AUTHORS

Madeline S. Knight and Michael J. Bennett

Maddy Knight and Michael Bennett  are currently third year law students at Vanderbilt University School of Law

Introduction

“Tax it and regulate it” has long been used as a selling point to states considering the legalization of recreational cannabis. Many have done just that after making the move to legalize cannabis, or marijuana. Most states have a taxation and regulation scheme that work in tandem to promote safe use. Common regulatory schemes for the production and distribution of marijuana include licensing standards, excise taxes, taxation of the seller, and THC-content requirements. This list, however, is far from exhaustive. While cannabis manufacturers, distributors, sellers, and consumers have a general idea of blanket compliance requirements, the variation among states is vast. Similarly, not only do the compliance requirements change across state-borders but so, too, does the legality of products one might wish to sell or buy. One of these products growing in prevalence is Delta-8. As lawmakers find themselves facing the loophole created by the 2018 Farm Bill, which has left confusion surrounding Delta-8 at a federal level, the resulting state cannabinoid market has been burdened by a flurry of confusion and a myriad of legal approaches. Many businesses and individuals in the cannabis industry who have complied with state requirements do not see their hemp-based competitors doing the same. In some cases, lawmakers view Delta-8 as a dangerous substance to be kept away from citizens. Under such circumstances, although excise taxes have generally played a diminished role in financing the federal government since the mid-20th century, states have long used sumptuary (or “sin”) excise taxing to generate revenue and impede to the use of negative externalities on society. These taxes are selective taxes on specific forms of consumption or behavior, unlike those general sales taxes that tend to apply to all forms of consumption. Today, excise taxing applies to a variety of goods and behaviors across the country thought to encourage negative effects on society like tobacco, e-cigarettes, vaping, indoor tanning, or firearms. Although the majority of United States citizens support both the legalization and regulation of marijuana, its use has become a large target for these taxations on perceived undesirable behavior. Similar approaches, in which legislatures are adopting such taxes, have begin to take rise among state regulatory schemes, especially within states where marijuana remains broadly illegal. Alternatively, other states have either sought to regulate the production and distribution of Delta-8 or ban it entirely. Whether attempting to limit the level of THC, impose testing requirements by the states’ agricultural departments, dictate the manner of consumption, or ban it entirely, little consensus exists among states regarding the appropriate treatment of Delta-8. Similar state disparities exist with respect to marijuana. At a federal level, marijuana is a Schedule I controlled substance under the federal Controlled Substance Act (CSA). Despite this, it is increasingly common for states to have laws or policies that allow for medical and/or recreational use of marijuana—activities that violate the CSA. Currently, twenty-three states (including Washington, D.C and Guam) have acted to legalize recreational marijuana, and more have amended laws to allow for the use of medical marijuana or decriminalize marijuana use. In those states where marijuana is legal in some capacity, legislatures have had the ability to tax and regulate the industry. Conversely, in those states where only low-tetrahydrocannabinol (THC) products are allowed, those regulatory and taxation schemas are beginning to take shape.  This article will first explain what Delta-8 is, which has been the source of confusion for many attempting to legislate around it. From there, this article will provide developing regulatory approaches across states in which Delta-8 remains legal. In cataloguing three different state approaches, the vast divergence that is rapidly growing among states will echo what cannabis industry professionals have long been saying: the cannabis industry needs uniformity in regulation of its own products, and now its competitors, more than ever. 

The Product at Issue

Marijuana refers to the dried leaves, flowers, stems, or seeds of the cannabis plants, either cannabis sativa or cannabis indica plant. These cannabis plants are made up of a variety of chemical compounds, known as cannabinoids; while these plants contain more than 500 components, only 104 of them have been identified. Of the identified cannabinoids, three of these components have been subject to extensive scientific investigation: Delta-9-tetrahydrocannabinol (Delta-9 THC), Delta-8-tetrahydrocannabinol (Delta-8 THC), and cannabidiol (CBD). The potency of these products is evaluated primarily according to a sample’s THC concentration, which is the primary psychoactive cannabinoid in cannabis, and the main difference is this potency. Delta-8 is an isomer of Delta-9, meaning it has similar atoms and molecular structure, but is less potent. CBD, however, is the non-psychoactive counterpart to THC found in both regular cannabis and in hemp plants; it is not—unlike Delta-9—a potent source of THC. In fact, CBD is considered legal in all states, although conditionally in some places, so long as it contains less than 0.3% THC.  CBD, however, undergoes a conversion process to convert CBD into Delta-8 through a synthetization process. Delta-8 can thus be a natural occurring product, or a synthetic product seized from CBD. While Delta-9 THC has been determined to be the compound responsible for the intoxicating effects of cannabis, although Delta-8 is present in cannabis, it is present only in negligible amounts and in its natural form, cannot cause the same psychoactive effects. This duality has complicated the regulatory status of Delta-8, since the Agriculture Improvement Act of 2018 removed hemp and hemp products containing less than 0.3% Delta-9 THC from the legal definition of marijuana in the Federal Controlled Substances Act. For Delta-8, hemp was defined as including “all derivatives, extracts, cannabinoids, isomers, acids, salts and salts of isomers, whether growing or not.”  Because Delta-8 can be both an isomer of Delta-9 THC and a derivative of CBD when obtained from the cyclization reaction, it may be considered to fall under this definition. On the other hand, there is an argument that the cyclization reaction makes the resultant Delta-8 a synthetic cannabinoid and therefore a controlled substance. Due to this technicality in the definition, Delta-8 has essentially become unregulated at the federal level and often unregulated at the state level. There are increasing concerns about the impurities present in the Delta-8 products sold to consumers due to the lack of regulations, and as states have taken their positions, the legal landscape of Delta-8 and other cannabis derivatives has become a minefield for industry professionals. Moving forward, excise taxation and industry-wide regulation may become a necessary mechanism to aid in the regulation of these products and the protection of the heavily taxed and regulated cannabis industry.

Delta-8 in a Legal Gray Area

Delta-8 seems to exist in a legal gray area, with many state laws making it unclear whether the product is legal, partially so, or completely illegal. In three states where marijuana is legal, Delta-8 is regulated to the extent that its sale is limited only to state-regulated marijuana retailers (Connecticut, Michigan, and Nevada). In some states, like Washington, where marijuana in all forms is legal, producers of Delta-8 must pay a mandatory fee to retain licensure under the Washington Hemp Program with no consumer offset. In other states where marijuana in all forms is entirely legal, like Rhode Island, legislatures have banned Delta-8 completely. Currently, the various classifications have given rise to a myriad of state approaches, yet industry players should be aware of the emerging trends in jurisdictional regulatory efforts.

• Tennessee

Despite the change in legality across many states, marijuana remains widely illegal in the state of Tennessee as a Schedule VI substance. In Tennessee, however, marijuana is defined to exclude hemp, as defined in § 43-27-101. Delta-8, delta-10, HHC, THC-O and other intoxicating cannabinoids are classified as “hemp-derived cannabinoids” under Senate Bill 378, which passed in May 2023. This bill levies a privilege tax of 6 percent of the sales price of products containing a hemp-derived cannabinoid when sold at retail in this state in addition to the state’s sales tax rate of 7 percent. It also requires sellers to obtain state licenses and abide by product-testing standards promulgated by the Department of Agriculture.  Tennessee has become one of the first states to implement such a regulatory regime in which cannabis remains illegal, and Delta-8 is not only legal but also regulated and taxed. Although the Tennessee State Legislature has introduced the “Free All Cannabis for Tennesseans Act,” which would legalize and regulate cannabis with an additional fifteen percent sales tax, as it stands, it is unlikely that the action will pass. Currently, those wanting to sell Delta-8 products in the state of Tennessee confront only the 6 percent privilege tax in addition to the state sales tax. Retailers and manufacturers, however, should be aware of the simultaneous regulatory impacts, which mandates both (1) full-panel testing on all active cannabinoid molecules to be conducted prior to final production of products containing a hemp-derived cannabinoid; and (2) potency testing to be conducted on finished goods to confirm potency is consistent with stated potency on the packaging to be required following July 1, 2024. This is unlike some states in which testing is done by the laboratory producing the product, and more closely resembles testing conducted by state departments, like Colorado’s Department of Public Health and Environment.

• New Jersey 

• Banning versus Regulating 

The New Jersey legislature recently passed Bill A5440 in a near unanimous vote, which prohibits the sale of Delta-8 in the state. The Bill now moves to the Governor’s desk to sign. This is a growing movement within states that have legalized recreational cannabis. Other states, like New Hampshire and Missouri,  have been swiftly moving to ban Delta-8 instead of enacting regulations. The logic behind these decisions is that states have already created a regulatory apparatus for cannabis and know that it can be safely used. Instead of creating a similar apparatus for Delta-8 and other cannabinoids, states would rather prohibit the use of the synthetic products.

• Social Equity Approaches 

In some states, excise fees are imposed as a means of furthering social equity. In New Jersey, for example, there is a Social Equity Excise Fee (SEEF) that, as of January 1, 2023, came to $1.52 per ounce of recreational cannabis. Although hemp is explicitly excluded from the state’s definition of cannabis, the definition includes “every compound, manufacture, salt, derivative, mixture, or preparation of the plant or its seeds.” Furthermore, marijuana includes “all cannabis that tests as having a concentration level of THC on a dry weight basis of higher than 0.3 percent.” While Delta-8 products can only fall under federal legal standards if containing under 0.3 percent of THC, there is no requirement that a Delta-8 product must contain so little. In other words, depending on the THC amount, Delta-8 in New Jersey could potentially fall under the definition of cannabis for the sake of the SEEF. Under such circumstances, SEEF has been designed to eliminate the problems caused by the unregulated manufacturing, distribution, and use of illegal marijuana within New Jersey. In recognition of significant racial disparities related to marijuana possession despite similar usage rates, controlling and legalizing cannabis and marijuana products enhances public health and minimizes harm to New Jersey communities and families. As it claimed in enacting the SEEF, New Jersey could not “afford to sacrifice public safety and individuals’ civil rights by continuing its ineffective and wasteful” enforcement policies. The same justification holds true for Delta-8 products falling outside the legal definition of cannabis.

• California

In California, marijuana has been legal since November 2016 when voters approved Proposition 64 (Adult Use of Marijuana Act). Since then, the California legislature has passed several laws regulating cannabis, including the Medicinal and Adult Use Cannabis Regulation and Safety Act., which set forth requirements for licensing, distribution, delivery, testing, labeling, auditing, information sharing, and equity. It also created the Department of Cannabis Control to carry out state regulations. Assembly Bill 195 revised the Cannabis Tax Law and imposed an excise tax of 15 percent, which is passed onto the consumer, paid in addition to the other taxes required in California, such as sales tax (7.25%) and licensing fees. Importantly, cannabis retailers must also register with the state for the payment of the excise tax. Delta-8 and other hemp-derived products are subject to similar regulations. The state has promulgated registration requirements, inspection plans, planting requirements, and enforcement mechanisms to regulate the production and consumption of hemp-derived products. Unlike marijuana, Delta-8 and other hemp-derived CBD products are not subject to an excise tax. This could allow consumers to purchase Delta-8 and other synthetic alternatives at a cheaper price than they are able to purchase cannabis. The legal marijuana industry in California has struggled in recent years, with the state moving to repeal the Cultivation Tax in 2022. The cheaper alternatives to highly regulated and highly taxed products could put an even stronger weight on the back of cannabis industry leaders that operate by the book. Moreover, the lack of regulation on Delta-8 potentially undercuts significant social justice programs implemented by the state. The City of San Francisco, for example, has created an equity applicant program to ensure that those most impacted by the War on Drugs were able to prosper from the legalization of cannabis. As such, many formerly incarcerated individuals or the families of formerly incarcerated individuals have taken advantage of the incentives offered by the program. Yet, California’s excise tax on cannabis and the lack thereof on Delta-8 could jeopardize their position in an already struggling market.

• What Is to Come

The United States Food and Drug Administration has still yet to greenlight the use and sale Delta-8 products at a national level. Quite conversely, the FDA claims the use of Delta-8 products “put the public health at risk” and may be “dangerous to consumers.” Despite a value of 6.4 billion dollars in 2022, with an annual growth rate expected to sit at 16.2 percent until 2030, there are talks among federal government agencies to ban nearly all Delta-8 products currently on the market. The Drug Enforcement Agency stated that delta-8 and delta-9 THCO—unlike delta-8 and delta-10 THC that is naturally derived from hemp—fall within the Controlled Substances Act’s definition of marijuana. This recent statement contradicts prior statements, but with several states deciding issues of Delta-8’s legality or choosing to ban it entirely, the DEA is expected to promulgate laws that would effectively ban Delta-8 across the country. As a topic of interest at a DEA conference, Terrence Boos, chief of the DEA Diversion Control Division’s Drug & Chemical Evaluation Section, indicated that the DEA will propose a new limit of no more than 0.1 percent THC on a weight-to-weight ratio in hemp-derived products. If enacted, federal drug laws would capture any cannabinoid “manufactured synthetically rather that [sic] produced by extraction from the plant” and would dramatically change the CBD market landscape. As it stands, the DEA’s timeline remains unclear, but the agency’s rulemaking process will allow for comments on the eventual proposal from the public, including industry players, to be received up to 180 days before the final rule is developed. The DEA’s proposal will eventually be available in the Federal Register.  

A State-by-state survey

Several states are marked as places in which Delta-8 is likely banned. These states are Indiana and Kansas.   Indiana: Although Delta-8 may be legal in the state of Indiana, the Attorney General has issued an opinion stating that Delta-8 THC, Delta-10 THC, and THCP are schedule I controlled substances pursuant to Ind. Code § 35-48-2-4-(d)(31). The opinion further states that Indiana law schedules the extracts of all cannabis species, making only limited exceptions for substances with concentrations below 0.3 percent delta-9 THC. Although not binding law, this suggests that Delta-8 with concentrations of THC higher than 0.3 percent are banned. Another opinion was issued in January 2023, which classified Delta-8 as a Schedule I controlled substance. Kansas: The Kansas Attorney General issued an opinion in 2021 stating that Delta-8 was a prohibited substance, which has since been removed from the Kansas government platform. The opinion stated that “Delta-8 tetrahydrocannabinol (Delta-8 THC) comes within the definition of a Schedule I controlled substance and is unlawful to possess or sell in Kansas unless it is made from industrial hemp and is contained in a lawful hemp product having no more than 0.3% total tetrahydrocannabinols (THC).” Johnson County District Attorney has subsequently declared that businesses must remove Delta-8 products from their stores. This is all against the backdrop of Senate Bill 282, which legalized all hemp compounds (including Delta-8) in May 2018. There remains, then, a question surrounding the legality of Delta-8 in Kansas.  South Carolina: South Carolina passed the Hemp Farming Act (H3449) in March 2019, which legalized industrial hemp in line with the limits specified in the federal Farm Bill. Despite this, the South Carolina Attorney General’s Office issued an opinion in October 2021, stating that it believed delta-8 THC is illegal under South Carolina law, essentially because THCs remain on the state’s controlled substances list. This opinion points out that “all isomers” of THC are Schedule I controlled substances, unless specifically exempted, and then also points out that the Hemp Farming Act creates one such exemption. Despite attempting to argue the opposite, this suggests that delta-8 THC is legal provided that it meets the definition of hemp. This opinion was issued in response to the Police Chief Mark Keel, so regardless of the “correct” interpretation, the South Carolina Law Enforcement Division’s position is also that delta-8 THC is illegal in the state. In line with this opinion, the Department of Agriculture issued guidance on its website, stating that the “Hemp Farming Act does not provide an exception for, and does not legalize, delta-8 THC.”

States are deploying a variety of regulatory methods to control the sale and use of Delta-8, with the following methods being the most prevalent.  Content Requirements: In several states, the regulatory compliance for Delta-8 products is only the requirement that a product contain 0.3% THC content in total or less. This is consistent with the federal government’s exemption for hemp as any part of the cannabis sativa plant with no more than 0.3% of THC—anything over that ventures into illegality.  The same content restriction applies in several states, including: California, Florida, Georgia, Iowa, Louisiana, Maine, Maryland, Nebraska, Nevada, North Carolina, Ohio, Oklahoma, South Dakota, Texas, Wisconsin, and Wyoming.  Tax: Imposition of various taxing schemas are also developing across states.  In New Mexico, Delta-8 is legal, and cannabis is defined to include “every compound, manufacture, salt, derivative, mixture or preparation of the plant, its seeds or its resin…” for the purpose of the Cannabis Tax Act (N.M. Stat. Ann. § 7-42-1), which currently imposes a 12% excise tax on retailers that sell in the state, including those who sell Delta-8.  In Oregon, Delta-8 is allowed and classified as an “Adult Use Cannabinoid.” Oregon’s Liquor and Cannabis Commission-licensed marijuana retailers are required to charge a retail sales tax of 17 percent for all recreational marijuana—including Delta-8—sold. In some cases, retailers must also charge customers an additional 3 percent for Oregon localities. In Pennsylvania, Delta-8 products are legal under the Pennsylvania State Hemp Plan. The Pennsylvania Department of Revenue considers CBD and hemp products as tangible personal property, and thus tax percentages are determined by product type—sometimes subjected to other tobacco products tax depending on the form.  Testing: Typically, states use their Department of Agriculture to conduct testing on Delta-8 products, with language that provides that “[t]he planting, growing, harvesting, possessing, processing or research of industrial hemp as an agricultural product shall be subject to the supervision and approval of the [D]epartment [of Agriculture]” as in Massachusetts. While limitations on THC content, labeling, or taxing usually accompany such requirements, some states have not provided these provisions in their laws regulating Delta-8.  Testing, Labeling: For some, concerns regarding consumer confusion have shaped the regulatory requirements for Delta-8. In those states, labeling requirements exist alongside other compliance requirements.  In Kentucky, for example, beginning on August 1, 2023, the Cabinet for Health and Family Services will promulgate regulations for the testing of Delta-8 products. In addition, each product manufactured, marketed, sold, or distributed must be packaged and labeled in compliance with the state’s Fair Packaging and Labeling Law. In Virginia, a hemp product or industrial hemp extract may contain more than two milligrams of THC if the product or extract contains an amount of cannabidiol that is at least 25 times greater than the amount of THC. Any person that intends to manufacture, sell, or offer for sale a substance intended to be consumed orally that contains an industrial hemp-derived cannabinoid must submit an Edible Hemp Products Disclosure Form. Any edible products that contain THC must be in child-resistant packaging and bear a label with specific information and be accompanied by a certificate of analysis produced by an independent, accredited laboratory. Retailers must have the laboratory’s certificate of accreditation available for review. In addition, these products are subject to packaging, labeling, and testing requirements of the Food and Drink Law that, if are not met, carry civil penalties of up to $10,000.  Other regulatory approaches take an even more comprehensive approach, integrating various approaches to control the manufacturing and sale of Delta-8 products.  In Tennessee, the legislature established a new, 6% sales tax for the privilege of engaging in the business of selling products containing a hemp-derived cannabinoid that became effective July 1, 2023. This applies in addition to the 7% state sales tax rate. Additionally, the enacted law requires producers and retailers to contract with an accredited third-party laboratory to test products containing a hemp-derived cannabinoid after being manufactured to determine the presence and amounts of cannabinoids, heavy metals, microbials, mycotoxins, pesticides, and residual solvents. The law requires each batch manufactured to undergo testing and obtain a certificate of analysis. Labeling is required to contain various warnings and disclaimers including “an expiration date, a list of ingredients and possible allergens, a nutritional fact panel, the total amount of hemp-derived cannabinoid in the entire package, and a code that can be scanned to access a website providing certain information, including the method of analysis for the testing report required.” As for licensure, the law requires a person in the business of manufacturing or selling products containing a hemp-derived cannabinoid to obtain a license from the Department of Agriculture authorizing the person to engage in that business prior to the commencement of business or by January 1, 2024, whichever is later. As of June 9, 2023, West Virginia put forth the Select Plant-Based Derivatives Regulation Act: Industrial Hemp. With a goal to “allow limited, regulated access” to Delta-8, the Commissioner of Agriculture and the Alcohol Beverage Control Commissioner is responsible for effectuating effective regulations “so as to not interfere with the strict regulation of controlled substances” in the state. These regulations require regular sampling and testing to determine purity levels; labeling that includes an explicit warning for children, pregnant individuals, and those on medication; age verification for sales; an 11 percent privilege tax on the retail sales price on each sale of hemp-derived cannabinoids; and a permit process put forth by the Commissioner. Although these regulations impose significant hurdles for retailers, manufacturers, and consumers, they do not ban Delta-8 entirely contrary to some sources.