The Legal Complexities of Selling CBD Products: What You Need to Know

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The Legal Complexities of Selling CBD Products: What You Need to Know

The cannabidiol (CBD) industry is burgeoning thanks to increasing customer interest and perceived health benefits.

Despite the industry’s upward mobility, CBD products are part of a complex legal landscape that business owners must navigate carefully, particularly regarding merchant account acquisition and management.

In this blog, we’ll discuss the legal challenges CBD merchants face when selling their products and how opening a ‍can help.

Legal Navigation and Compliance in CBD Sales

In the United States, CBD is legal at the federal level as long as it is derived from hemp plants and contains less than 0.3% THC.

However, each state has its own regulations regarding the sale and possession of CBD products. This creates a challenging environment for CBD merchants, who must adhere to both federal and state laws.

CBD merchants often struggle to secure merchant accounts due to this complex legal landscape and the fact that CBD businesses are deemed “high-risk” in the eyes of banks and other financial institutions.

Additionally, the industry's reputation for high chargeback rates also deters many providers from offering services to CBD businesses. While navigating these various legal and compliance challenges is possible, CBD sellers must partner with the right CBD merchant services providers to make it as streamlined as possible.

Understanding Federal vs. State Laws on CBD

CBD products derived from hemp were federally legalized in the United States with the 2018 Farm Bill. That said, federal agencies like the FDA still impose restrictions on how CBD can be advertised and sold.

Here’s a brief breakdown of some of the federal and state laws regarding CBD:

Federal Laws

  • The 2018 Farm Bill federally legalized the production of hemp and its derivatives, including CBD, but only if the THC content is below 0.3%.
  • Despite the legalization, the FDA still imposes restrictions on the marketing and sale of CBD. It is illegal to market CBD products as dietary supplements or add them to food without FDA approval.
  • CBD products cannot be advertised as treatments or cures for any diseases without going through the FDA's drug approval process.

State Laws

  • State laws on CBD vary widely and can sometimes contradict federal laws. It's crucial to research and stay updated on the specific laws in each state where the products will be sold.
  • Some states, like Colorado and Oregon, have fully embraced the CBD industry and have less restrictive laws.
  • Other states, such as South Dakota and Idaho, have stricter laws or outright bans on CBD sales, even in the face of federal legalization.
  • States might also have specific requirements for product testing, labeling, and sale, which CBD businesses must adhere to.

Remember, non-compliance with federal or state laws can lead to financial penalties and the loss of merchant accounts, so staying compliant and up-to-date with all regulations is essential.

This confusing patchwork of regulations significantly affects merchant account acquisition, as banks and financial institutions are often cautious and require businesses to demonstrate compliance with both federal and state laws.

CBD merchants must be diligent in documenting product sourcing, THC content (must be below 0.3%), and marketing practices to satisfy risk-averse payment processors.

What are High-Risk Merchant Accounts, and Why Do They Matter for CBD Merchants?

Merchant accounts and standard business bank accounts serve different roles in a business's financial operations.

While both accounts handle monetary transactions, a merchant account is specifically designed to facilitate credit and debit card payments, acting as a temporary holding space for funds before they're transferred to a business bank account.

Unlike standard business bank accounts, merchant accounts also interact directly with card-issuing banks and the payment gateway to authorize and process card transactions.

This distinction enables businesses, like those in the CBD industry, to offer diverse payment options, expand their customer base, and streamline their payment processes, thus boosting overall operational efficiency and profitability.

As far as CBD merchants are concerned, the need for a merchant account stems primarily from the inherent business risks associated with this industry.

A CBD merchant account offers businesses a safe, reliable, and legal way to process payments. These accounts are equipped to handle unique challenges, such as sudden changes in federal and state laws, the potential for increased chargebacks, and elevated risk perception.

They accommodate the needs of CBD businesses, ensuring smooth operations and the capacity to process larger volumes of transactions, which is crucial for growth.

Moreover, CBD merchant accounts provide additional benefits like secure online payment gateways, fraud protection, and chargeback management tools, which are crucial in maintaining a healthy merchant account.

The ability to accept multiple forms of payment also opens up new market opportunities, reaching a broad spectrum of customers. With these things in mind, a CBD merchant account is not just a payment processing solution - it’s a strategic tool that allows CBD businesses to sustain and thrive amidst industry challenges.

4 Common Legal Considerations CBD Merchants Face

  1. Chargeback Management

Chargebacks can be a significant issue for CBD merchants, potentially leading to account closure or fines.  

To manage chargebacks effectively, CBD merchants must maintain records of their transactions, provide excellent customer service, set clear expectations through accurate product descriptions, and utilize fraud prevention tools.

Regularly reviewing your chargeback ratio and working with CBD payment processors that understand the CBD market can also help avoid unwelcome surprises.

  1. Banking Restrictions

Many banks and financial institutions are hesitant to work with CBD merchants due to the industry's legal uncertainties. This makes it challenging for businesses to obtain traditional banking services, such as merchant accounts or credit card processing functionalities.

If CBD businesses can get a merchant account from a traditional financial institution, they usually have to pay significantly higher fees for those services than other businesses.

This can significantly cut into profit margins and make it difficult for small businesses to compete with larger players in the industry.

Because the banking limitations are so restrictive for CBD merchants, many have turned to payment processing providers, like Seamless Chex, which specializes in working with businesses in high-risk industries.

In addition to making it easier to secure a merchant account, Seamless Chex also reduces fees, provides next-day funding, and allows CBD companies to extend various payment options to their customers.

  1. Compliance with Payment Processor Requirements

Payment processors usually have specific requirements for high-risk industries, such as CBD.

These can cover product legality, mandatory laboratory testing, customer authentication protocols, and age verification measures.

Keeping up-to-date with these requirements isn't just a matter of maintaining a merchant account; it's also about building trust with customers and ensuring your business's longevity.

  1. Advertising and Supply Chain Challenges

Platforms like Google and Facebook have strict policies against advertising CBD products, limiting marketing opportunities.

This forces businesses to get creative with advertising strategies, such as utilizing influencer partnerships and email marketing.

Procuring and storing CBD products can be difficult due to regulatory restrictions and limited availability. This can lead to supply chain disruptions and increased costs for merchants.

Robust CBD Merchant Accounts Help CBD Businesses Grow

The CBD market is subject to legal nuances that can complicate merchant account acquisition and management.

By staying informed on both federal and state laws, diligently managing chargebacks, and adhering to payment processor guidelines, CBD merchants can set the groundwork for a stable and successful venture.

Finding the right merchant services provider who understands your CBD business's specific needs and challenges is vital.

Seamless Chex specializes in providing merchant services tailored to the complexities of the CBD industry.

If you want to strengthen your payment processing strategies and ensure your business thrives amidst legal intricacies, contact Seamless Chex today to discuss our CBD merchant services and more. Don't let financial hurdles slow your growth in this promising market.

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