What the Federal Hemp Ban Will Do

A new federal law taking effect on November 12 will reclassify intoxicating hemp as marijuana, subjecting the industry to the same restrictive federal regulations. This shift will eliminate the ability for hemp companies to claim federal tax credits or file for bankruptcy, potentially jeopardizing the profitability of a sector where 72% of North Carolina businesses currently operate in the black. The transition is expected to disrupt interstate commerce and force a shift toward state-specific seed-to-sale operational models.

Starting November 12, federal law will treat intoxicating hemp like marijuana, stripping hemp companies of their ability to claim federal tax credits or deduct business expenses. This change will subject these businesses to significantly higher tax rates and prevent them from seeking bankruptcy protection if they fail. According to a report from Whitney Economics, while 72% of North Carolina’s hemp businesses were profitable last year, only about a quarter of marijuana companies nationwide operate in the black, suggesting a difficult financial transition for the hemp sector as they lose the ability to deduct expenses under federal tax law.

Operational challenges will also increase as hemp products fall under marijuana-style restrictions, which typically prohibit credit card transactions and online sales. Raleigh cannabis lawyer Morgan Davis noted that the ability to sell online and accept cards previously helped hemp survive in states with legal marijuana, particularly for consumers uncomfortable visiting physical dispensaries. Furthermore, banking remains a major hurdle; while North Carolina-based First Citizens has operated a hemp program since 2018, senior vice president Ryan Palmquest stated that the looming ban is creating significant concern for clients, even as the DEA considers rescheduling marijuana to lift some tax and bankruptcy restrictions in the future.

The new legal framework will likely end the practice of sourcing hemp products from across all 50 states, as interstate transport would trigger federal law. Consequently, North Carolina companies will be forced to develop internal seed-to-sale infrastructures, sourcing only from within the state. However, current supply may be insufficient to meet demand; Whitney Economics reports that North Carolina has fewer than 500 licensed hemp farms and only 850 acres of growth as of January, a massive decrease from the 1,502 farms and 16,593 acres recorded in 2020 before a price collapse.