How Will Recreational Pot Distribution Work?

Jun 21, 2017

A district court judge in Carson City has granted a preliminary injunction that prohibits the state of Nevada from issuing distribution licenses for recreational pot to anyone other than wholesale alcohol distributors.

The ruling could impact the start date for retail cannabis sales, which were set to begin on July first.

Reno Public Radio's Michelle Billman sat down with our business reporter Noah Glick to learn more about what this means for the recreational marijuana industry.

So first, let’s get some context. How did we get to this point?

Question 2 on the November ballot last year legalized recreational marijuana. Language in Question 2 says in the first 18 months of the program, alcohol distributors would be the only entities distributing recreational pot unless the Department of Taxation deemed there were insufficient numbers of people interested in serving the new market.

In its first draft of regulations, the department said there wasn’t enough interest from alcohol distributors, so it also allowed medical marijuana establishments and verified marijuana agents to apply for distribution licenses.

An independent group of alcohol distributors then filed a lawsuit saying there actually was enough interest from them. District Court Judge James Wilson issued a temporary restraining order.

Essentially this case was all about whether or not there was sufficient interest from alcohol distributors to serve the retail cannabis market, and whether the Department of Taxation was correct in its initial determination.

You attended the all-day hearing Monday in Carson City. What were the main arguments you heard from both sides?

This hearing really came down to a few key points. At its core, the question is really about how much should the recreational marijuana industry look like the alcohol industry?

Liquor wholesalers believe in the three-tier system that’s currently in place for the alcohol industry. That means a retailer couldn’t also then be the manufacturer or distributor. There needs to be a middleman that acts as a check against total control.

Kevin Benson, who represented the alcohol distributors, explains how this works for alcohol distribution.

“You have a third party who’s independent of the two parties in between,” he says. “And so they can log how much product is going from Point A to Point B, and the tax department can then make sure that they’re getting taxes on that amount of product. So you have somebody who’s not in bed with one side or the other who’s helping to track that product.”

But the crux of the hearing came down to language around sufficiency. Here’s Department of Taxation Director Deonne Contine explaining during her testimony how that idea works in this context.

“If we determine that there was a sufficient number of wholesale liquor distributors, we would license them only,” she says. “And if we determine that it was insufficient at this point, we would license MMEs (medical marijuana establishments) who meet all the other requirements of the regulations, or anyone who has gone through the vetting process.”

The issue though is that the department couldn’t really answer what constitutes sufficient interest from alcohol distributors. When asked how many distributors the market needs, Contine said only the department has determined how many would not serve the market. And that number is zero and one.

What kind of impact does this ruling have on the recreational marijuana industry here in Nevada?

Basically it means alcohol distributors will be the only entities allowed to transport marijuana from cultivators and producers to retail establishments. But that comes with certain challenges that we’ll be looking into in more detail in the coming weeks.

Some of those include establishing different business entities to deal with marijuana, as alcohol is federally regulated. There are also certain local zoning issues that these distributors will have to navigate, including even talking to their neighbors to make sure they’re ok with being near a distributor with marijuana on hand.

The other impact is that only five liquor wholesalers applied for distribution licenses. But testimony in court asserted that one or two of these alcohol distributors could potentially serve the entire state.

So here’s the big question: Will this ruling the July 1 start date for retail pot sales?

The Department of Taxation says it’s committed to retail cannabis sales beginning July 1, but in an emailed statement the regulators said that none of the applications from alcohol distributors are complete. So they’re now in the process of contacting those folks and letting them know what needs to be done to complete those applications.

The big question mark here now is will licenses be approved for distribution and will those alcohol distributors be up to code concerning zoning, permitting, fees and all the other things they need to do in ten days when retail sales are supposed to begin?

It seems like it’s up to how quickly the various entities can come together and work on getting this done.

District Court Judge James Wilson's Injunction Order by KUNR Reno Public Radio on Scribd