Nevada’s flawed marijuana legalization leads to corruption and lawsuits

By Geoffrey Lawrence

Nevada’s marijuana licensing agency “acted beyond the scope of its authority,” took actions that were “arbitrary and capricious,” and engaged in “conduct that is a serious issue,” according to a court order filed in late August by District Court Judge Elizabeth Gonzalez.

The case is a blow to the marijuana legalization movement overall and shows how the licensing process can become subject to corruption when not set up correctly.

Nevada is one of 11 states to have legalized recreational marijuana and among five states that have placed statewide limits on the number of marijuana licenses that will be granted, although Nevada does so only at the retail level.  When the Legislature finally authorized a commercial system for medical marijuana in 2013—13 years after voters had approved a constitutional amendment approving its use—it allowed for a statewide maximum of 60 medical marijuana dispensaries.  No limitations were placed on the number of cultivation centers or processors.

Later, when advocates filed the initiative to legalize marijuana for recreational purposes that passed in 2016, they allowed that number to roughly double to 130 dispensaries.

The original licensing process for medical marijuana was fraught with problems.  Clark County, the state’s most populous county and also home to Las Vegas’s lucrative tourist market, decided to award licenses using its own criteria before the state had chosen which applicants would be approved.  This resulted in some applicants being approved at the state level but denied licenses in Clark County, and vice versa. A series of lawsuits followed.  Complicating matters further, several Clark County commissioners were exposed as receiving large campaign donations from applicants immediately before voting on which dispensaries would receive county medical marijuana licenses.  

The initiative to legalize recreational marijuana then granted existing medical marijuana licensees the exclusive ability to apply for recreational licenses for the first 18 months after the state began to accept applications.  The Nevada Department of Taxation, which regulates the industry, allowed these businesses to apply to co-locate a recreational license with their existing medical marijuana businesses shortly before the recreational program went live in July 2017.  It would subsequently make all additional, statutorily authorized licenses available in a second application period that spanned a few weeks in September 2018. This would effectively ensure that businesses that didn’t already possess medical marijuana licenses in Nevada would never be able to apply for a recreational dispensary license, regardless of what clouds might hang over that original process.

At a February 2018 hearing where state lawmakers approved the department’s proposed regulations to govern the application process, I testified that the draft regulations ran afoul of statutory protections meant to ensure the process would be fair and objective.  The voter-approved initiative required the process to be “impartial and numerically scored.” However, the regulations contained scoring criteria that demonstrated bias toward some applicants. For example, total tax revenues already collected from each applicant was a criterion, although only existing dispensaries paid retail excise taxes and dispensaries sell inventory at marked up rates, which effectively guaranteed only existing dispensary licensees would score well. They also failed to clarify the scoring system being used and instead declared the Department of Taxation could, arbitrarily, assign different weights to each scoring criteria every time it opened an application period.

Lawmakers considered these concerns briefly, but were advised by legislative counsel they had no choice but to pass the regulations as written because the existing emergency regulations would expire later that week.

Once the Department of Taxation announced it would accept applications in September 2018, it notified applicants they would be eligible to receive only one dispensary license in each jurisdiction where they applied.  This was a last-ditch effort to ensure fairness in execution, if not in written law.

This is where things really went haywire. Despite its written guidance, the Department of Taxation awarded several entities multiple dispensary licenses within the same jurisdiction.  Only 17 of 127 companies that applied received any of the 61 licenses made available and more than half of those licenses went to just four companies.  The winners were heavily associated with a group of insiders at the Nevada Cannabis Coalition and court records show that group’s attorney, Amanda Connor, enjoyed privileged access to department staff despite written warnings from the state against such activity.  

Nevada Department of Taxation Deputy Executive Director Jorge Pupo was wined and dined by applicants and acknowledged that he changed the application in ways favorable to these applicants.  For instance, he allowed applicants to be considered separate companies simply by altering their name slightly or setting up shell entities.  The department also circulated different versions of the application to different applicants—some required a specific street address and others did not, which is important because securing an address adds up-front costs to an applicant that may be lost if they don’t get a license.

After applicants who were denied licenses filed suit against the department, even more discrepancies came to light. According to court records, the department hired temporary workers to score the applications without providing significant training or oversight to those workers.  Points awarded for gender and racial diversity among ownership groups invited gamesmanship from applicants, who hired or promoted frontmen to boost their scores. Ultimately, though, what led Judge Gonzalez to issue an injunction against the state’s licensing decisions was the Department of Taxation’s decision to not require background checks on owners with less than a five percent stake in licensed businesses.  That ran afoul of a statutory requirement that all owners the state’s marijuana industry submit to background checks.

Nevada’s mishandling of marijuana licensing is sadly the predictable result of a flawed regulatory structure and is likely to be repeated elsewhere.  First, states contemplating marijuana legalization should take caution not to place arbitrary limits on the number of licenses. This only invites the types of political gamesmanship and corruption seen in Nevada. Nevada should move quickly to open up its licensing process and allow the market to balance supply naturally against demand.

The Reason Foundation’s conceptual framework for marijuana regulation cautions against these limits.  It also recommends specific agency structures and basic licensing criteria that would help states avoid the types of problems seen in Nevada.  We’ve found warm reception for many of those recommendations in places like Michigan, but forecast looming difficulties in places like Illinois.  

Nevada’s experience now offers a cautionary tale that other states should seek to avoid.

Geoffrey Lawrence is a senior policy fellow at the Reason Foundation.