On Tuesday, 51ԹϺ’s William S. Boyd School of Law will play host to a critical hearing of the Nevada State Supreme Court that is expected to clarify some of the regulations around Nevada’s burgeoning recreational cannabis industry.
Last November voters approved Question 2, which legalized recreational marijuana in Nevada. The law officially took effect in January. Oversight of recreational pot was given to the Nevada Department of Taxation, which has been working on developing the framework to regulate the new industry.
The bill granted initial distribution rights to transport recreational pot solely to licensed liquor distributors. After 18 months, other companies would be allowed to apply for their own licenses. The state’s taxation department has battled with liquor distributors over whether those distributors alone are capable of handling distribution for the new industry.
How did we get here?
Half a year after voters approved Question 2, the Department of Taxation adopted a regulation in May that laid out specific requirements for alcohol distributors to apply for distribution licensure. The Independent Alcohol Distributors of Nevada, or IADON, challenged this new regulation in court, accusing the department of making up “ad hoc” rules that could undermine their 18-month “monopoly” on licensed cannabis distribution.
In June the First Judicial District Court barred the Department of Taxation from issuing licenses to non-liquor distributors, until it had clarified its definition for sufficiency.
In July, the department, seeking to comply with the court’s ruling, adopted an emergency regulation that set forth criteria to determine if alcohol distributors by themselves were sufficient to serve the market, according to court filings. Meanwhile, retail sales of recreational cannabis began. In July, the state saw sales of more than $27.1 million — generating $3.68 million in tax revenue that will be split between the state’s Rainy Day Fund and its schools.
On Aug. 10, the state held a public hearing on its emergency regulation, but IADON claims that its members were not afforded due process during that meeting. Last month, IADON and another entity, PALIDIN LLC, appealed to the Nevada Supreme Court, challenging whether administrative agencies have the power to create emergency regulations without evidence that “an emergency actually exists.” The liquor distributors hope the court will declare the emergency regulation itself invalid.
According to the Department of Taxation, on the other hand, the district court did declare that interested parties at the August hearing “were afforded the opportunity to present evidence and testimony” and that testimony at the hearing “supported a need to expand the marijuana distributor licensed to more than alcohol distributors.”
What is 51ԹϺ’s role?
51ԹϺ Law will host the Nevada Supreme Court on Tuesday for a hearing that will attempt to resolve the claim brought forth by IADON. The hearing is a chance for law students to have a front row seat in the disputation of an important legal issue.
“As far as the law school and to us at the law journal it’s definitely exciting to have them come do this here,” says Stephanie Glantz, a third-year law student and editor in chief of the Nevada Law Journal.
As it turns out, students at the law journal are also working on a white paper to examine the legal implications of Nevada’s new recreational marijuana industry Authored by Alysa Grimes, Beatrice Aguirre, and Brent Resh, this report, aimed at deepening the courts’ and legislative bodies’ understanding of key issues, should be published in March.
How common is it for liquor distributors to have any role in cannabis distribution in other states?
It’s not common at all, and for good reason. Heather Azzi, Senior Campaign Counsel with the Washington, D.C.-based Marijuana Policy Project — and the author of Nevada’s initiative — says the state’s alcohol distributors are a diverse group. Nevertheless, all have federal licenses for wholesale alcohol distribution — those licenses could be in jeopardy to liquor distributors who try to get in on the cannabis business; a fact that the distributors know.
“I think a lot of the larger alcohol distributors and maybe even some of the smaller ones have thought very seriously about getting involved with this,” says Azzi. “Those that already have a very lucrative business model going probably weren’t willing to take the risk.
So why did liquor companies get involved in the first place?
Azzi says more states working to legalize recreational marijuana are looking at creating independence in the distribution system, to prevent tax evasion, which is easier if one entity controls production, distribution and retail, as well as diversion — the siphoning away of products either across state lines or to target populations such as children.
The idea in turning to liquor distributors was that they had experience and knowledge in transporting regulated items. “In the short term,” says Azzi, “it would have allowed the process to get up and running very quickly with very little trouble.”
Still, given that medical marijuana dispensaries in Nevada do have experience transporting cannabis for medical purposes, why bring liquor in at all?
“I think it’s just a matter of timing,” says attorney Amanda Connor, partner with Connor & Connor, a firm that represents licenses holders on the medical marijuana side, including dispensaries, cultivation and production facilities. “When the initiative petition was drafted and getting signatures there wasn’t a robust or open medical marijuana market. They wanted to build in some trust and make people feel confident it would be transported securely.”
Connor and Julie Monteiro, editor of Cannabis Nurses magazine, also suggest liquor distributors were written into the initiative in to help secure funding needed to actually get it on last November’s ballot.
What are the important issues here?
The important issues are really procedural ones: How does the state define “sufficiency” in determining whether liquor distributors have the capacity to provide enough distribution?
“If it comes down to that question it’s going to be tough for them to win on that. The tax department made its assessment,” says David Orentlicher, Cobeaga Law Firm professor of law and co-director of the 51ԹϺ Health Law Program. “The courts on these kinds of issues tend to defer to the expert agency. Is the court in a better position to sift the facts and judge whether they’re sufficient or not? They’re going to be inclined to defer to the tax department.”
He adds that IADON may have more luck on the procedural questions regarding whether they received a fair hearing on Aug. 10 and whether the state’s declared “emergency” really constitutes one.
Still, even that is no guarantee that their privileged 18-month window will hold. “If they win all they may get is for the tax department to redo the process in a more deliberate way,” says Orentlicher. “If they lose, they lose. If they win, it doesn’t preclude the tax department from revisiting it and say we’ll do a more elaborate process. It may just delay things.”
And Azzi notes that, because the ballot initiative gives the Department of Taxation discretion, “at some point their decision will be viewed as not an arbitrary decision or a capricious decision. And once we get to that point the court will uphold that decision. And that will be the end of it.”
What happens to the liquor distributors?
Even if the supreme court allows the Department of Taxation to open up the application to a wider poll of interested parties, liquor distributors will still be able to apply for a license. “They’re not being put out of business,” says Orentlicher. “They’re just losing another lucrative opportunity to expand their business.”
Nevertheless, once distribution companies get established, he says, “it’s harder for a new company to come in.”
Monteiro considers the matter in blunter terms.
“Any entity that has any federal ties should not even be near cannabis, period,” she says. “Why is alcohol being so difficult? They’ve already made their millions. Let the flood gates come for other people.”
