What went wrong in Nevada’s most recent cannabis dispensary licensing round?

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On December 5, 2018, Nevada State Department of Taxation (the “DoT”) began announcing the conditional license winners and the license application denials. As gleaned from various press releases and news coverage following those announcements, the vast majority of the license awards were made to a relatively small group of organizations. Only 17 different organizations out of the greater than 100 applicants were awarded the 61 licenses available. See https://www.scribd.com/document/395982081/ Taxation-Department-Retail-Marijuana-Applicants#from_embed for a link to the scores released by the DoT, which includes the highlighted winning application scores.

Although not able to be conclusively proven at this time, the understanding is that a “winning” application was replicated from jurisdiction to jurisdiction. An applicant who scored as a 227.84 (rank 1) application in Clark County – Las Vegas was able to submit that same application with little or no changes, and receive a 227.17 (rank 1) score in Clark County – North Las Vegas. This was repeated from jurisdiction to jurisdiction, thus 53 out of 61 licenses were obtained by eight primary applicants – Verano (Zen Leaf)(11), Essence Cannabis Dispensary(8), Green Growth Brands(7), Tap Roots(7), Thrive(6), Deep Roots(6), MPX(4), and Nevada Made(3). See https://lasvegassun.com/news/2018/dec/14/most-of-newrecreational- marijuana-licenses-awarde/.

So – what’s the problem?

  • Problem 1: Lack of clarity and transparency in the ranking resulting in arbitrary and capricious decision making.
  • Problem 2: Behind the scenes “deal-making” between certain applicants and the DoT, resulting in an unfair playing field to informed applicants.Problem 3: Multiple license awards to organizations in the same jurisdiction, in violation of the publicly disclosed application process.
  • Problem 4: Failure to acknowledge the antimonopoly legislative intent.
  • Problem 5: State cannot prove chain of custody of the applications.
  • Problem 6: The state says no one can “look into the process” to learn more.
  • Problem 7: Change of ownership groups immediately prior/during/after application.
  • Problem 8: Winning applicants, Verano, excluded key license holders resulting in significant lawsuit.

In order to examine this question more fully, it is helpful to discuss the statutory and regulatory framework of cannabis in Nevada, and the events leading up to the December 5, 2018 license awards.

Statutory and Regulatory Background Nevada

has a medical marijuana program and passed an adult-use legalization through the ballot box in November 2016. In 2000, Nevada voters passed a medical marijuana initiative allowing physicians to recommend cannabis for an inclusive set of qualifying conditions including chronic pain and created a limited non-commercial medical marijuana patient/caregiver system. Senate Bill 374, which passed the legislature and was signed by the Governor in 2013, expanded this program and established a for-profit regulated medical marijuana industry.

The Nevada Division of Public and Behavioural Health (the “Division”) licensed medical marijuana establishments up until July 1, 2017 when the state’s medical marijuana program merged with adult-use marijuana enforcement under the DoT. In 2014, Nevada accepted medical marijuana business applications and a few months later the Division approved 182 cultivation licenses, 118 licenses for the production of edibles and infused products, 17 independent testing laboratories, and 55 medical marijuana dispensary licenses. The number of dispensary licenses was then increased to 66 by legislative action in 2015.

On August 16, 2018, the DoT announced a competitive application process for the remaining retail marijuana store licenses based on the maximum statutory limits authorized under NRS 453D. That application window opened on September 7, 2018, and closed September 20, 2018. The licenses awarded in that round were announced on December 5, 2018, and remain conditional until the applicant passes all local jurisdictional requirements and passes a final state inspection. Further, the applicants were notified that conditional license holders would have 12 months to become operational, with the understanding that failure to obtain full licensure could result in termination of the conditional license by the DoT. Applicants paid a nonrefundable $5000 application fee per jurisdiction in which licenses were applied for.

Applications were to be scored based on a group of application (See DoT Recreational Marijuana Establishment Application 7-2-18, pgs. 17, 18) criteria which include the following:

  • The description of the proposed organizational structure of the proposed marijuana establishment and information concerning each owner, officer and board member of the proposed marijuana establishment including the information provided pursuant to R092-17. (60 points)
  • Evidence of the amount of taxes paid or other beneficial financial contributions made to the State of Nevada or its political subdivisions within the last five years by the applicant or the persons who are proposed to be owners, officers or board members of the proposed establishment. (25 points)
  • A financial plan. (30 points)
  • Documentation from a financial institution in this state or in any other state or the District of Columbia which demonstrates $250,000 (10 points)
  • Documentation concerning the integrated plan of the proposed marijuana establishment for the care, quality, and safekeeping of marijuana from seed to sale. (40 points)
  • Evidence that the applicant has a plan to staff, educate and manage the proposed recreational marijuana establishment on a daily basis. (30 points)
  • Plan describing the electronic customer age verification and inventory control system. (20 points)
  • Documentation regarding the adequacy of the size of the proposed marijuana establishment to serve the needs of persons who are authorized to engage in the use of marijuana. (20 points)
  • A proposal regarding community impact and manner in which the establishment will meet the needs of persons authorized to use marijuana. (15)

A minor amount of additional information was provided for these categories, but nothing sufficient to determine how the DoT would allocate points to the above categories. With this as the background, now let’s address the problems.

Problem 1: Lack of clarity and transparency. The DoT is a tax agency, with a set of rules and regulations designed to empower its agents to collect taxes in an efficient and effective manner. Without getting too deep into the background and certain requirements for a tax authority, a founding pillar of most tax authorities is that the information collected by the authority is protected from disclosure. This is designed specifically to enhance the authority’s ability to investigate sensitive books and records and to enhance the taxpayer’s trust in the tax system. Here, where the DoT is responsible for allocation of highly-valued licenses in which the public has a great degree of interest, concerns were raised during the public comment period for the regulations that the proposed framework did not adequately address transparency and further did not allow for a fair allocation of licenses.

See http://marijuana.nv.gov/uploadedFiles/ taxnvgov/Content/FAQs/Public-Comment- R092-17-PEELBRIMLEY.pdf. Thus, the DoT has been on notice since January 2018 that the proposed regulations, under which these applications were processed, did not allow for sufficient disclosure of the application scoring standards, and would result in a process that was contrary to the public interest. In hindsight, Peel Brimley’s public comment letter appears to be prophetic. Tasking a tax regulator with drafting the regulations for the award of valuable and limited licenses appears to have been contrary to the public’s interest in transparency and fairness.

Numerous of the denied applicants have expressed great concerns regarding how the licenses were scored. Until recently, none of the applicants knew who scored the applications. In a recent court filing, it was disclosed by the State of Nevada that a temporary services agency, “Manpower”, was engaged by the State to complete the license application review. Six temporary workers were directed to visit the DoT offices and review the electronic applications. Assuming historical pricing based on known transactions for adult-use licenses in Clark County, these licenses are worth in excess of $10 million each, and if properly managed will result in $100s of millions in tax revenues for the State of Nevada over the next few years, and the DoT delegated its responsibility to review the applications to a temporary agency. Upon further request, the DoT has refused to disclose the names or qualifications of those individuals. Only two DoT employees are known to have engaged in the review process, and the extent of their review has also been declined for further comment from the DoT.

Problem 2: Behind the scenes “deal-making” between certain applicants and the DoT, resulting in an unfair playing field to informed applicants.

Some, but not all, applicants were informed by the senior DoT representatives that if they obtained a license in a jurisdiction that was approved by the state, but denied by the local jurisdiction, that the DoT would work with those applicants to transfer the license to another jurisdiction. By way of example, Henderson and Carson City stated in a public release that no further licenses would be granted. Applicants that were not informed of this did not apply in those jurisdictions, and thus had no chance for a later fix.

Problem 3: Multiple license awards to organizations in the same jurisdiction, in violation of the publicly disclosed application process.

Highlighted in all red and all capital letters, the application stated, “No applicant may be awarded more than 1 (one) retail store license in a jurisdiction/locality unless there are fewer applicants than licenses allowed in the jurisdiction.” Despite this prohibition, at least one applicant has publicly released the following statement: “Essence applied for and was awarded eight licenses total, giving the Company retail expansion across the State, including Sparks, Carson City, Reno, Clark County (qty. 2), City of Las Vegas, North Las Vegas, and the City of Henderson.” The question remains, why did the DoT authorize Essence to obtain 2 licenses in Clark County, and why?

Problem 4: Failure to acknowledge the anti-monopoly legislative intent.

The final hurdle which the application process did not address is the legislative anti-monopoly intent. The medical marijuana statute, NRS 453A states, “To prevent monopolistic practices, the Department shall ensure … that it does not issue, to any one person, group of persons or entity, the greater of: … more than 10 percent of the medical marijuana establishment registration certificates otherwise allocable in the county.” The DoT attempted to mirror this language in R092-17A, Sec. 80 but did not consider the oligopoly it was creating by granting a group of eight applicants 86% of the licenses in Nevada. The real loser here is the residents and customers who will now be subject to the whims and pricing of a small group of business owners. The end result is that Nevada State will be the loser, as customers are driven back to grey and black markets, where no taxes are paid and safety is thrown out the window.

Problem 5 & 6: On legal argument and statements by the Nevada Department of Taxation, the Department of Tax claims that the actions of the state are a black box that cannot be disclosed to the public, which is offensive to due process and citizens rights. This includes who ranked the packages, procedures followed, detailed scoring criteria, maintenance of a custody log or other security protocols followed to ensure no tampering or impermissible application supplementation or tampering.

Problem 7&8: Discovered as recently as the end of January 2019.

No analysis currently conducted, but clear on the face of legal complaints among the Verano ownership group and upon review of licensing process and public announcements by Nevada cannabis companies Nevada Organic Remedies (The Source) and Essence group.

Conclusion

The new administration has an opportunity to send a strong message to Nevadans. Nevada and its residents come first, and those residents are entitled to transparency, consistency, and fairness – none of which were followed in this current debacle. The author has heard rumblings that the current provisional licenses can be revoked entirely – either through judicial, legislative, or administrative actions. An administrative remedy would be to place a freeze on the DoT to convert the conditional licenses to active licenses, and to empower a Marijuana Control Board similar to Nevada’s highly successful and renowned Gaming Control Board. Prior to the Board taking ownership of the application process, the Nevada State Tax Commission should explore any and all options to provide much-needed transparency and fairness to the process. DoT should be properly relegated to the area in which it shines – sales and MBT tax collection and tax policy enforcement. Barring that solution, the legislature can revisit the regulations as enacted by the DoT and issue legislative guidance that creates a transparent process with clear guidance for applicants and Nevada citizens.

LW

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