On July 1, 2017, recreational cannabis sales became legal in Nevada. Five years later, Nevada’s cannabis industry has grown and matured, yet it still faces many of the same issues that it did on Day One.
Brandon Wiegand
In the first year of legal recreational sales in Nevada, dispensaries sold nearly $530 million in product and brought in close to $70 million in excise tax revenue to the state.
That number steadily increased over the years until fiscal year 2021, when cannabis businesses hit a record high of $1 billion in sales, which brought in almost $158 million in excise tax revenue.
During the 2021 fiscal year, after funding the operations of the Cannabis Compliance Board, the state sent $159 million in cannabis tax revenue to the State Education Fund, which funds K-12 education.
This year has been challenging for many industries, and cannabis is no exception. Costs for everything from fertilizer to packaging have skyrocketed.
Because of price sensitivity and already high taxes, however, these costs cannot be passed on to consumers. Sales are down, and fiscal year 2022 fell short of the prior year’s totals. Licensed dispensaries reported about $965 million in sales, which generated a little over $152 million tax revenue for the state.
Cannabis businesses also face economic challenges that are unique to this industry and will not be resolved until Congress takes action.
Cannabis is still federally illegal and classified as a “Schedule 1 drug,” alongside heroin and methamphetamine. As a result, everything from traditional banking and lending, to intellectual property protections, to bankruptcy, is limited or unavailable to cannabis businesses.
Additionally, IRS Code Section 280E prohibits cannabis businesses from deducting ordinary business expenses, resulting in an effective tax rate of 60-70%. Since cannabis remains federally illegal, interstate commerce is prohibited, which means all cannabis sold in Nevada dispensaries must be grown in Nevada.
This requires a careful calibration of supply and demand to ensure that the amount of cannabis produced is not too much or too little based on consumer demand within the state.
When the price of cannabis on the licensed market is too high, customers look to the illicit market. Unlicensed operators are the biggest competitor of any licensed dispensary.
They are not subject to the same taxes or costs of regulatory compliance and testing as the licensed market. While there is no appetite to re-criminalize cannabis possession or sales, in order for the licensed market to be a healthy and tax revenue-generating sector, additional enforcement is necessary to shut down unlicensed businesses that brazenly operate in the shadow of the legal market.
Illicit cannabis businesses that threaten the licensed market rely on two things: confusion and lack of enforcement. A smartphone search of “dispensaries near me” or “dispensaries that deliver to the Strip” will turn up dozens of unlicensed companies offering to deliver unlicensed, untested products to any hotel on the Strip.
Meanwhile, licensed companies are prohibited from delivering to hotels or even being located within 1,500 feet of casinos. Fake dispensaries that sell hemp products disguised to look like licensed cannabis dispensaries also exist along the Strip and the Fremont Street Experience.
These companies rely on confusing tourists into thinking that they are purchasing products containing THC. Some of these also sell unlicensed products containing THC or Delta-8, which is illegal.
Because the Cannabis Compliance Board (CCB) was designed to regulate the licensed cannabis industry, it does not have the jurisdiction or the resources to shut down every illicit cannabis business. Yet, more enforcement is needed, from law enforcement, the CCB and Attorney General’s office, and local governments, to shut down these businesses and pursue civil penalties.
Another way to combat the illicit market and help the licensed market succeed is through regulation that is fair, consistent and cooperative.
Licensees face enormous costs due to regulation, such as licensee application fees and renewals, background checks for all employees, significant training requirements, oversight billing and six-figure disciplinary violations.
The CCB projected $293,000 in revenue from “time and effort” billing during the 2022 fiscal year, but actually collected $2.5 million from the industry, which was over eight times its budget.
The CCB projected $116,000 in revenue from civil penalties during the 2020 fiscal year, but actually collected $1.9 million from the industry, which was more than 16 times its budget.
The legalized cannabis industry has been an important component of building a durable tax base, diversifying the economy and providing valuable jobs for Nevada.
While nearly every other industry has seen price increases, cannabis has seen price decreases coupled with cost increases over the past year.
Simultaneously, the industry’s regulator has taken an aggressive approach to fines, fees and enforcement, but the real threat to public safety is the flourishing unlicensed market.
This isn’t what Nevada’s voters had in mind when they approved recreational cannabis. If we don’t want to kill the golden goose that is our cannabis tax base, reform is needed.
Brandon Wiegand is the chief operating officer for Thrive Cannabis Marketplace and president of the Nevada Cannabis Association, formerly known as the Nevada Dispensary Association.
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