Bloomberg Tax
Free Newsletter Sign Up
Login
BROWSE
Bloomberg Tax
Welcome
Login
Advanced Search Go
Free Newsletter Sign Up

Hemp Companies Plan Oklahoma Move After Texas Ban Court Loss

June 29, 2022, 3:15 PM

Some Texas companies say they’ll have no choice but to move their operations to Oklahoma if they want to keep producing smokable hemp products, after the Texas Supreme Court ruled last week that there’s no vested right to produce such goods under the state constitution.

Three smokable hemp companies are “scrambling” to find facilities in Oklahoma, an attorney representing the hemp companies in the lawsuit told Bloomberg Law.

“This is overt hostility based on a stigma surrounding the plant. It is absurd that out of state manufacturers can sell directly to consumers in Texas; yet those manufacturers who call Texas their home are being forced to leave,” Chelsie Spencer with Ritter Spencer PLLC said.

The move of these businesses from Texas could hurt the state’s tax revenue. According to an economic analyst retained for the case, Texas will lose $1 million in tax revenue by 2024 just from one company, Wild Hempettes, moving out of state.

Wild Hempettes, the smokable hemp division spun off from Crown Distributing LLC, one of the plaintiffs in the case, had been operating for 17 years in Texas. But now, it’s one of the companies which will likely move its manufacturing operations to Oklahoma because of the ruling, according to Spencer.

The company must spend a quarter of a million dollars on a new warehouse right over the Texas-Oklahoma border where it aims to produce smokable hemp products to ship right back to Texas, avoiding the ban. Wild Hempettes is also looking at costs exceeding $1 million to move specialized machinery across state lines, according to Zain Maghani, CEO of Wild Hempettes.

The ruling doesn’t “really make a lot of sense” or limit smokable hemp consumption in Texas, Maghani said. Instead, it “puts pressure on established companies in the state to move out.”

Now, like the two other plaintiffs, he’s planning to cut his losses, clear his 60,000 square foot warehouse, and relocate to one about an hour’s drive north. And while Maghani hopes he can keep several engineering professionals who run specialized machinery, he admits some of the processing jobs will likely move out-of-state.

The ruling also has the potential to disrupt the cannabis industry supply chain as small businesses who made their own specialty smokable hemp products will now have to outsource production, making it more difficult for struggling independent businesses to operate, Maghani said.

It’s strange that the state seems “to be fine with possession and sale of the product” and is simply “cutting out manufacturers, growers, and shop owners from being able to manufacture and process the products themselves,” Maghani said. “It’s essentially throwing business to other states instead of keeping it in Texas.”

In 2019 Texas generally authorized the cultivation, manufacture, and sale of low-THC hemp and hemp-containing products in the state. But the Texas Department of State Health Services prohibited the manufacturing or processing of hemp products “for smoking.”

Because importing, selling, buying, and using smokable hemp in Texas is still allowed under the law, the plaintiffs argued they were losing market share to out-of-state companies who could export their products into Texas.

But the Texas Supreme Court determined that the companies had no vested property interest or liberty interest in manufacturing smokable hemp that would be protected by the state constitution’s due course clause.

Justice Jeff Boyd, who delivered the unanimous decision, said that smokable hemp products aren’t made from the historically legal part of the cannabis plant, but instead use flower, buds, and leaves which were previously considered illegal under prior law.

The fate of the smokable hemp manufacturing ban now rests in the hands of the Republican-led Texas legislature, which will likely address the policy during the next legislative session in January 2023, said Andrea Steel of Frost Brown Todd LLC, who specializes in cannabis law.

“Consumable hemp is booming, and there’s a lot of economic factors that I don’t know if conservatives want to shutdown, especially considering a lot of these products have been highly supported by veterans, which is a big base for conservative lawmakers,” Steel said.

To contact the reporter on this story: Janet Miranda in Houston at jmiranda@bloombergindustry.com

To contact the editors responsible for this story: Rob Tricchinelli at rtricchinelli@bloomberglaw.com; Brian Flood at bflood@bloomberglaw.com