Booze Dealers Retain Exclusive Rights to Pot Distribution in Nevada

CARSON CITY, Nev. (CN)—A state judge has ruled that liquor wholesalers have the exclusive right to be distributors for the first 18 months of Nevada’s new recreational-marijuana industry, with sales set to begin July 1 under a stepped-up program.

Carson City Judge James Wilson Jr. on Tuesday granted a preliminary injunction prohibiting Nevada tax officials from issuing a permit to transport recreational marijuana from producers to retail stores to anyone other than licensed liquor distributors in the state.

The judge’s decision could delay the July 1 kick-off.

Stephanie Klapstein, a spokeswoman for the Nevada Department of Taxation, said in prepared remarks that the department is “committed to ensuring that the vote of the people to provide for the legal purchase of marijuana from a strictly regulated market will proceed on July 1.”

Klapstein said the department is reviewing the ruling with the Attorney General’s Office and will “explore all legal avenues to proceed with the program as provided in the regulations.”

None of the applications received so far from liquor distributors is complete, she said, and the department is notifying them of what they need to do to finish the process.

The judge agreed with arguments that liquor distributors likely will be shut out of the recreational marijuana business entirely if the department issues licenses to non-alcohol distributors.

“Once licenses are issued to others, it will be difficult if not impossible to revoke those licenses, or at least not within the 18-month period during which (state law) grants alcohol distributors exclusive licenses,” Wilson ruled.

Wilson’s ruling came after he presided over a day-long hearing on Monday that featured testimony from top state taxation department officials and liquor wholesalers.

The dispute over who can obtain distributor licenses stems from a voter-approved initiative legalizing marijuana and temporary state tax regulations designed to jump-start recreational sales six months earlier than the required Jan. 1 start date.

Nevada officials are eager to have shops operating early to collect tax revenue, especially from a 10 percent tax on sales that Republican Gov. Brian Sandoval proposed and state lawmakers approved. A bill approved by legislators allocates revenue from the tax to the state’s rainy-day fund.

The initiative declares that recreational marijuana will be regulated similar to alcohol, which has a three-tiered system in Nevada that separates production, distribution and retail sales.

To carry out that system, the law requires that for the first 18 months after the Nevada Department of Taxation begins receiving licenses, it may only issue distribution permits to licensed liquor wholesalers unless it “determines that an insufficient number of marijuana distributors will result from this limitation.”

While creating the temporary regulations, tax officials expressed worries that the number of liquor distributors would not be adequate, so they allowed current medical marijuana establishments to apply to distribute recreational marijuana in addition to selling or producing it.

The law provides that only licensed medical marijuana establishments are allowed to sell or cultivate recreational marijuana for the first 18 months.

Tax officials said they have not yet made a formal determination that the number of liquor distributors will be insufficient.

But the newly formed Independent Alcohol Distributors of Nevada group claimed in its lawsuit for injunctive and declaratory relief that the department “predetermined” the number would not be sufficient because of fears that the alcohol distributors would jeopardize their federal Alcohol and Tobacco Tax and Trade Bureau licenses if they distributed marijuana.

Alcohol distributors contend that they can easily serve the relatively limited number of marijuana shops. And to avoid problems with their federal licenses, some of them formed separate business entities to get into the marijuana business.

The alcohol distributors argued that the department’s regulations are invalid because they make it “unreasonably impracticable” for them for operate in the marijuana industry. In addition, they contended that tax officials have too much latitude, with no valid guidelines, in determining whether the number of liquor wholesalers is sufficient.

Judge Wilson’s ruling prevents the department from making a sufficiency determination until it has adopted, through the formal rulemaking process, valid definitions for determining what number of distributors is required to serve the market.

The department argued in a motion to dismiss the suit that the alcohol-distributors group failed to demonstrate that harm is probable.

“No liquor wholesale dealer has been denied a marijuana distributor license, and no marijuana distributor licenses have been issued,” according to the motion.

Kevin Benson of the Allison MacKenzie firm in Carson City represents the alcohol-distributors group.

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