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Marijuana plants grow in a climate controlled environment at the Premium Produce grow facility in Las Vegas on Tuesday, Dec. 4, 2018. (Jeff Scheid/The Nevada Independent)

Litigation filed against the Nevada Department of Taxation raises the specter of potential scandal in the state’s issuing of new marijuana licenses, but I’ll go it one better.

The scandal’s already here, and it’s not a close call.

It’s also hard to excuse given Nevada’s history. If ever a state should have been able to avoid the embarrassment of insufficient oversight of a pariah business, it’s Nevada, whose gaming industry provides us with painful lessons in the cost of embracing a vice-scented racket without first setting up a proper regulatory apparatus.

The tax department played the patsy back then, too. Decades ago it was handed the impossible task of licensing prospective casino operators at a time Nevada was the only state in the Union that dared to dance with the notorious card-and-dice kings. Scandal after scandal revealed unseemly and undeniable connections between the casino men and organized crime with the tax commission looking ever more buffoonish. The evolution was slow, but eventually Nevada created a two-tiered system of gaming control. While far from perfect or free of political influence, that regulatory structure has been copied throughout the country with the expansion of legalized casino gambling.

Plaintiff attorney Ross Miller, whose family knows plenty about the tumultuous evolution of the gaming industry from the inside, recognizes some parallels with the legal marijuana business.

“I think we’ve learned historically in this state that if you don’t have transparency in the process you leave the door open for essentially corruptive influences, or the influence of organized crime,” Miller says. He’s part of a legal team seeking a preliminary injunction in District Judge Elizabeth Gonzalez’s court in an effort to gather information to establish a factual basis for the issuance of the new licenses. To date, Miller said, all public records requests failed to produce anything relevant.

Legalization was sold to the public in no small part as a way of removing marijuana from the hands of organized crime and corruptive elements by properly taxing and regulating it. That’s why it’s been so important to know the ownership, to cultivate and process the plants in state. There’s a real public safety issue to consider.

Given Nevada’s history, there’s also a credibility issue.

This is probably an awkward time to mention that the Department of Taxation has admitted it used Manpower temporary workers to help process its new license applications.

Does Nevada’s new marijuana industry need its own version of the Gaming Control Board and Gaming Commission?

It certainly needs the Department of Taxation to considerably up its game under new Executive Director Melanie Young

The trouble extends beyond the current spate of lawsuits that accuse the department of a dangerous lack of transparency and failing to follow its own rules in burying its pot licensing criteria and results.  Although the litigation is coming from licensees in a highly lucrative but increasingly competitive market, it would be wrong to write off the accusations as sour grapes.

A cursory read of gaming history reveals the perils of poor due diligence and insufficient oversight around a cash-intensive business that provides an invitation to skim profits to avoid tax obligations. It was common in gambling culture, and pot’s listing on the Controlled Substances Act of 1970 as a Schedule I dangerous substance status, a designation that prevents licensees from using the federal banking system, further complicates the legal marijuana business. Given marijuana’s federal ranking right up there with heroin, banks could be charged with money laundering for accepting deposits from sales.

Local and federal law enforcement investigators know plenty about the relationship of cash-intensive businesses and corruption. Don’t be surprised to hear more on this front soon. In short, free-flowing cash businesses are a tax-collection nightmare.

It’s little wonder a partial audit of the department’s Marijuana Regulation and Enforcement function over a six-month period found data entry mistakes by licensed businesses cost the state more than $500,000 in tax revenue among a litany of other problems in the booming business. More importantly, the department was criticized for not assisting auditors in gathering documents that would have made the tax-financial picture are accurate.

While the roaring popularity of the legal availability of marijuana may have overwhelmed the licensees and the tax department’s regulatory function, it’s also true the vaunted seed-to-sale computer software, called Marijuana Enforcement Tracking Reporting Compliance, was nowhere near accurate. You don’t have to ask many questions around the industry to hear stories of certain licensees augmenting their crops with marijuana “imported” from outside Nevada.

That’s another reason the ongoing litigation by a dozen or so marijuana licensees is so important. Attorneys are attempting to compel the Department of Taxation to share information that ought to be in the public to start with. The lawsuit accuses the department of failing to follow its own licensing regulations and instead basing its selection on “arbitrary, irrelevant, vague, ambiguous, undisclosed and unpublished criteria.”

Say it ain’t so.

“They ran a process where they refused to tell anyone how they selected the winning applicants, who they are, or what criteria they used to select them,” Miller says. “That is extremely alarming, and I think just ripe for problems.”

As one of the new licensees is a publicly traded Canadian corporation, you might wonder how the state might be able to conduct background checks on every investor in keeping with Nevada statute. It didn’t, of course, and couldn’t have if it tried. Some of the investors were listed as “Anonymous.”

While some might speculate that leaves open the possibility of shadowy influence, I wouldn’t be surprised to learn Nevada licensees were privately buying shares. By law, a single entity can’t control more than 10 percent of the licenses.

The lack of transparency insults the citizenry.

New taxation director Young and Gov. Steve Sisolak have backed legislation meant to improve transparency and the regulations in a rapidly growing industry. It couldn’t come too soon.

Members of the state’s Cannabis Compliance Board, a panel based along the lines of the Gaming Control Board, were announced in January by Sisolak. It’s a good start. But let’s just say they have their work cut out for them in a system in which business is moving far faster than regulation.

Meanwhile, Miller’s musings figure to reverberate: “I don’t know that corruption took place, or that the process was run illegally, but I can tell you I don’t think you could design a process that would be more susceptible to it.”

In Nevada, we’ve heard that tune before.

John L. Smith is an author and longtime columnist. He was born in Henderson and his family’s Nevada roots go back to 1881. His stories have appeared in Time, Readers Digest, The Daily Beast, Reuters, Ruralite and Desert Companion, among others. He also offers weekly commentary on Nevada Public Radio station KNPR. His newest book—a biography of iconic Nevada civil rights and political leader, Joe Neal—”Westside Slugger: Joe Neal’s Lifelong Fight for Social Justice” is published by University of Nevada Press and is available at Amazon.com. Contact him at [email protected] On Twitter: @jlnevadasmith

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