Citing potential tax avoidance, ‘serious risk to public safety,’ Marijuana Enforcement Division warns companies about swapping illegal chemically converted hemp for marijuana

This article was produced for ProPublica’s Local Reporting Network in partnership with The Denver Gazette.

Colorado regulators announced on Monday that they plan to crack down on companies that illegally substitute cheaper and potentially hazardous hemp products for marijuana.

The regulators said they had detected “regulatory compliance issues” that threaten to unravel the marijuana industry in the nation’s first legal retail market.

These issues “present serious risks to public safety, market integrity and the tax revenue framework that supports Colorado’s regulated cannabis industry,” the state’s Marijuana Enforcement Division stated in an industry bulletin.

A Denver Gazette and ProPublica investigation in January reported that, despite Colorado becoming one of the first states to ban intoxicating hemp products made by chemical processing, the legislature and regulators failed to adopt many regulations that other states have employed to keep hemp products off marijuana dispensary shelves.

Creating the liquid distillate for vapes and edibles from hemp is much cheaper than using marijuana, giving companies a competitive advantage.

But regulators say they’re worried because manufacturers rely on toxic and potentially hazardous chemicals to convert the non-intoxicating compound CBD that is prevalent in hemp into THC, the psychoactive compound that makes people feel high. Regulators have banned such chemical synthesis because they say they fear chemical residues could remain in finished products, imperiling the public.

Colorado manufacturers have exploited the state’s regulatory gaps to continue using hemp to make THC distillate that goes in products marketed as marijuana, even though doing so is against state law, according to investigations by regulators, previous agency bulletins and testimony and lab test results contained in several lawsuits.

In 2024, state investigators found that one popular brand of marijuana vapes sold in dispensaries was actually derived from hemp, even though it was marketed and sold as coming from marijuana. Regulators found that the vapes were contaminated with methylene chloride, which is prohibited by Colorado’s marijuana regulators and banned for most uses by the U.S. Environmental Protection Agency because it can cause liver and lung cancer and damage the nervous, immune and reproductive systems. The chemical is often used to convert CBD from hemp into THC.

Ware Hause, the company that manufactured those vapes, surrendered its marijuana license. Ware Hause’s owner, Thanh Hau, and the company’s lawyer have declined to comment.

Congress passed a law in November banning nearly all hemp-derived products starting in the fall of 2026, but how the government implements that ban remains an open question and hemp manufacturers are pushing to overturn it.

In December, President Donald Trump issued an executive order tasking his aides to develop regulations with Congress that could allow some hemp products.

Colorado’s Marijuana Enforcement Division announced in the Monday bulletin that agency officials had “identified and investigated evidence” indicating marijuana businesses are using illicit practices and banned methods to manufacture products, instead of relying on marijuana that is supposed to be tracked for safety.

The bulletin said the agency would pursue emergency rules to address such problems. 

The bulletin also stated that marijuana manufacturers and cultivators are avoiding marijuana tax obligations through “a pattern of noncompliance” in the sales transactions they report to the state’s “seed-to-sale” tracking system, which tracks marijuana from the initial planting to the purchase of pot, vapes and other products in dispensaries.

Companies are misreporting their bulk marijuana sales at nominal prices, in some cases as low as $1 a pound for unprocessed marijuana material, the bulletin stated. Those products typically fetch as much as $600 a pound on the open market, depending on the category of marijuana, according to industry insiders.

Such fraudulent reporting has robbed the state and local governments of millions of dollars in marijuana tax revenue, industry insiders say, though there’s no official estimate.

Suspicious and anomalous transactions and inventories the state detects will prompt investigations, the bulletin stressed. Companies caught using hemp or other illicit material they pass off as marijuana face “immediate product embargo, license suspension or revocation, significant monetary penalties and referral to law enforcement,” the regulators warned.

The state’s announcement also confirmed initial efforts by The Denver Gazette and ProPublica to report on allegations of anomalous transactions in the seed-to-sale system, the Marijuana Enforcement Tracking Reporting Compliance database, often called METRC. Industry insiders have said the transactions would indicate that swapping hemp for marijuana is common.

Despite the newsrooms’ multiple attempts to obtain transaction data using Colorado Open Records Act requests, the Marijuana Enforcement Division has maintained that the records are not public.

Marijuana industry representatives met with division regulators late last month to press for a more aggressive response to hemp substitution from the agency. The bulletin was released shortly after that meeting.

“The division is also exploring additional modifications to its testing and screening protocols to detect” illicit products and banned methods and may require additional lab testing “of products throughout the supply chain as needed,” the agency’s bulletin stated.