Dealing with droughts is part of life in California, but an extension to the state’s self-imposed ban on hemp-derived THC drinks looks set to further stress an already reeling industry.
Prior to their scheduled expiration this month, California’s Department of Public Health extended a six-month ban on “intoxicating hemp products” imposed in September for another three months. Now set to expire on June 24, the emergency measure can be readopted only one more time, according to California law.
Gov. Gavin Newsom’s directive in the fall was intended to “strengthen California’s ability to stop the peddling of intoxicating hemp products to California’s children.” But many hemp industry stakeholders contend that the emergency measures are creating a black market for hemp-derived THC products and encouraging questionable actors to lean into the opportunity opened by the lack of regulatory framework.
“It’s unfortunate to see an extension of emergency regulations that have proven to be ineffective in terms of protecting the consumer – which was the primary goal,” said Diana Eberlein, chair of the Coalition of Adult Beverage Alternatives (CABA). “Bans hurt the good actors, not the bad ones.”
The CABA, along with other industry groups like the Hemp Beverage Alliance and the U.S. Hemp Roundtable, have been lobbying extensively in the last year for hemp-derived delta-9 drinks to be regulated through similar systems overseeing the alcohol industry.
California’s emergency regulations are a “real-time case study” of the “ineffectiveness” of bans, Eberlin said. “Many states are proposing regulation of low dose beverages, adopting infrastructures similar to the 3-tier system, including a reasonable tax structure where that revenue can be put towards enforcement and removal of the bad actors in the intoxicating hemp marketplace.”
Currently, Texas, Florida and Georgia – three of the biggest markets where hemp-derived beverages are still sold in retail – have bills moving through statehouses that would severely limit or effectively ban the products from store shelves.
‘Normal’ But “Inappropriate’
The debate over hemp’s place within the recreational THC market is playing out in other arenas as well. There is an escalating battle between cannabis companies that operate under the regulated framework and hemp brands that have capitalized on the grey area opened via the 2018 Farm Bill.
A lawsuit in the Superior Court of San Diego County between the two sectors exemplifies the turf-war over how and where hemp products should be sold.
While it was “procedurally normal” for California to readopt its emergency measures, the decision to address health concerns and brands flooding the market with untested and potentially harmful products was “wildly inappropriate from the start,” said cannabis industry lawyer Eric Postow, managing partner at Holon Law Partners.
“Instead of a sweeping ban, the state and Governor Newsom should have pursued a narrowly tailored solution to address specific concerns,” he said. “This move underscores a failure to legislate effectively, leaving businesses and consumers caught in regulatory uncertainty.”
Newsom’s decision to rein in the hemp industry came after a legislative bill failed in August to amend the state’s existing oversight of intoxicating hemp products to the Department of Cannabis Control. Previously, Newsom had been a proponent of legalized cannabis, lobbying for Proposition 64 which allowed recreational adult use in 2016. Later as governor, he passed Assembly Bill 45 which regulated industrial hemp in food and beverage.
Brands Remain ‘Hopeful’
The current ban on “intoxicating hemp products” not only pulls many low-dose THC drinks from retail shelves but also deprives the state of a potentially huge tax opportunity if detailed regulation were in place.
Richard Lee, CEO of Massachusetts-based hemp-derived THC seltzer brand Woodstock Goods and regulated cannabis sister company Woodstock Products, was “not surprised” to see California readopt the ban but is “hopeful” that, given more time, “rational heads” in the state can implement a framework to get “reasonable taxes” on hemp-based drinks.
“As someone who also operates a company on the recreational side in California (only high-dose, non-beverage consumables), we are likely going to be subject to an excise tax increase in July [between] 15% to 19%,” he said. “Unfortunately, that will overburden an industry already reeling from illicit market competition and high taxes. Also unfortunately, both of these moves [higher regulated product taxes and banning hemp-derived THC] strengthen the illicit market, without making it any safer for consumers.”
Other suppliers in the category were also cautiously optimistic that California’s readoption remains a short-term hindrance that will lead to more sensible regulation and enforcement.
Florida-based Triple has not stopped innovating while awaiting a decision by lawmakers on the fate of hemp beverages in California. The brand just launched a 5mg THC Triple Drop social drink enhancer available online while its leadership team lobbies for less stringent regulatory barriers to retail distribution in Florida.
“We are disappointed to see California extend its emergency ban on intoxicating hemp products, as it limits consumer access to tested and responsibly made beverage alternatives to alcohol,” said COO Will Spartin. “However, we remain hopeful that the voices of Californians who want legal, mainstream access to these beverages will be reflected in future legislation.”
Cantrip Seltzer is also leaning into ways to innovate around some states’ regulations, using XO reclosable lids on all its products in order to meet child-resistant requirements in Kentucky, Tennessee, Georgia, Florida and Rhode Island.
In terms of California, CEO Adam Terry remains “optimistic” that given the potential tax upside, cannabis business-friendly regulation is on the horizon.
At the time of its initial implementation, Beau Whitney, founder of cannabis industry economics firm Whitney Economics, said California’s hemp-derived total potential market (TAM) was about $3.65 billion. He estimated that about $258 million in potential tax revenue would be lost as a result of the six-month ban. That number will only go up the longer restrictions are in place.
“It’s important to remember this is a regulatory action, not a legislative one,” Terry said. “It can be overwritten by lawmakers if they pass a new law regarding hemp beverages.”