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By Brian Bahouth
@CRNeditor

Reno – Nevada voters approved the Regulation and Taxation of Marijuana Act last November.  The initiative language authorizes the Nevada Department of Taxation to “adopt all regulations necessary or convenient to carry out the provisions of the Act to include the licensing of cannabis businesses.”

Under the Act, a person 21 years old or older can legally possess one ounce of marijuana and various derivative products, and in the wake of the 2017 legislative session, state lawmakers are budgeting for roughly 100 million dollars in tax revenue over the biennium from adult use marijuana sales.

In order to undermine illegal markets and meet tax projections, the Department of Taxation must license businesses that would transport marijuana within the state, and in accordance with the ballot initiative, for the first 18 months after the Department begins to receive applications, only businesses licensed to transport liquor in Nevada are allowed to apply; but the Department is authorized to determine if there are enough applicants to support operation of the state’s marijuana industry, and if there is not sufficient liquor distributor interest, state regulators are able to accept cannabis transportation license applications from suitable businesses that do not distribute alcohol.

Last November the Department of Taxation queried the state’s liquor distributors, and in March of this year the Department determined that an insufficient number of liquor distributors had an interest.  In response, the Department recommended opening the distributor application process to include the cannabis companies currently licensed to grow and process marijuana in the state.

The Lawsuit

Following the passage of Ballot Question 2 last November, Nevada Governor Brian Sandoval empaneled a Task Force comprised of various stakeholders to help the Department write regulations for the new adult use cannabis industry, and during an April 17 Task Force meeting, a man who identified himself as Bill Magrath, a partner in the law firm of McDonald Carano, said he represented the Independent Alcohol Distributors of Nevada, and during the public comment period of the meeting told assembled members and lawmakers that his clients were not fairly included in the process.

“What steps did the Department take to make this determination, which has now wiped out this 18 month exclusive period ?” Magrath rhetorically asked the Task Force.  “Well, I hold in my hand a November 18 letter.  This was sent to a company Bevy Beverages  LLC, which is one of the members of my group.   It specifically notifies them that they are being considered for these licenses, and asked a question, if you’re interested, contact us.”

Magrath said every member of the Independent Alcohol Distributors of Nevada contacted the Department, but not one got a response.  Magrath said several members followed up with additional queries, yet according to Magrath, the only response they got was a letter that said an insufficient number of liquor distributors expressed an interest in the transportation of marijuana and that the Department would expand the pool of companies allowed to apply for a marijuana transport license.

“Poof,” said Magrath.  “There went the exclusivity that the Act provided to the licensed wholesale liquor dealers, just with one (he snapped his fingers for emphasis) decision of the Department.”

Listen to Bill Magrath’s comments to the Governor’s marijuana Task Force on April 17, 2017 … 5:35 …

The Department of Taxation and Mr. Magrath did not sort out their differences, and the Independent Alcohol Distributors of Nevada took legal action.  On June 20, First Judicial District Court judge in Carson City, James Wilson, imposed an injunction that prohibits the Department from making a sufficiency determination until it has established rules for what number of distributors are necessary to serve the state’s marijuana industry.

Four wholesale liquor dealers applied for a marijuana distributor license before the May 31 deadline; and an additional three liquor distributors have applied since the Court’s June 20 order, and on Friday July 7, the Department of Taxation issued a Statement of Emergency.  Here is an excerpt.

“Notwithstanding the fact that currently no applicants from a wholesale liquor dealer have qualified to be licensed as marijuana distributors, the Department is unable to make a determination that an insufficient number of marijuana distributors will result from limiting marijuana distributor licenses only to persons holding a wholesale dealer license pursuant to chapter 369 of NRS, without adopting this Emergency Regulation.  Without the ability to make a sufficiency determination, the Department cannot license other marijuana distributor applicants and, therefore, no marijuana or marijuana product can be transferred to a retail store.  Without the retail sale of marijuana, the State will not realize the revenue on which the State budget relies.”

The Nevada Tax Commission meets on Thursday July 13, and the Emergency Regulation is first on the Commission’s agenda, and should the Commission adopt the Regulation, the Department says in their Statement of Emergency that the rule change would not run counter to the June 20 Court decision but would allow the Department to move forward with licensing marijuana distributors.  Again, an excerpt from the Statement of Emergency.

“The adoption of this regulation complies with the June 20 Court decision that requires the Department to go through the regulatory process in Nevada Revised Statute Chapter 233B before it makes a determination about whether there are enough liquor wholesalers to serve the market as distributors.”

Urgency

As of July 1, the Nevada Department of Taxation licenses 47 of the state’s medical marijuana dispensaries to sell marijuana and derivative products to anyone 21 and older.  According to the Statement of Emergency the initial sale of legal cannabis generated more than 40,000 retail transactions, “and some establishments reported sales of more than double their estimates.”

The Department of Taxation says the need to license marijuana distributors is urgent.

“Based on reports of adult-use marijuana sales already far exceeding the industry’s expectations at the state’s 47 licensed retail marijuana stores, and the reality that many stores are running out of inventory, the Department must address the lack of distributors immediately. Some establishments report the need for delivery within the next several days.  We continue to work with the liquor wholesalers who have applied for distribution licenses, but most don’t yet meet the requirements that would allow us to license them. Even as we attempted to schedule the final facility inspection for one of the applicants this week, they told us their facility was not ready and declined the inspection. As of mid-day Friday, not one distribution license has been issued.”

In support of the Emergency Regulation, the Department notes the fiscal and economic repercussions of delay in licensing marijuana distributors.

“The business owners in this industry have invested hundreds of millions of dollars to build facilities across the state. They have hired and trained thousands of additional employees to meet the demands of the market. Unless the issue with distributor licensing is resolved quickly, the inability to deliver product to retail stores will result in many of these people losing their jobs and will bring this nascent market to a grinding halt. A halt in this market will lead to a hole in the state’s school budget.”

Nevada Governor Brian Sandoval has endorsed the Emergency Regulation, which all but ensures Tax Commission approval on Wednesday, and regarding the Independent Alcohol Distributor’s lawsuit, late last week the Department filed an appeal of the June 20 decision with the Supreme Court of Nevada, and the case was granted an expedited schedule.