Adult recreational use was legalized in 2017 after voters approved the 2016 Ballot Question 2, Initiative to Regulate and Tax Marijuana. On January 1, 2017, adults in Nevada could purchase up to one ounce of marijuana from legal dispensaries. The regulatory authority changed to the Nevada Department of Taxation under Chapter 453D of Nevada Revised Statutes (NRS).
In August 2018 the Department of Taxation reported first year revenues from the recreational market was $69.8 million; the projected 2018-2019 total taxable sales was $424.9 million.
Legalized recreational use brought an immediate, strong demand, partly because Nevada already had a medical marijuana program, said Adam Koh, editorial director, Cannabis Benchmarks, a company which provides price assessments for growers and retailers. Despite Nevada’s relative low population, the tourist market in Southern Nevada drives up the cannabis market revenue. New as Nevada is to legalized cannabis, the state ranks fifth in the big five that drive wholesale price assessments. The other top states are California, Colorado, Washington state and Oregon. Cannabis has become big business in short order.
Growing Pains
Despite strong early sales, in the two and a half years of adult use sales, there hasn’t been the dramatic growth in demand other states have seen. In states where recreational use is driven by residents, growth has been dramatic, generally 30 to 40 percent year over year.
“Nevada has been more gradual, maybe 15 to 20 percent growth rates,” said Koh. “That’s still very strong, of course, but it hasn’t had that big explosive expansion seen in the other markets like Colorado and Oregon where it’s been building over time.”
One factor affecting Nevada’s market is lack of hard limits on cultivation capacity. Licensed retailers can apply for cultivation licenses to essentially self-supply, Koh said. Other West Coast states limit cultivators by license class, number of plants, or square footage owned. Nevada has no hard limits unless set by a particular jurisdiction.
“The relatively liberal approach of allowing cultivators to expand as much as they might feel they need to and demand over time has resulted in wholesale prices in Nevada generally trending downwards,” said Koh. In 2018 Cannabis Benchmarks spot price for wholesale flower in Nevada was an annual average of $2,058 per pound. In November 2019 it was $1,686. The increasing use of greenhouses in cultivation is further lowering costs of production, which facilitates lower wholesale prices, contributing to an overall downward trend in wholesale cannabis prices.
Take it Easy
There are five types of cannabis businesses in Nevada: dispensary or retailers, cultivation or growers, production, distribution and labs, which test products and are the only sector that can’t be co-owned with another facet of the business.
“We want to make sure the industry continues to bring in a healthy amount of tax revenue, because it was created, or legalized, with the expectation that, these sales are already happening, so we might as well be collecting the tax revenue and sending it to education,” said Riana Durrett, Esq., executive director, Nevada Dispensary Association.
Safeguarding the revenue stream includes watching what other state cannabis industries are doing. For example, Oregon allowed an unlimited number of dispensary licenses and unlimited growing, which drove prices down. Prices dropped, tax revenue dropped, and the state even saw legal sales redirected to the illegal market.
Nevada capped the number of dispensaries, but is set to double the number. Sixty dispensary, 183 cultivation and 90 production licenses were originally released. Sixty new conditional licenses for retail stores were awarded December 2018, but individuals who didn’t win licenses sued, said Koh, and conditional licenses have been frozen until claims are worked out.
Should those facilities open, the sudden need to fill shelf space might force wholesale prices up. Or competing storefronts might counterbalance causing downward pressure on wholesale.
Durrett believes 132 dispensaries is a lot for Nevada’s population of 3 million. If the number of consumers doesn’t increase, increasing the number of retail outlets won’t increase revenue; it will simply dilute the market.
Challenges
Initially, no one thought growing cannabis in the Southern Nevada desert would take. But Solaris Farms is growing on 12 acres in North Las Vegas in a hybrid greenhouse facility. The desert is great for the product, because it has fewer contaminants than other areas. There’s fewer molds, bugs and animals, said Michael Sassano, owner. “There’s extreme heat, but there’s also plenty of sunlight.” Since the plants love the sun, there’s both pros and cons to the Southern Nevada location.
Cannabis companies face plenty of different challenges, from the cost of doing business to the inability to find banks to do their business with. Most of the challenges aren’t due to location but are rooted in the disconnect between state and federal law. Adult recreational is legal in 12 states; federal law still considers it illegal, although that may change in the near future. A bill was recently passed by the House Judiciary Committee to remove marijuana from the Schedule 1 classification and decriminalize it at the federal level. The bill doesn’t make it legal at the federal level but it does allow individual states to make their own rules for marijuana.
“We still are seeing state licensed establishments having difficulty attaining or in some cases maintaining bank accounts, and that leaves them in a cash intensive position where they can’t safely bank the revenues and proceeds [of their business],” said Alicia Ashcraft, co-founder, managing partner, Ashcraft & Barr. Operating in cash puts businesses in danger of criminal events, and forces owners to pay normal operating expenses in cash.
MYNT Cannabis Dispensary used a company that picked up cash at random, untraceable intervals using unmarked vehicles and taking cash to “virtual vaults.”
“In the past we worked with management companies. It’s not always the most transparent way of doing business. We’re still doing payroll in cash but moving to checks or direct deposit next month, finally,” said Clint Cates, director of compliance/partner, MYNT. “It’s not illegal or against the Bank Secrecy Act to bank with cannabis, but the compliance fees make it very expensive.”
And banks aren’t always willing. Because they’re federally insured and cannabis is federally illegal, banks are subject to extensive paperwork and audits when working with cannabis companies. Cannabis companies face extensive reporting systems: daily, monthly and quarterly reports, annual audits.
“The increased cost associated with operating in a compliant manner while competing with the illegal marketplace is probably the biggest burden,” said Jacob Halem, vice president of retail, Terra Tech, which operates Blum Dispensary.
Nevada cannabis taxes are the highest in the U.S., driving up retail prices, especially when compared to the tax-free illegal market.
“I don’t think it needs to be taxed more than other commodities like tobacco and alcohol,” said Halem. “It should be fair across the board.”
Cannabis companies face difficulty finding access to capital, since banks won’t make traditional loans and federally backed Small Business Development loans aren’t available, said Ashcraft.
One route to finding capital is to bring additional shareholders into cannabis businesses. Another is to be acquired by a Canadian company. Canada legalized cannabis in 2017; Canadian companies can go public, sell shares, raise capital. They can acquire Nevada establishments which can be publicly traded in Canada.
Such acquisitions raise questions about the Canadian company’s attention to everyday operations of U.S. companies, said Ashcraft. How involved are they in background checks, regulatory compliance required for privileged licenses, tracking product from seed to sale.
Partly to ease banking concerns, MYNT was recently acquired by a Canadian company. It’s still going through transfer of license.
Banking opportunities may soon improve. “I’ve been in this business enough years to say every year we thought something was going to happen and nothing happened,” said Sassano. The House Judiciary Committee’s bill sets the stage for a full floor vote.
Nothing is Certain But…
Question 2 legalized adult cannabis use in Nevada on January 1, 2017. Legal sales were slated to begin in 2018, but the Department of Taxation got regulations approved in May; sales went into effect July 1, 2017.
Question 2 included a 15 percent excise tax on wholesale with revenues directed to education. Confusion rose when the 2017 Nevada Legislative session passed Senate Bill 487 which included a 10 percent rate on retail sales. Because that revenue went into Nevada’s rainy day fund, the general belief was that funds promised to education were being misdirected.
“It was actually two different taxes,” said Cindy Creighton, president, Nevada Taxpayers Association. “Only the 15 percent from Question 2 was to go to education.” Of the $5 million from the 10 percent tax created by 2017’s SB487, $1.5 million was divided up equally between each county, and the remaining $3.5 million divided based on population to counties with the marijuana industry.
During the 2019 Legislature, SB545 amended NRS 372A.290 to reflect that the excise tax of 10 percent on retail marijuana sales must be paid into the State Distributive School Account in the General Fund.
Related to taxes, it’s interesting to note that because cannabis remains illegal federally, businesses involved in cannabis aren’t allowed to take standard business deductions from gross income associated with that business.
Safety First
Cannabis retailers are open during operating hours to authorized buyers with a medical card, or 21 and older with government issued ID.
Cannabis businesses are required to have security. Before a permit is even granted to start work on a retail location, owners submit security designs to the sheriff’s department and building department. Cameras are required to cover every inch of facilities, inside and out. Mantraps – spaces between doors where one door doesn’t open until the other door closes – must be installed.
“Solaris Farms has a physical outside presence, somebody who is always outside watching the perimeter, and inside there’s full security,” said Sassano.
When cannabis became legal, Dave Sinclair, owner, CEI Alarm, suggested his team seek certification for teaching cannabis companies security requirements. Only there was no certification system. So they read the statutes on cannabis establishment security and created their own training program.
“The state called up and said, ‘Let’s see your syllabus,’” said Sinclair. The syllabus included cameras and mantraps, use of force and surveys of fire, security, and camera systems.
When they didn’t hear back from the state, “We thought, did we do something wrong? Are we in trouble? We called back to ask if they liked it and [the state said] ‘We love it. Can we tell people you’re doing this?’” CEI is still the only company providing training. Sinclair expects eventually their syllabus will form the basis of a state certification program.
Nevada statutes require extensive camera surveillance of cannabis businesses. For retail it’s full perimeter and interior, including stockrooms, register views, entrances and exits.
There are so many cameras covering the outside of MYNT’s downtown Reno location that the Reno police department has occasionally requested their footage to help solve crimes in the area. Recordings must be retained for 30 days and backed up to the cloud. Cannabis companies are also required to have a trained safety person on staff, a requirement that’s starting to be enforced.
Safety includes growers, suppliers and retailers knowing where their plants are every step of the way. Complicated systems track plants from harvest to wholesale, through lab testing for pesticides, heavy metals, foreign matter, contaminants, salmonella or e-coli, then provides inventory control as product goes into backstock and is eventually sold. Staff is required to have agent cards, which require fingerprinting and background checks.
Complicating compliance is the fact that the book on adult use regulations weighs in at around 250 pages. Compliance with security, hygiene and sanitation, access and tracking rules is expensive and time intensive.
Not in my Backyard
Even after legalization, there’s a stigma to marijuana. Blum uses human resource management (HRM) systems because without them payroll would be a nightmare, but the company has gone through three HRM systems. Blum has been upfront about being a cannabis company, but after the HRM companies have done everything necessary to work with Blum, they’ve come back after a couple months to announce they don’t want to work with the industry.
Security requirements can be extensive and change by jurisdiction. Las Vegas requires security during operating hours. Blum’s Santa Ana location requires security round the clock and a location in a shopping center would be responsible for security for the entire center.
Even finding a location is tricky. MYNT first chose a site on Mt. Rose Highway before deciding on a lot in Lemmon Valley that’s county regulated and surrounded by the city. Zoned commercial and for cannabis, it met buffering requirements (distance from schools, community or rehab facilities, casinos). Even so, to change locations, Cates had to provide written justification to the state for moving a cannabis business, and go before the county commission for a vote. None of that is required for non-cannabis businesses. MYNT’s dispensary and cultivation provides 60 retail jobs and 70 cultivation. The privileged license provides an ongoing 3 percent gross sales to the state.
Cannabis Compliance Board
The 2019 legislative session created the Cannabis Compliance Board. Like the Gaming Control Board, it will function as the industry’s regulatory authority . A Cannabis Advisory Commission has also been formed and will operate like a hybrid of Gaming Control Board and Gaming Commission.
“You need expertise when regulating this industry,” said Durrett. “It can’t just be shoved in with other existing businesses. There’s a lot of technical information and laws to understand, a lot of things unique to the industry.” Which is also why Nevada Dispensary Association exists – the 501(c)6 trade organization helps organize the industry, works with government affairs, and provides industry education for members, lawmakers and policy makers.
For cannabis companies, the best seems yet to come as they deal with changing regulatory authorities, high taxes and banking challenges. What’s the upside of owning a cannabis business?
“Making cannabis socially acceptable and legally accessible,” said Cates. “The majority of our customers are between 40 and 70, 50 is average, and they need it for aches and pains.” Before legalizing recreational, Cates thought they had a lot of ghost patients who needed cannabis for ailments but didn’t want to be identified as using. Legalized cannabis seems better for them. Medical or recreational, cannabis is a cash crop for Nevada.
