Photo of Daniel Shortt

With a foundation in advocacy for cannabis legalization built through involvement on University of Washington's campus and with the Washington State Liquor and Cannabis Board, Daniel has positioned himself as a fearless advocate for the cannabis industry.

At the end of June, the U.S. Senate passed its version of the 2018 Farm Bill, which included the full text of McConnell’s Hemp Farming Act of 2018. If the Senate version is enacted, hemp and derivatives, extracts, and cannabinoids derived from hemp would be treated as agricultural commodities and removed from the purview of the Controlled Substances Act and the Drug Enforcement Administration. Though this is certainly exciting news, it’s not quite time to pop the CBD-infused champagne just yet. 

Both the Senate and the House have passed their own versions of the Farm Bill.  The Senate included the full text of McConnell’s Hemp Farming Act, but the House version was silent on hemp. The Farm Bill covers a vast range of agricultural issues including subsidies and crop insurance. Now the House and Senate must harmonize their versions of the Bill, including the provisions that relate to industrial hemp.

The House and Senate passed motions to proceed to conference for their respective the Farm Bills. Both chambers will need to agree on which portions of each bill will be included in a conference agreement. U.S. Hemp Roundtable compiled a list of conferees for the House and Senate. The House is represented by 47 conferees and the Senate is represented by 9 conferees.

The 9 Senate conferees show that the both Republicans and Democrats will be represented. The Senate Republicans will include Pat Roberts (Kan.), John Hoeven (N.D.), Joni Ernst (Iowa), John Boozman (Ark.), and Senate Majority Leader Mitch McConnell (Ky.). Senate Democrats Debbie Stabenow (Mich.), Patrick Leahy (Vt.), Sherrod Brown (Ohio). and Heidi Heitkamp (N.D.) will also negotiate on behalf of the Senate.

McConnell’s involvement is important for industrial hemp. McConnell was instrumental in passing the 2014 Farm Bill’s industrial hemp provision and continues to advocate for legalizing hemp. He even recently toured a hemp cultivation facility in Kentucky, as reported by the Lexington Herald Leader. He also happens to be the Senate Majority Leader making him one of the most powerful politicians in the country.

Here’s what McConnell had to say about the 2018 Farm Bill and his decision to sponsor the Hemp Farming Act:

I have proudly served on the Agriculture Committee since my first day in the Senate and know exactly how important this legislation is to agricultural communities across Kentucky, so as Majority Leader, I put myself on the Conference, and we’re ready to get to work to ensure the future of American agriculture. I will advocate for Kentucky’s multi-billion-dollar agriculture industry that supports thousands of good jobs and families in nearly every corner of the Commonwealth. Additionally, I will strongly advocate to legalize industrial hemp. I’m optimistic that my Hemp Farming Act, which I secured in the Senate bill, will be included in the final bill sent to the President for his signature. I am also glad to have the support of Congressman Comer on the Conference for legalizing industrial hemp.

If the House and Senate reach a resolution, they will issue a Conference Report that will be sent back to the House and Senate for final passage. If the passed in both chambers, the Bill would head to the Donald Trump’s desk for signature. For industrial hemp farmers, the sooner this happens, the better.

The 2014 Farm Bill is set to expire on September 30 or at the end of the applicable crop year. Hemp farmers operating under the 2014 Farm Bill will certainly be watching carefully to see whether the 2018 Farm Bill is signed prior to that date. If the 2014 Farm Bill expires, so too will the legal basis for cultivating industrial hemp under federal law. It’s possible that the 2014 Farm Bill will be extended in the event that the 2018 Farm Bill fails to pass. McConnell is hoping that the conference can reach agreement by Labor Day.

CBD lawyersLast week, the California Department of Public Health’s Food and Drug Branch (CDPH-FDB) issued a revised FAQ on cannabidiol (CBD) in food products that will likely block the sale of hemp-derived CBD products in California — which if you’ve been in the state lately, are pretty much already everywhere.

CDPH-FDB has determined that CBD sourced from industrial hemp cannot be added to food (including drinks) for either humans or pets:

[A]lthough California currently allows the manufacturing and sales of cannabis products (including edibles), the use of industrial hemp as the source of CBD to be added to food products is prohibited. Until the FDA rules that industrial hemp-derived CBD oil and CBD products can be used as a food or California makes a determination that they are safe to use for human and animal consumption, CBD products are not an approved food, food ingredient, food additive, or dietary supplement.

California’s Health and Safety Code defines “food” as “a raw, cooked, or processed edible substance, ice, beverage, an ingredient used or intended for use or for sale in whole or in part for human consumption, and chewing gum.” Further, CDPH-FDB’s FAQ elaborates on what will not be allowed in food in California as follows:

  • Any CBD products derived from cannabis
  • Any CBD products, including CBD oil derived from industrial hemp
  • Hemp oil not derived from industrial hemp seeds
  • Industrial hemp seed oil enhanced with CBD or other cannabinoids

Seeds derived from industrial hemp and oil made from industrial hemp seeds are allowed in food if the distributor of those items makes no medical claims about the seeds and/or oil.

CDPH-FDB also made the following distinction between “hemp seed oil” and CBD oil:
Industrial hemp seed oil and hemp-derived CBD oil are two different products. Industrial hemp seed oil is derived from the seeds limited to types of the Cannabis sativa L. plant and may contain trace amounts of CBD (naturally occurring) and other cannabinoids. Food grade Industrial hemp seed oil is available from a variety of approved sources.

However, CBD or CBD oil derived from industrial hemp is NOT approved for human and animal consumption by the FDA as food and therefore cannot be used as a food ingredient, food additive, or dietary supplement.

CDPH-FDB confirmed in is FAQ that “there is no regulatory agency that provides oversight for the production of CBD oil from industrial hemp,” but CDPH does have authority over food and dietary use products generally and, therefore, food products containing CBD oil are within its authority to regulate. The FAQ also adds that “CBD is an unapproved food additive and NOT allowed for use in human and animal foods in California regardless of where the CBD products originate.” So, no out-of-state hemp-CBD loophole.

CDPH-FDB distinguished cannabis edibles sold under MAUCRSA and regulated by CDPH’s Manufactured Cannabis Safety Branch from non-cannabis food products sold outside of that regulatory framework. Yet in another blow to hemp-CBD, the Bureau of Cannabis Control will not allow MAUCRSA-licensed retailers to sell stand alone hemp-CBD products even though BCC rules explicitly allow for selling non-cannabis products at licensed retail storefronts.

The FAQ also addresses the Food and Drug Administration (FDA), which has a complicated relationship with CBD. The FDA states in its own THC/CBD FAQs that it is prohibited to “introduce or deliver for introduction into interstate commerce any food (including any animal food or feed) to which THC or CBD has been added.” The FDA has also sent out cease and desist letters (see herehere, and here) to CBD producers and sellers across the country that were making medical claims about their CBD products in violation of the Federal Food, Drug & Cosmetic Act . The FDA takes the position that CBD is neither a conventional food nor a supplement exempt from drug testing. Recently though the FDA approved Epidiolex, the cannabis-based drug used to treat severe forms of epilepsy. This approval does not mean the FDA now allows for all CBD products or that it will now allow businesses to make medical claims about CBD for products that have not been approved as drugs under the Federal Food Drug & Cosmetic Act –in other words, anything containing CBD that is not Epidiolex.

Essentially, California is letting the FDA dictate what it will do with hemp CBD. Though many other states allow hemp CBD for human consumption pursuant to Federal Farm Bill programs, California is following nearly lock-step with big brother on this one. How exactly CDPH-FDB plans to enforce its FAQ is not clear given that hemp CBD products are already rampant in California.

Our CBD lawyers will continue monitoring this evolving situation as hemp CBD makers and sellers struggle to navigate and comply.

indiana cbd hemp
Home of legal CBD sales!

Indiana has uniquely positioned itself with some of the most robust regulations of hemp-derived CBD products. On March 21, 2018, Senate Bill 52 became law, allowing the distribution and retail sale of “low-THC hemp extract,” defined as a product “(1) derived from Cannabis sativa L. that meets the definition of industrial hemp; (2) that contains not more than 0.3% delta-9-THC (including precursors); and (3) that contains no other controlled substances.”

Exciting news, right? Indiana is a red state that has been slow to implement any kind of meaningful cannabis regulations. Prior to SB 52, Indiana implemented a strict CBD-only medical marijuana program and an industrial hemp program that has not really launched.

That’s what makes SB 52 so interesting. It shows that Indiana is cognizant of the existence of CBD products and has made a decision to allow their sale. The catch is that those sales are restricted to a certain class of CBD products, and they are heavily regulated.

Specifically, under SB 52, “low-THC hemp extracts” are only permitted for sale in Indiana if they are extracted from hemp that was tested by an accredited, independent laboratory. The distributor of low THC hemp extracts must have lab results showing “(1) the low THC hemp extract is the product of a batch tested by the independent testing laboratory; and (2) the independent testing laboratory determined that the batch contained not more than three-tenths percent (0.3%) total [THC], including precursors, by weight, based on the testing of a random sample of the batch.”

Assuming these products clear testing, the sellers of low THC hemp products must distribute them in packaging that includes the following:

(1) A scannable bar code or QR code linked to a document that contains information with respect to the manufacture of the low THC hemp extract, including the:

(A) batch identification number;

(B) product name;

(C) batch date;

(D) expiration date, which must be not more than two years from the date of manufacture;

(E) batch size;

(F) total quantity produced;

(G) ingredients used, including the:

(i) ingredient name;

(ii) name of the company that manufactured the ingredient;

(iii) company or product identification number or code, if applicable; and

(iv) ingredient lot number; and

(H) download link for a certificate of analysis for the low THC hemp extract.

(2) The batch number.

(3) The Internet address of a web site to obtain batch information.

(4) The expiration date.

(5) The number of milligrams of low THC hemp extract.

(6) The manufacturer.

(7) The fact that the product contains not more than three-tenths percent (0.3%) totaldelta-9-tetrahydrocannabinol (THC), including precursors, by weight.

That may read like a long list, but it’s roughly equivalent to what we see as far as packaging and labeling requirements for cannabis products in Washington, Oregon and California, the states in which our cannabis business attorneys are located.

This will also prove challenging for distributors who send products across the country as they now must consider Indiana’s labeling requirements. This will likely lead to some CBD distributors deciding not to sell products in Indiana. Other’s may choose to comply with Indiana’s labeling restrictions and place Indiana-complaint labels on products that are made available in other states.

Indiana is unique in the sense that it allows CBD and also regulates its sale so robustly. Let’s hope for more positive cannabis developments in the Hoosier State.

It is no secret that cannabidiol (CBD) is having a moment right now. Unlike its cousin tetrahydrocannabinol (THC), which is another cannabinoid found in the cannabis plant, CBD is not psychoactive. It has been growing in popularity for years for medical and other applications, but has really taken off lately.

Though CBD has become increasingly popular, it is still important to proceed with caution for any businesses operating in this space. Below are five important questions to keep in mind when dealing with CBD.

1.  What is the source of the CBD?

It’s not an accident that this question is first on this list. The source is key. If you are selling CBD at a licensed dispensary in a state that permits the sale of marijuana, then you need to verify that the product comes from a licensed source. Some states like Washington and Oregon may allow CBD additives from other sources, while other states are silent on the topic. You should act cautiously either way.

If you are selling across state lines or in stores that are not licensed to sell marijuana, then you must ensure that  your product is either derived from industrial hemp or from portions of the cannabis plant exempt from the Controlled Substances Act’s (CSA) definition of “marijuana.” If using industrial hemp, you need to make sure that the cultivator has a license from a state that  has implemented an agricultural pilot program in compliance with Section 7606 of the 2014 Farm Bill. If you are using exempt plant  material, you need to verify that the product was derived from mature stalks or seeds incapable of germination  as those sections are specifically exempted from the CSA.

If you a buying from a cultivator or processor, you should carefully draft your purchase and sales agreements to include representations and warranties from the supplier. It’s also important to learn about  who you are doing business as the question of source can determine whether or not something is legal.

2.  What do the lab tests say?

If your first thought in reading this is, “should I be testing CBD products?” the answer is “yes!” It’s important to test for items that could pose a risk to public health including pesticides, heavy metals, and microbials. States may require such testing, but the risk will ultimately fall on any company in the line of production. If a consumer is harmed, the cultivator, processor, and distributor may all be sued for product liability.

CBD is not independently listed as a controlled substance in the CSA. However, THC is. This means you need to test to make sure you CBD product does not contain THC, unless you are selling it in states that have legal marijuana programs. This is important whether your are dealing with Farm Bill hemp as it is defined as containing less than .3% THC on a dry weight basis, or if you are dealing with exempt plant material as THC alone is a Schedule I controlled substance.

3.  Where is the CBD going to be sold?

I recently wrote about how state law impacts the distribution of hemp-derived CBD products. If you are distributing products in a state that restricts the sale of CBD, like Michigan, you products could be seized and your company and its stakeholders could face criminal sanctions. It’s important to track where your products are being distributed and to inform your potential customers that they too must monitor state law.

4. What claims are you making about CBD?

We’ve written before that the FDA will treat products as drugs if their own labeling or marketing suggests they are “intended for use in the diagnosis, cure, mitigation, treatment, or prevention of disease.” Phrases like “combats tumor cells” and “[has] anti-proliferative properties that inhibit cell division and growth in certain types of cancer” clearly suggest that the CDB product can cure, mitigate, treat or prevent cancer, and is thus a drug.

Any suggestion that a product might have a role in treating or diagnosing disease, or that it is intended to affect the structure or any function of the human body of humans or other animals, is a health claim that subjects the product to drug regulations (unless it falls within the narrow confines of the Dietary Supplement Health & Education Act, which the FDA has ruled that  CBD does not.)

It’s important to remember that only the FDA can determine whether a drug can be labelled as safe and effective for a particular disease. Preventing health claims based on anecdotal evidence is one of the FDA’s core functions and  the agency will not hesitate to issue warning letters based on CBD health claims.

Long story short, don’t make health claims about your CBD products or allow others to post testimonials on your website.

5.  Has the law changed?

Finally, it’s important to keep up with the ever changing legal landscape. Tom Angell of Marijuana Moment recently reported that Mitch McConnell announced that his proposed  hemp bill will be included in the broad ranging agricultural act of 2018. This comes shortly after Congress approved a non-binding resolution acknowledging the vast potential of hemp.

In addition to federal law, stakeholders need to stay informed as to how the DEA feels about CBD that week. The DEA is often changing its policy on this subject, whether  that comes through a post on its website or an internal directive. It’s important to stay up-to-date on the  DEA’s latest position on CBD.

Finally, monitor state law. This is probably the hardest to accomplish  since there are 50 states who each  may  treat CBD  differently. Still, if you  are doing  business in  a state, it’s on you to  know the rules.

CBD law is incredibly complex and this list only scratches the surface as to what you need to look out for. If you have additional questions, give our firm a call to see how we can help your CBD business thrive.

industrial hemp CBD legal

As CBD and hemp continue to grow in popularity we are receiving an increasing number of calls and emails from companies that want to distribute hemp across the country. We have written about the legality of hemp and CBD under federal law:

This post focuses on another topic: state law on CBD and Industrial Hemp.

The 2014 Farm Bill grants states the authority to regulate Industrial Hemp, which contains less than .3%  THC on a dry weight basis, through an Agricultural Pilot Program. The Farm Bill also requires that Industrial Hemp is overseen by a state’s department of agriculture. The Farm Bill is light on additional details and states have taken different approaches to regulating Industrial Hemp and CBD derived from Industrial Hemp.

Colorado cemented its place in history as a cannabis pioneer by legalizing marijuana in 2012 along with Washington. Colorado’s hemp credentials are also solid as it has dedicated more acreage to the cultivation of hemp than any other state. Cultivators are permitted to sell hemp to the public. Colorado does not oversee the processing of hemp though which makes the extraction process largely unregulated.

Unlike Colorado, Oregon regulates both the production and processing of Industrial Hemp. Oregon’s Department of Agriculture (ODA) oversees the state’s industrial hemp program. “Growers” must register with the ODA in order to produce Industrial Hemp and “Handlers” must register to process Industrial Hemp. Oregon differs from Colorado in that it does not permit its Growers to sell Industrial Hemp directly to the public. Conversely, Handlers are permitted to sell Industrial Hemp to any person. Growers and Handlers may also sell their products to licensed recreational marijuana businesses giving them access the state’s recreational marijuana market. Growers and Handlers can apply to the Oregon Liquor Control Commission (OLCC) for an Industrial Hemp certificate to transfer hemp to recreational processors. OLCC retailers can then turn around and sell these hemp-based products to Oregon consumers.

Washington recently passed a law that sets up a similar structure. You can read about this law here, as we covered it a few months ago when it was still a proposed  bill. Washington’s licensed processors will soon be allowed to use additives derived from hemp-based products that were grown outside of its licensed marijuana system. These additives may come from Washington’s own Industrial Hemp program, which has been stalled for the last few years due to budget issues, or from Industrial Hemp sourced from other sources.

California has followed a similar path to Washington in that its hemp program has failed to launch in a meaningful way. Part of the hold up has been that California requires that Industrial Hemp only be grown by those on the list of approved hemp seed cultivars. That list includes only hemp seed cultivars certified on or before January 1, 2013. Industrial hemp may only be grown as a densely planted fiber or oilseed crop, or both, in minimum acreages. Growers of industrial hemp and seed breeders must register with the county agricultural commissioner and pay a registration and/or renewal fee. We wrote about proposed changes to California’s program here.

Michigan‘s office of Licensing and Regulatory Affairs (LARA) recently issued an Advisory Bulletin that only permits the sale of CBD in licensed medical marijuana dispensaries. The Bulletin first states that CBD cannot be found in portions of the cannabis plant that fall outside the state’s definition of “marihuana” (i.e., the mature stalks, seeds incapable of germination, fiber from stalks, oil or cake made from seeds or other derivatives of the mature stalks) other than in trace amounts. The Bulletin goes onto state that Michigan’s Industrial Hemp program does not authorize the “sale or transfer” of Industrial Hemp.

This is significant as it means that CBD derived from Industrial Hemp cannot be sold and that CBD derived from marijuana can only be sold in dispensaries. The Bulletin also seems to include Industrial Hemp from other states as it concludes with the following:

Any possession or transfer of industrial hemp – or any product claimed to be “hemp”-related – must be done in compliance with Michigan’s Industrial Hemp Research Act.

The bottom line in Michigan is that to sell CBD in that state, whether from marijuana or hemp, you need to go through a dispensary.

Also keep in mind that some states do not regulate Industrial Hemp at all. This should not be interpreted to mean that they will turn a blind eye to hemp products distributed within their borders. Other states, regulate CBD specifically, which can be found in Industrial Hemp, and those states limit the use of CBD to patients who have received an authorization from a physician for its medical use.

If you want to distribute Industrial Hemp across the country it is not as simple as making sure that you have a licensed cultivator. Sure, you need to know the laws of the state in which you are sourcing hemp, but that’s not enough. You need to also consider the legal landscape of the places you intend to ship and sell Industrial Hemp products.

On May 22, the federal Drug Enforcement Administration (“DEA”) issued an internal directive (the “Directive”) acknowledging the Agency’s jurisdiction over cannabis has its limits. The directive is in line with a plain reading of the federal Controlled Substance Act (“CSA”), which authorizes the DEA’s enforcement power, but does not regulate the whole cannabis plant.

To conceptualize this, think of the CSA distinguishing the cannabis plant into two parts. The first is “Marihuana” which is “all parts of the plant Cannabis sativa L., whether growing or not; the seeds thereof; the resin extracted from any part of such plant; and every compound, manufacture, salt, derivative, mixture, or preparation of such plant, its seeds or resin.” The second classification under the CSA is “Exempt Cannabis Plant Material.” As per the CSA definition, we can break Exempt Cannabis Plant Material into four categories:

  1. Mature stalks
  2. Fiber produced from mature stalks
  3. Oil or cake made from seeds
  4. Seeds incapable  of germination

Exempt Cannabis Plant Material also includes “any other compound, manufacture, salt, derivative, mixture, or preparation” of the items listed above. However, there is an exception to the exemption as resin derived from mature stalks is considered Marijuana, not Exempt Plant Material. If you are feeling confused at this point, don’t worry: This stuff is not for the faint of heart.

And that is where the Directive comes in. The Directive states that it was issued in order to clarify the ruling in Hemp Industries Ass’n v. DEA, 357 F.3d 1012 (9th Cir. 2004). In this 2004 decision the Court prevented the DEA from enforcing 21 C.F.R. § 1308.11(d)(31), which independently lists THC as a Schedule I substance, with respect to Exempt Plant Material. The Directive also acknowledges that the DEA does not enforce 21 C.F.R. § 1308.35, which was the agency’s attempt to regulate Exempt Plant Material when it was contained in products intended for human consumption. Kyle Jaeger of Marijuana Moment reported that the Directive’s concession was part of a settlement with the Hemp Industries Association (“HIA”).

So why would the DEA is issue a directive based on a case that was decided 14 years ago? It probably has to do with the HIA’s more recent lawsuit against the DEA over its Marijuana Extract Rule. In that case, the Ninth Circuit declined to review the Marijuana Extract Rule on largely procedural grounds. For those keeping score, HIA has sued the DEA three times, with two wins and a qualified loss.

The “Marijuana Extract Rule” broadly defines a “marijuana extract” as:

“[A]n extract containing one or more cannabinoids that has been derived from any plant of the genus Cannabis, other than the separated resin (whether crude or purified) obtained from the plant.”

Under the plain text, the “hook” for this rule is the presence of any cannabinoid from any part of the cannabis plant. Full stop. It makes no distinction between Exempt Plant Material and Marijuana. This seems to go far beyond the scope of the CSA. However, this directive concedes that the DEA’s power is limited to Marijuana and not Exempt Plant Material:

“Products and materials that are made from the cannabis plant and which fall outside the CSA definition of marijuana (such as sterilized seeds, oil or cake made from the seeds, and mature stalks) are not controlled under the CSA.”

The Directive goes a step further by acknowledging that Exempt Plant Material is outside of the DEA’s jurisdiction despite the presence of a cannabinoid:

“Such products may accordingly be sold and otherwise distributed throughout the United States without restriction under the CSA or its implementing regulations. The mere presence of cannabinoids is not itself dispositive as to whether a substance is within the scope of the CSA; the dispositive question is whether the substance falls within the CSA definition of marijuana.”

The Directive goes on to clarify that Exempt Plant Materials are also legal to import and export in compliance with the Controlled Substances Import and Export Act.

The Directive does not explicitly address Industrial Hemp as defined in 7606 of the 2014 US Farm Bill (the “Farm Bill”). The Farm Bill allows states to grow “Industrial Hemp” defined as having less than 0.3% THC on a dry weight basis in states that have implement agricultural pilot hemp programs. In the Court’s recent decision to deny reviewing the Marijuana Extract Rule, it threw HIA a pretty nice bone:

“[The Farm Bill] contemplates potential conflict between the Controlled Substances Act and preempts it. The Final Rule therefore, does not violate the [Farm Bill].”

Preemption means that the Farm Bill overrides the CSA, when the two conflict. The DEA cannot use its enforcement authority under the CSA to enforce the Marijuana Extract Rule with regards to extracts derived from bona fide Industrial Hemp. Specifically, the Industrial Hemp must be grown pursuant to a state’s industrial hemp program and contain less than .3% THC. Also, the DEA has stated that the Farm Bill does not permit the commercial sale of Industrial Hemp or its interstate transfer, although Congress has limited DEA’s ability to use federal funds to prohibit the sale or interstate transfer of Industrial Hemp until September 2018.

So where does that leave us with regards to cannabidiol (“CBD”)? The Marijuana Extract Rule is valid. Obviously, it would cover any product containing CBD if that product were derived from Marijuana. However, based on the Directive and the Ninth Circuit’s decisions, extracts containing CBD derived from Exempt Plant Material or Industrial Hemp would not be within the Marijuana Extract Rule.

There is significant scientific research showing that meaningful levels of CBD cannot be extracted from Exempt Plant Material. The Farm Bill provides protection to all parts of the cannabis plant if the plant is Industrial Hemp, including the flowering tops. CBD could be extracted from Industrial Hemp without necessarily falling under the DEA’s jurisdiction. And can it be sold interstate? Well, given what Congress has done, at least until September.

industrial hemp tax 280E
Not always taxed like marijuana, in theory.

Short answer: It depends.

As we discussed last week, the US Court of Appeals for the 9th Circuit in Hemp Industries Assn. et.al., vs. U.S. Drug Enforcement Admin., upheld the Drug Enforcement Administration’s (DEA) broad rule creating a separate classification for “Marijuana Extracts.”  Marijuana Extracts are broadly defined as “any extract containing one or more cannabinoids that has been derived from any plant of the genus Cannabis”. The ruling received an extraordinary amount of press, but lost in all of this breathless reportage was a very important point for a certain class of hemp businesses: The Court explicitly stated that the 2014 Farm Bill (“Farm Bill”) preempts the federal Controlled Substances Act (CSA). Accordingly, expenses incurred through an activity conducted strictly within the parameters of the Farm Bill arguably are not subject to IRC §280E.

Businesses that are operating outside the narrow parameters of Section 7606 of the Farm Bill, however, whether trading in hemp or any derivative product, will have to deal with IRC §280E. As a refresher, the Farm Bill allows a state to grow “Industrial Hemp” if it has implemented an official agricultural pilot program. These pilot programs, generally administered through state Departments of Agriculture, issue licenses or permits to businesses and individuals, allowing the cultivation of “Industrial Hemp.” That cultivar is defined as any part of the cannabis sativa plant with less than 0.3% THC on a dry weight basis. If a plant contains 0.3% or more THC on a dry weight basis, or is not cultivated by a pilot program licensee, the cultivator is operating outside of federal law and hence subject to IRC §280E.

So why is this such a big deal? As we explained previously, IRC §280E prohibits a deduction for any amount paid or incurred in carrying on any trade or business that consists of trafficking in a Schedule I or II controlled substance under the CSA. Accordingly, any industrial hemp business conducting the following activities is possibly subject to the horror of IRC §280E including:

  • Food and Body Care;
  • Textiles;
  • Building Material; and
  • Cannabinoids.

If IRC § 280E applies to a hemp business, that business will lose deductions otherwise available to almost every other US business. Clearly, IRC §280E puts these businesses at a competitive disadvantage. The disadvantage can be so severe as to be fatal in certain cases.

It’s important to note that although IRC 280E disallows expenses and credits paid for trade or businesses engaged in trafficking of marijuana listed as a Schedule I drug, this onerous code section does not apply to cost of goods sold. As such, a grower, farmer, cultivator, processor, or a manufacturer of hemp products may deduct any costs that are properly included in cost of goods sold. This rule is noncontroversial: In 2015, the IRS Chief Counsel issued a memorandum that clarified that a cannabis business may deduct these costs under IRC §471 and related regulations. Specifically, under IRC §471, costs included in cost of goods sold are those costs incident and necessary to production including:

  • Direct material costs;
  • Direct labor costs;
  • Utilities;
  • Maintenance;
  • Rent (real estate and equipment); and
  • Quality control.

Depending on your treatment for financial statement purposes, the following indirect costs may be included in cost of goods sold including:

  • Taxes necessary for production;
  • Depreciation;
  • Employee Benefits;
  • Factory administrative costs; and
  • Insurance.

On the other hand, a non-Farm Bill compliant hemp producer will lose under IRC §280E deductions related to sales, marketing and non-production related management costs.

In addition to creating headaches for non-Farm Bill compliant growers, the application of IRC §280E will have a detrimental impact on wholesalers and retailers of CBD products who also are not operating in full compliance with the Farm Bill. For these businesses, IRC §280E would operate to disallow a deduction for most overhead costs. This could have an especially severe impact on mixed retail businesses that sell CBD products in conjunction with other products.

Example: A pharmacy that sells products containing non-Farm Bill CBD as well as more traditional health products (e.g., shaving cream) may now be subject to IRC §280E. Unless the sale of non-CBD products can be considered a separate trade or business, it is possible that IRC §280E would operate to disallow the deduction of all operating expenses.

Finally, it is unclear if the IRS will apply IRC §280E retroactively to non-Farm Bill hemp businesses. The IRS could apply IRC §280E retroactively on audit or to years otherwise open. For example, the IRS could go back to tax year 2014 and adjust the income tax returns of certain taxpayers engaged in hemp manufacturing and sales of hemp products.

Under the new tax law effective January 1, 2018, Congress gave U.S. business several targeted tax benefits. For many businesses in the developing industrial hemp sector, the impact of IRC §280E reverses many of the benefits of the new tax law. Perhaps Congress can address some of these issues by passing the expansive Hemp Farming Act of 2018 which, as currently written, would explicitly remove Industrial Hemp and derivatives of that cannabis cultivar from the Controlled Substances Act. Better yet: repeal IRC §280E.

CBD hemp extract
The law on CBD is still a maze.

If you were hoping for some clarity as to the legality of industrial hemp and cannabidiol (CBD) derived from industrial hemp, I have some (mostly) bad news.

On Monday, the US Court of Appeals for the Ninth Circuit denied a lawsuit challenging the Drug Enforcement Administration’s (DEA) controversial Marihuana Extracts Rule. In Hemp Industries Assoc. v. DEA, the petitioners and other industry groups challenged the DEA’s rule creating a new drug code number for “”Marihuana Extracts” which is defined to include any extract “containing one or more cannabinoids that has been derived from any plant of the genus Cannabis.” This rule is so broadly drafted that it seems to prohibit extracts from parts of the cannabis plant that are legal or at least unregulated under federal law. Petitioners requested the Court clarify or strike down the DEA’s land-grab rule.

The Court denied both requests. Rather than diving into the substance of the petitioners’ complaint, the Court dismissed the action on largely procedural grounds, as we recently predicted it would. First, the court pointed to the fact that the petitioners failed to make an argument to the DEA while it was accepting comments on the Marihuana Extract Rule and are therefore barred from raising those issues before the Court. The petitioners claimed that another commenter raised their concerns by submitting a question as to whether the rule would cover “100% pure Cannabidiol by itself with nothing else?” But the Court determined the DEA considered this comment and altered the rule to clarify that it covered all cannabinoids. The Court also determined that several of the petitioners’ other arguments were waived for failure to raise the issue during the DEA’s notice and comment period.

The Court did determine that the petitioners’ argument that the Marihuana Extract Rule conflicted with 7606 of the 2014 US Farm Bill (the “Farm Bill”) was not waived, because Congress passed that law after the notice and comment period ended. The Farm Bill allows states to grow “Industrial Hemp” defined as having less than 0.3% THC on a dry weight basis in states that have implement agricultural pilot hemp programs. However, the Court determined that the argument failed on the merits. The Court found that the Farm Bill “contemplates potential conflict between the Controlled Substances Act [CSA] and preempts it. The Final Rule therefore, does not violate the [Farm Bill].” To the positive, the Court is stating that when the Industrial Hemp portions of the Farm Bill conflict with the CSA, the Farm Bill prevails.

This decision makes it clear that the Marihuana Extract Rule is unfortunately still valid, meaning that any products extracted from marijuana is still illegal under federal law, which has long been the case according to the DEA. The great unknown is how this ruling will be interpreted. It’s possible that the ruling could have a chilling effect on the growing CBD industry, by emboldening the DEA to actively pursue products that contain CBD. On this point, it’s important to note that Congress has limited the DEA’s ability to use federal funds “to prohibit the transportation, processing, sale, or use of industrial hemp” grown in accordance with the 2014 Farm Bill. However, it can be difficult to prove where a product containing CBD was derived and the DEA may try to push its boundaries in light of the decision. Therefore, it’s important that companies who are distributing CBD verify that it was derived from a legal source and are prepared to prove it.

State law enforcement agencies could also interpret this decision to crack down on CBD, especially in states that have not implemented Farm Bill hemp programs. These agencies are not limited by the budget provision that restricts the DEA enforcement activities. Although we have not heard any instances of state law enforcement cracking down on these sales, it is certainly possible that some will do so.

The Ninth Circuit could have used this as an opportunity to state explicitly that CBD derived from a legal source is also legal. Unfortunately, it did not. Because the Court did explicitly state that the Farm Bill preempts the CSA, though, the silver lining here is that Industrial Hemp, grown pursuant to the Farm Bill, is not illegal under the CSA according to the Ninth Circuit. In addition, shortly after the HIA filed its petition, the DEA made the following helpful clarifications: 

  • The “marihuana extract” definition does not include materials or products excluded from the definition of marijuana set forth in the CSA.
  • The rule includes only those extracts that fall within the CSA definition of marijuana.
  • If a product consists solely of parts of the cannabis plant excluded from the CSA definition of marijuana, such product is not considered “marihuana” or a “marihuana extract.”

Consistent with the Court’s ruling, this appears to exempt extracts that are derived from lawfully grown Industrial Hemp. It also exempts extracts derived from portions of the cannabis plant that are not included in the CSA’s definition of “marihuana”, which include the mature stalks and seeds incapable of germination.

All in all, this convoluted mess of marijuana, hemp, and CBD law could soon become much clearer if Mitch McConnell’s Hemp Farming Act of 2018 is passed. Stay tuned for more information on the ongoing saga of legal hemp and its derivatives.

hemp federal law
Are the glory days of hemp returning?

Senator Mitch McConnel (R-KY) recently introduced S.2667, a bill which would allow states and tribes to regulate hemp production. The proposed law is appropriately titled the “Hemp Farming Act of 2018” (the “Act”). As the Senate Majority Leader, McConnell is one of the most powerful politicians in Washington, so it goes without saying that this is a big deal. In addition, the Act is being fast-tracked through the Senate, bypassing the standard committee review process.

The Act is currently in draft form and the details are subject to change. As written, “hemp” would be defined 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-0 [THC] concentration of not more than 0.3 percent on a dry weight basis.”

This proposed definition is significant, because it specifically includes the term “extracts”, thereby undermining the DEA’s much-maligned “marihuana extract” rule, which broadly defines any extract from the cannabis plant as “marijuana” and not hemp. The proposed “hemp” definition also includes “cannabinoids” contained in hemp which could add much needed legal certainty to the already booming CBD market. The Act would also explicitly remove hemp from the Controlled Substances Act’s definition of marijuana.

The authority to regulate legal hemp would be placed in the U.S. Department of Agriculture. One major issue with the current federal “Industrial Hemp” program is that the 2014 Farm Bill, which established the program, does not name a federal agency to oversee it. Feel free to debate whether government regulations help or hurt an industry, but at least this bill provides some guidance as to who is responsible for the program.

Speaking of the 2014 Farm Bill, the Act would repeal and replace the “Industrial Hemp” section of that the 2014 Farm Bill one year after Act is passed into law.  The 2014 Farm Bill allows states to enact pilot programs for hemp research making hemp legal within the state’s borders. Hemp cultivated in compliance with a State’s program is expressly legal under the Farm Bill. The Drug Enforcement Administration (DEA) and other federal agencies have issued a joint Statement of Principles claiming that the commercial sale and/or the interstate transfer of Industrial Hemp is outside the scope of the Farm Bill and therefore unlawful. However, Congress has limited the DEA’s ability to use federal funds “to prohibit the transportation, processing, sale, or use of industrial hemp” grown in accordance with the 2014 Farm Bill.

Ultimately, the Act would require that states and tribes submit a plan to the US Department of Agriculture in order to cultivate hemp. The plan must include details on how to track the land where hemp is produced, a procedure for testing the THC concentration in hemp, a procedure for disposing of products that are not in compliance, and procedures for enforcing the Act. The Act would also allow hemp researchers to apply for grants from the and make hemp farmers eligible for crop insurance.

McConnell introduced the Act in the Senate on April 12, 2018, and it was co-sponsored by Oregon senators Ron Wyden and Jeff Merkley. That same day saw Representatives James Comer of Kentucky introduce companion bill H.R. 5485 in the House of Representatives with and Rep. Jared Polis of Colorado co-sponsoring.

McConnell hails from Kentucky and it’s no surprise that lawmakers from Kentucky, Oregon, and Colorado would support hemp legalization. In 2014,  we predicted Kentucky would lead the nation in industrial hemp as it was one of the first states to implement a hemp cultivation program under the 2014 Farm Bill. Kentucky was also one of the first states to legally obtain hemp seeds after it stepped up to fight the DEA in federal court in order to obtain those seeds. Since then, farmers in Kentucky have been happily producing hemp as a replacement for tobacco crops. McConnell and Kentucky Agriculture Commissioner Ryan Quarles highlighted Kentucky’s hemp program in announcing the Act:

McConnell: Hemp has played a foundational role in Kentucky’s agricultural heritage, and I believe that it can be an important part of our future. I am grateful to join our Agriculture Commissioner Ryan Quarles in this effort. He and his predecessor, Jamie Comer, have been real champions for the research and development of industrial hemp in the Commonwealth. The work of Commissioner Quarles here in Kentucky has become a nationwide example for the right way to cultivate hemp. I am proud to stand here with him today, because I believe that we are ready to take the next step and build upon the successes we’ve seen with Kentucky’s hemp pilot program.

Quarles: Here in Kentucky, we have built the best Industrial Hemp Research Pilot Program in the country and have established a model for how other states can do the same with buy-in from growers, processors, and law enforcement. I want to thank Leader McConnell for introducing this legislation which allows us to harness the economic viability of this crop and presents the best opportunity to put hemp on a path to commercialization.

In addition to Kentucky’s leadership on hemp, Oregon has reconfigured its hemp program and is a national bellwether in this space. Oregon hemp growers and handlers are able to sell their products to state-licensed marijuana businesses (as well as anyone else in the country). The merger of Oregon’s hemp and marijuana markets is unique and other states will likely follow suit, especially if the Act becomes law. Finally, Colorado has more acreage dedicated to hemp cultivation than any other state at present.

As mentioned above, it appears that McConnell is flexing his considerable political muscle to get this bill fast-tracked through Senate. McConnell is using procedural Rule 14 which allows a bill to skip over the committee process so that legislation may be brought up on the Senate floor. This doesn’t guarantee that the Hemp Farming Act will get a vote, but it does indicate that McConnell means business.

washington cannabis license

As of April 1, 2018, Washington marijuana processors are required to hold a special endorsement from the Washington State Department of Agriculture (WSDA) to make marijuana-infused edibles (MIEs). This requirement follows from the WSDA’s appointment to share regulatory authority over MIEs with the Washington State Liquor and Cannabis Board (LCB). The WSDA’s Food Safety Program regulates, inspects and provides technical assistance to food processors generally, regarding product safety issues. Now, the WSDA will conduct similar activities with MIE processors including carrying out enforcement and recalls when necessary.

The endorsement costs $895 initially and $895 for each annual renewal. Applications must be submitted to the Washington State Department of Revenue Business Licensing Service website. Technically, processors are required to hold the endorsements as of April 1, but WSDA is providing a 30-day grace period. Therefore, the clock is ticking on any processors who have not yet acquired this mandatory endorsement.

Note that the endorsement is only available to businesses that already hold a processor license. The LCB is not currently accepting applications for new processor licenses. To add an MIE endorsement, a business or individual must currently have a processor license and only produce MIE products at a single facility. A business or individual cannot add MIE products under a Food Processor license, process MIE products at a facility that processes non-marijuana food products, or process non-marijuana food products at a facility that produces MIE products.

Prior to April 1, the WSDA had contracted with the LCB to inspect the facilities of processors making MIEs, so in some ways, not much is changing. Other than the new $895 fee, processors shouldn’t feel the impact of this regulatory change immediately. The LCB will maintain authority over marijuana activities such as processor license requirements, packaging, and labeling. Processors that are currently in compliance with food-related regulations for MIEs will not need to re-submit food safety information (e.g., floor plan, sanitation procedures) when applying for the MIE endorsement. If there are no changes to ownership, location, or products, WSDA will not require an inspection. Processors that have not produced MIEs before will have to submit additional information to WSDA and LCB. In 2015, the WSDA provided an outline of the basic requirements for processing MIEs and that document is available here.

Looking forward, processors can expect to deal with the WSDA more frequently. The WSDA now has authority to undertake enforcement action and implement recalls. On March 19, the WSDA issued a letter to stakeholders, stating that processors “may experience more frequent inspections, as well as more outreach efforts and industry engagement.” WSDA intends to inspect MIE-producing facilities within 12 months of the endorsement and may collect additional information during those inspections. Processors who make ownership, location, or product changes must submit materials to both WSDA and LCB.

If you hold a processor license that currently produces MIEs, you need to apply for this special endorsement this month to continue operating. This firm is very familiar with licensing procedures and can assist your business throughout the process of applying for this new endorsement. Feel free to contact us with any questions and stay tuned for additional updates.