During a recent webinar, Jon Dubrow, Greg Heltzer, Lisa Rumin, and Ryan Tisch provided a comprehensive introduction to the new Hart-Scott-Rodino (HSR) rules and their impact on the US premerger notification filing process. The program concluded with a Q&A moderated by Reese Poncia and featuring Ty Carson, a former Federal Trade Commission Premerger Notification Office lawyer, who shared his insider’s perspective from six years with the agency.
Navigating the Buzz: How State Agencies Are Addressing Confusion Around Hemp and Low-Dose THC Beverages
Hemp and low-dose delta-9 tetrahydrocannabinol (THC) beverages continue to flood the marketplace. Depending on the state, these products can be purchased in liquor stores, gas stations, grocery stores, bars, restaurants, and/or online. Despite their rise in popularity and presumed legality under the 2018 Farm Bill, some state agencies have recently made headlines with decisions to ban these products from being sold by alcohol-licensees in their states.
In this blog post, we walk through some recent examples of how different state alcohol agencies are handling the regulation of hemp and low-dose THC beverages.
Understanding Hemp and Low-Dose THC Beverages
As we mentioned in our previous blog post on this topic, hemp and low-dose THC beverages are nonalcoholic beverages infused with delta-9 THC derived from hemp, distinguishing them from traditional marijuana products. The 2018 Farm Bill legalized hemp and its derivatives, provided they contain no more than 0.3% THC on a dry weight basis. This legal gray area has led to a surge in products that can deliver psychoactive effects while being marketed alongside or as alternatives to alcohol.
State-by-State Overview
The rise of hemp and low-dose THC beverages in the market has prompted state alcohol, health, agriculture, and cannabis agencies to review their regulatory frameworks regarding the sale and distribution of these products. Each state approaches the issue differently, which has resulted in a patchwork of regulations across the country.
- California: The California Department of Alcoholic Beverage Control (ABC) has taken a strict stance on hemp beverages containing THC. On October 3, 2024, the ABC issued an industry advisory stating that alcohol licensed businesses may not carry, market, offer for sale, or sell any industrial hemp products intended for human consumption (including food, beverages, and dietary supplements) that contain a detectable amount of total THC or other intoxicating cannabinoids. Any businesses that do not comply will subject the licensee to disciplinary action. To date, the ABC has already begun enforcement efforts. Recently, ABC agents have been reported visiting licensed locations across the state and seizing hundreds of products from several licensees, removing them from shelves and preventing them from being sold.
- Massachusetts: On May 30, 2024, the Massachusetts Alcoholic Beverages Control Commission (ABCC) issued an advisory in connection with the joint notice issued by the Massachusetts Department of Public Health (MDPH) and the Massachusetts Department of Agricultural Resources (MDAR) regarding the sale of beverages and food with hemp-derived cannabinoid extracts (CBD) or THC. The ABCC made clear that it is unlawful to manufacture and/or sell food or beverages containing CBD and/or THC. This applies to alcoholic and nonalcoholic beverages. Under the advisory, the ABCC directed that products need to be removed immediately, and anyone found in violation faces potential revocation or suspension of its license. The joint notice and advisory each make clear that they only apply to hemp-derived CBD and THC products and are separate from marijuana products regulated by the Massachusetts Cannabis Control Commission.
- Minnesota: In contrast to California and Massachusetts, Minnesota explicitly [...]
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Contract Manufacturing Versus an Alternating Proprietorship: What Is the Difference?
We frequently receive questions about the differences between contract brewing and alternating proprietorships, as well as questions concerning the key details the Alcohol and Tobacco Tax and Trade Bureau (TTB) and other regulators will be looking for in either approving the proposed structure or, more importantly, during a company audit. Here we discuss the primary considerations for businesses utilizing other premises for production.
Alternating Proprietorship. The TTB allows two or more proprietors with different federal employer identification numbers (FEINs) to operate their respective businesses at the same premises by alternating and sharing space and/or equipment. How does it work? Typically, each proprietor obtains its own federal and state licenses and permits and operates and produces on its own behalf; these latter tasks include maintaining its own reports, records, excise tax payments, label approvals, and bond changes once approved. One proprietor is the “host,” and another is a “tenant” paying rent to the host. The rent can be a fixed monthly rate or based on equipment-hour usage. Other shared-cost arrangements are possible, as well.
During its review of an alternating proprietor’s application for a federal basic permit, the TTB will evaluate the written agreement between the alternating proprietor and the host. The TTB’s primary concern is to ensure the protection of each proprietor’s revenue. As such, the separation and movement of each proprietor’s products, payment of taxes, etc., will likely face the most scrutiny by TTB in an alternating proprietorship agreement. Accordingly, the alternating proprietorship agreement should expressly state that the alternating proprietor is responsible for its own production, recordkeeping, reporting, labeling, and payment of taxes. The agreement should provide that the alternating proprietor will pay the host directly for its floor space, equipment use, and, where applicable, personnel time and material consumed if the host is to provide additional services or materials. Payment to the host should not be based on volume rates (e.g., tons, gallons, or cases). The TTB reviews all of these factors to determine if the arrangement is a true alternating proprietorship and not a contract manufacturing relationship in disguise.
Entities engaging in alternating proprietorships frequently use a combination of direct employees and independent contractors to maintain their operations. In this highly specialized industry, independent contractors are in high demand due to their extensive knowledge and experience. Utilizing these workers enables producers to meet higher production targets with a shorter learning curve, while allowing direct employees to learn the process with limited downtime. However, it should be clear in the alternating proprietorship agreement that these employees are acting solely at the alternating proprietor’s direction, or they should be hired directly by the alternating proprietor.
Contract Manufacturing. Also known as co-packing, contract manufacturing is an operational methodology that differs from an alternating proprietorship. With contract packaging, a co-packer entity produces and/or packages product(s) on behalf of their customers, with all operations occurring under the co-packer’s license or permit and often under the customer’s trade name. In a co-packing situation, the co-packer also may be producing or packaging for [...]
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Seasonal Considerations for Packaging and Selling Alcoholic Beverages
The final quarter of the year is the alcohol industry’s busiest period, accounting for approximately 70% of annual business. Many holiday-themed seasonal products are beginning to make their way to market, and it is important to remember that these products may have additional regulatory considerations and hurdles.
The Alcohol and Tobacco Tax and Trade Bureau (TTB) publishes a list of allowable revisions to approved labels – that is, the changes that can be made to a product with an existing certificate of label approval (COLA) without necessitating a new label approval. Notably, however, seasonal products have special allowances. Generally, any nonmandatory label information, such as a graphic, would require a new COLA to be added to a label. Yet, in accordance with Allowable Revision #28, so long as that graphic is holiday and/or seasonally themed, it can be added, deleted, or changed without a new COLA. For example, adding a smiley face to a label would require a new COLA, but adding a candy cane would not.
Even though the candy cane would not require a new COLA, it is important to remember that any additions must not conflict with or qualify the mandatory information, and they must comply with all existing regulations and avoid all prohibited practices. For example, “Happy Valentine’s Day!” can be added to a label, but “Dizzy with love on Valentine’s Day” could not be added – with the acquisition of a COLA or without. “Dizzy” or other statements that describe how the contents of the bottle may affect someone would, if added to a distilled spirits label, run afoul of 27 CFR § 5.129 (a)(1), as the term implies a physical or psychological sensation resulting from consuming the distilled spirits. For wines, a similar qualification can be found in 27 CFR § 4.39(h), and for beers, it can be found in 27 CFR § 7.129(a)(1).
After the new seasonal labels have been printed, there are several additional considerations. These include:
- Packaging: There are limitations on whether the alcoholic beverage can be packaged together with a food or point of sale (POS) item.
- Pricing: It is important to consider the price and whether the market will allow a pricing variance from the same alcoholic beverage when not accompanied by POS.
- Separate brand registrations and price postings where required.
- Special price posting designations, such as a limited availability designation for New York.
Label and packaging compliance is an area that is routinely investigated by the TTB and state regulators. Regulators conduct these compliance checks by visiting retail locations and verifying that the labels on the products conform to state and federal labeling requirements. When a label is not in compliance, the industry member may face penalties and will need to address the regulators’ concerns and correct the label(s). Maintaining compliance with TTB and state regulations helps safeguard existing licenses and helps avoid disruptions within supply chains.
For questions or assistance with seasonal items or their packaging, please contact Alva Mather [...]
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Maine Updates Ownership Disclosure Requirements
On August 9, 2024, the new Public Law 2023, ch. 633 (L.D. 2069) from Maine’s Bureau of Alcoholic Beverages and Lottery Operations (BABLO) formally went into effect, bringing an end to the previous burdensome “entire ownership” disclosure requirement that disrupted the industry in 2023.
This legislation establishes new ownership disclosure requirement related to alcohol licensing in Maine. It amends Sec. 1. 28-A MRSA § 651 to require the disclosure of any person holding an ownership interest of 10% or more in the license or certificate holder in the state of Maine. Additionally, if a business meets this threshold of ownership in the licensee, that business must also disclose any individual or entity which holds 10% or more in said business; if no one meets this threshold, the license holder may submit an affidavit which attests that no individual or entity holds such ownership interest in the licensee or applicant.
The new legislation also requires in Sec. 2. 28-A MRSA § 651 that the licensee or applicant disclose any individual or entity holding indirect financial interest in the license holder, with “indirect financial interest” including (a) an option or right to acquire equity interest in the licensee or (b) a right to payment of or based upon all or any portion of revenues, profits, or losses from the operation of the licensee.
In connection with the implementation of these new disclosure requirements, BABLO has issued a new Supplemental Ownership Form for convenience of industry members to identify the information required from the necessary stakeholders. With many licenses operating on temporary extensions for the last year as BABLO updated these requirements, industry members are now working diligently to complete the necessary documents for renewal of their existing licenses.
McDermott’s alcohol team is ready to guide you through the new requirements. For questions or assistance with Maine’s disclosure requirements, please contact Alva Mather or the alcohol team.
