Tuesday, July 18, 2017 | 2 a.m.
State-led marijuana legalization has led to Onion-like headlines across the country. “Here comes the first Church of Cannabis,” “Colorado to offer one-day tax holiday on marijuana,” “Marijuana lawsuit claims legal pot grow makes horse riding less pleasant,” and now “Governor declares state of emergency as marijuana stash runs short.”
These headlines are bound to continue as states create highly regulated industries that did not previously exist. Unintended consequences lie around every corner. Colorado’s system immediately ran up against the state’s taxpayer bill of rights, requiring a one-day tax holiday. For Nevada, the distributorship as defined in Question 2 did not work as intended, and the state faced the prospect of having stores ready to sell, producers ready to deliver and no mechanism to connect (distribute to) the two.
While the governor searches for short-term solutions for licensing distributorships, we propose a long-term one for when the Legislature is able to act: Do not require distributors.
How cannabis is distributed from a cultivation facility and ultimately to a storefront is an important issue. It is an integral part of the economics of legal cannabis and is crucial to ensuring that a closed-loop, safe and traceable inventory exists.
Yet Nevada’s decision to mandate third-party distribution generates a detail of policy that has little evidence of value in the cannabis industry. Nevada should be focused on regulatory mechanisms that have been proven to work: inventory tracking, product testing, data collection, public health awareness, traffic safety, consumer education and youth prevention.
While all eyes are on the Silver State as the newest and fastest adult-use cannabis market, Nevada should take lessons from other states to understand how distribution models have or have not worked successfully.
Other states have allowed third-party distribution, but no one has mandated it in the adult-use market. Colorado for instance, allows its licensees to use third-party distributors if they choose; however, licensees are able to distribute on their own, as well. Mandated third-party distribution is not the keystone to a safe, traceable inventory system. A robust, regulated seed-to-sale tracking system provides that safety net. By requiring a single system to track inventory from the moment a seed is planted or a clone is rooted to the point of sale assists the system in multiple ways. First, it allows regulators to have an accurate assessment of the quantity, movement and potential deficiencies (bad acts) in the inventory system. Second, it allows firms to be confident in their own inventory, product yield, revenue flows and tax burdens. Third, it ensures for consumers that the product they are being sold reflects the product that is marketed. Seed-to-sale tracking is the cornerstone of a secure marijuana inventory system, regardless of the distribution model utilized.
Often, the impetus for a third-party distribution model is a desire to emulate the alcohol industry; and in fact, Nevada has opted to use that exact industry and system. There is much the cannabis industry can learn from beer, wine and spirits; however, those comparisons must be considered thoroughly. Peer industries adopt policies for a variety of reasons. Sometimes, those policies arise because of best practices. Other times, those policies arise because of interest-group lobbying, cronyism, and/or historical legacies, at the expense of effective public policy. There is little evidence that mandatory distributorships can be considered a best practice.
The arguments supporting a required, third-party distribution model proffer that it will be both a more efficient and a more effective way to protect public safety and public health. We have no way of knowing if this is correct. But let’s consider each in turn.
If a third-party distribution system is indeed more efficient, firms will flock to that system. If it is not, firms will avoid it. Third-party firms should have to prove their worth just like each and every firm must demonstrate to a discriminating cannabis consumer that it has the best strains in town. Although cannabis is heavily regulated, we know from other states that market forces are meaningful and effective at allowing the best actors to succeed and bad actors to be rooted out. Competition, not mandate, has the potential to increase efficiency.
It is possible that a third-party distributor is not more efficient but is more effective. A distributor can act as a redundant measure to ensure public safety and public health. In regulatory enforcement, redundancy is not always a negative concept. Redundancies can increase costs, but it can still be in the public interest to require them if they are shown to increase safety in a significant way. The point, though, is that we do not yet have the data from other states to prove that this redundancy will protect public health and public safety.
Requiring distributorships has the potential to increase costs significantly. Not only will the distributorships be an added cost, they have the potential to become choke points in the production chain, driving up prices as demand outpaces supply. This could prove a challenge in Nevada’s goal to displace the black market. Eliminating the black market requires that prices for legal cannabis be close enough to black market prices so that the average consumer opts into the legal market.
Nevada has opted to mandate third-party distribution. The early challenges involving distribution grew out of the state’s choice to allow sales before certifying distributors for the cannabis industry. Those challenges have not grown out of something inherent about the distributors themselves. Yet the idea that distributors are the cornerstone of the safe market is not a foregone conclusion. When Nevada’s distributorship mandate sunsets, the state should consider the costs and benefits of certain aspects of the system, and re-evaluate whether the distribution system that developed under mandate reflects the most effective policy. If it doesn’t, Nevada’s cannabis consumers deserve something different than the status quo.
Andrew Freedman is founder and partner at Freedman & Koski Inc., and previously served as the director of marijuana coordination for Colorado Gov. John Hickenlooper. John Hudak is senior fellow at the Brookings Institution and founder and senior adviser at Freedman & Koski Inc. He also serves as a f