Audit: State missed out on $500K marijuana tax revenue because of recordkeeping issues
Discrepancies in data entry by marijuana businesses are estimated to have cost the state more than $500,000 in tax revenue in a six-month period among a subset of companies tested by state auditors.
An audit of the Nevada Department of Taxation’s Marijuana Regulation and Enforcement operations found that information reported to the state in tax returns didn’t match information entered into a seed-to-sale tracking software nearly three-quarters of the time. The report also faulted the department for using only a fraction of the money lawmakers allocated to ramp up security in state offices working with the mostly cash industry, and for not helping auditors obtain documentation that could have given a clearer understanding of the recordkeeping problems.
Chairwoman Teresa Benitez-Thompson described the audit, discussed Thursday at a meeting of the Legislative Audit Subcommittee, as “less than stellar.” Others acknowledged that Nevada’s marijuana regulatory structure popped up in a matter of months and the field is something of uncharted territory.
“I understand where you’ve been. You’re trying to fly an aircraft while you’re building it, and I guess to your credit, you’ve remained in flight,” said Democratic Sen. David Parks, a member of the subcommittee. But, he said, “there just seems to be an undertone in this entire report that there seems to have been a lot of lack of cooperation.”
Taxation department Director Melanie Young, who took office earlier this year, said she could only assume that the refusal had to do with the volume of records requested or concern that it went against licensees’ due process rights.
“I’m going to have to apologize for the department not providing those records. That was done under previous administration,” she said.
Among auditors’ findings:
- There was “inaccurate and incomplete data” in the seed-to-sale tracking software METRC (an acronym for Marijuana Enforcement Tracking Reporting Compliance), which exists to ensure that cannabis is not diverted to or from the black market or out of state. They said the department has not been conducting “effective monitoring and oversight of the system” — it does not reconcile data in METRC with tax returns — and has not provided “sufficient guidance” to licensees.
- Data in the METRC system didn’t match with the totals reported on tax returns in 72 percent of the returns that were examined — 86 of 120 of the returns tested.
- Auditors reviewed tax returns from 10 cultivators and five retail marijuana stores with what they had logged in METRC. Wholesale tax returns didn’t match METRC data in 70 percent of cases, retail marijuana tax returns didn’t match in 57 percent of cases, and sales tax returns didn’t match about 60 percent of the time.
- Auditors could not determine why the rates did not match because when they asked the Department of Taxation to obtain additional documentation from licensees, the department initially accepted but later declined to do so.
- High-potency products meant for medical marijuana patients were improperly sold to recreational customers in 43 percent of cases examined by auditors. “Medical marijuana products contain high THC levels and are intended to be used for the exclusive benefit of a person to mitigate the symptoms or effects of a debilitating medical condition,” the audit said. “Allowing recreational users to consume medical products threatens the health and safety of the consumer, the general public, and the integrity of the industry.”
- Dispensaries that have recreational and medical marijuana licenses are not properly logging sales. One logged all sales as those to medical patients even though 81 percent of products were sold to recreational customers; eight dispensaries recorded all sales as recreational when 18 percent should have been labeled as medical.
- The department is not effectively using METRC to track waste during the marijuana production process and hasn’t come up with a way to isolate inappropriate transactions. “Marijuana products are susceptible to loss and theft and misappropriations can be covered up through the waste process,” auditors said.
- In spite of the risks of operating in an all-cash industry, the Department of Taxation spent only 7 percent of the $340,000 that lawmakers allocated in 2017 to upgrade security at offices that collect taxes by the end of fiscal year 2018. The department pegged that to leadership turnover and higher-than-expected quotes.
The department accepted all 13 of the recommendations auditors made to improve its systems, but noted that they launched recreational marijuana sales at a breakneck pace in 2017, and said that METRC is only one of the tools they use to ensure compliance.
“The deficiencies identified in the Metrc system and its monitoring do not impair the Department’s overall ability to provide for public safety oversight of the marijuana industry,” the department said in a written response to auditors.
Nevada’s marijuana industry consists of 65 retail stores and more than 900 individual licenses or conditional licenses. Single businesses often have multiple licenses because they include a store, a distribution operation, cultivation and production.
In its first year, the industry brought the state nearly $70 million in revenue from a 10 percent excise tax on retail sales and a 15 percent wholesale tax.
Nobody representing the marijuana industry spoke up during the public comment period about the issues raised in the audit. But Benitez-Thompson said they were partly to blame.
“Obviously the regulatory oversight we’re going to beef up and make sure that we as a state of Nevada are providing and funding a regulatory system that ensures safety and compliance,” she said. “But to the point, the onus of entering this information into METRC falls on the industry, and it’s not happening, and that’s the industry’s to own.”