Anda di halaman 1dari 42

Electronically Filed

Sep 05 2017 09:43 a.m.


Elizabeth A. Brown
Clerk of Supreme Court

Docket 73883 Document 2017-29569


Preliminary Injunction' ("Wilson's Order") that required that the Department refrain

from "making any determination of the sufficiency or insufficiency of the number

of alcohol distributors under NRS 453D.210(3) until it has adopted valid definitions

or rules for determining what number of distributors is required to serve the

market."'

In the days following Wilson's Order, the Department began issuing licenses

to the liquor wholesale licensee applicants for marijuana distribution. On July 13,

2017, the Commission voted to adopt an emergency regulation, consistent with the

rulings in Wilson's Order. 3 The emergency regulation provided that information

would be requested from all market participants, both licensed liquor wholesalers

and marijuana establishments. The Department's determination regarding the

insufficient number of licensees would be made in a public meeting noticed in

accordance with NRS Chapter 241, and the Department's final decision would be

appealable to the Commission.

' Order Granting Application for Preliminary Injunction, June 21, 2017, 17
OC 00098 1B, attached as Exhibit 1.
2 NRS 453D.210(3) provides that "[for 18 month
s after the Department
begins to receive applications for marijuana establishments, the Department shall
issue licenses for marijuana distributors pursuant to this chapter only to persons
holding a wholesale dealers license pursuant to chapter 369 of NRS, unless the
Department determines that an insufficient number of marijuana distributors will
result from this limitation."
3 See Emergency Motion, Exhibit 2.

2
On July 17, 2017, Independent Alcohol Distributors of Nevada, Inc.

("IADON") filed an application for temporary restraining order and preliminary

injunction challenging the validity of the emergency regulation. Following a hearing

on the matter on July 24, 2017, the District Court denied IADON's application.'

("Russell Order I"). The District Court found that the emergency regulation was

validly adopted in accordance with NRS 233B.0613, "sets forth the criteria" for the

Department's determination, requires a "public meeting," and provides that the

Department's "final decision is appealable to the Commission." On that basis, the

District Court ruled that the emergency regulation complied with Wilson's Order.

Further, the District Court ruled the "Department has not yet conducted a hearing

pursuant to the Emergency Regulation, and thus an action seeking to preclude the

Department from making a decision based on the criteria and procedure set forth in

the Emergency Regulation is premature."

The Department sent out surveys to the market participants in accord with the

regulation. Following receipt of the information, the Department noticed a public

meeting for August 10, 2017. An Administrative Law Judge from the Department

oversaw the meeting. Representatives from liquor wholesalers and from marijuana

4 Order Denying Application for Temporary Restraining Order/Preliminary


Injunction, July 27, 2017, 17 OC 00153 1B, attached as Exhibit 2. Although IADON
says it is appealing this order, it was not filed as part of the Notice of Appeal.

3
establishments presented evidence in addition to what was provided in the surveys.

At the conclusion of the hearing, the Department stated its determination and

subsequently issued a final written decision on August 15, 2017. 5

On August 11, 2017, IADON filed a renewed application for temporary

restraining order and preliminary injunction on grounds the parties were not afforded

adequate due process at the August 10, 2017, public meeting. On August 17,

following a hearing on matter, the District Court ruled that the "Department's public

meeting was properly noticed, and interested parties were afforded the opportunity

to present evidence and testimony in accord with applicable due process

requirements." 6 (Russell Order II). The Court also ruled the "testimony [at

Department's public meeting] overwhelmingly supported a need to expand the

marijuana distributor licenses to more than alcohol distributors."

In summary, the District Court has ruled that the Department has complied

with the requirement of the Order to "adopt[] valid definitions or rules for

determining what number of distributors is required to serve the market" before

5 See Determination of Department, August 15, 2017, attached as Exhibit 3.


This Determination was appealed to the Commission and heard on August 29, 2017.
The Commission affirmed the Department's Determination but there is not yet a
written decision from the Commission. The decision of the Commission is a final
decision for purposes of seeking a petition for judicial review.
6 See Order Denying Application for Preliminary
Injunction and Dissolution
of Temporary Restraining Order, Aug. 22, 2017 filed as part of Appellants' Notice
of Appeal.
4
"making any determination of the sufficiency or insufficiency of the number of

alcohol distributors under NRS 453D.210(3)." In addition, the District Court has

further ruled that the August 10, 2017, public meeting, held in accordance with the

emergency regulation, did afford parties adequate due process.

ARGUMENT

I. IADON is not entitled to an injunction as they have no likelihood of success


on the merits.
A.The Emergency Regulations state a valid emergency justifying action by
the Commission.
Nevada law sets out the procedure for adoption of an emergency regulation. 7

Here, IADON must concede that the foregoing statutory procedure was duly

followed: the Emergency Regulation and the statement of the emergency was

delivered to the Governor, the Governor endorsed the statement of the emergency,

the Commission conducted a duly-noticed hearing at the conclusion of which it

adopted the Emergency Regulation, and it was then filed with the Secretary of State.

Having followed this rulemaking process, the Emergency Regulation bears a

rebuttable presumption of validity and has the force of law.'

This appeal is effectively IADON's request that this Court should (1)

"judicially review" the statement of emergency, (2) in so doing should apply a "good

cause standard of review," and (3) on that basis "invalidate" the statement of

7 NRS 233B.0613
8 NRS 233B.090; 040.
5
emergency on grounds that a possible tax revenue shortfall, the potential for

increased black market sales, or economic harm do not constitute a bona fide

emergency.

As a threshold matter, Nevada law is devoid of any "standard or rule for the

courts to follow" in reviewing a statement of the emergency endorsed by the

Governor. In similar circumstanceswhere the issue concerns an executive branch

policy choicethis Court has ruled that the political question doctrine precludes

judicial review. 9 If, however, this Court were to evaluate the sufficiency of the

statement of emergency, the proper standard of review is that an agency's finding of

an emergency is given every presumption in its favor and is not subject to question

unless "palpably wrong.' 110

This is the standard employed in jurisdictions with statute's similar to

Nevada." The three cases cited by IADON are inapposite as they do not involve

statutes with language similar to Nevada. 12 Similarly, there is no basis for citing the

9 N. Lake Tahoe Fire v. Washoe Cnty. Comm 'rs, 129 Nev. _, 310 P.3d 583
(2013)(citing Baker v. Carr, 369 U.S. 186, 217 (1962)).
1 2 Am. Jur. 2d Administrative Law, 203 (2017).
11 Berrios v. Dep't of Pub. Welfare, 583 N.E.2d
856, 861 (Mass. 1992)
(agency decision to adopt emergency regulations was entitled to "every presumption
in its favor and is not subject to question in judicial proceedings unless palpably
wrong") (internal citation omitted); Melton v. Rowe, 619 A.2d 483, 485 (Conn.
1992) (agencies' emergency determinations are not subject to question unless
"palpably wrong").
12 State of N. j, Dep't of Envtl. Prot. v. U.S. E.P.A.,
626 F.2d 1038, 1045
(D.C. Cir. 1980)(applying the "good cause" standard set forth in the 5 U.S.C.
6
statutory definition of "emergency" in the Nevada Open Meeting Law. Under that

statute, an agency can forego publishing any notice of a public meeting in a statutory

definition of "emergency." 13 Here, the Emergency Regulation was adopted by the

Commission in a duly-noticed public meetingthe Open Meeting Law exemption

was not invoked, and that statutory standard inapplicable here.

Instead, applying the applicable standard, it is clear that the statement of

emergency signed by Governor Sandoval is not "palpably wrong." The stated

reasons for the emergency include avoiding loss of revenue to the State, mitigating

the risk of "black market" sales, and protecting against economic loss to Nevada

businesses, employees and investors.'

Here, IADON contends that economic harm to a particular business or

industry does not constitute an emergency. However, a cursory review of the Nevada

Register reveals that similar reasons have been the basis for numerous emergency

regulations in Nevada. 15 These, and other statements of emergency, have supported

553(b)(B)); Mauzy v. Gibbs, 723 P.2d 458 (Wash. Ct. App. 1986)(Washington
statute defined emergency); Wilcox v. New Mexico Bd. of Acupuncture & Oriental
Med., 288 P.3d 902 (N.M. App. 2012)(applying a statutory definition of emergency).
NRS 241.020(10).
14 Statement of Emergency, Emergency Motion,
Exhibit 2.
15 Regulations have been adopted on: property tax
abatement (LCB File No.
E003-5A (2006)); a tax amnesty program that might result in additional revenue for
Nevada (LCB File No. E002-008A (2008)); a state employee furlough program to
mitigate budget shortfalls (LCB File No. E001-11A (2011)); acceptance of
7
the adoption of emergency regulations to loss of State revenue and to protect against

economic loss to Nevada individuals and business.'

IADON also contends that the "threat" of a "budget shortfall" is not

sufficiently "credible." The statement of emergency recognizes that the current State

budget relies on $100 million in marijuana tax revenue for the biennium, which could

be jeopardized absent the Emergency Regulation. Clearly, absent the "flow of

revenue related to the legal sale and regulation of marijuana," this tax revenue will

be jeopardized to some extent."

B. IADON failed to exhaust its administrative remedies.

IADON is appealing Judge Russell's denial of a preliminary injunction

requested after the Department held its public meeting and made a sufficiency

determination. After a hearing, Judge Russell properly denied IADON's second

preliminary injunction, because a judicial challenge of the Department's sufficiency

determination cannot be made until after an appeal and decision from the

Commission. The Emergency Regulation specifically states that the Department's

decision is appealable to the Commission pursuant to NRS 360.245. That statute

applications for new transportation network companies (LCB File No. E006-15A
(2015)).
16 See also LCB File No. E001-14A (2014); LCB File No.
E002-10A (2010);
LCB File No. E002-09A (2009).
17 See LCB File No. E001-14A (2014), citing a shortfal
l of $30,000 annually
received from group camping fees.
8
states that a decision from the Commission "is a final decision for the purposes of

judicial review." "[A] person generally must exhaust all available administrative

remedies before initiating a lawsuit, and failure to do so renders the controversy non-

justiciable."' "The exhaustion doctrine gives administrative agencies an

opportunity to correct mistakes and conserves judicial resources, so its purpose is

valuable; requiring exhaustion of administrative remedies often resolves disputes

without the need for judicial involvement."' The only remedy allowed by NRS

360.245 is an appeal to the Commission, and then judicial review under NRS 233B. 2

In addition to Judge Russell finding that IADON failed to exhaust their

administrative remedies, he also found that "there was substantial evidence to

demonstrate a need for additional distributors over and above alcohol wholesale

licensees."' And further that the "testimony overwhelmingly supported a need to

expand the marijuana distributor licenses to more than alcohol distributors."' The

court also found that the "Department's public meeting was properly noticed, and

interested parties were afforded the opportunity to present evidence and testimony

in accord with applicable due process requirements." 23 IADON's argument to need

18 Allstate Ins. Co. v. Thorpe, 123 Nev. 565, 571, 170 P.3d 989, 993 (2007).
' 91d. at 571-72.
213 See S. California Edison v. First Judicial Dist. Court of State of Nevada,
127 Nev. 276, 283, 255 P.3d 231, 236 (2011).
21 See Russell Order II.
22 Id.
23 Id.

9
additional due process is unfounded in the law."

II. IADON is not entitled to an injunction because it will not suffer irreparable
harm

IADON cannot show that it will suffer irreparable harm because the alleged

harm is contingent or speculative. 25 "Irreparable harm is an injury 'for which

compensatory damage is an inadequate remedy." 26 In order for unreasonable

interference with a business or lost profits to constitute irreparable harm, there must

be an act committed without just cause resulting in an unreasonable interference.'

However, as argued above, the emergency regulation was not enacted without just

cause.

At this point, IADON's harm is entirely speculative. There has been no

unreasonable interference with any liquor wholesaler business because the

Department's determination was made pursuant to a valid regulation and has not

been reviewed subject to NRS 233B. The Department's authority to determine if the

number of liquor wholesalers is insufficient to serve the market flows directly from

' Additionally, the Department and Commission do not concede that IADON
has a protectable property interest. There is no individual entitlement unique to these
appellants, and the Department has significant discretion in removing whatever
individual entitlement does exist.
25 Boulder Oaks Community Ass 'n, 125 Nev. 397, 403, 215 P.3d 27, 31 (2009).
26 Excellence Cmty. Mgmt. v. Gilmore, 131 Nev. _, 351 P.3d 720, 723-24
(Adv. Op. 38 , 2015)(quoting Dixon v. Thatcher, 103 Nev. 414, 415, 742 P.2d 1029,
1029 (1987)).
27 Finkel v. Cashman Prof'l, Inc. 270 P.3d 1259, 1263 (Nev. 2012)(quoting
Sobol v. Capital Management, 102 Nev. 444, 446, 726 P.2d 335, 337 (1986)).
10
the statute. This law and the decisions of the Department and Commission are

presumptively valid. And despite IADON's repeated misrepresentations of the

Initiative, to "regulate marijuana like alcohol" does not mean that there must be an

independent wholesaler involved.

CONCLUSION

For the foregoing reasons, Respondents respectfully request that the Court

deny Appellants' Emergency Motion Under NRAP 27(e) for Injunction Pending

Appeal.

Dated: September 1, 2017.

ADAM PALM LAXALT


Attorney General

By: /s/ Melissa Flatley


WILLIAM J. MCKEAN
Chief Deputy Attorney General 6740
MICHELLE BRIGGS
Senior Deputy Attorney General 7617
MELISSA FLATLEY
Deputy Attorney General 12578
100 N. Carson Street,
Carson City, NV 89701
Telephone: 775.684.1100
Attorneys for the Defendant/Respondent
Email: mflatley@ag.nv.gov

11
CERTIFICATE OF SERVICE

I certify that I electronically filed the foregoing with the Clerk of the Nevada

Supreme Court. Participants in the case who are registered CM/ECF users will be

served by this Court's CM/ECF system as follows:

kbenson@allisonmackenzie.com
Kevin Benson, Esq.
Allison MacKenzie
402 N. Division Street
Carson City, Nevada 89703

stephanie@winterstreetlawgroup.com
Stephanie Rice, Esq.
The Winter Street Law Group
96 & 98 Winter Street
Reno, Nevada 89503

Is! Anne Goldy


An employee of the
Office of the Attorney General

12
INDEX OF EXHIBITS
to
Opposition to Emergency Motion

Exhibit Description Number of Pages


Number (Including
Cover Page/s)
1 Amended Order Granting Preliminary 13
Injunction, entered June 21, 2017
2 Order Denying Application for Temporary 5
Restraining Order/Preliminary Injunction, July
27, 2017, 17 OC 00153 1B
3 Determination of Department, August 15, 2017 11

13
Docket 73883 Document 2017-29569
REG0 & FILED
2911 JUN 21 pai 101 1 -4
SUSANA-1E,FRIWETKR
CLERK
BY 1701-17

IN THE FIRST JUDICIAL DISTRICT COURT OF THE STATE OF NEVADA


IN AND FOR CARSON CITY

INDEPENDENT ALCOHOL CASE NO.: 17 OC 00098 1B


DISTRIBUTORS OF NEVADA DEPT. NO.: 2
Plaintiff, AMENDED
ORDER GRANTING PRELIMINARY
v. INJUNCTION
NEVADA DEPARTMENT OF TAXATION,
Defendant.

This matter comes before the Court on Independent Alcohol Distributors of


Nevada (IADON)'s Application for Preliminary Injunction,

I.
FINDINGS OF FACT
On November 8, 2016, the voters of Nevada approved the "Initiative to Regulate
and Tax Marijuana" (the "Initiative"). The Initiative imposed. a 15% excise tax at the
wholesale level.
The provisions of the Initiative became effective January 1, 2017, and are now
codified at Nevada Revised Statutes ("NRS") Chapter 453D.
Under the Initiative, a "marijuana distributor" is an entity licensed to transport
marijuana in amounts in excess of one ounce between marijuana establishments. NRS
I 453D.030(10), 453D.110(1), 453D.120(4).
2 The Initiative mandates: "For 18 months after the Department [of Taxation (the
3 "Department")] begins to receive applications for marijuana establishments, the
4 Department shall issue licenses for marijuana distributors pursuant to this chapter only
5 to persons holding a wholesale dealer license pursuant to Chapter 369 of NRS, unless
6 the Department determines that an insufficient number of marijuana distributors will
7 result from this limitation." NRS 453D.201(3),
8 A wholesale dealer license under NRS Chapter 369 is required before any entity
9 can operate as a liquor distributor in Nevada. There are 47 separate local licensing
10 jurisdictions in Nevada which require a license to operate as an alcohol distributor. Each
11 of these jurisdictions has unique and distinct methodologies for application, licensure
12 and determination of suitability. These local licenses serve as the predicate for licensure
13 under NRS Chapter 369.
14 Governor Sandoval implemented budgetary plans that relied on an estimated $60
15 to $70 million from a proposed retail sales tax of lo% on adult marijuana use over the
16 next fiscal biennium. The Legislature implemented the sales tax as part of SB 487.
17 Governor Sandoval set July 1, 2017 to begin the retail marijuana program.
18 The Department developed a proposed regulation, LCB File No. To 02-17, dated
19 March 16, 2017. Section 14(1) of the regulation states in part: "Pursuant to NRS
20 453D. 210 (3), the Department has determined that there is an insufficient number of
21 distributor licenses from persons holding a wholesale liquor dealer's license ...." (Exhibit
22 4).
23 Department Director Contine explained the insufficiency finding was based on
24 the fact the Department had sent a notice to all wholesale liquor licensees in November
25 of 2016 requesting those licensees inform the Department if the licensee was interested
26 in becoming a retail marijuana distributor, and she never heard from anyone except
27 those that said they would not apply for a retail distributor license. The Director was
28 trying to be prepared in case no wholesale liquor licensee applied.
2
1 The Department issued an Industry Notice Regarding Marijuana Distribution
2 Licenses in March 2017, Exhibit 6. That notice stated the Department "will accept
3 applications for marijuana distributor licenses beyond those who hold NRS Chapter 369
4 wholesaler liquor dealer licenses during the temporary retail marijuana program." The
5 Notice stated the basis for the finding of insufficiency:
6 To make [the insufficiency] determination, in November
2016, the Department reached out to wholesale liquor license
7 holders in writing to determine whether there would be
enough interest to serve the marijuana establishment
8 market. While some were "interested" none followed up to
indicate that they had a plan going forward to be ready to
9 serve the market or that they had sorted out issues with
respect to their federal liquor license ....
10
In considering the lack of evidence of serious interest or
11 activity by the liquor wholesalers, the problems that liquor
licensees could face with the federal government, and the
12 lengthy process to get started in the marijuana business
(state licensing requirements and local business license and
13 zoning requirements), the Department determined that an
insufficient number of marijuana distributors will result
14 from limiting distributors to licensed NRS Chapter 369
wholesalers.
15
The wholesale liquor licensees strongly objected to the Department's finding of
16
insufficiency.
17
The regulation was amended and the finding of insufficiency language was
18
dropped.
19
The Department's own documents show and the Court finds the Depai Lirent
20
received expressions of interest in applying for a retail marijuana distributor from 29
21
wholesale liquor licensees during November of 2016. Exhibit 14. The Department told
22
the licensees that had expressed an interest that they would be put on a Department
23
email list for further communication.
24
The Court finds Kurt Brown's testimony credible. Mr. Brown has operated Capital
25
Beverages, a wholesale alcohol distribution business for 45 years. Capital Beverages
26
currently has 55 vehicles and serves about 350 wholesale alcohol customers. Mr. Brown
27
received the Department's November 2016 notice and through Paladin LLC responded
28
3
1 that he was interested in applying for a marijuana retail distributor license'. The
2 Department responded to his letter of interest by saying the Department would get back
3 to him. The Department did not get back to him so he called the Department in
4 December. The Department did not request any additional information. Paladin LLC
5 filed an application for a retail marijuana distributor before the May 31, 2017 deadline.
6 Based upon 45 years of distribution experience in Nevada Mr. Brown believes he could
7 service all 106 marijuana retail establishments allowed under NRS 453D.210(4)(d).
8 Mr. Brown also testified about the busines's reality. It will be expensive to become
9 a retail marijuana distributor and all business enterprises are risky. Nevertheless, if
10 licensed Paladin LLC can begin immediately distributing retail marijuana. He has
11 researched the business of marijuana distribution, hired qualified people, acquired
12 warehouse space, and made security modifications.
13 The Court finds Mr. Nassau's testimony credible. He had the essentially the same
14 experience with the Department as Mr. Brown. Mr. Nassau has distributed alcohol for
15 ten years in Clark County, Nevada through Redrock Wine. Redrock Wine serves more
16 than 300 customers. Ms. Nassau opined Rethock Wine could service most of the 106
17 marijuana retail distributors.
18 There are thousands of retail alcohol businesses in Nevada.
19 The Department has received applications for temporary marijuana distribUtor
20 licenses from four liquor wholesalers.
21 The Court finds the Department never asked the 29 wholesale liquor licensees
22 that expressed interest in 2016 in applying for a retail marijuana distributor license to
23 provide additional information about whether they were "serious[ly] interest[ed]" in
24 distributing retail marijuana, or about the licensee's "plan" or "activity" toward
25 becoming a retail marijuana distributor, or about "problems [the] liquor licensee[] could
26 face with the federal government," or about "the lengthy process to get started in the
27 marijuana business (state licensing requirements and local business license and zoning
28 requirements)."
4
I The Nevada Tax Commission adopted the regulation on May 8, 2017, following a
2 workshop on March 29, 2017, where the Department heard public comment. The
3 regulation set May 31, 2017 as the deadline for applications. The regulation did not
4 become effective until June 12, 2017 when it was filed with the Secretary of State.
5 The Department began accepting applications for marijuana establishments on
6 May 15, 2017.
7 The regulation provides that after May 31, 2017, the Department may determine
8 pursuant to NRS 453D.210(3) that an insufficient number of marijuana distributors
9 would result from limiting licenses to persons holding a liquor wholesaler license based
10 upon a review of the totality of applications received by the Department, and whether
11 liquor wholesalers can demonstrate compliance with local zoning and safety
12 requirements already in place for medical marijuana establishments under NRS 453A.
13 LCB File No. Too2-17, Sec. 14(2).
14 The Department has not determined what the likely demand for retail marijuana
15 will be or what will be required to meet the likely demand.
16 There is no evidence that the Depai talent has determined how much demand
17 any particular alcohol distributor licensee can service.
18 The Department has not determined whether exclusively licensing liquor
19 wholesalers as temporary marijuana distributors will result in an insufficient number of
20 licensees.
21 There is no evidence that anyone at the Department of Taxation contacted the
22 Clark County Business Licensing Division to interfere with any applications for liquor
23 wholesaler licenses. This is true even considering the hearsay statements offered by
24 IADON.
25 /////
26 /////
27 /////
28 /////

5
1 IL
2 ANALYSIS
3 A court may issue a preliminary injunction "where the moving parry can
4 demonstrate that it has a reasonable likelihood of success on the merits and that, absent
5 a preliminary injunction, it will suffer irreparable harm for which compensatory
6 damages would not suffice." Excellence Cmty. Mgmt. v. Gilmore, 131 Nev. Adv. Op. 38,
7 351 P.3d 720,722 (2015); NRS 33.010.
8
9 A. Ad hoc rulemaking
10 NRS 453D.210(3) states that the Department shall issue licenses only to alcohol
11 distributors for the first 18 months after accepting applications, unless the Department
12 determines that this would result in an insufficient number of marijuana distributors. A
13 determination of whether the number of alcohol distributors will be insufficient or
14 sufficient to serve the market necessarily requires the Department make a determination
15 regarding what number of distributors the market needs to function.
16 The Department adopted Temporary Regulation Too 2-17 on May 8, 2017, which
17 sets forth the various criteria for an alcohol distributor to apply for a marijuana
18 distribution license, and set a deadline of May 31, 2017 to apply. The Regulation also
19 requests certain information from alcohol distributor applicants related to whether they
20 have made security modifications to their facilities, complied with local zoning, etc.
21 However, the Regulation does not define what "sufficient" is or how it is determined.
22 The Regulation does not request any information from retail marijuana stores (or
23 anyone else) to determine their need for distributors. In short, the Regulation is silent as
24 to what constitutes sufficiency to serve the market.
25 A "regulation" includes an "agency rule, standard, directive or statement of
26 general applicability which effectuates or interprets law or policy, or describes the
27 organization, procedure or practice requirements of any agency." NRS 2338.038(1)(a).
28 "An agency makes a rule when it does nothing more than state its official position on

6
1 how it interprets a requirement already provided for and how it proposes to administer
2 its statutory function." Coury v. Whittlesea-Bell Luxury Limousine, 102 Nev. 302, 305,
3 721 P.2d 375, 377 (1986) (internal quotations omitted).
4 In this case, a determination of whether there are sufficient alcohol distributors is
5 a statement of general applicability that effectuates law and policy because it directly
6 impacts the substantive rights of all applicants by changing who is eligible to obtain a
7 distributor license. See State, Dep't of Taxation v. Chrysler Grp. LLC, 300 P .3d 713,717
8 (2013) (defining a "statement of general applicability" as "a policy or rule that applies to
9 multiple parties in a similar manner"); see also Coury, 102 Nev. at 305, 721 P.2d at 376-
10 77 (granting a license for a "stretch" limousine constituted ad hoc rulemaking because
11 the statute and regulations did not recognize any subclass or different license for
12 "stretch" limousines, as distinguished from a normal limousine license). It also affects
13 the public, because it will determine whether marijuana transportation is performed by
14 an independent third-party, similar to the three-tiered system for alcohol distribution,
15 or whether the new industry will be allowed to vertically integrate from the very
16 beginning.
17 The determination of sufficiency is not merely an "interpretative ruling" because
18 its effect reaches well beyond any individual applicant, and. instead sets forth a new
19 policy of the Department and effectuates law, i.e., whether it will issue licenses to an
20 expanded class of applicants. See State Farm Mut. Auto. Ins. Co. v. Commir of Ins., 114
21 Nev. 535, 537, 958 P.2d 733, 734 (1998) (where no statute or regulation defined the
22 term "at fault," agency determination that "at fault" meant driver was at least 51%, not
23 just 50%, responsible for the accident constituted rulemaking that must comply with
24 NRS Chapter 233B because this "interpretation" declared a new policy affecting all
25 insurers and insured).
26 The Department argues the Regulation does contain specific criteria for
27 determining whether alcohol distributors are sufficient, because it asks the alcohol
28 distributors to provide information such as their plan to serve different geographic

7
1 areas, whether they have already complied with local zoning and security requirements,
2 etc., and the Department will use those responses in determining sufficiency. See
3 Section 14(2). This argument is unavailing because these criteria probe the applicants'
4 readiness and ability to begin distributing marijuana, but they do not help answer the
5 threshold question of what is sufficient for the market to function. Without any standard
6 regarding what is "sufficient," the Depai Ltuent is free to simply determine that the
7 applicants are not good enough, regardless of how they responded to those questions.
8 Similar to the term "at fault" in State Farm, "sufficiency" is open to multiple reasonable
9 interpretations, but has never been defined. If the Department is going to decide
10 whether alcohol distributors are "sufficient" (and decide who is eligible for a license
11 based on that decision), it must first define the meaning of sufficiency. Otherwise, it is
12 necessarily measuring alcohol distributors against an unknown, arbitrary standard. This
13 is the same problem that arose in State Fan-n: there was no defined standard of when a
14 driver was "at fault" for an accident. The Insurance Commissioner determined that State
15 Farm's 50% rule was invalid, because it was less than 51% responsibility. The Nevada
16 Supreme Court held that this decision constituted improper ad hoc rulemaking because
17 it effectively defined and set the standard for "at fault" as 51% or greater responsibility,
18 but the Commissioner did not go through the proper rulemaking process. 114 Nev. at
19 544,958 P.2d at 738-39.
20 Section 14(2) of the Regulation states that the Department may make a
21 determination after accepting applications as to whether the alcohol distributors are
22 sufficient to serve the market. The Department's failure to define sufficiency through the
23 rulemaking process cannot be cured by adopting a rule stating that it can define the
24 term later, without going through the rulemaldng process. Accordingly, Section 14(2) is
25 invalid because it purports to authorize the Department to engage in ad hoc rulemaking.
26 /////
27 /////
28 /////
8
1 B. May 31, 2017 deadline for filing
2 IADON has demonstrated a strong likelihood of success on its claim that the May
3 31, 2017 application deadline in Section 15 of the Regulation is invalid. The Regulation
4 was adopted on May 8, 2017, but did not become effective until June 12, 2017. See NRS
5 233B.070(2) (agency may not file a temporary regulation with the Secretary of State
6 until 35 days after it was adopted. Regulation becomes effective upon filing with the
7 Secretary of State).
8 Accordingly, the May 31, 2017 deadline set forth in Section 15 of the Regulation
9 passed before the Regulation had any force or effect of law. In other words, on May 31,
10 2017, there was no legal duty or opportunity for anyone to submit an application to the
11 Department. The legal duty only arose later, on June 12, 2017, at which time it would
12 obviously be impossible for someone to comply with the May 31, 2017 deadline. The
13 Regulation is retroactive.
14 "Retroactivity is not favored in the law." Bowen v. Georgetown Univ. Hosp., 488
15 U.S. 204, 208 (1988). Retroactive application of an administrative rule that creates new
16 legal rights or duties is impermissible. Cnty. of Clark v. LB Props., Inc., 315 P.3d 294,
17 296-97 (2013). Since the May 31, 2017 deadline preceded the June 12, 2017 effective
18 date of the Regulation, it is invalid.
19
20 C. Equitable estoppel
21 IADON did not offer any evidence to show a likelihood of success on the merits of
22 its equitable estoppel claim to warrant preliminary injunctive relief. This is true even if
23 the Court considers the hearsay statements offered by IADON.
24
25 D. Irreparable harm
26 1ADON has also demonstrated that it will suffer irreparable harm if a preliminary
27 injunction does not issue. "[A]cts that unreasonably interfere with a business or destroy
28 its credit or profits, may do an irreparable injury." Finkel v. Cashman Prof 1, Inc., 270
9
I P.3d 1259, 1263 (Nev. 2012) (quoting Sobol v. Capital Management, 102 Nev. 444, 446,
2 726 P.2d 335, 337 (1986)). Even though the harm is economic in nature, such acts still
3 support the issuance of an injunction. Guion v. Terra Mktg. of Nevada, Inc., 90 Nev.
4 237, 239-40, 523 P.2d 847, 848 (1974).
5 The evidence presented and the briefs of amid indicate that much of the medical
6 marijuana industry is already vertically integrated, meaning that no third-party
7 distributors are used. Only medical marijuana licenses are permitted to apply for
8 recreational marijuana for the first 18 months (NRS 453D.210(2)). Many of these
9 licensees have also applied for distributor licenses, and intend to distribute to
10 themselves if the Department determines alcohol distributors to be insufficient. See
11 Brief of Amicus Curiae Nevada Dispensary Association, p. 3. In other words, these
12 entities will use the existing vertically integrated model for medical marijuana and apply
13 it to recreational marijuana. Id.
14 Amici's arguments corroborate Plaintiff's evidence and arguments that Plaintiffs
15 members will very likely be shut out of the marijuana distribution business entirely if
16 the Department issues distribution licenses to non-alcohol distributors. Once licenses
17 are issued to others, it will be difficult if not impossible to revoke those licenses, or at
18 least not within the 18-month period during which NRS 453D.210(3) grants alcohol
19 distributors exclusive licenses. Thus Plaintiff has demonstrated that, absent injunctive
20 relief, it is likely to suffer irreparable harm. Finkel, 270 P.3d at 1263.
21
22 III.
23 CONCLUSIONS OF LAW
24 The regulation allows ad hoc rulemaking and is therefore invalid.
25 The May 31, 2017 deadline for filing applications is retroactive and therefore
26 invalid.
27 IADON has not produced evidence to support its equitable estoppel claim.

28 /////
10
1 IADON has demonstrated it will suffer irreparable harm if the Department is not
2 enjoined,
3
4 III.
5 ORDER
6 GOOD CAUSE APPEARING, IT IS HEREBY ORDERED:
7 IADON's Application for Preliminary Injunction is granted.
8 The Department is enjoined from:
9 Issuing a retail marijuana distributor license to any person or entity other
10 than wholesale alcohol distributors;
11 Making any determination of the sufficiency or insufficiency of the number
12 of alcohol distributors under NRS 45311210(3) until it has adopted valid
13 definitions or rules for determining what number of distributors is
14 required to serve the market, through the regulation-Making process in
15 NRS Chapter 233B;
16 Enforcing the May 31, 2017 application deadline in Section 15 of the
17 Regulation.
18 IADON will post an $5,000 bond for this preliminary injunction.
19 Counsel for IADON will arrange with counsel for the Department to confer with
20 the Court's judicial assistant within ten days to set the permanent injunction trial.
21 June 21,2017,
22
23
24
25
26
27
28

11
1 CERTIFICATE OF MAILING
2 I hereby further certify that on the ,,2/ day of June 2017, I placed a copy
3 of the foregoing in the United States Mail postage prepaid, addressed as follow
s:
4 Kevin Benson,
Esq. William McKean, Esq.
5 402 N. Division St. loo N. Carson St.
Carson City, NV 89703 Carson City, NV 89701-4717
6 kbenson@allisonmackenzie.com wmckean@ag.nv.gov
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
Docket 73883 Document 2017-29569
OFFICE OF THE ATTORNEY GEN'f F
CARSON CITY, NEVADA
1
"11

JUL 2 8 2017
BUREAU OF PUBLIC AFFAII
RECT & FILED BUSINESS & TAXATION DIMS

2011 JUL 27 AM 10: 142


S1JS/0 MERRIWETHER
/CLERK
BY VEptii
IN THE FIRST JUDICIAL DISTRICT(10pRi OF
THE STATE OF NEVADA IN AND FOR CARSON CITY

INDEPENDENT ALCOHOL DISTRIBUTORS


OF NEVADA, and PALIDIN, LLC., Case No. 17 OC 00153 1B
Dept. No. 2
Plaintiffs,

V S.

NEVADA DEPARTMENT OF TAXATION,


NEVADA TAX COMMISSION,

Defendants.

ORDER DENYING APPLICATION FOR


TEMPORARY RESTRAINING ORDER/PRELIMINARY INJUNCTION

This matter comes before the Court on the Application for Temporary Restraining
Order/Preliminary Injunction filed by Plaintiffs on July 17, 2017, with their Complaint for
Injunctive and Declaratory Relief. Defendants, the Department of Taxation (the
"Department") and the Tax Commission (the "Commission") filed their Opposition on July
21, 2017. This Court held a hearing on July 24, 2017. The Court, having reviewed the
pleadings on file and applicable law, and having heard the argument of counsel, finds as
follows:
On July 13, 2017, the Commission adopted an emergency regulation (the "Emergency
Regulation") providing substantive and procedural rules implementing subsection 3 of NRS
ta*N Pak\

453D.210. That statutory provision requires that the "Department shall issue licenses for
marijuana distributors pursuant to [NRS Chapter 435D] only to persons holding a wholesale
dealer license pursuant to chapter 369 of NRS [liquor], unless the Department determines that
an insufficient number of marijuana distributors will result from this limitation." NRS
453D.210(3). The Emergency Regulation sets forth criteria for determining whether an
insufficient number of marijuana distributors will result from issuing marijuana distributor
licenses only to liquor wholesale dealer licensees. It also requires that such a determination
by the Department be made in a public meeting, and provides that a final decision of the
Department is appealable to the Commission.
The Court finds that the Emergency Regulation was validly adopted in accordance
with NRS 233B.0613, which governs an agency's adoption of an emergency regulation.
Here, the reasons for the Emergency Regulation set forth in the underlying statement of
emergency endorsed by the Governor include the need to protect retail marijuana tax revenue
that the legislature had relied on in setting the State budget. This Court finds that to be a valid
basis for the adoption of the Emergency Regulation under NRS 233B.0613. 1
The Court also fmds that the provisions of the Emergency Regulation merely proscribe
the criteria and procedure to be used by the Department in implementing the requirements of
NRS 453D.210(3). The Department has not yet conducted a hearing pursuant to the
Emergency Regulation, and thus an action seeking to preclude the Department from making a
decision based on the criteria and procedure set forth in the Emergency Regulation is
premature. If and when the Department does conduct such a hearing, the Court presumes and
expects it will do so in accordance with applicable due process requirements and render a
decision based on a preponderance of the evidence presented. Accordingly, the issues raised
in the Application for Temporary Restraining Order/Preliminary Injunction are not ripe.

1 The Court also finds that the Emergency Regulation complies with the preliminary
injunction issued by this Court on June 21, 2017. Amended Order Granting Preliminary
Injunction, Independent Alcohol Dist. on Nevada, Case No. 17 OC 00098 1B, 1st. Jud. Dist.
Ct., Dept. No. 2 (June 21, 2017) (restraining the Department from determining whether an
insufficient number of marijuana distributors will result from issuing marijuana distributor
licenses only to liquor wholesale dealer licensees until after the adoption of "valid definitions
or rules for determining what number of distributors is required to serve the market. . ..").
-2-
tow, eb

1 THEREFORE, good cause appearing;


2 IT IS HEREBY ORDERED that Plaintiffs' Application for Temporary Restraining
3 Order/Preliminary Injunction is DENIED.
4 DATED this 2') itA day of July, 2017.

5
6
7
(DISTRICT CO
Submitted by:
8 ADAM PAUL LAXALT
9 Attorney General
WILLIAM J. MCKEAN
10 Chief Deputy Attorney General
Nevada State Bar No. 6740
11
100 North Carson Street
12 Carson City, NV 89701
(775) 684-1207
13 Attorneys for the State ofNevada
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28

-3-
CERTIFICATE OF MAILING
Pursuant to NRCP 5(b), I certify that I am an employee of the First Judicial District
Court, and that on this .91 4.1aay of July, 2017, I deposited for mailing at Carson City, Nevada, a
true and correct copy of the foregoing Order addressed as follows:

William J. McKean, Esq.


Office of the Attorney General
100 N. Carson St.
Carson City, NV 8971

Kevin Benson, Esq.


Allison Mackenzie
402 North Division Street
Carson City, NV 89703

Stephanie Rice, Esq.


WINTER STREET LAW GROUP
96 & 98 Winter Street
Reno, NV 89503 a-

711
Lin ay Liddell, Ei-q.
La Clerk, Dept. 1

4
Docket 73883 Document 2017-29569
STATE OF NEVADA
RENO OFFICE
DEPARTMENT OF TAXATION 4600 Kietzke Lane
Building 1., Suite 235
Web Site: https://tax.nv.gov Reno, Nevada 89502
1550 College Parkway, Suite 115 Phone: (775) 687-9999
Carson City, Nevada 89706-7937 Fax: (776) 688-1303
PhOme: (776) 864-2000 Fax: (775) 684-2020
BRIAN SANDOVAL
Governor LAS VEGAS OFFICE HENDERSON OFFICE
JAMES DEVOLLD Grant Sawyer Office Building, Sulte1300 2550 Paseo Verde Parkway, Suite 180
Chair, Nevada Tax Commission 555 E. Washington Avenue Henderson, Nevada 89074
DEONNE E CONTINE Las Vegas, Nevada 89101 Phone: (702) 456-2300
Executive Director Phone: (702)486-2300 Fax: (702) 486-2373 Fax: (702) 486-3377

RETAIL MARIJUANA DISTRIBUTOR INSUFFICIENCY DETERMINATION

The Department of Taxation ("Department") held a meeting on August 10, 2017, to accept
information from the public necessary for the Department to determine whether issuing licenses under
NRS 453D.210(3) only to licensed alcohol distributors will result in an insufficient number of marijuana
distributors to service Nevada's retail marijuana market. Based on the information gathered by the
Department and the information presented during the meeting, the Department determined that limiting
the marijuana distributor licenses exclusively to licensed alcohol distributors had resulted in an
insufficient number of marijuana distributors and that the insufficiency would not be remedied by the
applications currently pending with the Department. In order to ensure an adequate number of
distributors for the retail marijuana market, the Department will accept applications from both licensed
alcohol distributors and from other entities that have been transporting medical marijuana and will issue
distributor licenses to those applicants who are in good standing with all applicable license requirements
and who meet the criteria to operate as marijuana distributors.

PROCEDURAL BACKGROUND
Through initiative petition, Nevada legalized the sale and private use of marijuana by adults over
the age of 21 ("retail marijuana") beginning July 1, 2017. The provisions of the initiative petition were
codified at NRS 453D. The initiative specifies that licensed distributors will transport retail marijuana
between marijuana cultivation facilities, testing facilities, manufacturing facilities, and retail stores. NRS
453D.030(10). For the first 18 months after July 1, 2017, "the Department shall issue licenses for
marijuana distributors pursuant to this chapter only to persons holding a wholesale dealer license
Retail Marijuana Distributor Insufficiency Determination
August 15, 2017
Page 2

pursuant to chapter 369 of NRS, unless the Department determines that an insufficient number of
marijuana distributors will result from this limitation." NRS 453D.210(3).
Effective May 8, 2017, the Department adopted temporary regulations to govern the licensure of
distributors during the first 18 months of retail marijuana sales. NRS 453D.200, LCB File No. 1002-17
Section 14. The regulations specified that the Department would accept distributor applications from
persons holding liquor wholesaler dealer licenses issued under NRS Chapter 369. And, in order to
prepare for the contingency contemplated in NRS 453D.210(3) of an insufficient number of NRS
Chapter 369 wholesaler licensee applicants, the Department also accepted applications from
establishments that had been transporting medical marijuana. The Department could then ensure an
adequate number of licensed retail marijuana distributors when retail sales began on July 1. The deadline
for submission of those applications was May 31, 2017. LCB File No. T002-17 Section 15. After the
May 31 deadline, the Department could then make the determination regarding the sufficiency of the
number of licensees if the licensees were limited to NRS Chapter 369 wholesaler licensees.
The temporary regulation was challenged by the Independent Alcohol Distributors of Nevada
("IADON"), a non-profit corporation purportedly representing alcohol wholesalers, who asked a Nevada
District Court to prevent the Department from issuing distributor licenses to anyone other than NRS
Chapter 369 wholesaler licensees. On June 20, the Court ordered that the Department could not issue
marijuana distributor licenses to other than NRS Chapter 369 wholesaler licensees until the Department
made additional rules for the process to determine an insufficient number of marijuana distributors. In
compliance with this order, the Department adopted an Emergency Regulation on July 13, 2017, that
specified the criteria the Department would use to make the determination, the timeline for distribution
of surveys to the industry and alcohol wholesalers, required that the determination would be made in a
meeting that was noticed to the public, and provided that the decision would be appealable to the
Nevada Tax Commission. The validity of the Emergency Regulation was established by order of the
District Court on July 27, 2017.
Retail Marijuana Distributor Insufficiency Determination
August 15,2017
Page 3

INFORMATION FROM SURVEYS


In mid-July, the Department sent surveys to marijuana retailers, producers, and cultivators
seeking information to help the Department determine the demand for retail marijuana and how well that
demand was being met by the current number of retail marijuana distributors. 65 recipients initially
responded and the Department received subsequent information from a majority of the 53 retail
marijuana licensees. The retail establishments reported that they required at least 9 toll deliveries of
products per week, relied on at least 7 to 9 suppliers for the products they stocked in their stores, and
needed deliveries between 12 hours and 5 days after placing orders. On average, they expected their
businesses to grow 35% in the next 6 months. The retailers provided comments that indicated that
distribution provided at that time was slow in comparison to the demand for product at the stores and in
comparison to the delivery of medical marijuana. One retailer indicated that conversations with liquor
companies showed that those companies did not understand, and were not seeking to understand, the
needs of the marijuana market. Specifically, the marijuana establishments need the product to be
delivered frequently and sometimes on short notice. The alcohol distributors' business model is to
charge penalties for those deliveries and would increase the cost of the product dramatically.
The Department also emailed surveys to 61 licensed liquor wholesalers seeking information on
their current and future intent to provide retail marijuana distribution, their status of preparation for that
endeavor, and their estimated capacity to provide distribution services to the retail marijuana industry.
The Department sent the surveys to the email addresses the licensees had provided to the Department.
The Department received responses from 17 licensed liquor wholesalers. Of those who responded, 4 are
currently licensed as marijuana distributors, 3 have applications pending, 6 indicated they may submit
applications in the future, 4 said they would not apply, 1 did not indicate intent either way. Two of the
respondents licensed as marijuana distributors claimed to have a greater number of inspected vehicles
than the Department had actually inspected. One of the pending applicants made a similar claim for
more vehicles than it has allowed the Department to inspect.
Retail Marijuana Distributor Insufficiency Determination
August 15, 2017
Page 4

INFORMATION FROM AUGUST 10, 2017, MEETING


On August 7, 2017, the Department properly issued notice that it would hold a meeting on
August 10, 2017, to accept information from interested persons and entities to assist the Department in
making a determination of whether issuing licenses under NRS 453D.210(3) only to licensed alcohol
distributors will result in an insufficient number of marijuana distributors to service Nevada's retail
marijuana market. Nearly 50 people attended the meeting in Las Vegas and a dozen attended in Carson
City. There was no way to determine the number of people who attended by telephone.
As of the date of the meeting, only 9 applications have been received from licensed liquor
wholesalers since the application became available in May 2017, 16 vehicles have been inspected by the
Department, and 16 marijuana distributor agent cards have been issued (agent cards are required of all
employees and contractors of a marijuana establishment). Of those distributor applications, some were
licensed medical marijuana establishments that obtained their liquor wholesale dealer licenses solely to
secure a retail marijuana distributor license. Six distributors are licensed, but only one is operating.
Department staff has been tracking and studying the retail marijuana market since this process
began. Kile Porter, Economist for the Department, is knowledgeable with regard to the Colorado retail
marijuana market and its tax structure. Colorado's data is relevant for predictions for Nevada's market
because the tax structure is similar and both states started with medical marijuana industries before
moving to retail marijuana. Mr. Porter presented economic analysis of Colorado's market which shows
that tax revenues from retail marijuana sales in Colorado have increased 5% on average each month
since 2014. He anticipates that the growth in Nevada may even outpace Colorado because Nevada's
revenue from its tourist market is nearly twice that of Colorado's. Mr. Porter concluded that in order for
Nevada's legal marijuana market to compete with and keep buyers from using the black market, those
companies need to be able to compete both on price and on selection. When there is inadequate supply
and variety, the prices of legal marijuana increase and licensed retailers do not have the products
demanded by their customers. Both situations drive consumers to the black market.
Retail Marijuana Distributor Insufficiency Determination
August 15,2017
Page 5

Joe Brezny and Matt Griffin, both of whom were involved in drafting and sponsoring the

initiative petition, offered testimony regarding how licensed alcohol distributors fit in the retail

marijuana scheme. Early in the initiative process, they contacted the licensed alcohol distributors in

order to make political friends who would help them get the initiative petition enacted. But the

distributors were never intended to be a separate tier of the retail marijuana system and were not

envisioned as independent third parties who served as checks on that system. The retail marijuana

system was always intended to allow for vertical integration, and the inevitability that it would have
self-distribution was written into the initiative. Testing laboratories serve as the independent third

parties in the medical marijuana program and that structure was repeated in the initiative. The language

in NRS 453D.210(3) was drafted to give the Department complete discretion to license people other

than licensed alcohol distributors if the number of licensed alcohol distributors was insufficient to serve

the market.
Blackbird, an agent of Crooked Wine, the only licensed marijuana distributor that is fully

operational, began business in mid-2015 as a delivery and software solutions provider for medical

marijuana establishments. It wanted to serve the same role in the retail marijuana market. In early July,

Blackbird entered into an operating agreement with Crooked Wine, an alcohol distributor that obtained a

marijuana distribution license. Currently, Blackbird has 30 employees, which is 5 times as many as they

required for medical marijuana services. Blackbird owns 12 vehicles (10 inspected) and has purchased

10 more vehicles. Blackbird currently services 99 wholesalers and makes 100-150 deliveries each day.
On behalf of Blackbird, Timothy Conder admitted that they are too busy to offer the level of service

they would like to provide to their clients. Mr. Conder firmly stated that based on his work in the
medical marijuana industry and his knowledge of the adult-use market today, a single distributor is
insufficient and at least 5 more distributors of his size, with the ability to scale up rapidly, are required to

support the industry at the level that it is performing and to accommodate predicted growth.
When the members of the public added their testimony to the record, only 4 licensed alcohol

distributors spoke in favor keeping the retail marijuana licenses exclusive to the licensed alcohol
Retail Marijuana Distributor Insufficiency Determination
August 15,2017
Page 6

distributors. Those individuals spoke vaguely of the rapid process for putting the retail marijuana market

into place and argued that the question of whether there were sufficient distributors was premature. They

asked for more time and data gathering before that determination was made by the Department. One

business, Focus Distribution LLC, which has not yet received its marijuana distributor license,

announced a new alliance with a licensed alcohol distributor, Palidin LLC, for marijuana distribution

staring the week of August 14. They promised 200-240 deliveries per day. However, as of the date of

the meeting, Palidin had only had 1 truck inspected by the Department. Mr. Hagemeyer, attorney for

Mighty Sun West, testified regarding the business of liquor distribution activities and of the capabilities

of 3 other unnamed distributors he had spoken with. No specifics were provided regarding Mighty Sun
West's preparation for distribution of retail marijuana. As of the date of the meeting, the Department had

only inspected 1 truck for Mighty Sun West. Many marijuana retailers testified that they rely on

Blackbird for product deliveries but none mentioned Palidin, Mighty Sun West, or Focus. The attorney

for the IADON testified, but provided no additional information regarding the ability of liquor

wholesalers to exclusively serve the marijuana retailers.


The remainder of the testimony, from approximately 25 people, was in favor of the proposition
that the liquor wholesalers were an insufficient number of distributors to service the retail marijuana

market. Those testifying were representing liquor wholesalers, cultivation, production, and retail store

marijuana establishments. Some pointed out the inefficiency of having a third-party distribution system

as compared to the medical marijuana system, while others expressed that they did not have an interest

in maintaining a delivery fleet but needed access to a fair and timely delivery service. This testimony

was consistent with the comments the Department had received in survey questions. They
distinguished traditional alcohol distribution system from the point-to-point transportation required by

the marijuana industry. They calculated that this difference doubled the transportation costs to marijuana
enterprises. One retailer provided a copy of a fee proposal he has received from a licensed distributor for
17% of the retail price and another testified to a 10% fee.
Retail Marijuana Distributor Insufficiency Determination
August 15, 2017
Page 7

There was agreement that the marijuana market was not performing to its full capacity because
there was insufficient distribution to ensure supply that could meet the current demand of the market.
They anticipate growth as more licensees phase in their multiple licenses, more municipalities allow
retail marijuana, production facilities increase production, and consumer demand continues to grow.
This testimony was consistent with the economic analysis done by the Department's Economist.
The retailers reported they need deliveries 7 days a week, 8 to 10 times a day. Currently in many
cases, deliveries take 7 to 14 days. The retailers who were able to maintain an adequate supply for the
first few weeks of sales did so because they front-loaded their facilities. In other words, they transported
marijuana to their dispensaries and held it in inventory under their medical license in anticipation of the
July 1, 2017, retail start date. Now that the product amassed in advance has been sold out in many cases,
they struggle to keep stock on their shelves. Vertically integrated locations need internal deliveries,
between 3 and 5 each week, and they could not get those deliveries made either, even when the
cultivation, production, and retail store are physically located in the same building. Retail stores in
outlying areas reported that they cannot get deliveries to their locations. The variety of products being
offered has declined as much as 65% due to the inability to have products picked up and delivered by

distributors.
The retailers reported the security risks created by insufficient distribution: large amounts of
product on the premises because they have to order more at a time to try to keep the shelves stocked;
large amounts of cash on the business premises because of the long wait time between pick up; and
delivery drivers who will not wait for verification of inventory to invoice, thus creating an opportunity
for diversion of product into the black market. Additionally, distribution delays have increased retail
store overhead, interrupted their compliance with regulation, and driven sales down 20-30% because

they simply cannot meet demand.


Retail Marijuana Distributor Insufficiency Determination
August 15, 2017
Page 8

DETERMINATION
The Department must make the determination whether the exclusive licensing of liquor

wholesalers as marijuana distributors will result in an insufficient number of distributors based on a

preponderance of the evidence. This preponderance is a requirement that more than 50% of the evidence

points to a given conclusion and is based on the more convincing evidence and its probable truth or

accuracy, not on the amount of evidence.


The testimony of the industry regarding their unmet distribution needs is credible. These

businesses are struggling without a robust distribution system. Cultivators and producers have product
sitting for days waiting to be delivered to stores while the quality of the product degrades. Retailers do

not have the products their customers desire, products that are legal and should be available to them.

The data the Department collected from both marijuana enterprises and liquor wholesalers shows

that the distributors who are currently licensed and those who have currently applied cannot, on their

own, serve the market because they are too small and under-resourced. Liquor distributors have not

brought online sufficient services to meet the needs of the industry: frequent deliveries, specific

handling of product, growth in the market, and widespread geographic locations. The Department's

economist illustrated how the increased prices and reduced supply that result from insufficient
distribution can push consumers to the black market. Finally, it is clear that only a few liquor

wholesalers want to limit these licenses to liquor wholesalers only.


After considering all of the evidence gathered by the Department and presented by the public

during the meeting, a preponderance of the evidence supports the Department's determination that
limiting marijuana distribution licenses to only liquor wholesalers will result, and has in fact resulted, in

an insufficient number of distributors for the retail marijuana market. Issuing distribution licenses to a
broader pool of applicants than just liquor wholesalers will facilitate a robust marijuana market, prevent
inflation of market prices, decrease the possibility of diversion of product and customers to the black

market, and provide consumers with a broad selection of products. The Department will immediately
Retail Marijuana Distributor Insufficiency Determination
August 15, 2017
Page 9

open distribution licensing to both liquor wholesalers and to other applicants identified in the
Department's Regulation T002-17 and who meet the requirements for licensure as retail marijuana
distributors contained therein.

Dated this 15th day of August, 2017.

Deonne E. Contine, Executive Director


Nevada Department of Taxation
Retail Marijuana Distributor Insufficiency Determination
August 15, 2017
Page 10

APPEAL RIGHTS
Licensed liquor wholesalers who disagree with the Department's determination may appeal this
decision to the Nevada Tax Commission provided that a notice of appeal is filed within 30 days after the
date of this determination.
Although notice of the appeal need not be in any particular format, it must be in writing, must
clearly state the desire to appeal the Department's determination, and must be filed with the executive
staff of the Department of Taxation within 30 days after the date of service of this determination. In this
regard, you are advised to mail or personally deliver any notice of appeal to the attention of:

Tina Padovano, Executive Assistant


Nevada Department of Taxation
1550 College Parkway, Suite 115
Carson City, Nevada 89706

This determination will become final 30 days from the date above unless a notice of appeal is
filed within those 30 days.
All the above general information is provided to you as a matter of courtesy only. You, or your
counsel, should ascertain with more particularity your legal rights and obligations with regard to this
determination and any appeal of determination.