Washington Upends Its CBD Industry

Last month, Washington governor Jay Inslee signed SB 5367, a largely unpublicized bill “concerning the regulation of products containing THC”. Among other things, the bill amends the definition of “cannabis product” in the state’s Controlled Substances Act to include products with any detectable amount of THC concentration.

Selling such CBD products will require licensure by the Washington State Liquor and Cannabis Board (WSLCB), effective July 23, 2023. The WSLCB is set to vote on initiating the rulemaking process under the state’s administrative procedures act on July 21. Although rulemaking won’t commence for a month, any business manufacturing or distributing CBD products for sale in the state Washington should begin to prepare for this sea change today.

What does SB 5367 do?

The bill amends the definition of a cannabis product in Revised Code of Washington (RCW) 69.50.101 to include “any product intended to be consumed or absorbed inside the body by any means including inhalation, ingestion, or insertion, with any detectable amount of THC” (my emphasis). The former definition of a cannabis product meant “useable cannabis, cannabis concentrates, and cannabis-infused products”. Clearly excluded from that definition were CBD products with a THC concentration of less than 0.3%, as that threshold was the defining characteristic of cannabis under state and federal law.

The bill also adds the defined term “hemp consumable” to RCW 15.140.020, which means:

“a product that is sold or provided to another person that is: (a) made of hemp; (b) not a cannabis product as defined in RCW 69.50.101; and (c) Intended to be consumed or absorbed inside the body by any means, including inhalation, ingestion, or insertion.”

This added definition clarifies that a hemp consumable, be it a smokable hemp joint, CBD tincture, etc. may not have any THC in it whatsoever.

Also important, is that the bill changed the definition of “THC concentration.” The new definition no longer references delta-9 THC. There are several types of THC in cannabis plants, delta-9 being the most commonly known because it is the most prevalent and intoxicating form of THC. The removal of delta-9 from the definition of THC content is important because it broadens the criteria for a product being considered a cannabis product.

The conclusion of the federal regulators and agencies, as evidenced by the Farm Bill, is that products containing less than 0.3% delta-9 THC are incapable of producing intoxicating effects. So, the insistence by Washington lawmakers that hemp-derived CBD products contain 0.0% of any THC isomer doesn’t read like a public health initiative. Rather, it seems like the cannabis lobby successfully using the lawmaking process to recapture a significant part of the CBD industry. This is made pretty clear when we consider that one of the open questions is whether the production of CBD products containing over 0.0% THC will now require a WSLCB cannabis producer license.

Consequences of WSLCB regulating all Washington CBD commerce

For years, large sectors of the U.S. CBD industry have been producing CBD products in line with the 2018 Farm Bill (“Farm Bill”). The Farm Bill made the production and sale of hemp and hemp derived products federally legal, so long as they contain less than 0.3% delta-9 THC. Most states have deferred to the feds (outside of the FDA context) and the U.S. CBD products market has since grown into a multi-billion dollar per year industry doing $5.3 Billion in sales in 2021. That figure is projected to grow to $16 Billion in 2026.

CBD products are sold at many, many retail stores in Washington at the moment, from bodegas on Aurora to Wholefoods in Bellingham, and everywhere in between. The prevalence of CBD products in Washington retail stores raises a serious question for these retailers about how (and whether?) the WCLCB will enforce the law. In any case, Washington is showing itself to a be true outlier with SB 5367, by forcing these sales through its state cannabis regulator’s pipeline.

We should also note that there are processing methods that isolate only CBD from the hemp plant that exclude all THC and other cannabinoids. Producers of these CBD products, the retailers that buy these products for resale, and the consumers of them won’t be negatively affected by this bill. With that said, a lot of Farm Bill legal CBD products do have some detectable amount of THC in them. Those products will now be considered cannabis products in Washington. Subject to rulemaking and absent any further guidance on the matter, it seems like those products will only be available for sale in a WSLCB licensed retail cannabis dispensary.

The economic impacts of this bill are sure to be enormous. To highlight just a few:

  1. CBD producers of products containing federally legal amounts of THC in Washington will lose access to a much larger retail market: they will be forced to sell their products exclusively in WSLCB licensed cannabis dispensaries.
  2. E-commerce CBD sales account for 40% of the U.S. market and CBD producers from out of state will be faced with complicated compliance questions including whether selling online directly to consumers in Washington is legal anymore.
  3. Retailers without a WSLCB cannabis retail license are going to have to terminate supply contracts and liquidate existing inventory. Many will ultimately lose out on revenue from selling products previously considered lawful and not requiring special licensure.

WSLCB enforcement is an open question

We don’t yet know how the WSLCB is going to enforce this new law or whether it will wait pending completion of the rulemaking process. As noted above, the WSLCB is having a meeting on June 21 and a vote will be held to initiate a pre-proposal statement of inquiry (a “CR-101”). This is part of the rulemaking process under the state’s administrative procedures act that is necessary where bills signed into law by the governor require interpretation and specific rules on how an agency will be enforcing a new law.

The WSLCB needs to provide clarity on several open questions. If the state’s position is that both the production and sale of all products containing detectable levels of THC now requires a WSLCB cannabis license, SB 5367 will be a massive boon to the state cannabis industry. If a processor must chose between: a) changing its methods so a WSLCB license is not required, or b) partnering with WSLCB licensed producers and processors, many may chose the former.

Relate to this analysis, Washington has placed a moratorium on issuing new cannabis licenses; so it is not as if businesses thrown out of compliance by SB 5367 can merely apply for and obtain a cannabis license. Equally important, many CBD products with detectable levels of THC sit on shelves all over the state right now. The possibility of all of them being removed by July 23 seems remote at best. What are these retailers to do with that product if they cannot sell it before July 23? What will the penalties be for violations? Will there be a grace period of some sort? The state needs to provide guidance on these and other questions so that stakeholders can prepare themselves.

We’ll be following developments from the state on this emerging issue here.

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Hemp/CBD, Washington