Commercial Hemp in Arizona? Not Yet!

The recently-enacted Farm Bill (H.R. 2) federally decriminalizes hemp. But what exactly does that mean here in Arizona? This post takes a closer look.

Why was hemp illegal under federal law?

In 1970, Congress enacted the Controlled Substances Act (CSA) to establish a controlled system for the manufacture and distribution of certain substances. The law placed these substances into one of five categories – or Schedules – based upon the substance’s medical use, potential for abuse, and safety or dependence liability.

The CSA also assigned criminal penalties for the manufacture, distribution, dispensing, or possession of drugs listed in Schedule I, including marijuana, which were deemed to have a high potential for abuse, no currently accepted medical use in treatment, and a lack of accepted safety for use under medical supervision.

The statute broadly defines marijuana to include any variety of the plant Cannabis sativa L., including lower THC-producing hemp plants. So, although hemp contains significantly lower levels of tetrahydrocannabinol, the psychoactive chemical of the cannabis plant, its cultivation was nonetheless prohibited along with its more popular cousin, marijuana.

Did the 2018 Farm Bill deregulate hemp?

No. It decriminalized hemp, but it did not deregulate it. There’s a difference. Congress partially decriminalized hemp in the 2014 Farm Bill (H.R. 2642) by exempting so-called “industrial” hemp (hemp with a THC level of no more than .3 percent dry weight basis) from the CSA if it is cultivated pursuant to state law for research purposes by a state agricultural department or institution of higher education.

The 2018 Farm Bill goes beyond the 2014 bill to entirely decriminalize hemp by removing hemp with a THC level of no more than .3 percent from the definition of marijuana in the CSA. For purposes of that law, hemp is no longer listed in Schedule I and no longer subject to the criminal penalties in the CSA.

But Congress did not deregulate hemp entirely. In conjunction with decriminalizing it, the 2018 Farm Bill establishes a new regulatory framework for the cultivation of hemp for commercial purposes. The law creates a bifurcated regulatory scheme administered by the USDA in which states and Indian tribes can opt for “primary regulatory authority” over commercial hemp production and submit to the USDA a hemp regulatory plan, which essentially includes a licensing scheme, THC testing and inspection procedures, and other regulatory requirements. The USDA has 60 days to approve or reject a plan and state and tribal governments can submit amended plans to perfect approval.

Alternatively, the USDA acts as the primary regulator in states or on tribal lands where plans are not approved. Similarly to the state and tribal plans, the USDA must provide for licensing, testing, inspections, and other procedures.

In the 2018 legislative session, Arizona enacted the necessary state law (SB 1098) (set to take effect on August 4, 2019) to comply with the more narrow agricultural pilot program enacted in the 2014 Farm Bill. The law also authorizes the commercial production of hemp once it is given the green light federally.

Does federal law or state law govern commercial hemp production?

It depends. This is due to some curious preemption provisions in the law. The short answer is that, for commercial hemp to be grown in a state or on tribal land, the state or tribe must – at a minimum – authorize commercial hemp production. Now comes the long answer.

State or tribe as “Primary Regulatory Authority”

In the instance of a state/Indian tribe that submits a plan to the USDA, the state/tribe must obviously first have a law in place legalizing hemp (with no more than .3 percent THC!) for commercial production, must authorize the necessary officials to administer the hemp production plan, and – to the extent it deems necessary – impose penalties for failure to abide by such plan.

The Farm Bill does not preempt the laws of these jurisdictions if the law is more stringent than federal law. The very next subparagraph of the Farm Bill, however, authorizes states/Indian tribes to cite to their commercial hemp laws for support in their proposals to the USDA (seems rather a necessity for USDA approval, but whatever) BUT only to the extent that such law is consistent with the Farm Bill. The Farm Bill goes on to instruct the USDA to approve state/tribal hemp production plans if they comply with the requirements of the statute.[1]

So, which is it? Must the state/tribal law be more stringent than or merely consistent with the Farm Bill for its plan to be approved and state/tribe achieve the status of “primary regulatory authority” over commercial hemp? It’s unclear. Hopefully the regulations to be issued by the USDA will flesh out whether a state/tribal law must meet or exceed the requirements of the Farm Bill and how that is achieved.

The Farm Bill separately preempts state/tribal laws that impose criminal penalties for the negligent violation of their hemp plans (arguably something that would be more stringent than federal law). One way a producer can violate a hemp plan is to grow hemp with a THC level above .3 percent, which by definition then is marijuana. BUT, if a hemp producer is found by the state or tribal government to have violated the hemp plan by acting with a higher mental state than negligence (reckless, knowing, or intentional), then all bets are off and none of these preemption provisions apply to that violation. Arizona statutes require that a person knowingly engage in prohibited acts involving marijuana, so those laws won’t be preempted by the Farm Bill. Also, SB 1098 authorizes the Department of Agriculture to impose civil penalties for licensing or other regulatory violations and imposes criminal penalties for intentional violations of the law, neither of which should be preempted by the 2018 Farm Bill.

USDA as “Primary Regulatory Authority”

The USDA becomes the primary regulatory authority of commercial hemp production if two things occur – 1) if a state or Indian tribe plan is not approved and 2) hemp production is not prohibited by state or tribal law. It’s unclear from the statute whether a state must submit a plan and that plan must be rejected in order for USDA jurisdiction to kick in. The bill text in several instances says “for which a State or Tribal plan is not approved under Section 297B.” What if a state/tribe doesn’t want to be the primary regulatory authority and therefore doesn’t submit a plan to the USDA? Can a plan never submitted be “not approved”? Boy, it would have been a whole lot clearer to simply throw in a clause that says “or opted not to submit a plan.” Another thing for USDA regulations to clear up.

A state/tribe that does not want to be the primary regulatory authority must nonetheless not prohibit commercial hemp production, which is legal-speak for they must authorize it.

Does Arizona need to enact a new law authorizing commercial hemp production?

Probably not. In anticipation of future hemp decriminalization, SB 1098 provides that “if authorized under federal law, the commercial production, processing, manufacturing, distribution and commerce of industrial hemp in this state is allowed outside of the agricultural pilot program.” The law also exempts from Arizona’s criminal marijuana penalties acts relating to hemp production both for the agricultural pilot program and broader commercial production (if federally authorized).

SB 1098 gives the Arizona Department of Agriculture rulemaking authority to carry out industrial hemp cultivation in the state, which also includes commercial production now that it has been approved federally. This should be sufficient for the state to move forward with submitting a commercial hemp production plan to the USDA once final federal regulations – and state regulations – are in place. To accelerate the Arizona rulemaking process, Arizona Senator Borrelli, the sponsor of SB 1098, has pre-filed SB 1003 for the 2019 legislative session to move up the SB 1098 effective date to May 31, 2019 and instruct the Department to issue initial rules by this date.

Can you grow hemp commercially in Arizona?

Not yet! First, federal, state and tribal rules need to be finalized and Arizona’s hemp production plan (and any plans submitted by an Arizona tribal government) need to be approved by the USDA (or not). Growers must then be properly licensed either by the state, tribe or USDA.

Are there any restrictions on commercial hemp products?

Yes! Industrial hemp can be used for a wide variety of products including clothing, health foods, construction materials, biofuels, and plastic composites. But arguably the most popular – and profitable – hemp product is cannabidiol or CBD oil. The Farm Bill did NOT legalize CBD oil – or THC for that matter. In fact, the law expressly preserved the FDA’s authority to regulate products containing cannabis or cannabis-derived compounds under the Federal Food, Drug, and Cosmetic Act (FD&C Act) and section 351 of the Public Health Service Act.

Following the Farm Bill’s enactment, FDA Commissioner Scott Gottlieb issued a statement cautioning that cannabis products marketed as therapeutic or with any other disease claim must first be FDA approved. “Selling unapproved products with unsubstantiated therapeutic claims is not only a violation of the law, but also can put patients at risk, as these products have not been proven to be safe or effective.”

The same is true for food products or dietary supplements containing CBD or THC. The statement continues: “Under the FD&C Act, it’s illegal to introduce drug ingredients like these into the food supply, or to market them as dietary supplements. This is a requirement that we apply across the board to food products that contain substances that are active ingredients in any drug.”

The FDA has approved one cannabis-derived product, Epidiolex, used for the treatment of seizures, which was officially approved in June. The FDA has also approved three parts of the hemp plant that do not contain CBD or THC – hulled hemp seeds, hemp seed protein, and hemp seed oil as “generally recognized as safe,” meaning they can be legally marketed in human foods.

So what needs to be done?

A lot. First, those interested in growing hemp need to participate in the federal rule-making process to get questions answered in USDA regulations so they are not at risk in the future. Second, those same folks need to participate in the state rule-making effort, knowing that state regulations will be the workhorse of Arizona’s compliance with the 2018 Farm Bill and will only kick in after the feds are finished. Third, potential commercial growers need to develop business plans that ensure compliance with a future USDA-approved state hemp production plan and protect them from buyers who might use their crops for non-FDA approved therapeutic products, dietary supplements, or the like that could expose the grower to enforcement action by the FDA.

Commercial hemp production is coming to Arizona, but there is work to be done first.

[1] The text says the USDA must approve a plan if it complies with the requirements of subsection (a) of the new Section 297B governing state and tribal plans. But state and tribal plans must also adhere to enforcement mandates in subsection (e) governing negligent violations by growers, repeat violations, corrective action plans, reporting requirements, and prohibitions for convicted felons and those who make materially false statements in their hemp production applications.