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Kentucky Hemp Grower Group Reaps $2,000,000 Harvest in 2016

Source: Atalo Holdings Communications

Winchester, Ky. – Atalo Holdings, Inc., a diversified industrial hemp research and production company in Winchester, Ky., announced a $2,000,000 payout to their Growers' Group for the 2016 harvest. “We are pleased to announce payments of $2,000,000 to our growers for hemp grain and CBD production in 2016,” said Atalo Chairman Andrew Graves. “This represents a solid step forward in hemp research and development and offers the potential for positive rural economic development in 2017.”

Ben Furnish is a grain and tobacco farmer who participated in the Atalo Growers' Group. “This was a good year for our hemp grain. Much better than last year with an all around good yield. Atalo's proprietary seed proved to be an improvement, the crop fit in well with our soy bean program and the return on investment was a little better than corn,” said Furnish. Hemp-based foods have emerged as “superfoods” in the health and wellness food category in North American and European markets with a projected compounded annual growth rate of 20% through 2020. This is good news for Kentucky farmers. “Hemp is a unique plant, with so many uses, from fiber to protein, oils and CBD. These multiple uses should make revenue from hemp comparable with tobacco,” Furnish said.

Dave Spalding is the Growers' representative for Atalo Holdings. According to Spalding, “In 2016, we had 58 growers and 2,466 acres approved for hemp production, making us one of the largest permitted hemp companies in the US. At our Hemp Research Campus, the mission is to provide leadership and value through research, development and commercialization of industrial hemp. For this harvest, 410 acres were for CBD, which we are processing, and 755 acres were for grain and seed replication. Hemp is demonstrating great potential as a sustainable source of quality agricultural protein and gross returns from CBD production appear to be at least comparable to if not better than gross returns from tobacco on a per acre basis.”

Robert Eads is a tobacco farmer who sees hemp as a potential alternative crop. “I had a very good year and an excellent return on investment in Atalo's CBD program,” said Eads. “They helped me with seed selection, planting methods, harvesting and drying. All in all I'd say next year's CBD crop will be accomplished with my existing tobacco equipment. With that kind of return on investment, I'm looking forward to next year and an opportunity for improved seed, planting, harvesting and drying techniques. We're all learning and the market looks promising.”

Atalo CEO, William Hilliard, says the market is expanding rapidly. “According to Hemp Business Journal, dispensary sales of CBD products will grow to $1.6 billion in sales by 2020 and SPINS, a leading provider of retail consumer insights, analytics reporting for the Natural, Organic, and Specialty Products Industry, tracked $1,344,646 in sales of products containing CBD as a primary ingredient in the Natural and Specialty Retail channel over the 52-week period ending Aug. 7, 2016.”

“The Hemp Business Journal also estimates that total sales of CBD products in the pet supplement channel will be just shy of $7 million in 2016 and account for about 6 percent of hemp-based CBD product sales.” These economic indicators coupled with the 2016 harvest results give us strong momentum going into the 2017 season, Hilliard said.”

Atalo Holdings, Inc. and subsidiary companies Super Food Processing, KentuckyCBD and Kentucky Hemp Seed R&D operate the Hemp Research Campus in Winchester, Kentucky.

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Kentucky Hemp Grower Group Reaps $2,000,000 Harvest in 2016

Source: Atalo Holdings Communications

Winchester, Ky. – Atalo Holdings, Inc., a diversified industrial hemp research and production company in Winchester, Ky., announced a $2,000,000 payout to their Growers' Group for the 2016 harvest. “We are pleased to announce payments of $2,000,000 to our growers for hemp grain and CBD production in 2016,” said Atalo Chairman Andrew Graves. “This represents a solid step forward in hemp research and development and offers the potential for positive rural economic development in 2017.”

Ben Furnish is a grain and tobacco farmer who participated in the Atalo Growers' Group. “This was a good year for our hemp grain. Much better than last year with an all around good yield. Atalo's proprietary seed proved to be an improvement, the crop fit in well with our soy bean program and the return on investment was a little better than corn,” said Furnish. Hemp-based foods have emerged as “superfoods” in the health and wellness food category in North American and European markets with a projected compounded annual growth rate of 20% through 2020. This is good news for Kentucky farmers. “Hemp is a unique plant, with so many uses, from fiber to protein, oils and CBD. These multiple uses should make revenue from hemp comparable with tobacco,” Furnish said.

Dave Spalding is the Growers' representative for Atalo Holdings. According to Spalding, “In 2016, we had 58 growers and 2,466 acres approved for hemp production, making us one of the largest permitted hemp companies in the US. At our Hemp Research Campus, the mission is to provide leadership and value through research, development and commercialization of industrial hemp. For this harvest, 410 acres were for CBD, which we are processing, and 755 acres were for grain and seed replication. Hemp is demonstrating great potential as a sustainable source of quality agricultural protein and gross returns from CBD production appear to be at least comparable to if not better than gross returns from tobacco on a per acre basis.”

Robert Eads is a tobacco farmer who sees hemp as a potential alternative crop. “I had a very good year and an excellent return on investment in Atalo's CBD program,” said Eads. “They helped me with seed selection, planting methods, harvesting and drying. All in all I'd say next year's CBD crop will be accomplished with my existing tobacco equipment. With that kind of return on investment, I'm looking forward to next year and an opportunity for improved seed, planting, harvesting and drying techniques. We're all learning and the market looks promising.”

Atalo CEO, William Hilliard, says the market is expanding rapidly. “According to Hemp Business Journal, dispensary sales of CBD products will grow to $1.6 billion in sales by 2020 and SPINS, a leading provider of retail consumer insights, analytics reporting for the Natural, Organic, and Specialty Products Industry, tracked $1,344,646 in sales of products containing CBD as a primary ingredient in the Natural and Specialty Retail channel over the 52-week period ending Aug. 7, 2016.”

“The Hemp Business Journal also estimates that total sales of CBD products in the pet supplement channel will be just shy of $7 million in 2016 and account for about 6 percent of hemp-based CBD product sales.” These economic indicators coupled with the 2016 harvest results give us strong momentum going into the 2017 season, Hilliard said.”

Atalo Holdings, Inc. and subsidiary companies Super Food Processing, KentuckyCBD and Kentucky Hemp Seed R&D operate the Hemp Research Campus in Winchester, Kentucky.

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Coffee and cannabis are two of the most widely used psychoactive substances in the world. Whereas cannabis is often consumed to relax the body, enhance perception, and stimulate creativity, coffee – like tea and other caffeinated beverages – is typically used to energize and help people focus, particularly in the face of exhaustion.

Does it make sense to consume cannabis and coffee together? How do they interact? Is it fitting that decriminalized THC-rich cannabis was first sold over-the-counter in Amsterdam's coffee shops?

Coffee and Cannabis

Coffee and cannabis are two of the most widely used psychoactive substances in the world. Whereas cannabis is often consumed to relax the body, enhance perception, and stimulate creativity, coffee – like tea and other caffeinated beverages – is typically used to energize and help people focus, particularly in the face of exhaustion.

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Cannabis Taxation: Does IRC Section 280E Apply to Industrial Hemp?

industrial hemp tax 280E
Not always taxed like marijuana, in theory.

Short answer: It depends.

As we discussed last week, the US Court of Appeals for the 9th Circuit in Hemp Industries Assn. et.al., vs. U.S. Drug Enforcement Admin., upheld the Drug Enforcement Administration’s (DEA) broad rule creating a separate classification for “Marijuana Extracts.” Marijuana Extracts are broadly defined as “any extract containing one or more cannabinoids that has been derived from any plant of the genus Cannabis”. The ruling received an extraordinary amount of press, but lost in all of this breathless reportage was a very important point for a certain class of hemp businesses: The Court explicitly stated that the 2014 Farm Bill (“Farm Bill”) preempts the federal Controlled Substances Act (CSA). Accordingly, expenses incurred through an activity conducted strictly within the parameters of the Farm Bill arguably are not subject to IRC §280E.

Businesses that are operating outside the narrow parameters of Section 7606 of the Farm Bill, however, whether trading in hemp or any derivative product, will have to deal with IRC §280E. As a refresher, the Farm Bill allows a state to grow “Industrial Hemp” if it has implemented an official agricultural pilot program. These pilot programs, generally administered through state Departments of Agriculture, issue licenses or permits to businesses and individuals, allowing the cultivation of “Industrial Hemp.” That cultivar is defined as any part of the cannabis sativa plant with less than 0.3% THC on a dry weight basis. If a plant contains 0.3% or more THC on a dry weight basis, or is not cultivated by a pilot program licensee, the cultivator is operating outside of federal law and hence subject to IRC §280E.

So why is this such a big deal? As we explained previously, IRC §280E prohibits a deduction for any amount paid or incurred in carrying on any trade or business that consists of trafficking in a Schedule I or II controlled substance under the CSA. Accordingly, any industrial hemp business conducting the following activities is possibly subject to the horror of IRC §280E including:

  • Food and Body Care;
  • Textiles;
  • Building Material; and
  • Cannabinoids.

If IRC § 280E applies to a hemp business, that business will lose deductions otherwise available to almost every other US business. Clearly, IRC §280E puts these businesses at a competitive disadvantage. The disadvantage can be so severe as to be fatal in certain cases.

It’s important to note that although IRC 280E disallows expenses and credits paid for trade or businesses engaged in trafficking of marijuana listed as a Schedule I drug, this onerous code section does not apply to cost of goods sold. As such, a grower, farmer, cultivator, processor, or a manufacturer of hemp products may deduct any costs that are properly included in cost of goods sold. This rule is noncontroversial: In 2015, the IRS Chief Counsel issued a memorandum that clarified that a cannabis business may deduct these costs under IRC §471 and related regulations. Specifically, under IRC §471, costs included in cost of goods sold are those costs incident and necessary to production including:

  • Direct material costs;
  • Direct labor costs;
  • Utilities;
  • Maintenance;
  • Rent (real estate and equipment); and
  • Quality control.

Depending on your treatment for financial statement purposes, the following indirect costs may be included in cost of goods sold including:

  • Taxes necessary for production;
  • Depreciation;
  • Employee Benefits;
  • Factory administrative costs; and
  • Insurance.

On the other hand, a non-Farm Bill compliant hemp producer will lose under IRC §280E deductions related to sales, marketing and non-production related management costs.

In addition to creating headaches for non-Farm Bill compliant growers, the application of IRC §280E will have a detrimental impact on wholesalers and retailers of CBD products who also are not operating in full compliance with the Farm Bill. For these businesses, IRC §280E would operate to disallow a deduction for most overhead costs. This could have an especially severe impact on mixed retail businesses that sell CBD products in conjunction with other products.

Example: A pharmacy that sells products containing non-Farm Bill CBD as well as more traditional health products (e.g., shaving cream) may now be subject to IRC §280E. Unless the sale of non-CBD products can be considered a separate trade or business, it is possible that IRC §280E would operate to disallow the deduction of all operating expenses.

Finally, it is unclear if the IRS will apply IRC §280E retroactively to non-Farm Bill hemp businesses. The IRS could apply IRC §280E retroactively on audit or to years otherwise open. For example, the IRS could go back to tax year 2014 and adjust the income tax returns of certain taxpayers engaged in hemp manufacturing and sales of hemp products.

Under the new tax law effective January 1, 2018, Congress gave U.S. business several targeted tax benefits. For many businesses in the developing industrial hemp sector, the impact of IRC §280E reverses many of the benefits of the new tax law. Perhaps Congress can address some of these issues by passing the expansive Hemp Farming Act of 2018 which, as currently written, would explicitly remove Industrial Hemp and derivatives of that cannabis cultivar from the Controlled Substances Act. Better yet: repeal IRC §280E.

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Federal Court Denies Review of DEA’s Marijuana Extract Rule

CBD hemp extract
The law on CBD is still a maze.

If you were hoping for some clarity as to the legality of industrial hemp and cannabidiol (CBD) derived from industrial hemp, I have some (mostly) bad news.

On Monday, the US Court of Appeals for the Ninth Circuit denied a lawsuit challenging the Drug Enforcement Administration’s (DEA) controversial Marihuana Extracts Rule. In Hemp Industries Assoc. v. DEA, the petitioners and other industry groups challenged the DEA’s rule creating a new drug code number for “”Marihuana Extracts” which is defined to include any extract “containing one or more cannabinoids that has been derived from any plant of the genus Cannabis.” This rule is so broadly drafted that it seems to prohibit extracts from parts of the cannabis plant that are legal or at least unregulated under federal law. Petitioners requested the Court clarify or strike down the DEA’s land-grab rule.

The Court denied both requests. Rather than diving into the substance of petitioners complaint, the Court dismissed the action on largely procedural grounds, as we recently predicted it would. First, the court pointed to the fact that petitioners failed to make an argument to the DEA while it was accepting comments on the Marihuana Extract Rule and are therefore barred from raising those issues before the Court. Petitioners claimed that another commenter raised their concerns by submitting a question as to whether the rule would cover “100% pure Cannabidiol by itself with nothing else?” The Court determined the DEA considered this comment and altered the rule to clarify that it covered all cannabinoids. The Court also determined that several of petitioners’ other arguments were waived for failure to raise the issue during the DEA’s notice and comment period.

The Court did determine that petitioners’ argument that the Marihuana Extract Rule conflicted with 7606 of the 2014 US Farm Bill (the “Farm Bill”) was not waived because Congress passed that law after the notice and comment period ended. The Farm Bill allows states to grow “Industrial Hemp” defined as having less than 0.3% THC on a dry weight basis in states that have implement agricultural pilot hemp programs. However, the Court determined that the argument failed on the merits. The Court found that the Farm Bill “contemplates potential conflict between the Controlled Substances Act [CSA] and preempts it. The Final Rule therefore, does not violate the [Farm Bill].” In other words, the Court is stating that when the Industrial Hemp portions of the Farm Bill conflict with the CSA, the Farm Bill prevails.

This decision makes it clear that the Marihuana Extract Rule is unfortunately still valid, meaning that any products extracted from marijuana is still illegal under federal law, which has long been the case. The great unknown is how this ruling will be interpreted. It’s possible that the ruling could have a chilling effect on the growing CBD industry, by emboldening the DEA to actively pursue products that contain CBD. On this point, it’s important to note that Congress has limited the DEA’s ability to use federal funds “to prohibit the transportation, processing, sale, or use of industrial hemp” grown in accordance with the 2014 Farm Bill. However, it can be difficult to prove where a product containing CBD was derived and the DEA may try to push its boundaries in light of the decision. Therefore, it’s important that companies who are distributing CBD verify that it was derived from a legal source and are prepared to prove it.

State law enforcement agencies could also interpret this decision to crack down on CBD, especially in states that have not implemented legal hemp programs. These agencies are not limited by the budget provision that restricts the DEA. Although we have not heard any instances of state law enforcement cracking down on these sales, it is certainly possible that some will do so.

The Ninth Circuit could have used this as an opportunity to state explicitly that CBD derived from a legal source is also legal. Unfortunately, it did not. Because the Court did explicitly state that the Farm Bill preempts the CSA, though, the silver lining here is a industrial hemp, grown pursuant to the Farm Bill, is not illegal under the CSA according to the Ninth Circuit. In addition, shortly after the HIA filed its petition, the DEA made the following helpful clarifications:

  • The “marihuana extract” definition does not include materials or products excluded from the definition of marijuana set forth in the CSA.
  • The rule includes only those extracts that fall within the CSA definition of marijuana.
  • If a product consists solely of parts of the cannabis plant excluded from the CSA definition of marijuana, such product is not considered “marihuana” or a “marihuana extract.”

This appears to exempt extracts that are derived from lawfully grown industrial hemp. It also exempts extracts derived from portions of the cannabis plant that are not included in the CSA’s definition of “marihuana”, which include the mature stalks and seeds incapable of germination.

All in all, this convoluted mess of marijuana, hemp, and CBD law could soon become much clearer if Mitch McConnell’s Hemp Farming Act of 2018 is passed. Stay tuned for more information on the ongoing saga of legal hemp and its derivatives.

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