Loopholes are fun. They provide a way to get around a law, without really breaking it; by taking advantage of inconsistencies or gaps in specifics. Sometimes they really exist, and sometimes they’re ideas that are simply not worth fighting by regulators. The most recent loophole to rock the cannabis world, is surrounding the use of THC precursor, THCA. What’s this loophole all about? Read on for more info.

What is THCA?

We’re all at least somewhat familiar with the cannabis plant. At least enough to know that it goes by the names ‘marijuana’ and ‘hemp’ as well, and that there are some plants more geared toward THC, and some toward CBD. The former group is legally identified as ‘marijuana,’ while the 2018 Farm Bill specified the lower-THC grouping as ‘hemp.’ And this designations leads to the THCA loophole.

These terms are related to THC amount in the plants, with a .3% cutoff between the two categories. But this distinction undermines something important: that realistically, no growing cannabis plants have a lot of THC. They’re all low-THC, because THC barely exists in the growing plants. THC is a product of heating weed, which means if a cannabis plant is taken and used raw, there will always be negligible amounts of THC involved. It requires heat to turn the precursor acid – known as THCA – into the THC that makes us high.

THCA, aka tetrahydrocannabinolic acid, is what really exists in high amounts in the cannabis plant. But the thing about THCA? It doesn’t get you high, and thus can be used from a raw plant, without psychoactive effects. By itself it has the chemical formula C₂₂H₃₀O₄. When heated, it decarboxylates to C₂₁H₃₀O₂, meaning it changes in the presence of heat. As you can tell by the formulas, they are closely related, but not the same thing. Decarboxylation is done through smoking, vaping, or leaching out active compounds using heat, like in cooking.

In a raw cannabis plant, decarboxylation does take place, but at slow rates and in low amounts. If you find some really old, dried-out weed, it’s likely to have decarboxylated a little. But if you see a nice fresh plant, still in the ground or just recently harvested, it’s likely to have almost no THC. In either case, the amounts are small enough to not cause any effects.

Is THCA legal?

Depends where it’s from. Marijuana is defined like this: “all parts of the plant Cannabis sativa L., whether growing or not; the seeds thereof; the resin extracted from any part of such plant; and every compound, manufacture, salt, derivative, mixture, or preparation of such plant, its seeds or resin.” According to this definition, a precursor acid is still technically a part of the plant, and therefore illegal.

But that only refers to high-THC marijuana. The last US Farm Bill made a legal distinction for hemp plants, giving them this definition: “…the plant Cannabis sativa L. and any part of that plant, including the seeds thereof and all derivatives, extracts, cannabinoids, isomers, acids, salts, and salts of isomers, whether growing or not, with a delta-9 tetrahydrocannabinol concentration of not more than 0.3 percent on a dry weight basis.”

So now we have the situation wherein identical compounds are legal when taken from one place, and illegal when taken from another. This resembles another loophole related to delta-8 THC, which operates similarly. The main difference is that the production of delta-8 requires synthetic processes, which takes it out of the definition of hemp; since the definition never allowed for synthetics. In the case of THCA, it doesn’t require synthetic processing, making it difficult to use the same argument if its place of origin, is within legal limits.

This is the THCA loophole. Whereas delta-8 cannot be extracted in high-enough amounts from either hemp or marijuana for direct product manufacturing (it occurs in amounts far too small), there is a huge amount of THCA in marijuana plants, and at least some in hemp plants. Way more than delta-8 anyway, and enough for extraction.

Since the legal application is based on the decarboxylated compound, and not the one found in the plant, selling hemp flowers as THCA flowers, isn’t technically incorrect. The THCA loophole exists by defining the plants by their THC amount, rather than their THCA amount. While its really a case of semantics, ‘THCA’ flower is any cannabis plant with below .3% THC, with no stipulation for THCA quantity.

How the THCA loophole causes problems for the government

The government likes to apply hefty taxes on any cannabis product, and its not into products sold which aren’t regulated, and therefore not able to carry this tax. Sin taxes put on cannabis products by every state, are the primary source of revenue for regulating bodies. Sin taxes are excise taxes that span a large range, some as low as 10%, and some well over 30%. Though they’re supposed to be put on dangerous products that pose personal or societal harm, the application on cannabis products means applying this tax in places where cannabis is a sanctioned medication. Massive contradiction.

The government has already had a bad time with the cannabinoids market, since it can’t get a handle on it, and that means lost tax revenue. In an effort to turn people’s opinions against the compounds, and the black market operators who sell them, the DEA and FDA have made different statements and warnings; though they’re not really backed by a death toll. I always find that part funny considering that the same governments (state and federal) support opioids through regulation; which killed close to 100,000 people in the US alone in both 2021, and 2022.

The only real ability the federal government has, is to backhandedly go after these companies by trying to ruin business. When Shopify dropped all cannabinoid sellers last year, it wasn’t stated that the move was from government pressure, but its also unlikely Shopify would reduce its own income with a ban it didn’t need to do. What the US government can do is go after internet platforms that sell the products, or mess with banking, or credit unions of those who work with sellers.

This won’t get the products out of corner shops, or even stop the internet sales; but it can cause a bit of a kink for companies, and keep them on the move to find different sales venues. Realistically, the industry exists in large numbers both on and off-line, and if it were that easy to stamp out, it would’ve been done already.

Where the federal government runs into an extra issue with THCA, is that it can’t ban it. If it put a federal ban on it, this would undermine its own definition of ‘hemp.’ If THCA is illegal, then so is all cannabis. And it wouldn’t matter at that point if it was from hemp or marijuana. Unlike delta-8 THC which comes with the issue of the need for synthetic processes, THCA extraction, does not.

How does the government deal with THCA loophole?

Governments don’t like to bring things up if it makes them look bad, or backs them into a corner. For all the strife in the cannabis industry now, you’d think the governments in question would do whatever they had to. Just to preserve a consistent tax revenue line, even if just in small amounts like standard income tax. Instead, they ignore the issue of sin taxes, as if the subject isn’t pertinent. As if the taxes must exist to facilitate the industry. In fact, when California finally updated cannabis tax laws last year, it did nothing to do away with these high taxes, which increase prices. And it didn’t improve its market issues either.

Likewise, the government doesn’t want to mention THCA because it doesn’t have an argument against it. Instead, it focuses on what it does have an argument against – delta-8 THC, and other synthetically-made cannabinoids. And it works to lump THCA into that category, so it doesn’t have to answer for the difference. New possible plan? A delta-8 ban, and lowering the THC limit for hemp to attempt to exclude cannabinoids like THCA. Realistically, neither is a probable answer to get rid of lower-priced black market products. We know this from the existence of black markets in general.

The big looming question now? How do governments so completely not learn? US governments (state and federal) have been fighting these black market sellers for several years, and with no real progress. Cannabis legalizations in general are an attempt to divert from already existent black markets, which have been around as long as prohibition. And no government actions have worked, except creating the legal industries, which diverted a certain amount. This most recent THCA loophole is just a showing that the black market will always prevail in the face of bad regulatory moves.

Conclusion

What will the federal government do about all this? Probably nothing. Maybe it’ll update definitions in the next Farm Bill. Maybe it’ll try to go after illegal sellers online. So far, history indicates that it has very little power to do much at this point, which means the sale of THCA flowers through the loophole, is likely to continue. And this offers yet another avenue for the black market to dominate the legal one; simply because of poor and ongoing judgement in regulation.

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Every other weed headline is about Canada’s failing market; whether it targets the companies closing down, the dismissal of employees, or reporting major losses and restructuring plans. Now, in a move that shows the strains within, Canada is sending out the taxman to collect unpaid cannabis excise taxes from legal producers in the country.

Most recent news of Canada and cannabis tax collection

A lot can be written on Canada and cannabis, and all the problems therein. Today we’ll start with a little on one of the more recent events. The taxman! On May 18^th, MJBizDaily reported that Canada’s governmental revenue service, the Canada Revenue Agency (CRA), is now going after producers who failed to pay their cannabis excise taxes. This is interesting timing given how many companies are posting bad sales news, and downsizing operations. Like Canada is trying to collect what is can before an even bigger fall.

The agency is not only going after the actual money, but threatening garnishment (the government legally withholding money to pay off debts), plant property and equipment liens (the government taking property and equipment until debts are paid), and further legal action for those who do not pay up. This according to an email from Dan Sutton, the CEO of Tantalus Labs (a cannabis producer out of British-Columbia), to MJBizDaily.

The CRA put out warnings like this to businesses: “If you do not pay the full amount or respond to this letter within 14 days, we may enforce Cannabis Duty provisions of the Excise Act, 2001 without further notice.” The business which received this one requested anonymity, as it does want to work out its tax issues and continue operating; and is afraid that posting the letter publicly might hurt its chances.

All of this is based on Canada’s cannabis excise tax laws, which state: “If a corporation fails to pay any duty or interest as and when required under this Act, the directors of the corporation at the time it was required to pay the duty or interest are jointly and severally or solidarily liable, together with the corporation, to pay the duty or interest and any interest that is payable on the duty or interest under this Act.”

What’s an excise tax?

This entire topic is about excise taxes. So before getting back to the story on Canada, let’s talk a little about what excise taxes are. These taxes are taxes levied on a product, but not at the point of sale. Which means they factor into the total price of an item, but with no distinction to the consumer between tax amount, and other product production costs. They’re collected at some point within the process, whether from cultivators to manufacturers, or manufacturers to retailers, etc.

As consumers, we technically pay a lot of taxes, but we don’t often know how much of a total cost, is actually attributable to taxes. We can see the tag for sales tax in the US, but that’s only what gets collected at the register. Excise taxes are paid by businesses, but their cost does factor into the overall price, as the business who pays them, will raise their own costs to make up for them. So in the case of business not paying these taxes, it does mean collecting the money for them through sales, but not giving the amount to the regulating body.

Excise taxes don’t have to be extreme, and usually make sense in their placement. However, some excise taxes are different, like sin taxes. Sin taxes are taxes instituted the same way as a regular excise tax, but which are way, way higher, and based solely on the idea that a regulating body decided something is bad for a person or society. These taxes are levied most on products like cigarettes, alcohol, and now cannabis. This is contradictory, of course, as the first two show detriment to health with no benefit; whereas cannabis is a recognized medical product in the country.

According to a Forbes article, cannabis sin excise taxes in Canada are paid by the producer in the amount of $1 CAD per gram, or 10% of sale price for dry flowers. It goes by whichever is higher to ensure more tax revenue. The article points to professionals in the field explaining how due to different factors, these taxes can account for 20-35% for operations, making it difficult to survive, especially for small operators. And it helps explain why there are so many unpaid taxes, as these tax amounts are a huge burden for all affected, and not reflective of actual income ability.

Canada’s tax situation

So Canada institutes cannabis excise taxes, with large sin taxes included, despite cannabis not causing the negative effects to health or society that the other products receiving sin taxes do. And rather than getting rid of them in a climate with tons of businesses dying out, the government is upping the ante and going after the money; essentially from companies that are barely making it to begin with, some teetering on the brink of bankruptcy.

MJBizDaily reports that around 2/3 of cannabis businesses in Canada are in debt due to unpaid cannabis excise taxes, as of September 2022. At the time of that reporting, it was halfway through Canada’s fiscal year. This totals almost $100 million CAD from a total of 172 licensed producers. That’s a lot of unpaid taxes.

Reports from the previous year (2021-2022), indicate Canada collected $1.5 billion CAD in taxes, from the total $4 billion spent on cannabis products. If you do the math, that means over 1/3 of the money collected on cannabis products for that year, went to the government in taxes and other revenue. And this up against the reality that there’s a functional black market which doesn’t have to pay those taxes, and will always be able to undercut the legal market.

The question for many in the industry, is how aggressive Canada will be in tax collection. Maybe the story is more to induce fear with no real action coming; and maybe Canada is looking to take every cent it can now. Said George Smitherman, the CEO of the Cannabis Council of Canada, “I think it’s an offshoot of the issues management problem that the Trudeau government faces with an excise tax that’s ill conceived.”

He continued, “In a certain sense, at all levels in Ottawa, they recognize the dilemma they have, which is that a very large proportion of (cannabis) CRA license holders can’t keep up with their bills.” He explained, “While we hope that recognition (of the excise debt problem) is going to lead to real action to fix the excise, rather than just the words we’ve heard so far, in the meantime we are faced with the gnarly face of collections.”

But wait, isn’t Canada trying to save the market?

We know that sin taxes don’t really need to be included. They’re not fundamental, nor necessary for what they’re supposed to do. Yet, the conversation is so rarely about them. You’d think Canada (and every US state having the same issue) was entirely backed against a wall, but they’re not. The best answer for all companies, is to eliminate this unnecessary tax. That would fix the problem, right? Yet, the greed of governments becomes obvious when broaching these topics, as they will often go quite a distance, to avoid changing this. They don’t even want you talking about it. They sidestep or avoid the issue.

Think of California finally making amendments to its cannabis tax laws in 2022. What did it do? It did get rid of a cultivation tax, which was good; but did nothing to get rid of the excise tax (15%), which includes the sin tax. And while the industry walks around with its hands up seemingly confused on the matter, the answer is obvious to the point that its getting frustrating and maddening. Sin taxes on weed must be eliminated, or its unlikely these markets can work out long term.

Canada’s market has taken such a distinct downturn, that on March 25^th of this year, the Canadian government put up a notice of intent to start consultations to make changes in the industry. Considering every province except for one has seen sales declines, this move is an indication of Canada knowing there’s a big problem. For the country, between December 2022, and January 2022, for example, sales slipped from CA$425 million to CA$395 million.

The notice speaks of finding ways to update regulation concerning licensing, security, production, and packaging, in order to help out the ailing industry. Lowering licensing expenses is surely useful; but if you’ll notice, the country doesn’t say anything about attacking current tax structures. Its left out as if it’s not something that can be modified. As if that tax must be there or the industry can’t survive. But that’s not true. Sin taxes are extra taxes, added onto regular tax structures. You can see in the notice, that Canada doesn’t mention taxes at all:

“Health Canada recognizes there may be regulatory measures that could be made more efficient and streamlined without compromising the public health and public safety objectives in the (Cannabis) Act,” it continues that this includes “(reducing) administrative and regulatory burdens where possible.”

Canada was also supposed to start a ‘strategy table’, a forum for those in the industry, and those regulating it, to come together and talk about issues and how to resolve them. Though this was proposed in April 2022, reports from earlier this month show it never got off the ground. This seems at least partially due to a lack of communication between the industry and regulators. But then, if the only real answer is ‘lower taxes,’ perhaps regulators were never interested in the conversation at all.

Conclusion

There’s a lot to say about the situation; but it really comes down to one thing, and one thing only. If the US and Canada want to keep cannabis from becoming a 100% black market industry; they must forfeit the extra tax revenue they collect unnecessarily through sin taxes (among other unnecessary costs). If they don’t, there’s unlikely to be an industry to collect taxes from soon. And getting nothing is way less than they’d get from an operational tax structure. End of story.

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The heyday of marijuana sales in Colorado — back in 2020 when recreational and medical sales topped out at a combined $226 million — is a distant memory, as the state’s dispensaries struggle through an economic downturn, with sales plummeting and small businesses foundering.

“The market’s just bad. It’s bad right now,” said 29-year-old Val Tonazzi, who works in cannabis sales. “There’s businesses closing, left and right.”

In March, Colorado’s total medical marijuana sales were about $17 million — around $5 million less than last March. Retail marijuana sales racked up to $122 million, but that’s still a $17 million drop from March 2022.

Read the rest of this story on DenverPost.com.