UPDATE: 9:20 p.m. Aug. 11, 2017

A Carson City judge has issued a temporary restraining order restricting the Nevada Department of Taxation from issuing marijuana distribution licenses to non-liquor licensees.

The order comes just a day after a meeting in which the tax agency concluded there weren’t enough liquor licensees to adequately serve the recreational marijuana market, clearing the way for an expanded pool of distributors. Judge James Russell indicated the department’s hearing didn’t give liquor distributors due process.

“Although, it was previously reported to this Court that the outcome of the meeting would not be pre-determined … it appear that the Department invited the speakers in order to support its pre-determined conclusion that alcohol distributors are insufficient,” he wrote.

The judge said that the department was required to provide liquor distributors an opportunity to prepare, present evidence and cross-examine witnesses, but didn’t appear to do any of those things or notify liquor distributors that an economist and three others would make presentations supporting the agency’s eventual determination.

Russell said there are six liquor licensees already approved to serve the marijuana market, so it’s unlikely there would be any major disruption in revenue from the order. By contrast, liquor distributors “are likely to be entirely shut out of the marijuana distribution business if the Department proceeds to issue marijuana distribution licenses to existing marijuana establishments, instead of solely to alcohol distributors.”

He scheduled a hearing on the matter in Carson City on Aug. 17.

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Original story:

Marijuana dispensaries are celebrating after the Nevada Department of Taxation decided to open up pot distribution licenses to a broad pool of applicants rather than allowing liquor wholesalers exclusive rights to the role.

Agency Director Deonne Contine’s determination, which came after a three-hour-long hearing that featured economic projections of marijuana demand and testimony from dispensaries and liquor distributors, means her department can start processing dozens of distribution applications filed by non-liquor licensees. She said some of the new cohort of distributors could be up and running in a week.

“I think the operators and owners who are losing money because of the lack of distribution are very relieved,” said Riana Durrett of the Nevada Dispensary Association. “They’re very happy that this will no longer be the reason this program is at risk.”

The determination could be appealed to the Nevada Tax Commission. An attorney for the Independent Alcohol Distributors of Nevada (IADON), which has been fighting the expansion since March through legal and administrative processes, said the group intends to challenge the latest development in court.

Recreational sales have been legal in Nevada since July 1, and the state now has 53 retail stores and six liquor distributors who are licensed to deliver marijuana. Contine said the only distributor that’s up and running right now is Blackbird Logistics, which had been the sole company delivering medical marijuana in the state before recreational sales began.

Blackbird CEO Tim Conder testified that there have been growing pains for his company, which was the first to receive a distribution license when it was approved in mid-July, once it took on the mantle of serving the entire state. His 30 employees and 12 vehicles have to make 50-150 deliveries a day, and dispensaries testified that the shipments were often not on time.

“I can say without a doubt that Blackbird is not enough,” Conder said. “We cannot make everyone happy although we’d love to. There could easily be at least five other license holders in the state with our size and stature.”

But other liquor distributors argued that’s just what they’re doing. A representative for a partnership between Focus Distribution and liquor licensee-owned Paladin said they had 15 drivers trained and ready to go in both Northern and Southern Nevada next week, with several custom-built refrigerated transport cars on the way. The company expects to handle 200-250 deliveries a day.

A lawyer for a liquor distributor that recently secured a marijuana distribution license said opening the floodgates now was too early.

“We feel that at this juncture, any determination of sufficiency is premature,” said the lawyer, Michael Hagemeyer.

The political bargain that started it all

A ballot measure approved by voters in November gives liquor distributors the exclusive right to transport marijuana from cultivation and production facilities to retail stores for the first 18 months of recreational sales. The authors and early supporters of the campaign to legalize recreational marijuana in Nevada explained that they included the provision to help get the ballot measure past political opposition.

“When you're a political operative and you're trying to pass a statutory initiative, the approach is pretty simple -- you want as big a tent as possible with as many people inside your tent,” explained Joe Brezny, the former spokesman for the legalization initiative — the Coalition to Regulate Marijuana Like Alcohol. “The problem is, when you're running a marijuana initiative, a lot of people just say no because they have moral questions about what you're doing or because they’re worried about their federal licenses.”

The liquor distributors helped contribute $87,500 early in the campaign and were interested at the time in getting involved in the industry.

“We looked at this as a way to bridge the two industries, because nationally, there's kind of a grind,” he said.

Ballot measure author Matt Griffin said including the liquor distributors was part of a calculation to avoid stirring up potentially ballot measure-killing opposition.

“That was part of our effort … to reach out to people in Nevada,” he said. “You’ve got to find friends. At the time, it was 2013 in Nevada — you’re an island when you’re talking about marijuana. You have to write something responsible enough that it’s not going to offend people in Nevada.”

But Brezny contends that liquor distributors disappeared from the campaign for about two years until this spring, rather than gearing up to take advantage of marijuana legalization. Griffin said he reached out to California Nevada Beverage Association but was told many distributors were not interested in the marijuana industry because it might jeopardize their federal licensure.

The two said the ballot measure language included an “escape hatch” that allowed the tax agency wide discretion to determine distribution licenses should be opened up beyond liquor licensees, should liquor distributors not express enough interest. It says liquor distributors get exclusive rights “unless the Department determines that an insufficient number of marijuana distributors will result from this limitation.”

Members of IADON have contended that they did express interest in getting involved in marijuana after the ballot measure passed, but their inquiries were largely disregarded by tax department before they were blindsided this spring with regulations that declared too few of them were interested.

The court battle

Liquor distributors say they want to be involved to provide a layer of independence in the supply chain, similar to the liquor industry’s Prohibition-era three-tier system where ownership in multiple tiers is banned. Otherwise, marijuana companies could be fully vertically integrated — meaning entities with the same owners could be involved in cultivation, production, delivery and retail sales.

Brezny counters that there’s already a layer of independence — marijuana testing labs cannot be owned by marijuana businesses involved in other layers of the supply chain — and that vertical integration worked just fine in the medical marijuana world.

IADON fought to preserve its exclusive spot in the supply chain and prevailed at the district court, where a judge ordered an injunction that prohibits non-liquor licensees from getting a distribution license for the time being. He cited vagueness in regulations on how the state would make a determination that the pool of liquor distributors is insufficient. The matter is being appealed to the Nevada Supreme Court.

Meanwhile, the tax agency drafted emergency regulations to address the judge’s concern about vagueness and got them approved by the tax commission. As grounds for emergency status, the department cited reports that dispensaries were seeing high demand for newly legal weed and running into supply issues.

The regulation created a structure for the taxation department to determine whether there are an insufficient number of liquor distributors to serve the market based on factors such as historical demand for marijuana distribution in the past three months, projections of future demand and the operational needs of dispensaries, including frequent deliveries and quick turnaround time.

Contine read aloud responses to a survey the department conducted last month about marijuana distribution. Dispensaries complained that some potential distributors wanted to charge 10-17 percent of gross revenue to make deliveries — something that could eat through their profit margins — and that liquor wholesalers wouldn’t know the marijuana industry.

They also said they needed an average of 9-11 deliveries per week and expected orders to be turned around in anywhere between 12 hours to five days. Stores predicted their sales volume would grow by 35 percent over the next six months.

Department economist Kile Porter presented some complex charts showing his predictions that marijuana sales would grow by 5 percent each month, or perhaps more because Nevada has such an active flow of tourists. If the number of distributors and competition didn’t grow, it could push prices up and drive consumers to the black market.

In announcing her decision, Contine said the distributor bottleneck could hurt companies’ bottom line and could suppress tax revenue to the state — including an estimated $64 million over the next two years from a 10 percent marijuana excise tax. What’s more, voters who approved the measure aren’t always able to access the types of products they want.

“As our economist outlined, restricted distribution could lead to higher prices that could push consumers to the black market,” she said. “I have no reason to doubt that these are real, urgent issues for these businesses.”

This story was updated at 8:10 a.m. on Aug. 11, 2017 to reflect that IADON intends to challenge the determination in court.