This article is the second part of a two-part article which provides an overview of Texas cannabis-related legislation and regulations affecting Texas cannabis operators and consumers. Part I covered the State’s regulations for limited medical cannabis use and consumption. In this article, we will discuss the State’s hemp program for both consumable and non-consumable products.
The Miseducation of Hemp – from Banned Substance to Emerging Industry
Hemp is a variety of the cannabis sativa plant which is processed in at least 2 distinct ways: one for its fiber (sometimes known as industrial hemp, and referenced in Texas statutes as non-consumable hemp products) and another for its extracts, such as CBD oil (referred to in Texas statutes as consumable hemp products).
In the 1700s, North American farmers were legally required to grow hemp as a staple crop; Thomas Jefferson is even rumored to have written a draft of the Declaration of Independence on hemp paper. Over time, cotton production overshadowed hemp production, especially with the advent of the cotton gin in the late 1700s. In the 1930s, new machinery dramatically lowering the cost of hemp production became available, threatening synthetic textiles and paper pulp industries. Ultimately, anti-hemp lobbying efforts ruled the day, and the U.S. government banned hemp production altogether in 1937 via the Marihuana Tax Act.
Except for a brief period during World War II, hemp production was prohibited until the 2014 Farm Bill, which, among other things, distinguished “hemp” (i.e., cannabis containing no more than 0.3% THC) from “marihuana” under the Controlled Substances Act of 1970 (“CSA”), and, in states that legalized hemp cultivation, authorized certain institutions to conduct hemp research and pilot programs to evaluate whether hemp farming would be beneficial for American farmers and businesses. Texas declined to participate in this hemp research and pilot program.
Congress subsequently passed the Agricultural Act of 2018 (colloquially known as the “2018 Farm Bill”), which expanded upon the 2014 legislation by broadening the definition of hemp to include extracts and cannabinoids derived from the cannabis plant, and more importantly, removed hemp from the CSA. The 2018 Farm Bill also empowered states to regulate commercial hemp farming after obtaining approval of such plan from the U.S. Department of Agriculture (“USDA”). Beyond pilot programs, the 2018 Farm Bill allows hemp cultivation, authorizes crop insurance for hemp, and expressly allows transfer of hemp-derived products across state borders for commercial or other purposes.
Deep in the Heart of Texas
The Texas plan for hemp production was signed into law on June 10, 2019, and approved by the USDA on January 27, 2020 (as approved, the “Texas Plan”). The Texas Plan permits the production, manufacture, retail sale, and inspection of both consumable hemp products and non-consumable hemp products containing no more than 0.3% THC. Put simply, a person may possess, transport, sell or purchase (i) consumable hemp products processed or manufactured in compliance with the Texas Plan, and (ii) non-consumable hemp products legally produced in Texas, or sell at retail non-consumable hemp products manufactured outside of Texas if such product was cultivated lawfully and such retail sale does not violate federal law. Texas local governments may not enact, adopt or enforce any rule, ordinance, order, resolution or other regulation prohibiting the cultivation, handling, transportation or sale of hemp as authorized by the Texas Plan.
Consumable Hemp Products
The Department of State Health Services (“DSHS”) is responsible for establishing a licensing system for the manufacture, processing, and distribution of consumable hemp products and creating a registration process for retailers of CBD-containing consumable products. After review of more than 1,700 comments received during the formal rule comment period, DSHS recently released final rules and regulations, effective August 2, 2020.
Smokable Hemp – Up in the Air?
Most controversial in the final regulations, DSHS banned the manufacture, processing, distribution, or retail sale of consumable hemp products for smoking. In doing so, Texas has joined the ranks of Iowa, Louisiana, Massachusetts, and North Carolina in banning smokable hemp. Opposition recorded at least 1,690 comments against this ban on retail sale of smokable hemp; however, DSHS resisted changing its position, reasoning that it would be difficult for law enforcement in the field to distinguish between smoking legal hemp flower and smoking non-hemp cannabis, which remains illegal in Texas. In an attempt to clarify its stance, DSHS noted that properly tested and labeled hemp flower potentially has multiple uses, e.g., it can be marketed and labeled as a tea or a food additive, which are not subject to the retail ban.
Not surprisingly, a challenge to this smokable hemp ban is working its way through Texas courts. On September 18, 2020, a Texas state district court judge issued a temporary injunction in a case styled Crown Distributing LLC et al. v. Texas Department of State Health Services, blocking DSHS from enforcing the ban or assessing any fines or other penalties for such violation until the underlying lawsuit is tried; the trial date is currently set for February 1, 2021.
License and Registration
A consumable hemp products license is needed in order to manufacture, process or distribute consumable hemp products, which is valid for one year, and, if an applicant desires to license more than one facility, then each facility must be listed on a separate application. The application must include GPS coordinates for the perimeter of each location where the applicant intends to manufacture, process or store consumable hemp products; and the applicant must give DSHS, the Department of Public Safety or any other state or local law enforcement agency written consent to enter all such locations and to conduct a physical inspection to ensure compliance (if the applicant does not own the location, the property owner thereof must provide such written consent). Finally, the applicant must pass a fingerprint-based background check. Of note, DSHS will not issue a license if any applicant has been convicted of a felony relating to a controlled substance under federal law or the laws of any state within 10 years prior to the application date. In the event DSHS issues a license to such an applicant and later receives information of such conviction, the license shall be revoked.
Any retail seller of consumable hemp products containing CBD is required to first register with DSHS. The registration process includes identification of each location a registrant owns, operates, or controls at which such products are sold. The registration requirement does not extend to a retail seller’s employees or independent contractor selling the registrant’s products at retail. Retail registrations are valid for one year. Registrants are neither subject to fingerprint-based background checks, nor do the applicable laws and regulations provide any restriction with respect to registrants convicted of a felony relating to a controlled substance under federal law, or the laws of any state within 10 years prior to the application date.
Hemp and hemp derivative products are subject to testing as appropriate for the product and process by an accredited laboratory to determine the presence and concentration of THC levels and cannabinoids, and the presence and quality of residual solvents, heavy metals, pesticides, and harmful pathogens. A “Certificate of Analysis” is issued in connection with such conducted tests. Testing results must be provided to DSHS upon request and must be retained for at least three years from the date results are made available to the license holder. In addition, retail sellers must provide testing results to a consumer upon request. DSHS is further authorized to conduct random testing at retail or other sale or distribution facilities, or request representative samples of raw or finished consumable hemp product from a manufacturer, processor, distributor, or retailer to confirm compliance with applicable laws and regulations.
Note, a consumable hemp product is not required to be tested under Section 300.301 of the regulations if each hemp-derived ingredient of the product has been previously tested, includes such testing results before distribution or sale, and contains an acceptable THC level. All consumable hemp products marketed as containing more than trace amounts of cannabinoids must comply with certain labeling requirements, including lot number and date, product name, manufacturer name and contact information, and a Certificate of Analysis that the delta-9 THC content is within a distribution or range that includes of 0.3% or less. If a person sells, offers for sale, or distributes a cannabinoid oil and claims the product is processed and manufactured in compliance with the Texas Plan but in fact is not in compliance, consumer claims related to non-compliance fall under the purview of the Deceptive Trade Practices-Consumer Protection Act.
Free Flow of Hemp Commerce
Within Texas, retailers may sell consumable hemp products that are processed or manufactured outside of Texas, so long as such products are processed and manufactured in compliance with the originating jurisdiction’s hemp program plan (as approved by the USDA) and in accordance with its laws, provided the products are tested in accordance with, or in a manner similar to, Texas’s testing requirements for consumable hemp products and comply with federal regulations. In the event DSHS requests evidence of compliance, the retailer must comply.
Consumable hemp products processed or manufactured in Texas may also be legally transported across state lines and exported to foreign jurisdictions in a manner that is consistent with federal law and the laws of respective foreign jurisdictions.
Non-Consumable Hemp a/k/a Industrial Hemp
The Texas Department of Agriculture (“TDA”) is responsible for regulating the planting, inspection, testing, and harvesting of hemp crops, as well as the processing and manufacture of non-consumable hemp products (sometimes referred to as industrial hemp). Earlier this year, TDA promulgated and adopted regulations and, on March 16, 2020, began accepting license applications for hemp cultivation. There is no wait list, no limit to the number of hemp producer licenses available, and license applications are processed on a first-come, first-served basis.
License to Grow Handle, Sample, and Collect
TDA requires a license in order to produce, handle, sample, or collect hemp in Texas, or transport hemp outside of the state. Licenses are valid for one year, and renewal applications require the same level of information and approval criteria. The license application includes providing contact information for all key participants, completion of TDA’s mandatory orientation course, and payment of all required fees. Each applicant, including key participants of an entity, must be at least 18 years old and undergo a criminal background check.
No license will be issued if the applicant and, if applicable, all key participants covered by the license application, has been convicted of a felony relating to a controlled substance under state or federal law within the last 10 years, with certain limited exceptions. Any person who has had its hemp licensed revoked by TDA, USDA, or another U.S. jurisdiction or Indian nation is ineligible to submit a license application within five years from the date of revocation. Further, following such period, TDA may deny an application for any lawful reason, including previous conduct in connection with such revocation.
How Does Your Garden Grow?
If an applicant seeks a producer and/or handler license, the application must identify GPS locations for each and every facility and lot the applicant intends to use for such activities. One license can cover several facilities and lots; however, each facility must be separately listed and is subject to separate registration fees, and each lot within each facility requires a separate lot permit and separate lot permit fees.
With respect to facilities, license applicants must also provide proof of ownership or control over such location. In the event an applicant leases such real property, the landlord or real property owner must also pass certain eligibility hurdles, including: (1) the landlord must itself not be ineligible for licensure under TDA hemp program requirements; and (2) the landlord must not be a person whose own application or renewal application under the TDA hemp program was denied, or whose license was terminated or revoked.
Following TDA license approval, the licensee must obtain a TDA lot permit for each lot intended for hemp production and handling. As part of the lot permitting process, the license holder must provide the GPS location of the lot where the hemp variety will be planted, the facility where the lot is located, and anticipated dates of cultivation. In the event of change in GPS location of a lot, TDA will consider the revision as a new lot. Once a lot has been harvested (or disposed, as the case may be), the licensee must obtain a new lot permit in order to plant a new lot of hemp.
A license holder may produce or handle hemp or other cannabis in or on a facility, only if such facility is identified on its license application (including renewals) or a facility addition or modification request approved by TDA. Hemp must be physically separated from other crops unless TDA provides prior written approval to the license holder. Hemp plants located in an area beyond what is licensed by TDA, and plants not accounted for in required reporting to TDA, are considered unauthorized and must be destroyed at the license holder’s expense and without compensation from the State of Texas, USDA or the federal government. As a condition to holding a license, the licensee shall provide: (1) TDA, the Drug Enforcement Administration (“DEA”), the Department of Public Safety, and local law enforcement agencies complete and unrestricted access to all hemp plants, whether growing or harvested, and all facilities used for the production and storage of all hemp in all locations where hemp is produced or handled; and (2) access to TDA to conduct random inspections to verify that hemp production and handling are compliant with applicable state and federal laws.
Before the Harvest, Sample First
Hemp crops on any lot may not be harvested until a licensed sampler has collected samples on such lot. No fewer than 15 days prior to an expected harvest date, the licensee must submit a completed sample request form to TDA for a site inspection and sample collection. A delay in harvesting beyond 15 days triggers a licensee requirement to notify TDA of such delay by submitting another completed sample request and initiating a subsequent sample collection from each lot to be harvested. Samples are then transported and tested at a registered laboratory in accordance with TDA’s Sampling and Collections Procedure, with results to be delivered electronically to TDA and the licensee within 14 business days from the sample collection date. Once samples have been collected, the applicable hemp crop may be harvested before results are known, but in any event, within 15 days of collecting such samples.
Per TDA’s final regulations, TDA-registered laboratories for testing hemp samples must also be registered with the DEA, to be consistent with federal regulations. However, USDA issued guidance delaying enforcement of this DEA registration requirement, such that hemp sample testing may be conducted by labs which are not yet registered with the DEA until the final rule is published, or October 31, 2021, whichever comes first.
Within 30 days after a final sample is collected from a lot (but in no event later than 180 days after the lot permit issue date), the licensee must provide to TDA a lot report which includes, among other things: (i) the disposition of cannabis plant materials produced or handled within the lot, such as harvest, disposal, transplanting, cloning, distribution, processing, sale or other use; (ii) certification as to whether any living cannabis plants remain in any lot identified in the lot report, and if so, whether licensee intends to cultivate such plants or dispose of the same; and (iii) report and certify any disposal of cannabis plants, including date and method of disposal.
Some Like It Hot – But Not Hemp Growers
The licensee may only sell or use its hemp plants from the lot that sampling test results reflect an “acceptable hemp THC level”. Sampling test results include a “measurement of uncertainty” (which can vary by laboratory), resulting in a distribution or range with respect to hemp’s THC levels. In considering whether a sample is within an acceptable hemp THC level, TDA factors in the measurement of uncertainty, and if such distribution or range includes a THC level of 0.3% or less, then TDA considers such sample within an acceptable hemp THC level. For example, if a laboratory’s measurement of uncertainty is 0.06% greater or less than the reported THC levels, then a sample from this laboratory reported as 0.35% THC ranges from 0.29% THC to 0.41% THC after applying this measurement of uncertainty. In this example, because the range includes 0.3% THC, the sample is within the acceptable hemp THC level for the purposes of compliance with the Texas Plan.
If, after applying the measurement of uncertainty, the sampled hemp still exceeds 0.3% THC (i.e., the sampled hemp tests “hot”), a license holder must destroy, at the licensee’s expense and without compensation from the State of Texas, USDA or the federal government, all material found to be in excess of the acceptable hemp THC level. A licensee may request a retest within five days after receiving results; provided that all retests shall be of the original samples and retesting must be conducted by the same laboratory which conducted the original tests. If the samples again test hot, the entire lot must be destroyed in strict compliance with applicable requirements (including USDA’s Hemp Disposal Activities Guidelines), and the licensee must contact an appropriate DEA-registered reverse distributor or other authorized person or entity to request such disposal of non-compliant cannabis plants. The licensee must, no later than seven days of a final test (or retest, if applicable), submit a completed disposal report to TDA, which in turn potentially triggers a field inspection. In the event that sampled hemp tests hot, TDA does not consider a hemp producer to have committed a negligent violation, provided that such producer makes reasonable efforts to grow hemp, and the sampling test or retest results do not exceed 0.5% THC.
In the event TDA determines the cannabis plants represented by the sample reached that concentration solely as a result of negligence, the license holder is subject to negligent violation provisions but may also take the following corrective actions: (1) trim the cannabis plants until THC levels do not exceed 0.3% and dispose of the non-compliant parts in a manner approved by TDA; (2) process the cannabis plants into fiber with THC levels not to exceed 0.3% and dispose of the non-compliant parts in a manner approved by TDA; or (3) any other corrective action consistent with federal regulations applicable to non-consumable hemp.
Consulting the Farmer’s Almanac
Aside from potential or perceived issues with the laws and regulations themselves, however, Texas farmers may find another challenge – the weather. The hemp plant thrives in a mild, humid climate with good soil moisture. Texas, as compared to some other states, faces more severe and prolonged heat, potential drought and torrential rain during the planting season. Many Texas farmers are seeing limited hemp crop yields, and for the lucky few, the heat and drought threaten to raise THC levels beyond legal limits. To compound the issue, virtually all domestic crops are subject to extensive research; however, relatively little research has been conducted on hemp, particularly with respect to Texas weather conditions and other factors affecting the planting season and harvest. Finally, the USDA announced a pilot hemp insurance program for select counties in 21 states for the 2020 crop year, which provides coverage against loss of yield because of insurable causes of loss. However, the program is not yet available to Texans, who will continue to bear the risk of loss if their hemp crop investments do not yield their projected harvests.
The Road Ahead
Although Texas was not an early adopter of a legal hemp program, it is making strides to catch up. TDA announced its first industrial hemp license was issued on April 9, 2020, and more recently, shared that 5,000 acres were licensed for hemp production in the program’s inaugural year. Texas is also shoring up its infrastructure. For example, although there is currently no facility in place to process raw hemp into a consumable hemp product, a few processing facilities are expected to open state-wide before year-end.
Critics of the consumable hemp product explosion cite poor labeling and lax standards from a consumer protection standpoint, to restrictive labeling and standards from a manufacturer and seller standpoint. There is also the cloud of confusion when it comes to the legality of smokable hemp, with many Texans and non-Texans alike hoping the Crown Distributing lawsuit is resolved to allow the retail sale of some form of smokable hemp. It is indeed a long road ahead, but we Texans are a resilient bunch.