According to a research report published by Cowen & Co. earlier this year, the investment bank believes that the U.S. market for cannabidiol (CBD) consumer goods could reach $16 billion—a “conservative” forecast—by 2025, up from between $600 million and $2 billion in 2018 retail sales. As the third-most populous state in the country, this is a very big deal for Florida.
Florida’s state hemp program law, Section 581.217, Fla. Stat., created by the enactment of Senate Bill 1020, has the potential to transform Florida’s agricultural landscape while also capitalizing on a fertile market of enthusiastic cultivators and eager consumers.
With a population of more than 21 million, Florida has long been viewed as ripe for potential commercialization by the cannabis industry. Gov. Ron DeSantis made headlines in March when he signed legislation that effectively repealed the ban on smoking and “vaping” medical cannabis. Yet outside of Florida’s medical marijuana program (and the hemp pilot project discussed below), cannabis—which includes hemp and hemp-derived products—has remained a controlled substance, making the manufacture, processing, sale and possession of hemp or hemp-derived products (including cannabidiol, i.e., CBD-infused items) a criminal endeavor. Even within the state’s medical use program, the cultivation of cannabis, even for medicinal purposes, remains tightly regulated.
In the wake of the 2014 Farm Bill, Florida did create an industrial hemp pilot project program, under which certain educational institutions were authorized to cultivate, process, test, research, create and market safe and effective commercial applications for industrial hemp in Florida. Yet in the aftermath of the 2018 Farm Bill, Floridians looked to the state legislature to take the state’s limited hemp program a step further by defining, permitting and regulating hemp and hemp-derived products, including those containing CBD, outside the confines of the pilot project.
SB 1020, passed by the Legislature in May and signed into law on July 25, was that long-awaited “step forward.” The new law makes a number of significant changes to Florida law vis-à-vis the treatment of hemp and hemp-derived products.
Critically, the bill provides that hemp is an “agricultural commodity” and that “hemp-derived cannabinoids, including … cannabidiol, are not controlled substances,” shifting control over hemp and hemp extracts away from the criminal sphere and into the agricultural and commercial spheres.
In addition, the new legislation creates a statutory and regulatory framework whereby persons and entities may apply for and obtain licenses from the Florida Department of Agriculture and Consumer Services, allowing them to cultivate hemp, which the new law defines as “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 thereof, whether growing or not, that has a [THC] concentration that does not exceed 0.3% on a dry-weight basis.”
Further, the law expressly provides for the distribution and retail sale of hemp extracts—defined as substances or compounds “intended for ingestion” that are “derived from or contain” hemp and that do not contain other controlled substances—subject to specific testing and labeling requirements. Although South Floridians have inevitably seen CBD-infused products (including food items and cosmetics) advertised in storefront windows and on various websites, until now, the sale and consumption of such products have been outside the bounds of the law.
The law also marks a significant advancement with respect to producers’ and retailers’ “bottom line.” Section 280E of the Internal Revenue Code prohibits a business expense deduction of any amount paid or incurred in carrying on any business that consists of trafficking in any Schedule I controlled substance (under the Controlled Substances Act) which is prohibited by Federal or State law. Section 280E previously prevented producers or retailers of hemp or hemp-derived products from deducting business expenses except those which are considered a “Cost of Goods Sold” (COGS), which has a narrow definition and only includes those costs incident and necessary to production.
Following the 2018 Farm Bill, the only barrier to the business expense deduction was Florida’s own prohibition of the product. Following the enactment of SB 1020, hemp and hemp-derived products, which contain less than 0.3 percent THC, are no longer considered illicit substances in Florida. Consequently, a producer or retailer of hemp in Florida should be permitted to deduct from federal and state taxable income, wages, rents, or repair expenses attributable to its general business activities or its marketing activities under Section 280E of the Code. Since Section 280E no longer applies, this provides access to more sophisticated tax planning opportunities under the 2017 Tax Cuts and Jobs Act. This is an unexpected and tangible benefit that producers and retailers can appreciate.
While SB 1020 surely expanded the (lawful) cannabis market in Florida and clarified a number of points of confusion with respect to the hemp industry, the law governing the growth and sale of hemp and hemp-related products in Florida remains somewhat hazy. For instance, CBD-infused products are subject to constant scrutiny by the U.S. Food and Drug Administration, which—along with the Federal Trade Commission—has issued warning letters to retailers selling CBD products marketed with unsubstantiated health-related claims. This reality, among others, demonstrates why businesses and individuals engaged or exploring possibilities in the cannabis industry need to be mindful of the constantly evolving applicable regulatory framework. Federal regulations, expected before the end of the year, should clear up some of the confusion. Similarly, state regulations implementing the new hemp law are expected to be released shortly.
Yet despite the lack of complete clarity, Florida has taken a significant leap forward, placing it among the dozens of other states with burgeoning hemp and hemp-product businesses. Just eight months ago, hemp was a Schedule I controlled substance under federal law; one month ago it remained an illicit substance in Florida. Today, it is a promising agricultural commodity, the derivatives of which will soon be regulated and sold lawfully throughout the state.
Justin M. L. Stern, an associate with Duane Morris in the firm’s Miami office, is a member of the firm’s national cannabis industry group, where he regularly provides federal and state regulatory advice to companies involved in or pursuing opportunities in the cannabis/hemp industry, with a focus on the cannabis industry in Florida.
Robert A. Zinn, a partner with the firm, is a seasoned transactional attorney focusing on mergers and acquisitions and full-service representation of closely held companies, and leveraging his in-depth knowledge of all operational areas of the automotive industry.
Jay Steinman, a partner with the firm, represents domestic and international real estate development and investment companies as well as financial institutions, family offices and real estate dedicated funds and owners and operators of all real estate asset classes, including vacant land, office, retail, hospitality, health care, mixed-use, industrial, multifamily and for-sale residential projects.
Jennifer A. Migliori, an associate with the firm, practices in the area of strategic tax planning, wealth transfer planning and corporate for-profit and nonprofit matters.
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