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.

industrial hemp cannabis farm bill
We like this one.

For the past few months, the U.S. Senate has made significant strides toward legalizing industrial hemp. That is welcome news to many of our clients, who are working with the plant under federally approved Agricultural Pilot Programs, while also dealing with almost absurdly complex issues surrounding the legality of cannabidiol (“CBD”) sales.

The legislative developments began in earnest earlier this year, when Senate Majority Leader Mitch McConnell (R-KY) introduced the short and sweet Hemp Farming Act of 2018 (the “Hemp Farming Act”), which aims to lift an 80-year old ban on hemp as an agricultural commodity. We analyzed that development here.

Then, on June 5th, the Senate adopted its third annual non-binding resolution that recognized “the growing economic potential of industrial hemp” and its “historical relevance,” further suggesting Congress’s intention to legalize the non-psychoactive cannabis cousin of marijuana. Around the same time, Senate Leader McConnell incorporated the Hemp Farming Act into the wide-ranging agriculture and food policy bill known as the 2018 Farm Bill to ensure a greater chance of success, and it worked. Last week, the Senate overwhelmingly approved the 2018 Farm Bill, including the Hemp Farming Act, by an unambiguous 86-11 vote.

As with the Strengthening the Tenth Amendment Through Entrusting State Act (the “STATES Act”), which we covered here and here, the Hemp Farming Act provides for the removal of industrial hemp from Schedule I of the Controlled Substance Act (“CSA”). This removal would explicitly legalize the cultivation, processing and sale of all hemp-derived products, including CBD. This means that if cannabis legislation continues to move forward in Congress—which seems highly probable given the fact that the Hemp Farming Act has passed the Senate and that the STATES Act has reached the House—Congress will likely reconcile these pieces of legislation and industrial hemp prohibition will end.

In addition to removing industrial hemp as a Schedule I drug of the CSA, the passage of the Hemp Farming Act into law would:

  • Empower states and tribes to regulate the production of hemp without fear of federal intervention;
  • Permit farmers to grow, process and sell hemp-derived products as an agricultural commodity, which in turn would create economic opportunities and stimulate economic growth in rural communities;
  • Make hemp plants eligible for crop insurance;
  • Ensure access to public water rights for hemp farmers;
  • Enable hemp farmers to access the national banking system;
  • Recognize that some hemp-derived products, such as CBD oils, have valid medical use;
  • Make hemp-derived products eligible for federal trademark protection; and
  • Advance research opportunities by enabling hemp researchers to apply for grants with the U.S. Department of Agriculture.

Although the passage of the Hemp Farming Act in the Senate is a promising step toward the legalization of industrial hemp, more hurdles must be overcome before the federal legality of hemp becomes the law of the land.  The Hemp Farming Act now must be merged with a competing version from the House, which does not provide for the legalization of industrial hemp, before it can reach President Trump’s desk for signature.

Whether the final version of the Hemp Farming Act will become law is purely speculative at this point; however, the fact that Senate Majority Leader McConnell (i.e., THE most powerful senator) is its most fervent supporter seems to suggest that the Hemp Farming Act is likely to survive and (hopefully) become law. We will definitely keep you posted.

In the meantime, for more on industrial hemp and CBD, check out the following:

trademark cbd hemp
Official USPTO position on industrial hemp CBD marks.

With the cannabidiol (CBD) industry continuing to boom, I’ve had numerous inquiries from my CBD-selling clients regarding federal trademark protection for their CBD brands, particularly when the CBD they are selling is derived from Farm Bill hemp and grown in accordance with a derivative state program.

I’ve discussed the “legal use in commerce” requirement for federal trademarks at length in other posts, so I won’t go into too much detail here. But the gist is that in order to procure federal trademark protection for your mark, the goods and/or services for which you are claiming trademark protection must be legal pursuant to federal law. Because the manufacture, distribution and dispensing of cannabis is illegal under the Controlled Substances Act, the lawful use in commerce requirement cannot be met.

But what about CBD? This is the question I’m hearing on a near daily basis. If my CBD products are “legal under federal law,” why can’t I obtain federal trademark protection? To begin with, the federal legal status of CBD is still tenuous and complicated, and the USPTO’s position here only serves to affirm that. But there is one particularly informative case that helps to illustrate the USPTO’s position on CBD trademarks.

On December 5, 2014, Stanley Brothers Social Enterprises, LLC filed a U.S. federal trademark application for CHARLOTTE’S WEB, to be used on “plant extracts, namely, hemp oil sold as a critical component or ingredient of dietary supplements.” That application has been alive and the subject of multiple office actions from the examining attorney since, including a final office action that was issued on April 20th of this year (harsh). This final office action is very interesting, because the refusal to register the mark was made final for unlawful use in commerce on two grounds: Lack of compliance with the Controlled Substances Act (CSA) and lack of compliance with the federal Food, Drug & Cosmetic Act (FDCA). I’ll take each of the USPTO’s lawful use determinations in turn.

The Examining Attorney used a pretty standard argument in deeming the Applicant’s goods unlawful pursuant to the CSA stating:

“[i]n this case, the items or activities in the application with which the mark is used involve a per se violation of federal law. See In re Brown, 119 USPQ2d at 1352. Specifically, federal law prohibits the sale, distribution, dissemination and possession of marijuana. That is, under the [CSA] prohibits, among other things, manufacturing, distributing, dispensing, or possessing certain controlled substances, including marijuana and marijuana-based preparations.”

The Examining Attorney goes on to note that the Applicant’s specimens submitted with its application show that the “goods are dietary supplements infused with or which are comprised of cannabidiol (CBD) which is derived from what applicant has called industrial hemp plants which is grown in Colorado.” The Applicant also provided a statement to the USPTO that the goods are “comprised of CBD derived from the plant Cannabis sativa L and that applicant obtains the CBD from more than just the mature stalks and sterilized seeds of the plant. Applicant processes the entire plant including the resins, stalks, stems, buds and flowers …”. Therefore, the Examining Attorney deemed Applicant’s CBD to be derived from the portions of the hemp plant that are unlawful under the CSA.

Interestingly, the Applicant also made a tertiary argument that CBD is a cannabinoid found in other plants which are not members of the Cannabis Sativa L family such as Echinacea (coneflower), Heliopis helianthoides (oxeye), etc.. Notwithstanding the accuracy of these assertions, this is an argument I’ve seen made on other trademark applications. But the key here is that the CBD contained in Applicant’s goods is not obtained from any of these other plants. It is obtained from Cannabis sativa L, and therefore falls within the definition of marijuana under the CSA.

The Examining Attorney also determined that the Applicant’s goods are not in compliance with the FDCA, which prohibits the introduction or delivery for introduction into interstate commerce of a food to which has been added a drug or a biological product for which substantial clinical investigations have been instituted and for which the existence of such investigations has been made public. 21 U.S.C. §331(11). The U.S. Food and Drug Administration (FDA) has stated that substantial clinical investigations of cannabidiol have begun and thus products containing CBD may not be sold as dietary supplements. Applicant plainly indicates that its goods are a dietary supplement, both in its application and on its website, and the Examining Attorney analyzes why CBD does not fall into any of the FDA exceptions that would allow it to be marketed as such.

In wrapping up his analysis, the Examining Attorney made a final argument entitled “The 2014 Farm Bill Did Not ‘Legalize’ Hemp on a National Level.” The Applicant here argued that “its goods are not prohibited under either the CSA or the FDCA [because] the 2014 Farm Bill, 7 U.S.C. Section 5940, has effectively overruled the FDCA as well as the CSA by declaring that hemp is a legal product at the federal level and that all things made from hemp are, therefore, legal.” Applicant also argues that the omnibus law prohibits the expenditure of federal funds to prohibit the transportation, processing, sale or use of hemp that is grown or cultivated under the 2014 Farm Bill. Here’s the relevant portion of the 2014 Farm Bill:

“[N]otwithstanding the Controlled Substances Act, or any other federal law, an institution of higher education or a State department of agriculture may grow and cultivate hemp if (1) the industrial hemp is grown or cultivated for the purposes of research conducted under an agriculture pilot program or other agricultural academic research and (2) the growing or cultivating of the industrial hemp is allowed under the laws of the State in which such institution of higher education or State department of agriculture is located and such research occurs.” 7 U.S.C. Section 5940(a).

And here is the Examining Attorney’s succinct response:

“Although applicant is correct that the cited portion of the Farm Bill states that ‘industrial hemp’ is Cannabis sativa L which is less than 0.3 percent tetrahydrocannabinol (THC) on a dry weight basis, the Farm Bill did not make ‘hemp’ and everything made or extracted from hemp ‘legal’ on a nationwide basis as applicant contends. Section 7606 of the 2014 Farm Bill, 7 USC Section 5940, merely allowed universities and/or state departments of agriculture to create pilot programs to grow Cannabis sativa L with a THC content of less than 0.3 percent for purposes of conducting academic or scientific or marketing research. However, this marketing research did not extend to general commercial activity nor did it make all hemp related goods ‘lawful’ on a federal level. The 2014 Farm Bill provision, for example, did not allow those participating in a state pilot program to sell seeds or plants to consumers in other states nor did it allow for goods made under the program, such as applicant’s dietary supplements, to be sold in states which have not established similar pilot programs … The Federal Register notice goes on to state that Section 7606 of the 2014 Farm Bill, 7 USC Section 5940, did not amend the federal Food, Drug and Cosmetic Act’s requirements for obtaining FDA approval for new drug applications or the requirements for conducting clinical trials and research prior to such approval, or the FDA’s oversight of marketing claims such as those in the Warning Letter addressed to applicant. With regard to the Controlled Substances Act, the Farm Bill provision did not alter the provisions of the CSA that apply to the dispensing, distribution and manufacture of drug products containing controlled substances. ‘Manufacturers, distributors, dispensers of drug products derived from cannabis plants, as well as those conducting research with drug products, must continue to adhere to CSA requirements.’ Federal Register, Vol. 81, No. 156 (August 12, 2016). With regard to ‘marijuana,’ a Schedule I prohibited substance, this means that anything which falls within the statutory definition of marijuana, 21 USC Section 802(16), cannot be distributed or disseminated in interstate commerce. This means that if applicant is extracting CBD from all parts of the Cannabis sativa L plant, as applicant has stated, then the goods are marijuana and cannot be sold in interstate commerce under the CSA.”

So, there you have it. The USPTO’s take on CBD derived from Farm Bill hemp is that it is, for the reasons outlined above, ineligible for federal trademark protection.

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.

oregon hemp cbd
So it goes with Oregon hemp.

In the past six to twelve months, we have seen an extraordinary increase in businesses and individuals interested in growing and processing industrial hemp. This is especially true in Oregon, where Department of Agriculture (ODA) grower and handler registrations are fast, cheap and easy to acquire. In many cases, these registrants are cultivating and processing hemp in order to create cannabidiol (CBD) based products. The products can be sold state-wide without limitation, including into the Oregon Liquor Control Commission (OLCC) adult use marijuana market via hemp-endorsed OLCC processors.

Other entrepreneurs, in Oregon and elsewhere, are extracting CBD for sale interstate. This is a legally nebulous area at the federal level, although interstate sales are not prohibited under Oregon law. With CBD isolate changing hands at upwards of $4,500 per kilo, however, and given the proliferation of CBD products making their way into big box retail, many businesses and individuals feel the risk is worth taking. Perhaps for this reason, we have been getting numerous weekly inquiries as to the viability of CBD sales interstate, especially as of late.

From a state rules perspective, Oregon has taken significant steps in the past several months in building out its industrial hemp regime. We wrote about the recent OLCC rules promulgated in December, which allowed for ODA hemp registrants to sell into the OLCC market; and more recently we wrote about House Bill 4089, which tied up a number of loose ends related to the tracking of those sales. The upshot of all of this is that we now have unprecedented interplay between the OLCC and ODA markets. And as the OLCC hustles to write rules implementing HB 4089, there is a fair bit of confusion about what is actually allowed.

One question that keeps coming up is whether an OLCC processor applicant may process ODA hemp (under both ODA and OLCC rules) while waiting to receive its license from OLCC. According to our reading of the rules, recently confirmed to us by OLCC, the answer is “yes.” Much in the way that marijuana growers used to attempt to “squeeze in” a medical marijuana crop pending their OLCC inspection and licensure, ODA hemp processors can float their operations by processing industrial hemp while in line with OLCC. Note that this is allowed even for ODA processors that are not seeking a hemp endorsement in their OLCC processor applications.

Of course, ODA, local fire marshals and other state or local actors may place limitations on hemp processing operations, or may require certain approvals. And just like with medical marijuana growers converting to OLCC production, OLCC may require that all hemp and hemp-derived items be removed from the processor’s premises as a condition of passing the necessary site inspection. If you think about it, this makes sense: Under OLCC rules, a licensed marijuana processor may not have hemp on its premises except if endorsed to receive that hemp via the OLCC Cannabis Tracking System (CTS) from an ODA grower or handler. Thus, pre-existing hemp items must be removed from the OLCC applicant’s premises prior to receiving the OLCC license.

Once licensed by OLCC with a hemp endorsement, the OLCC processor may receive hemp concentrates and extracts from ODA handlers, and the OLCC processor may receive raw hemp, hemp commodities and hemp products from ODA growers. Note that any form of hemp the OLCC processor receives from an ODA registrant must 1) come with clean ODA test results; and 2) be logged in CTS. Regarding the latter requirement, this means that no sale or transfer is allowed outside of OLCC channels, or to anyone other than OLCC wholesalers and retailers.

Finally, regarding ODA hemp processors–including those businesses waiting in the OLCC application queue–that’s another story. In keeping with the analysis above, those processors can sell their hemp products to anyone under Oregon law. When it comes to interstate sales and federal law, though, that’s a whole ‘nother question.

Happy 4/20.