A judge has sided with liquor distributors in their challenge against the state Department of Taxation in a move that could potentially delay the planned July 1 start of recreational marijuana sales in Nevada.
Carson City Judge James Wilson granted a preliminary injunction on Tuesday that was sought by the Independent Alcohol Distributors of Nevada (IADON), saying the state is barred for now from issuing marijuana distribution licenses to anyone but licensed liquor dealers. Five liquor wholesalers have submitted applications, although the tax department hasn’t formally approved any of them and it was unclear whether the agency could or would license them by July 1.
“Plaintiff’s members will very likely be shut out of the marijuana distribution business entirely if the Department issues distribution licenses to non-alcohol distributors,” Wilson’s ruling said. “Thus Plaintiff has demonstrated that, absent injunctive relief, it is likely to suffer irreparable harm.”
Kevin Benson, an attorney who represents IADON, said he hadn’t heard of any plans from the state to appeal the ruling and believed sales could start on time.
“I don’t know who all the applicants are, but I believe our members who applied will be ready to start work on July 1,” he said in an email to The Nevada Independent. “My hope is that we can work together with the Department to make sure the program gets moving as quickly as possible.”
The Nevada Department of Taxation issued a lengthy statement saying they were exploring their legal options. The agency also said it was committed to a July 1 start date, but noted that the applications it received from liquor distributors weren't complete and officials will need more information before advancing them:
The court issued a decision today that granted IADON’s request for a preliminary injunction. The injunction prevents the Department from issuing marijuana distributor licenses to anyone but a liquor wholesaler. It also prevents the Department from making a determination that there is an insufficient number of liquor wholesalers to serve the marijuana market as distributors until we have adopted definitions or rules around determining what number of distributors are required to serve the market. It also prevents the Department from enforcing the May 31 deadline.
The Department is reviewing the court’s decision with the Attorney General’s office and will explore all legal avenues to proceed with the program as provided in the regulations.
The Department has received questions around whether we still expect the retail sale of marijuana to begin on July 1. We do expect to issue licenses to qualified marijuana establishments – including , retail marijuana stores – ahead of July 1.
However, we do not have any qualified liquor wholesale dealers to license as marijuana distributors at this time. None of the applications we have received so far from liquor wholesalers are complete, and we are notifying those applicants of what they need to do to make their applications complete so we can further process them.
We hope for a quick response from those who are seeking exclusivity in marijuana distribution. We are committed to ensuring that the vote of the people to provide for the legal purchase of marijuana from a strictly regulated market will proceed on July 1.
An all-day hearing for the case on Monday centered on whether the state had a rational method for determining whether there are enough liquor distributors to deliver marijuana for the whole state.
Voters approved a ballot measure in November that gives liquor distributors first dibs on marijuana distribution for the first 18 months of recreational sales, but includes the caveat that the department could open it up more broadly than that if it determines there are an insufficient number of liquor distributors to serve the state.
IADON, a group of smaller wholesalers, sued, saying that if the department opens the distribution task up to existing marijuana businesses, they’ll “self-distribute” and their vertical integration will forever shut liquor distributors out of the industry. That would constitute irreparable harm, plaintiffs argue, and was the reason a judge issued a preliminary injunction barring the state from enforcing a May 31 application deadline or handing out marijuana distribution licenses.
Until distributors are licensed, the recreational marijuana industry can’t get off the ground. The law requires licensed distributors transport marijuana from wholesale facilities to retail stores.
Liquor distributors who testified on Monday — some who said they have enough capacity to singlehandedly distribute to the entire state — bristled at suggestions from medical marijuana companies that they want to corner the market.
“They think we want a monopoly in distribution,” testified Allan Nassau of Red Rock Wines. “We want what the voters of Nevada wanted, which is to have us included as marijuana distributors to provide a check and balance, to make sure things are on the up and up. It's the (medical marijuana enterprises) that want the monopoly.”
Benson argued that while 106 retail store licenses are allowed in the state, only somewhere between 36 and 69 of them are expected to take advantage of the “early start” program that’s expected to serve the state in the next six months. With some IADON members serving liquor to hundreds of individual businesses each, he said there should be more than enough to serve the dispensaries.
During the hearing, Nevada Department of Taxation Director Deonne Contine testified that she didn’t know how many distributors would be sufficient to serve the market, but knew that zero or one would be inadequate.
“Because this state is large, and what happens if somebody breaks down or has some other issue with their license?” Contine said. “I don't think it would be a good regulatory decision to have one company that somebody could use for an entire industry.”
Benson seized on that admission, saying that the department hadn’t studied how many distributors the state’s marijuana industry would need. With no guidance to applicants or to Department of Taxation staff, any internal determination about sufficiency would be arbitrary and capricious.
“It leaves the department with completely unbridled discretion,” he said. “There is no guidance whatsoever on how to determine if somebody qualifies.”
The court sided with Benson in that argument, saying the regulations are too vague about the criteria that would qualify a liquor licensee for a marijuana license.
“Without any standard regarding what is ‘sufficient,’ the Department is free to simply determine that the applicants are not good enough, regardless of how they responded to those questions,” the ruling said. “If the Department is going to decide whether alcohol distributors are ‘sufficient’ (and decide who is eligible for a license based on that decision), it must first define the meaning of sufficiency.”
The two parties clashed in the Monday hearing over who was to blame for any difficulties meeting the original May 31 application deadline and why the state originally declared in March that there was insufficient interest among liquor wholesalers to give them exclusive rights to distribution licenses. Contine said liquor distributors didn’t bring up their concerns to her even though they could have sought her out, and didn’t demonstrate their ability or willingness to get into the marijuana business even though it could threaten their federal liquor license since pot is still illegal on that level.
Liquor distributors, some who have created separate business entities and secured a liquor license for those spinoffs that they plan to use for marijuana distribution, countered that the department didn’t follow up with them in the months following the passage of Question 2 even though 33 liquor entities had expressed interest. Benson read aloud emails from February in which distributors asked if there was anything further they needed to do to get ready for their marijuana application; Contine said she wasn’t sure those messages made it to her.
The court determined the state never asked wholesalers who expressed preliminary interest in the marijuana industry about their progress towards getting into the business, or provided information about how to get started in the licensing process.
Chief Deputy Attorney General William McKean, defending the state, argued that the liquor distributors have suffered no actual harm because no distribution licenses have been given out. He also pushed back against the delay, said the state needs to get marijuana sales up and running as soon as possible to curb the black market and bring revenue to the state.
A projected $64 million from a 10 percent excise tax on recreational marijuana over the next two years is earmarked for the state’s rainy day reserve fund.
In a victory for the state, though, the court ruled that there was no evidence that the department meddled in the Clark County business licensing process before some distributors’ liquor license applications were mysteriously taken off a mid-May agenda. IADON raised the prospect that someone improperly intervened to slow down the process and prevent distributors from meeting a tight licensing timeframe.
This story was updated on Tuesday to reflect the arrival of the court order.
Featured photo: Cannabis plant nearly ready for harvest at Reef Dispensaries, 3400 Western Ave., on Wednesday, Feb. 15, 2017. Photo by Jeff Scheid.