From Retail to Wholesale: A Tax Structure Reimagined

The most significant change is the repeal of the 6% retail sales tax on Hemp-Derived Cannabinoid Products (HDCPs), which has been in place since 2023. In its place, Tennessee will implement a wholesale tax structure that varies by product type and potency.

Under the new law, wholesale taxes will be assessed as follows:

• $0.02 per milligram of hemp-derived cannabinoid in each product.
• $50 per ounce for HDCPs sold as hemp plant parts or flower.
• $4.40 per gallon for liquid HDCPs, or a proportional rate for smaller containers.

This shift moves the tax burden upstream in the supply chain, placing new compliance obligations on manufacturers, distributors and wholesalers rather than retailers. Businesses will need to adjust pricing models and tax reporting systems accordingly.

HB1376/SB1413: A Broader Regulatory Framework

Public Chapter 526 is more than a tax bill — it represents a comprehensive regulatory overhaul of the HDCP market. The legislation defines and categorizes a wide range of cannabinoids, including Delta-8, Delta-10, HHC, THCp and THCv, while excluding non-intoxicating compounds like CBD, CBG and CBC.

The law also:

• Establishes a licensing and registration framework for all HDCP manufacturers, distributors and retailers.
• Requires batch-level tracking and age verification protocols for all sales.
• Transfers regulatory oversight from the Department of Agriculture to the Tennessee Alcoholic Beverage Commission (ABC) beginning in 2026.

This transition signals the state’s intent to treat HDCPs more like controlled substances than agricultural commodities, aligning Tennessee with national trends in cannabinoid regulation.

Licensing and Compliance: What’s Changing and When

Until the end of 2025, the Tennessee Department of Agriculture (TDA) will continue to license HDCP retailers and suppliers under existing rules. However, beginning in 2026, the ABC will assume regulatory authority, including enforcement of the new wholesale tax and product registration requirements.

Businesses currently licensed by TDA should prepare for:

• New application procedures under ABC oversight.
• Revised compliance standards for labeling, testing and packaging.
• Potential enforcement actions for non-compliance with the new framework.

Business Tax and Entity Implications

While hemp growers remain exempt from business and sales tax on raw agricultural products, the new law clarifies that corporate entities involved in HDCP production or sales are subject to Tennessee’s franchise and excise taxes. This distinction is critical for structuring new ventures or advising clients on entity formation.

Strategic Considerations for Legal Counsel

For attorneys advising clients in the hemp and wellness sectors, Public Chapter 526 presents both opportunities and risks. Key considerations include:

• Supply chain restructuring: Clients may need to renegotiate contracts or shift distribution models to accommodate the wholesale tax.
• Tax planning: The new rates could significantly impact margins, especially for high-potency products.
• Regulatory compliance: Brand registration, batch tracking and age verification will require robust internal systems and legal oversight.
• Entity selection: Advising clients on the tax implications of different business structures is more important than ever.

A Maturing Market Demands Sophisticated Counsel

Tennessee’s hemp industry has grown rapidly since the federal legalization of hemp in 2018. With that growth has come increased regulatory attention. Public Chapter 526 reflects the state’s effort to balance economic opportunity with consumer protection and tax fairness.

For business lawyers, the message is clear: the legal landscape for HDCPs is no longer the Wild West. It’s a regulated, taxed and increasingly sophisticated sector that demands equally sophisticated legal guidance.

Sources

Tennessee Department of Revenue – Important Notice: Taxability of Hemp-Derived Cannabinoid Products: https://www.tn.gov/revenue/news/2025/6/5/important-notice--taxability-of-hemp-derived-cannabinoid-products.html

Tennessee Department of Revenue – SUT-112: Hemp – Tennessee Tax Implications: https://revenue.support.tn.gov/hc/en-us/articles/360058231712-SUT-112-Hemp-Tennessee-Tax-Implications

HB1376/SB1413 – Full Text of Public Chapter 526: https://www.capitol.tn.gov/Bills/114/Bill/HB1376.pdf

Tennessee Department of Agriculture – Hemp Licensing Update: https://www.tn.gov/agriculture/businesses/hemp.html

Tommy Fridy is a corporate associate in the Memphis office of Wyatt Tarrant & Combs LLP. He assists with counseling clients regarding mergers, acquisitions, dispositions and provides operational, regulatory and general transactional support. His practice also includes the development, leasing, acquisition and disposition of commercial real estate and lending.