DSHS Proposed Rules Part II

If you joined us for Parts I through III of this Series, you will know that the Texas Department of State Health Services (“DSHS”) published its proposed rules to govern the Texas consumable hemp program (the “DSHS Proposed Rules”) in the Texas Register on May 8, 2020. The DSHS Proposed Rules are open for public comment for 31 days, meaning the public comment period closes on June 7, 2020. To provide comment on any of the draft rules, you can submit your comments directly to DSHS via email to [email protected]. When emailing comments, you will need to indicate “Comments on Proposed Rule 19R074 Hemp Program” in the subject line. Written comments may also be submitted to Rod Moline, Ph.D., R.S., Section Director, Mail Code 1987, Texas Department of State Health Services, P.O. Box 149347, Austin, Texas 78714-9347. 

Part IV: Registration for Retailers of Consumable Hemp Products

Application and Registration Requirements

According to the DSHS Proposed Rules, you may not sell consumable hemp products containing CBD at retail unless your retail location registers with DSHS for each location selling consumable hemp products that you own, operate, or control. Title 25 TAC § 300.501(b). Employees and independent contractors of registrants who sell the registrant’s products at retail do not have to register with DSHS. See id. at § 300.501(c).

Applications for registration must be submitted by the owner, owner designee, or operator and must include the following information:

  • (1) the name under which the business is operated; 
  • (2) the mailing address of the facility; 
  • (3) the street address of each location;
  • (4) the primary business contact telephone number;  
  • (5) the phone number for each location; and 
  • (6) the primary business email address. Id. at § 300.502(b).

 

Retailers must submit their applications and fees for registration electronically through www.Texas.gov and, if approved by DSHS, the proof of registration shall be noticeably displayed in a location visible to the public. See id. at § 300.502(d)-(e). 

Similar to the consumable hemp products license, registration is valid for one year and may be renewed annually as long as the registrant remains in good standing. See id. at § 300.502(c). You may be asking, “[w]hat exactly does ‘good standing’ mean?”  For clarity on such ambiguous provisions, DSHS needs to receive public comment during the 31-day public comment window. 

All fees for registration with DSHS must be submitted with the application for registration. The following fee requirements for registration include the following: 

  • (1) A retail hemp registration or renewal fee of $150.00 for each location is required before the sale of consumable hemp product. 
  • (2) A person who holds a registration issued by the department under Texas Health and Safety Code, Chapter 443, shall renew the registration by filing an application for renewal on a form authorized by the department accompanied by the appropriate registration fee. A registrant must file for renewal before the expiration date of the current registration. A person who files a renewal application after the expiration date must pay an additional $100 delinquency fee. 
  • (3) Fees are non-refundable. Id. at § 300.502(g).

Thus, in order to be issued registration, retailers must annually register each location with DSHS in which consumable hemp products will be sold and must pay a $150 registration or renewal fee for each location. For example, if you own 10 retail stores, you must annually register and pay the $150 registration or renewal fee to DSHS for each of your 10 retail stores, totaling $1,500 in fees per year. 

Part V: Retail Sale of Consumable Hemp Products

According to Title 25 TAC § 300.401 of the DSHS Proposed Rules, a person licensed or registered by DSHS may distribute, possess, sell, or transport consumable hemp products that are manufactured or processed in compliance with DSHS regulations. 

Packaging and Labeling Requirements

In addition to the requirements of § 300.102 (as described in Part I relating to Applicability of Other Rules and Regulations), DSHS requires that all consumable hemp products marketed as containing CBD must be labeled with the following information:

  • (1) lot identification number; 
  • (2) lot date; 
  • (3) product name; 
  • (4) the name of the product’s manufacturer; 
  • (5) telephone number and email address of manufacturer; and 
  • (6) a Certificate of Analysis that the delta-9 tetrahydrocannabinol content concentration level on a dry weight basis, that, when reported with the accredited laboratory’s measurement of uncertainty, produces a distribution or range that includes a result of 0.3 percent or less. Id. at § 300.402(a).

DSHS defines “lot number” as

A specific quantity of raw or processed hemp product that is uniform and intended to meet specifications for identity, strength, purity, and composition that shall contain the manufacturer’s, processor’s, or distributor’s, number and a sequence to allow for inventory, traceability, and identification of the plant batches used in the production of consumable hemp products. Id. at § 300.101(22).

The labels containing the above-mentioned information must appear on each consumable hemp product intended for individual retail sale. See id. at § 300.402(b). The labels may come in the form of:

  • (1) a uniform resource locator (URL) for the manufacturer’s Internet website that provides or links to the information required by this section; and 
  • (2) a QR code or other bar code that may be scanned and that leads to the information required on the label. Id. at § 300.402(c).

Once the Final Rules are adopted, adhering to the DSHS labeling requirements will be essential for retailers, particularly given the rise in consumer lawsuits against CBD companies for false, deceptive, or mislabeled CBD products. Although these requirements may appear burdensome, several states already require similar labeling requirements and many other states throughout the country are beginning to impose such requirements. Moreover, these regulations are consumer-friendly since consumers will know that they are purchasing compliant consumable hemp products, what exactly the products consist of, and who manufactured the products.

Retail Sale of Out-of-State Consumable Hemp Products

Upon request, a registrant who is selling consumable hemp products that were processed or manufactured outside of Texas must submit to DSHS evidence that their products were processed or manufactured in another state or foreign jurisdiction in compliance with the following:

  • (1) a state or tribal or jurisdiction’s plan approved by the United States Department of Agriculture under 7 United States Code (U.S.C.) §1639p; 
  • (2) a plan established under 7 U.S.C. §1639q if that plan applies to the state or jurisdiction; or 
  • (3) the laws of a foreign jurisdiction if the products are tested in accordance with §300.301 of this chapter (relating to Testing Required) and comply with federal regulations. Id. at § 300.403.

Only under the above circumstances may a registrant in Texas legally sell consumable hemp products manufactured or processed outside of Texas. 

Furthermore, consumable hemp products may be legally transported into and out of Texas “in a manner that is consistent with federal law and the laws of respective foreign jurisdictions.” Id. at § 300.404. Thus, according to the DSHS Proposed Rules, it is legal to transport compliant consumable hemp products across state lines so long as federal and foreign jurisdiction regulations are followed.

Part VI: Enforcement 

Violations and Administrative Penalties

A person commits a violation of the DSHS Proposed Rules if the person distributes, processes, or manufactures a consumable hemp product without a DSHS-issued consumable hemp products license, or if the person sells at retail a consumable hemp product without DSHS-issued registration. Title 25 TAC § 300.601(a). According to DSHS, “[e]ach day a violation continues or occurs is a separate violation for purposes of imposing an administrative penalty.” Id. at § 300.601(b). This provision means that DSHS has the authority to assess a fine for each day you remain non-compliant. DSHS shall notify a registrant of a potential violation, made unintentionally or negligently, concerning sold consumable hemp products and provide that registrant an opportunity to resolve such violations within 10 business days of the notification. See id. at § 300.606(b).  

Under the DSHS Proposed Rules, administrative penalties shall be assessed by DSHS based upon one or more of the following criteria:

  • (1) the seriousness of the violation, including the nature, circumstances, extent, and gravity of any prohibited acts, and the hazard or potential hazard created to the health, safety, or economic welfare of the public; 
  • (2) the history of previous violations; 
  • (3) the amount necessary to deter future violations; 
  • (4) efforts to correct the violation; and 
  • (5) any other matter that justice may require in relation to the violation. Id. at § 300.606(c).

If DSHS determines a violation has occurred, DSHS shall issue a notice of violation in writing by certified mail to the license holder or registrant, which must include the facts on which the determination was made, a summary of the alleged violation, a statement of the amount of the recommended penalty, and information that “the person has the right to a hearing on the occurrence of the violation, the amount of the penalty, or both the occurrence of the violation and the amount of the penalty.” Id. at § 300.606(d)-(e).

When a consumable hemp products license holder or registrant receives a notice of violation, that person has up to 20 business days to either accept in writing the DSHS determination and recommended penalty or to make a written request for a hearing concerning the violation, the penalty amount, or both the violation and penalty amount. See id. at § 300.606(f). If that person accepts the determination and recommended penalty, then DSHS shall impose the recommended penalty. See id. at § 300.606(g). If that person does not respond within the 20 business days of receipt of the notice of violation, then DSHS must assess the penalty after determining a violation occurred and “issue an order requiring that the person pay the penalty.” Id. at § 300.606(h). Lastly, if that person requests a hearing, DSHS shall refer the matter to the State Office of Administrative Hearings. See id. at § 300.606(i).

Prohibited Acts and Adulterated Articles

Under the DSHS Proposed Rules, the following acts, and the causing of the following acts, that occur in Texas are illegal:

  • (1) the distribution in commerce of a consumable hemp product, if such consumable hemp product is contained in a package, or if there is affixed to that consumable hemp product a label that does not conform to the provisions of this chapter; and 
  • (2) the engagement in the packaging or labeling of such consumable hemp products. Id. at § 300.602.

Additionally, if DSHS finds or has probable cause to believe an article that is a food, drug, device, cosmetic, or consumer commodity is adulterated, misbranded so that the article is dangerous or fraudulent, or in violation of the Texas Health and Safety Code (§431.084, §431.114, or §431.115), then DSHS shall affix to that article a tag or other appropriate marking that gives notice of the adulteration or misbranding and that the article has been detained or embargoed. See id. at § 300.603.

Once detained or embargoed, DSHS may request court-ordered destruction of the article. If the court finds that the article is adulterated or misbranded, then the court can enter an order for an authorized agent to supervise the destruction of the article, and the claimant of the article shall pay for the destruction costs. See id. at § 300.604(a)-(c). If the article is being destroyed due to its THC content exceeding the acceptable hemp THC level (thus classifying it as a Schedule I drug), then “the article must be destroyed by a reverse distributor authorized by the United States Drug Enforcement Agency.” Id. at § 300.604(d).

Alternatively, if the court finds an article to be adulterated or misbranded, the court may order the delivery of that article to the claimant of the article for labeling or processing under DSHS supervision (paid for by the claimant) if all of the following criteria are met:

  • (1) the decree has been entered in the suit; 
  • (2) the costs, fees, and expenses of the suit have been paid; 
  • (3) the adulteration or misbranding can be corrected by proper labeling or processing; and 
  • (4) a good and sufficient bond, conditioned on the correction of the adulteration or misbranding by proper labeling or processing, has been executed. Id. at § 300.605(a).

If the claimant of the article meets the above criteria and again becomes fully compliant under the DSHS Proposed Rules, then that consumable hemp products license holder or registrant will be permitted to continue to distribute, manufacture, process, and/or sell consumable hemp products in Texas. 

Final Comments

We hope you have enjoyed the information presented in our DSHS Proposed Rules series. Any concerns with DSHS’s draft rules and provisions should be raised during the 31-day window for public comment, which is open until Sunday, June 7, 2020. Stay tuned for our hemp lawyers’ analysis of their top issues with the DSHS Proposed Rules.

Paul Stevenson is an associate attorney with Ritter Spencer PLLC based in the Dallas office, who represents all sectors of the hemp industry, including manufacturers, distributors, and retailers of consumable hemp products. As cannabis and hemp lawyers, the lawyers at Ritter Spencer are prepared to advise your hemp or cannabis business in all facets of the industry, including formation and transactional issues and in cannabis litigation. Contact Ritter Spencer or give us a call at 214.205.5070 for more information.

 

Ritter Spencer, PLLCDSHS Proposed Rules Part II

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