Extras on Excise: All Eyes on the Supreme Court of Nevada for Decision on the Topsy-Turvy World of Marijuana Distribution


 

Judge's Gavel

On Nov. 8, 2016, Nevada voters approved Question 2, which allows individuals aged 21 years or older to purchase, possess, and consume small amounts of marijuana. Question 2 was originally scheduled to take effect on Jan. 1, 2018, however, on May 8, 2017, the Nevada Tax Commission passed Temp. Reg. T002-17, allowing recreational sales to start July 1, 2017. While the expedited timeline will undoubtedly increase tax revenue for the state—mainly through a 15 percent tax on the fair market value of marijuana at wholesale, in addition to a 10 percent tax on retail sales of marijuana—there has also been a plethora of questions related to Nevada’s licensing of retail marijuana stores, marijuana cultivation facilities, and, most notably, marijuana distributors.

Specifically, Question 2, § 10.3, provides, in pertinent part, that “[f]or 18 months after the Department [of Taxation] begins to receive applications for marijuana establishments, the Department shall issue licenses for marijuana distributors … only to persons holding a wholesale dealer license pursuant to chapter 369 of NRS, unless the Department determines that an insufficient number of marijuana distributors will result from this limitation.”

Nevada Revenue Statute § 369.130 defines a wholesale dealer as “a person licensed to sell liquor as it is originally packaged to retail liquor stores or to another licensed wholesaler, but not to sell to the consumer or general public.”

Thus, per Question 2, only licensed wholesaler liquor dealers may be licensed as marijuana distributors for 18 months after the Nevada Department of Taxation began accepting applications for marijuana distributors, unless the department determines there will be an insufficient number of marijuana distributors.

In Temp. Reg. T002-17—the regulation passed May 8, 2017—the department put forth various requirements for wholesale liquor dealers to apply for marijuana distribution licenses and set a May 31, 2017, application deadline.

After the department issued this regulation, the Independent Alcohol Distributors of Nevada (IADON) filed suit in the District Court for Carson City, alleging the department was engaging in ad hoc rulemaking.

The court agreed, reasoning the regulation did not define what “sufficient” meant, nor how sufficiency was determined. Because of this, the court issued a preliminary injunction on June 21, 2017, prohibiting the department from issuing distribution licenses to anyone other than licensed wholesale liquor dealers.

On July 1, 2017, the Nevada recreational marijuana market opened.

Less than two weeks later, the Nevada Tax Commission adopted an emergency regulation establishing the criteria the department would use to determine whether there would be an insufficient number of marijuana distributors resulting from only issuing licenses to wholesale liquor dealers. The department’s criteria includes historic market demand, industry growth expectations, and historic operational needs of marijuana establishments.

Then, on Aug. 7, 2017, the department posted notice for an Aug. 10, 2017, meeting to determine whether there were a sufficient number of wholesale liquor dealers to serve the marijuana market.

After the meeting, the department determined there was an insufficient number of wholesale liquor dealers and, subsequently, IADON renewed its suit in the District Court for Carson City, again seeking a temporary restraining order and a preliminary injunction against the department. This time, however, the court ruled in favor of the department, reasoning IADON had not exhausted its administrative remedies before seeking relief in the district court.

After exhausting its administrative remedies (by appealing the Department’s determination to the Nevada Tax Commission), IADON appealed to the Supreme Court of Nevada, alleging, among other things, that no emergency existed permitting the department to issue its emergency regulation. IADON also alleged that it was deprived due process in the Aug. 10, 2017, meeting because the department had determined prior to the meeting that there were not enough wholesale liquor dealers to satisfy the marijuana market.

After considering multiple briefs on the issue, on Sept. 14, 2017, the Supreme Court of Nevada provisionally ruled in favor of IADON, granting a temporary injunction banning the department from issuing marijuana distribution licenses to applicants other than those currently licensed to distribute alcohol. The court further concluded that oral argument would help determine if the temporary injunction should continue pending resolution of the appeal.

Pursuant to the court’s order, on Oct. 3, 2017, the Supreme Court of Nevada sat en banc at the William S. Boyd School of Law in Las Vegas and heard arguments from multiple parties, with several members of the media in the audience.

While the court has not yet made its final decision, given Nevada had over $27 million in sales in its first month—two times what Colorado and Oregon sold in their initial months, per USA Today—expect all eyes in the industry to be glued to news from the court.

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