful person in the Texas State Senate is currently on track to ban hemp-derived cannabis products.
“The Lieutenant Governor of Texas [Dan Patrick] — arguably the most powerful person in the state — is pushing to eliminate an entire multi-billion-dollar industry,” Hoffman said. “Every year, before the session begins, he puts out a list of the bills he wants passed,” he explained. “And you can tell how important a bill is by its number. SB1 is the top priority, SB2 is second, SB3 is third and so on. Currently, SB3 is a bill that will make all intoxicating hemp products illegal in Texas, so that’s how high of a priority this is there.”
Though Texas aims to ban the products outright, states like California, Nebraska, Florida and South Dakota have proposed laws related to hemp-derived cannabis. Tennessee has proposed regulations on it, and Arkansas, Alaska and Virginia have implemented legislation either prohibiting or regulating hemp-based cannabis products.
Hoffman also explained how legislation on these products is coming from states regardless of their stance on cannabis’ legality. “In fact, all of the cannabis-legal states are doing it because they don’t want it competing with their regulated cannabis markets, and the states that don’t have legal cannabis are now also moving to ban it — because these intoxicating hemp products have become a back door,” he said. “People are using them to get high in states where cannabis isn’t legal.”
