Texas Two-Step

The Lone Star regulatory regime takes root.

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If you’ve been to the DMV, or wondered why we still observe Daylight Savings Time, you have visceral evidence of why bureaucracy is often more durable than legislation, and harder to reverse than an executive order.

Texas’ cannabinoid economy is now being administered through the same boring institutional plumbing as occupational licenses, food safety codes, and notaries.

Bureaucracy gets its fair share of criticism, but in this case, boring is exciting.

While headlines focused on Governor Abbott’s hemp ban veto and related legislative drama, the real story of Texas cannabinoids is unfolding in mundane government bureaucracy.

Texas is constructing its cannabinoid regulatory regime on its own terms, using its own agencies, funded by its own fee revenue, enforced by its own peace officers.

When federal rules arrive, Texas will already have an operating system in place. Other states will look at Texas and see a template.

This “liberalize and enforce” pattern is the most under-appreciated trend in modern cannabis, and one that is already well underway at the federal level.

The Bureaucratic Lay of the Land

Recent cannabinoid rule making in the Texas Register (specifically Chapter 300) signifies a new era for Texas cannabinoids.

With each new subchapter and rule, the cannabinoid industry digs its roots deeper into bureaucratic constituencies and across state agencies.

Agency Power Dynamics: There’s significant resource asymmetry between the two primary regulators of Texas cannabinoids:

• Department of State Health Services (“DSHS”): Operates with only seven staff members to handle all rule making, licensing, and labeling

• Texas Alcoholic Beverage Commission (“TABC”): Employs 600 people, including 230 enforcement officers

While DSHS writes the rules, TABC, with its decades of experience in alcohol compliance, is the “muscle” conducting minor stings and age-verification enforcement.

During the last legislative session, the speaker’s office specifically requested that TABC staff work on the statutory language for Ken King’s hemp bill (the one that would have placed full regulatory authority with TABC).

We understand TABC staff have invested considerable hours ensuring the proposed language would be implementable and free of internal conflicts.

TABC cannot advocate for or against legislation, but it can, and did, shape how the legislature’s intent would translate into enforceable rules.

That kind of technical participation is how regulatory regimes get built to last.

1,421 Commenters and The Child Safety Anchor

The DSHS rulemaking under 25 TAC Chapter 300 drew 1,421 individual commenters across 90 distinct issues. We analyzed every comment and agency response.

The data tells a story about where power sits in this market and how the regulatory architecture is being constructed:

The Agency Held Firm

90 thematically separate issues were raised and DSHS denied 72% of them (1)

DSHS couldn’t have been more “by the book” if it tried; in comment after comment, the agency’s response followed the same formula: (1) acknowledge the concern, (2) cite the Governor’s directive, (3) decline to change the rule. In essence, the Governor’s office gave DSHS political cover to hold firm, and the agency used i

DSHS does not need legislative consensus for its rules. It needs only the absence of legislative opposition, and in Texas, that absence is temporally hard-wired.

The 89th Legislature adjourned without challenging the agency’s authority, and the 90th does not convene until January 2027. This means that for the next year, there is no legislative mechanism to contest the rulemaking, even if the votes existed.

Meanwhile, the market these rules are shaping serves more than 8,400 active retail locations, supports over 1,400 licensed manufacturers, and generated an estimated $4.5bn in retail sales in 2025.

Remember, this is a major consumer market whose customers vote.

Where the Industry Won, and Where It Didn’t

The 17 issues where DSHS agreed and changed rules were almost entirely technical and definitional.

The agency removed the word “marihuana” from warning label language after commenters pointed out it was unfamiliar to consumers. It clarified the definition of “approved hemp source” to address international and out-of-state sourcing ambiguity.

It revised the manufacturer-versus-distributor distinction, confirmed that complaint file obligations apply only to manufacturers, and added language requiring batch-specific Certificates of Analysis.

These are real improvements. They reduce compliance ambiguity for operators.

But they are refinements at the margin of a framework the agency had no intention of fundamentally revising.

Where the industry pushed hardest, on THCA reclassification, on the smokable hemp ban, on track-and-trace requirements, on the pace of implementation, DSHS held firm.

The most common objection, raised by the largest volume of commenters, was opposition to the THCA flower ban. DSHS disagreed, citing GA-56’s directive and HB 1325’s regulatory mandate. Hemp flower will be banned as of April 1, 2026 (2)

The second most common: opposition to the proposed fee schedule. DSHS revised the fees to $10,000 per manufacturer facility and $5,000 per retail location and committed to “periodic reevaluation.”

The Child Safety Anchor

Every enforcement-related rejection ultimately circled back to GA-56’s core stated purpose: preventing minor access to consumable hemp products.

This framing made it politically difficult for DSHS to compromise on packaging standards, child-resistant container requirements, testing protocols, track-and-trace mandates, or inspection authority.

When an agency can anchor every “no” to child safety, the burden of persuasion shifts entirely to the commenter. Industry groups found themselves arguing against rules framed as protecting children, which is precisely the rhetorical position a regulator wants to occupy.

This is literally a textbook “liberalize and enforce” pattern we’ve tracked across post-Prohibition alcohol regulation; open the market, tighten the controls, use public safety as the justification for an enforcement apparatus that, once built, becomes permanent infrastructure.

The enforcement apparatus is already underway. Our research suggests TABC has conducted several hundred minor sting operations at hemp-selling locations since enforcement began under GA-56.

Early results: approximately ten locations have sold hemp products to underage buyers, a violation rate of roughly 5%, which is not as bad as one might expect.

The consequences of a violation are serious.

The penalty now stands at a thirty-day suspension of alcohol and hemp licenses on first offense. Thirty days without selling alcohol or hemp is still severe enough to threaten the viability of a small retail operation.

It should be noted that the initial Executive Order would have entirely cancelled both licenses, but the Governor’s office was talked off of that ledge by industry stakeholders, based on our research.

$46 Million in Annual Compliance Fees

The adopted fee schedule creates a self-funding regulatory apparatus that is arguably the stickiest of all features of Texas’ regulatory program.

Our best-case estimates, based on current license data:

• 742 manufacturer facilities × $10,000/year = $7.4 million

• 7,729 retail locations × $5,000/year = $38.6 million

• Total annual compliance revenue: $46 million

That’s $46 million to fund DSHS enforcement staff and TABC compliance operations.

For context, $46 million in annual fee revenue exceeds what many states collect from their entire cannabis licensing programs. Texas built this without legalizing recreational marijuana, without a ballot initiative, and without a single dollar of tax revenue from cannabis sales.

The fees alone create institutional inertia: agencies that depend on fee revenue have a structural incentive to maintain the regulatory regime that generates it.

We call this the “liberalize and enforce” cannabis flywheel:

(1) Fees fund enforcement.

(2) Enforcement requires staff.

(3) Staff requires budget justification.

(4) Budget justification requires a regulated market.

And thus, the market now has a bureaucratic constituency inside Texas state government that did not exist eighteen months ago.

In Part II of this series, we’ll discuss additional nuances to the new Texas cannabinoid regulatory regime, and what it means as we think about the federal picture coming into sharper focus.

(1): The agency agreed and made changes on 17 issues, offered partial concessions on 3, and declared 5 topics out of scope entirely. Seven additional topics were explicitly deferred to “future rulemaking,” a bureaucratic pressure valve that acknowledges industry concerns without delaying implementation.

(2): Enforcement will be an entirely different story.

This is Third-Party content and does not reflect (or not not reflect) the views of Cannabis Confidential or CB1 Capital.

Ian founded Delta Emerald to intelligently invest in the cannabinoid industry. He specializes in using behavioral data to capitalize on major consumer trends, drawing on over a decade of private and public market investing at institutional hedge funds and family offices.

Ian started his career in JP Morgan’s Leveraged Finance group and graduated from the University of Virginia, earning a B.S. in Commerce with concentrations in Finance and Accounting. Ian lives in Miami with his wife and son.