This article originally appeared in Cannabis Business Executive and is republished here with permission.
The rapid evolution of the cannabis industry in the United States poses many unique questions, the most interesting of which is what cannabis regulation will look like under federal legalization. Although (legal) cannabis is a brand new industry, this is not the first time that the United States has emerged from an era of prohibition. The cannabis industry can learn from the regulatory regimes governing the alcohol industry to facilitate a smoother transition to an era where the recreational use of cannabis is no longer a taboo in our society. This article provides an overview of the current regulatory systems for both industries, the main regulatory bodies, the merits of the alcohol industry’s three-tier system as a model for cannabis, and the applicability of laws on direct-to-consumer (DTC) alcohol for cannabis.
Current Alcohol and Cannabis Regulations
Alcoholic beverages are regulated at the federal, state, and local levels in the United States. The main federal agencies are the Alcohol and Tobacco Tax and Trade Bureau (TTB) of the Treasury and the Food and Drug Administration (FDA). The TTB plays by far the largest role and its implementing regulations include licensing, product labeling, product formulation and advertising requirements.
Alcoholic beverages are also subject to the provisions of the Food, Drugs and Cosmetics Act regarding adulteration and misbranding. The FDA has generally agreed with TTB through Memoranda of Understanding that TTB will be the lead agency for labeling, formula, and ingredient requirements.
Because the 21 The amendment (which ended prohibition in 1933) provided special deference to state liquor laws, federal liquor regulations do not automatically anticipate state regulations as they do for other heavily regulated products. As such, states play a key role in regulating alcohol by requiring licenses for producers, distributors, wholesalers, retailers, transporters, etc. ; collecting taxes; and enforcement of trade practice requirements.
Federal and state alcohol laws mandate a “three-tier system” in which alcohol is first sold by a producer or importer to a distributor or wholesaler, and then to a retailer. Vertical integration was prohibited and traditionally producers could not circumvent distributors or wholesalers.
Despite the three-tier system, a growing number of state DTC laws allow producers and/or retailers of alcoholic beverages to ship DTC products via common carrier or deliver DTC products via last-mile delivery services or by their own employees. These laws are most common for wine, but less so for beer and spirits.
Cannabis, unlike alcoholic beverages, remains illegal at the federal level and is currently only regulated at the state and local levels. Some states completely ban cannabis businesses, while others only allow medical use. Nineteen states and Guam allow the sale of cannabis for recreational purposes.
As with alcohol, the route to market for a cannabis product depends entirely on the state in which the company operates. Within states, the distribution chain for cannabis is similar to that for alcohol: most states allow all elements of the supply chain, from cultivation and manufacturing to transportation and retail. . Unlike alcohol, while some states prohibit vertical integration in the cannabis industry by further mandating a three-tier system, many other states either require vertical integration (more common in medical markets) or allow the industry to choose by offering licenses to the same company. for different levels. This flexibility allowed growers direct access to their customers, but it also allowed dominant multi-state operators to expand their footprint across cultivation, manufacturing, distribution, and retail sectors.
Cannabis DTC services are currently geographically limited to the area around the delivering retailer (similar to pizza delivery). Due to its federal illegality, manufacturers cannot ship cannabis via USPS or other major common carriers.
Main regulatory bodies
As described above, the TTB is the primary federal alcoholic beverage regulatory agency, with the FDA playing an important but minor role. Although state agencies play a more dominant role in the day-to-day operations of liquor businesses, TTB regulations provide a degree of uniformity that makes it easier for businesses to comply with state laws. For example, the TTB’s labeling and formula requirements make it easier for alcoholic beverage companies to market brands nationwide, and many states simply require applicants to provide TTB endorsements upon registration.
Typically, state liquor commissions, or similarly named agencies, are the primary state regulators, with some authorities overlapping with revenue departments (for tax laws) and tax departments. font (for application support).
With respect to any future federal legalization, many states and cannabis companies would prefer to see a regulatory model similar to alcohol, in which deference is given to states to regulate the industry within their borders. according to the will of their constituents and representatives. Ideally, the federal government would play a minimal role in the cannabis industry, enforcing federal licensing and excise tax collection, as well as labeling requirements. In this scenario, a federal agency, such as TTB, could take the lead and other agencies, such as the FDA, could provide support and advisory roles, depending on each agency’s particular expertise and background. . To the extent that federal law does not specify which agency has the lead role, the TTB, FDA, and other relevant federal agencies could formally agree on clear and delineated regulatory oversight responsibilities between them.
At the state level, it makes sense to combine adult cannabis and alcoholic beverage industry oversight in the same agency. If cannabis for adults were to be regulated in the same way as alcoholic beverages, including by reviewing existing alcoholic beverage laws and regulations, it would be counterproductive for different agencies to take different views on substantially similar laws. related to each industry.
The three-tier system
The three-tier system was designed, in part, to prevent foreclosure by a vertically integrated dominant producer and to stimulate competition. Although the three-tier system has advantages, by its very nature it prevents a producer from having direct access to retailers and consumers. Larger distributors may tend to focus on their larger suppliers, so smaller, newer manufacturers may find that larger distributors refuse to distribute their brands or may not pay as much attention to marketing their brands if they agree to sell them.
Given the varied approach states are currently taking to distribution and the desire for traceability and security in the transportation of cannabis, it may make sense to adopt a hybrid model for the cannabis industry at the federal level. For example, a federal agency might offer producer, distributor, and retailer licenses, but not prevent the licensee from holding interests in another license category.
DTC shipments and deliveries
DTC technology, however, has advanced to the point where most tax collection and evasion issues are easily resolved. It’s likely that as this technology continues to advance and more third-party companies offer services to help with age verification, licensing, and tax compliance, we’ll see more states pass laws regarding this new model of alcohol sales.
Federal legalization will result in interstate shipping of cannabis products, and the cannabis DTC industry should learn lessons about age verification and safety from the alcoholic beverage industry. While this may not be one of the first developments in the cannabis legal regime at the federal level, we expect CIPH regulation to become a major part of the cannabis framework given that today’s consumers have grown accustomed to the world of on-demand delivery and shipping that so many other industries already provide.