To provide some clarity on this new fee for cannabis retailers located in Colorado, we answer some of your commonly asked questions.

What exactly is the new retail delivery fee charge? What kind of sale is it collected on?

As we stated, this new charge impacts tangible property, including cannabis products, that are delivered to a location within the state of Colorado by a vehicle. It is $0.27 per sale (regardless of the number or value of the items delivered).

And … cannabis counts as “tangible personal property?”

It does. CDOR defines tangible personal property as “all goods, wares, merchandise, products and commodities, and all tangible or corporeal things and substances that are dealt in and capable of being possessed and exchanged.” While several things are exempt from sales tax, cannabis products are not included — thus, this delivery fee applies to cannabis too.

What if I use a third-party vehicle to deliver my goods?

Whether you use a company-owned vehicle or a third-party organization, every seller must collect this 27-cent fee from its customers. The company facilitating the transport of cannabis products bears no responsibility for the fee.

Are there any sales that are exempt from this new charge? What about sales of cannabis otherwise exempt from the Colorado Delivery Fee?

Yes, wholesale transactions (or other tax-exempt purchases) don’t have to collect the retail delivery fee. This includes wholesale cannabis deliveries, making them exempt from the delivery fee. Sales of exempt tangible personal property (i.e., items for resale) will be exempt from the fee unless one item of tangible personal property subject to sales or use tax is included in the delivery. In that case, the delivery fee would apply.

Who is responsible for the fee?

Both the buyer and the seller, in a way — as the seller of the item(s) being delivered, you must collect the fee. But the customer is responsible for paying the fee once you have charged them — and it must be listed on your invoice as a separate item (shown on the receipt as “retail delivery fees”), so there is full transparency.

Do I have to register for this?

Businesses that have a sales tax collection obligation are required to also collect the delivery fee in addition to sales tax. If your business has already registered for sales and use tax, then you will automatically be registered for this additional retail delivery fee (with a Retail Delivery Fee Account). As mentioned above, third party delivery companies that would not otherwise charge sales tax, are not subject to this new fee.

Can I report this new fee on the same return as the Colorado sales and use tax? When is it due?

The fee must be reported on its own return called the Retail Delivery Fee Return (DR 1786), which is separate from the state-wide Colorado Sales and Use Tax System (SUTS) return or other local Colorado returns. However, both are due on the same date, or by the 20th day of the month after the reporting period. There are plans to incorporate the return into SUTS, but the feature will not be available until later this year.

July 1 has come and gone. Will I be penalized for failing to implement this quickly?

No. CDOR has generously decided to provide some leniency, as it received feedback that listing and collecting the fee by the July 1 start date would prove challenging. Informal guidance says if you fail to separately state the fee, you will not incur penalties or interest — given you do the best you can to implement the separate statement requirement.

The buyer will still be required to pay the fee whether you collect it from them or not, and you, the retailer, will still be responsible for remitting the fee for any transactions made on or before July 1, 2022, even if you did not charge it to the buyer.

Our perspective on the new delivery fee in Colorado

There is no question this fee, imposed while the country is experiencing record-setting inflation and sky-high fuel prices, has caught consumers and businesses alike by surprise. While you, the seller, do not have to pay the fee, your potential customers do — and this impacts everything they buy that gets delivered (including restaurant delivery). These add-ons will stack up, and with Colorado’s cost of living already rising, consumers may have to start budgeting, indicating this could affect your bottom line in the future.

Rely on cannabis and tax professionals

If you have any questions about the new fee, such as how to file this separate tax return or collect the tax from your customers, contact MGO’s team of Tax professionals.

MGO is positioned as a national leader in both tax advisory and cannabis accounting and financial best practices.

About the author

Ilias Savakis is a State & Local Tax Manager at MGO. He has over five years of experience in Sales and Use Tax compliance and consulting. Contact Ilias at ISavakis@mgocpa.com.

The immense demand for hemp-derived CBD has motivated farmers to embrace the crop. According to the advocacy group Vote Hemp, 9,770 acres of hemp were grown in 2016 under a limited USDA pilot program. In 2018 the number was 78,176 acres. This year, the first planting since the Hemp Farming Act was signed into law, farmers have received licenses to plant 511,442 acres. By giving farmers a defined, though many think unduly onerous, testing process to certify their crop is within the THC limit, the rule is likely to encourage more hemp planting until supply and demand reach equilibrium. There has been a wide range of where that may be given the many uses of the crop, and only time will tell where research will lead us to or consumer demand will pull us towards.

Certified legal hemp

The Hemp Farming Act of 2018 removed hemp containing .03 percent or less THC from Schedule 1. In theory, this immediately made hemp (and presumably CBD derived from it) as legal as a bushel of corn. Legal hemp is indistinguishable from illegal cannabis without lab testing, which has resulted in police mistaking hemp for cannabis.

The hemp farming rule establishes a national laboratory protocol for certifying hemp is within THC limits, a crucial step for allowing routine transport of hemp from field to processor to market.

Putting the USDA hemp certification process into effect will take some time. The labs will have to be DEA certified. The samples of hemp flower must be collected no more than 15 days before harvest by a USDA-approved agent, who could be law enforcement officers. The testing protocol allows for a margin of error, or “measurement of uncertainty” as USDA terms it, to allow for crops marginally above the THC limit. Beyond that, however, crops with excessive THC will be destroyed. It is likely the hemp industry will advocate for more lenient testing and certification protocols, so the final rule could be different. Given the nature of the plant and benign effects of remediating the crop to reduce THC levels, there’s little reason why more leniency wouldn’t be employed other than to create significant waste and loss (hardship for farmers) for no other discernible reason than continued demonization of a useful cannabinoid.

The draft hemp rule marks the end of hemp’s regulatory stigma but USDA has work to do before the crop is fully normalized. A freak hail storm in eastern Oregon late this summer severely damaged 500 acres of hemp worth $25 million. That’s a total loss for the farmers because the USDA crop insurance program doesn’t yet cover hemp. USDA still must specify standard measures and units for hemp, as it has for all other crops. There can’t be a hemp commodity market until there is a measure, like the bushel, for a standard unit of hemp.

CBD as a commodity

Consumer demand for CBD is the economic engine that has driven a 50-fold increase in the amount of hemp planted in the US since the first pilot programs authorized in the Farm Bill of 2013. High prices for CBD-rich hemp encouraged a rapid increase in the number of acres planted and a frantic scaling of the supply chain to process raw biomass into consumer products.

Prices for hemp biomass and the wholesale CBD products derived from it have been dropping recently, a response to the bumper harvest anticipated this year and continued acreage expansion expected as a result of the USDA rule. Consumer demand for CBD is expected to grow. BDS Analytics estimates that US sales of cannabis- and hemp-derived CBD products were $1.9 billion in 2018 to $20 billion by 2024, a compound annual growth rate of 49 percent.

A growing consumer market for CBD products and an abundant hemp supply will require a buildout of the hemp supply chain and is likely to create significant opportunities, such as specialized farm equipment and building the DEA-certified labs required for testing and certification.

The USDA hemp farming rule will allow farmers to grow as much hemp as required for CBD (if not more) but how soon the market for CBD consumer products grows is subject to other rulemaking. CBD is unlikely to reach its full market potential as a food ingredient before the FDA, or Congress, makes a regulatory distinction between the amount of CBD in a single serving snack or beverage and the therapeutic amounts in prescription medications (Epidiolex, the first FDA approved drug containing a cannabinoid, came on the market in 2018).

Currently, most of the companies adding CBD to food and beverages are relatively small but risk-tolerant regional players. Every global CPG brand is formulating a CBD strategy and some are considering or entering the US market with their own products or through acquisition of incumbent companies even prior to FDA guidance. Similarly, the CBD market is unlikely to reach its full potential until the Treasury Department, or Congress, normalizes CBD sales. Though CBD is legal, companies still have difficulty obtaining routine banking services, such as payment processing.

The exuberance about the prospects for CBD over the next few years is entirely rational, but CBD is just one of the 113 known cannabinoids. One of the others, THC, is the basis of the multi-billion dollar legal cannabis industry. Another, CBG (cannabigerol) is a strong contender to be the next cannabinoid on the market. What little is known of the other cannabinoids points to promising therapeutic applications. The global pharmaceutical industry, like the global CPG industry, is ready to invest in hemp and cannabinoids as soon as the regulatory picture becomes clear and some have begun R&D to get ahead of that timing.

USDA takes the long view

What USDA repeatedly makes clear in the rule is that hemp, outside of the strict requirements for lab certification, is just another legal crop free to find markets and cross borders.

There are no restrictions on hemp seed import/export, which means US farmers can purchase seed on the international market and US cannabis biotech companies are free to export seeds. The rule explicitly states “there’s no need for additional regulation on biomass, fiber, seed, hemp seed oil or hemp seed for consumption.”

The rule sets the stage for US farmers to participate in a global hemp trade. The labs that certify hemp for THC content will also be able to certify it for export, so long as they are DEA certified. USDA, which actively promotes American crops on global markets, will do the same for hemp. “Should there be sufficient interest in exporting hemp in the future, USDA will work with industry and other Federal agencies to help facilitate this process.”

The regulation in many ways clears regulatory barriers to import/export of hemp-derived products. It is reasonable to see this as good for free trade in CBD. The first export of US CBD products was shipped to Mexico at the end of last July.

What about the rest of the plant?

The 90 percent of the hemp plant that yields no CBD (or other cannabinoids) may someday be at least as valuable as the 10 percent that does. In 1938, Popular Mechanics extolled hemp as The New Billion Dollar Crop (which is about $18 billion now) based solely on its value as fiber. Though farmers in 1938 could have used a valuable new crop, the Marihuana (sic) Tax Act was making the crop economically worthless. The farm economy hemp might have sustained was not allowed to take root.

The hemp farming rule begins to reverse that historic mistake. The potential for hemp as a source of food, fiber and plant-based industrial products is substantial. The Congressional Research Service found “The global market for hemp consists of more than 25,000 products in nine submarkets: agriculture, textiles, recycling, automotive, furniture, food and beverages, paper, construction materials, and personal care.” The relatively small existing markets for hemp fiber and hemp seed as food are more profitable per acre than the depressed prices for corn and soybeans.

There is reason to think future policies to address global climate change through “carbon farming” could benefit hemp agriculture. An Australian study concluded a hemp crop is “the ideal carbon sink” because hemp absorbs more atmospheric carbon per acre than any forest or commercial crop.

Products derived from hemp could have advantages in a future carbon-constrained economy. For example, concrete manufacturing is one of the largest industrial sources of C02 emissions globally but hempcrete, a product few people have heard about, is a carbon-negative substitute.

It will be a while, perhaps a long while, before hemp is as common as cotton or hempcrete is standard in new construction. Hemp has a tiny market presence outside of CBD and hemp seed as a food, and its lobbying presence is no larger. The future of hemp as a large and growing market is nonetheless very promising. As more and more hemp is harvested each year it is all but inevitable that entrepreneurs and investors will take on the challenge of bringing entirely new product categories to market.

Many cheered the passage of the 2018 Farm Bill, which descheduled industrial hemp and its derivatives (including CBD). But that was just the start of a much more complicated regulatory story that continues to have a major impact on entrepreneurs, investors, and advocates and patients who rely on CBD.

CBD and the 2018 Farm Bill

When President Trump signed the 2018 Farm Bill into law one of the key changes affecting the cannabis industry was the separation of “hemp” and “marijuana.” Before the Farm Bill, any incarnation of the cannabis plant and its byproducts were lumped into a single category and considered a Schedule 1 drug. Key language in Section 1103 of the Farm Bill defines hemp 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, whether growing or not with a delta-9 tetrahydrocannabinol concentration of not more than 0.3 percent on a dry weight basis.”

In short, the Farm Bill descheduled industrial hemp and its byproducts as long as it stayed under the threshold of less than 0.3 percent THC. CBD is derived from the cannabis plant, whether there are significant levels of THC or not. CBD industry advocates have interpreted the language “all derivatives, extracts, cannabinoids, isomers, acids, salts, and salts of isomers” as descheduling CBD when industrial hemp is the source. And they are “mostly” correct in this interpretation. Unfortunately, there are other federal agencies in play.

CBD and the FDA

United States Department of Agriculture (USDA)  enacted the 2018 Farm Bill in their position overseeing laws related to the cultivation of industrial hemp. The United States Food and Drug Administration (FDA) oversees medicine and food additives. CBD has emerged as a “wonder drug” with a growing list of potential benefits and now appears as an additive in a wide range of consumer products. In addition, the FDA approved Epidiolex, the first CBD-derived drug, in 2018.

All of this has culminated in CBD being a priority of the FDA, so much so, that just a week after the Farm Bill was signed into law, the FDA issued a press release clarifying and asserting their regulatory control over all cannabis-derived compounds.

“We treat products containing cannabis or cannabis-derived compounds as we do any other FDA-regulated products — meaning they’re subject to the same authorities and requirements as FDA-regulated products containing any other substance. This is true regardless of the source of the substance, including whether the substance is derived from a plant that is classified as hemp under the Agriculture Improvement Act.”

Concurrent with the Farm Bill and the press release regarding CBD, the FDA also issued three Generally Regarded as Safe (GRAS) notices for hemp by-products: hulled hemp seeds, hemp protein powder, and hemp seed oil. Clearly demonstrating that (some) hemp products have been descheduled and cleared for use by the FDA.

The FDA’s policy is different toward CBD for two key reasons. Firstly, CBD products are largely marketed with a wide variety of therapeutic claims. In their press release the FDA notes:

“The FDA requires a cannabis product (hemp-derived or otherwise) that is marketed with a claim of therapeutic benefit, or with any other disease claim, to be approved by the FDA for its intended use before it may be introduced into interstate commerce.”

Secondly, the FDA’s approval of CBD-based drug Epidiolex, put CBD and THC into the category of “active ingredients in FDA-approved drugs.” Under the Federal Food, Drug, and Cosmetic Act (FD&C Act) it is “illegal to introduce drug ingredients like these into the food supply, or to market them as dietary supplements.”

In short, the FDA does not distinguish between CBD derived from hemp or “marijuana,” and until the agency approves CBD and establishes a regulatory framework, adding CBD to food and beverages is illegal.

Has the regulation of CBD slowed businesses?

While early CBD research has shown promise as a treatment for conditions like epilepsy and anxiety, as a consumer product it is unproven and has been largely unregulated until recently. In the absence of labeling standards and regulated dosage guidelines, consumers often have little understanding of what they are buying and its potential effects.

All of this uncertainty has earned greater regulatory attention for CBD. There have been reports of crackdowns on bakeries, restaurants and retailers selling CBD in California, New York, Maine and Ohio, just to name a few. This regulatory response has shocked and angered a number of hemp producers and CBD retailers who have invested millions into business ventures that they feel only supply the public with products that help manage health concerns.

Despite the confusing legality, the CBD industry appears to be moving full-steam ahead. In recent months, national retailers as diverse as Walgreens, DSW and Barney’s New York have announced plans (or have already begun) selling CBD products. Indicating the burgeoning CBD industry is well on the way to mainstream acceptance.

What is next for CBD?

In February, former FDA Commissioner Scott Pruitt testified before the House Appropriations Committee and said that the FDA is initiating a rule making procedure with the goal of creating “an appropriately efficient and predictable regulatory framework for regulating CBD products.” The FDA will launch the process with a public hearing on CBD scheduled for May 31, 2019.

Further complexity struck when Pruitt unexpectedly announced his  resignation, which took effect in early April. Pruitt has been replaced by Dr. Ned Sharpless, the former director of the National Cancer Institute. To date, it is unknown whether Sharpless intends to take a progressive stance toward CBD.

While delays occur at the federal level, states are shifting into action. Maine recently passed an emergency law governing CBD. The bill aligns the definition of hemp in Maine’s laws with the definition used in the Farm Bill. Meaning, as long as CBD is derived from hemp sources it is to be considered a food product, rather than medicine, and is cleared for use in Maine.

Ultimately, until the FDA creates a regulatory framework for CBD, it will remain illegal to add it to any food or drink products.

Learn more about the FDA Public Hearing on CBD here

Provide a public comment for the FDA on CBD here