Authored By: Tracy A. Gallegos

Tracy has a multifaceted practice that touches upon corporate, real estate, sports, and entertainment law for clients ranging from start-up companies to established businesses. Tracy’s clients include, but are not limited to, community association management companies, homeowners’ associations, medical marijuana dispensaries, and individuals and companies involved in the promotions and management aspects of the nightlife industry.

Attorney at Law

Fox Rothschild LLP
1980 Festival Plaza Drive
Suite 700
Las Vegas, NV 89135
(702) 699-5908 – direct
(702) 597-5503- fax
TGallegos@foxrothschild.com
www.foxrothschild.com

 

The Regulation and Taxation of Marijuana Act (the “Act”), which was passed by a fifty-four percent (54%) vote last November, permits a person 21 years of age or to possess, use, consume, purchase or process one ounce or less of marijuana, excluding concentrated marijuana, and one-eighth of an ounce of concentrated marijuana in Nevada. The Act also permits a person 21 years of age or older to cultivate no more than six marijuana plants for personal use, provided that:

(1) the cultivation takes place in a closet or other enclosed area that can be locked;

(2) no more than 12 plants are possessed or cultivated at a single residence; and

(3) the cultivation is not within 25 miles of a licensed retail marijuana store. Last, the Act allows a person 21 years of age or older to obtain and use marijuana paraphernalia.

With respect to marijuana businesses, the Act also permits the operation of recreational marijuana establishments, which will be regulated by the Nevada Department of Taxation (the “Department”). Pursuant to the Act, the Department is required to begin accepting applications for marijuana establishments no later than 12 months after January 1, 2017, which was the effective date of the Act. While it was originally anticipated that applications would be accepted beginning January 1, 2018, it is possible that the Department will have temporary regulations in place and be in a position to begin accepting applications as early as July 1, 2017. Any temporary recreational licenses that are issued will be in effect until the earlier of December 31, 2017, or 30 days after enactment by the Department of permanent regulations.

For a period of 18 months after the Department begins accepting applications, applications for retail stores, product manufacturing facilities and cultivation facilities will only be accepted from currently licensed medical marijuana establishments. Moreover, during the 18-month time frame, the Department will only issue marijuana distributors licenses to persons holding a Nevada wholesale liquor license, unless the Department determines that doing so would result in an insufficient number of marijuana distributors.

So what does the Act mean for the marijuana industry in Nevada?

The industry has already been impacted in several, albeit conflicting, ways. First, because of the priority that will be given to currently licensed marijuana establishments, there has been an increase in the attempted purchase and sale of existing marijuana licenses. Those wishing to enter the recreational cannabis industry have aggressively sought to purchase licenses from such existing marijuana establishments. The problem with this approach is that a marijuana license, which is a special use permit, cannot itself be transferred. Rather, only the ownership interest in a medical marijuana establishment can be transferred pursuant to Nevada Revised Statutes (“NRS”) Chapter 453A. Specifically, NRS 453A.334 provides, in relevant part, as follows:

1. Except as otherwise provided in subsection 2, the following are nontransferable…

(b) A medical marijuana establishment registration certificate.

2. A medical marijuana establishment may transfer all or any portion of its ownership to another party, and the Division shall transfer the medical marijuana establishment registration certificate issued to the establishment to the party acquiring ownership, if the party who will acquire the ownership of the medical marijuana establishment submits:

(a) Evidence satisfactory to the Division that the party has complied with the provisions of sub-subparagraph (III) of subparagraph (2) of paragraph (a) of subsection 3 of NRS 453A.322 for the purpose of operating the medical marijuana establishment.

(b) For the party and each person who is proposed to be an owner, officer or board member of the proposed medical marijuana establishment, the name, address and date of birth of the person, a complete set of the person’s fingerprints and written permission of the person authorizing the Division to forward the fingerprints to the Central Repository for Nevada Records of Criminal History for submission to the Federal Bureau of Investigation for its report.

(c) Proof satisfactory to the Division that, as a result of the transfer of ownership, no person, group of persons or entity will, in a county whose population is 100,000 or more, hold more than one medical marijuana establishment registration certificate or more than 10 percent of the medical marijuana establishment registration certificates allocated to the county, whichever is greater.

(Emphasis added).

The foregoing language expressly states that only ownership can be transferred, and not the actual license itself. Many current holders of marijuana establishment licenses and prospective purchasers are unaware of the foregoing restrictions under Nevada law and have attempted to enter into asset purchase transactions that purport to transfer the marijuana license as an asset. This is expressly prohibited under NRS 453A.334(1).

Furthermore, in some cases holders of marijuana establishment licenses have even attempted to tie an existing license with a lease for the premises at which the marijuana business is being operated, and have attempted to transfer the existing marijuana license with the lease. This scenario is also prohibited under Nevada law. Based on the foregoing, a prospective purchaser must be mindful that he or she must purchase the ownership interest in the entity that holds the license; the license itself is not an asset that can be purchased.

While the above-referenced effect on the marijuana industry suggests that an increase in marijuana businesses may be forthcoming, a second contradictory effect has been the closure of smaller marijuana establishments. There are many reasons why smaller marijuana business have already closed their doors in Nevada, such as their inability to compete with larger, well-funded marijuana establishments in terms of the price of products, advertising, and the quality of their products. Furthermore, the process for obtaining a medical marijuana registration card is both onerous and expensive, which has likely resulted in fewer people applying for a medical marijuana registration card. This means that there are fewer customers that can be served by smaller operators.

Last, the black market for marijuana products is still preferred by many people as the prices are often less expensive. The price for an eighth of an ounce of marijuana can range between $35 to $60 at licensed marijuana establishments, depending upon the strain. On the black market, the same amount of marijuana can be purchased for as little as $25. Furthermore, marijuana products sold on the black market are not taxed.

Other than the price difference, some believe that the quality of marijuana sold on the black market is superior to the quality of marijuana sold in licensed establishments. This has also led to people continuing to purchase from the black market. With the approval of the Act and the general misconception that all marijuana use and sale is permissible in Nevada, sales on the black market will likely increase, thereby decreasing the revenue that might have been realized by smaller licensed marijuana establishments.

The Act has created an uncertain future for the marijuana industry in Nevada. Until the Department enacts regulations regarding the sale of recreational marijuana, the full effect of the Act on marijuana businesses remains to be seen.