Federal Hemp Redefinition: What Hemp Beverage Operators Need to Know

The hemp beverage industry is weeks away from its most significant regulatory change since the 2018 Farm Bill. In November 2025, Congress rewrote the federal definition of hemp in Section 781 of Public Law 119-37. A stopgap funding bill signed in September 2026 delayed most of those changes by about a month, but it did not soften them.

For a category that has grown to an estimated $1 billion to $1.3 billion in annual sales, the impact could reach well beyond compliance. Valuation, investment and tax exposure could all shift almost overnight.

In a recent episode of Withum’s What the Hemp? Podcast, Raymond Owens and Derek White, who specializes in food and beverage companies, discussed what the coming deadlines mean and how operators can prepare.

How We Got Here

The 2018 Farm Bill separated hemp from marijuana for the first time. It defined hemp as cannabis with no more than 0.3% delta-9 THC on a dry-weight basis, grown under a state program or, where none existed, a federal one. Lawmakers saw a new cash crop, particularly for agricultural states looking for alternatives to struggling crops.

Early uncertainty about where the line sat gave way to court decisions confirming that products meeting this definition were not Schedule I controlled substances. That conclusion carried a major tax consequence: hemp businesses were not subject to Section 280E.

Section 280E disallows deductions and credits for businesses trafficking in Schedule I or II substances. In practice, an affected company can generally deduct only its cost of goods sold. Rent, payroll, marketing and most other operating expenses become non-deductible, which can produce very high effective tax rates even on products with minuscule amounts of THC.

Outside of 280E, hemp beverage companies could operate like any other food and beverage business, deducting both cost of goods sold and indirect costs. That treatment fueled a boom. Hemp drinks appeared in convenience stores, liquor stores and online, and startups entered the category at a rapid pace.

Key Dates to Know

The new hemp definition arrives in two stages, with the midterm elections falling just before the first.

Products above the 0.4-milligram threshold would no longer qualify as hemp under federal law. That would push most intoxicating hemp beverages out of the federal hemp category entirely.

The tax consequences follow directly. A product classified as marijuana outside of a state medical program remains a Schedule I substance, even after the April 2026 rescheduling of certain marijuana products to Schedule III. Businesses selling those products could find themselves subject to Section 280E once again.

Politics and the Courts Add Uncertainty

The fight over hemp has largely played out between two senators from the same state. Kentucky’s Mitch McConnell, who championed hemp legalization in the 2018 Farm Bill, pushed to close what he viewed as an intoxicating-hemp loophole. Fellow Kentucky Senator Rand Paul argued that growers and businesses in both of their constituencies were thriving and should be protected.

The election calendar adds another variable. The first deadline falls just eight days after the midterms, and the second about a month later. Hemp is unlikely to be a top ballot issue, but a shift in the balance of power could change whether Congress revisits the definition before or after it takes effect.

Litigation is also testing the edges of the 2018 definition. In one case drawing industry attention, a beverage company is challenging the application of 280E to products containing roughly 0.2% to 0.3% THC, arguing they fit within the Farm Bill’s hemp definition even though they may be derived from cannabis rather than hemp. On its face, the argument appears to favor the taxpayer, but the outcome is far from certain. However it is decided, the case could signal how courts and the IRS will interpret the definition for prior tax years.

A Fragmented State Landscape

If hemp-derived THC products lose federal protection, the market may revert to the familiar cannabis model: federally restricted, but regulated state by state. States are already taking very different approaches.

What Operators Should Do Now

There is no one-size-fits-all answer, and the uncertainty makes it difficult to act in a timely way. Still, operators can take several steps to be ready for whichever outcome arrives.

How Withum Can Help

Withum’s Cannabis Services Team and food and beverage professionals in our Industrial and Consumer Products Practice are helping hemp and beverage companies model Section 280E exposure, review cost accounting, evaluate state and local tax obligations and plan for each regulatory scenario. We will continue monitoring developments as the November and December deadlines approach.

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