Insights

= Insights
Article | Cannabis

Consequences Associated with Selling Delta 8, a Schedule 1 Controlled Substance

Delta 8 is a relatively new cannabis product that has been gaining popularity. It is derived from hemp, which was legalized by the 2018 Farm Bill and is used to develop CBD products. That has led to a misinformed assumption that Delta 8 is a legal substance, but it produces a “high,” and as such, the Drug Enforcement Authority (DEA) has made it clear that it considers Delta 8 a Schedule 1 controlled substance. Retailers not licensed to sell marijuana who are selling Delta 8 products should be aware of its legal status and the potential consequences associated with violating the Controlled Substances Act (CSA).

Of course, selling a controlled substance without a license could create severe legal consequences for those selling Delta 8, including arrest, conviction, and jail. But there are also financial issues to be concerned about, including the ever-watchful eyes of the IRS. Provisions of Section 280E of the IRS code limit tax deductions for expenses to the cost of goods sold for purveyors of Schedule I controlled substances. Much of Delta 8 is being sold through convenience stores, gas stations and other retailers who aren’t licensed to sell marijuana. As such, the IRS could deem those retailers’ entire businesses subject to 280E, thereby eliminating all other ordinarily tax-deductible costs, such as real estate and salaries.

Some retailers have argued that because the drug comes from hemp it should be legal. Some have even taken their cases to court. But the rulings have been clear. Delta 8 is a synthetic form of THC, and according to the DEA, which is charged with administering the CSA, a controlled substance. Given the serious ramifications of violating the CSA, no retailer should be selling Delta 8 products without a license.

For more information, or to talk with a cannabis industry accounting specialist, contact HBK Cannabis Solutions at 239-263-2111, or by email at cmarrie@hpkcpa.com.

About the Author(s)

Chris is a Principal in the Naples, Florida office of HBK CPAs & Consultants and National Director of the HBK Cannabis Solutions. He has been with the firm since 1998, and has extensive experience working with closely held companies and their owners. He specializes in working with clients in the medical and adult-use cannabis industries and the industrial hemp industry, providing financial consulting, assurance, and business advisory services to clients located throughout the U.S. and abroad. As National Director of HBK Cannabis Solutions, Chris is responsible for the growth, strategic direction, and day-to-day operations of HBK’s cannabis industry practice.

Chris has presented at cannabis industry conferences, prepared and presented continuing professional education on accounting and other financial aspects of the cannabis industry, and served on various panels as a subject matter expert on the medical and adult-use cannabis industries and the industrial hemp industry.

Chris has worked with clients in the cannabis industry on a wide range of projects, including:

  • Audits and reviews of financial statements for both vertically and horizontally integrated cannabis businesses under various financial reporting frameworks, including U.S. GAAP and IFRS
  • “Carveout” audits and other attest engagements required by cannabis regulators in various states
  • Implementation of SKU-based standard costing systems compliant with both U.S. GAAP and the requirements of IRC Sec. 471 and IRC Sec. 280E
  • Transaction advisory services for both acquirers and acquirees in the cannabis industry
  • Analysis of compliance under various royalty and licensing agreements for intellectual property owned by cannabis businesses
  • Entity structuring specific to businesses operating in the cannabis industry

    • Hill, Barth & King LLC has prepared this material for informational purposes only. Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.

    RECOMMENDED ARTICLES