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October 13, 2019

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Nevada Dispensary Association responds to state audit showing possible tax loss

Nevada Dispensary Association News Conference on Recreational Sales

Steve Marcus

Marijuana is displayed at a Las Vegas area dispensary during a Nevada Dispensary Association news conference on legal recreational marijuana sales Thursday, June 29, 2017.

The Nevada Dispensary Association is calling for more training with the state’s METRC seed-to-sale software system in response to an audit that found hundreds of thousands of dollars of potentially lost tax revenue.

Association officials said the revenue found in the audit may not have been lost product, and stressed that the review found no evidence of legal marijuana making its way into the black market.

“Inaccurate entry, confusion over batching and tagging during the program’s rollout, and destruction of unusable marijuana are likely responsible for a vast majority of the discrepancy between Department of Taxation sales data and METRC data,” the group said in a statement.

The audit found that around $500,000 in tax revenue could have been lost over a six-month period due to discrepancies between seed-sale tracking logged in a state database and tax returns filed with the Department of Taxation.

“It should not be interpreted to mean that actual improper sales are occurring at significant frequency in licensed dispensaries or that establishments are misrepresenting sales,” the association said in a statement. “Nevada Dispensary Association member dispensaries are vigilant to only sell tested, clearly labeled and legally appropriate products to customers, and will work with regulators to ensure accurate documentation of sales in accordance with Nevada laws and regulations.”

Chris Giunchigliani, a member of the Gov. Steve Sisolak’s advisory panel for the formation of a Cannabis Compliance Board, said the findings do not necessarily mean the money is lost to the state.

“In a public audit sense, you have to say even though you may not have actually lost that money, this was potentially what you do if you don’t fix these steps,” she said.

Taxation on marijuana in Nevada has a few steps. A 15 percent excise tax is paid on plant products sold by cultivators, and a 10 percent excise tax is paid on nonmedical sales to the consumer. County rate sales taxes are also charged on the sale.

The excise taxes totaled around $70 million in fiscal year 2018, according to the audit. But data in METRC did not line up with 72 percent of the tested tax returns, suggesting the “potential unpaid tax liability” of half a million dollars.

Here’s what the audit revealed:

• Whole marijuana tax returns filed by cultivators and state tracing data did not match up around 70 percent of the time.

• Retail marijuana tax returns filed by dispensaries and state tracing data did not match up around 57 percent of the time.

• Sales tax returns filed by dispensaries and state tracing data did not reasonably match up around 60 percent of the time.

State auditors requested details of certain marijuana licensees’ inventories to check them with the tax returns filed with the Department of Taxation. In a letter to the auditors, the department said it was “not aware” of any authority auditors had to check the accuracy of filed tax returns.

“There’s still some subtle resistance within that agency because they claim that they have confidentiality issues with the business — it’s not a gaming privileged license,” Giunchigliani said. “It’s a privileged license, but I think everybody’s playing a game on being … open and forthright with the information.”

Auditors said the lack of complete tracing data and taxation department-created guidelines to determine how the program could be “easily used” made the tracing system not as useful as it should be.

“Because METRC is not used to its capabilities, efficiency is lost and it is difficult for the department to determine the resources necessary to effectively regulate the program,” the audit read.

The audit also found that some marijuana earmarked for medical sales, which has a higher THC level, was sold to recreational users. Forty-two percent of the medical marijuana products looked at in the audit were marked as sold inappropriately.

Most recreational products cannot exceed 800 milligrams of THC per package. Edibles cannot contain more than 100 milligrams per package. Some of the edibles sold that the audit pointed out had more than five times the amount of THC allowed.

“It is possible that these were instances of failures to properly designate the sale as a medical sale rather than an intentional violation of the regulations,” the dispensary association said in a statement. “The Nevada Dispensary Association supports and will actively pursue improvements in this area, including additional training and a proposed amendment to Senate Bill 238 that would require designation of the sale as medical or nonmedical at the point of sale.”

Senate Bill 238, sponsored by Sen. Yvanna Cancela, D-Las Vegas, would, among other things, bar third-party delivery of medical marijuana, require one of the members of the Nevada Tax Commission to have five years’ experience in the legalized marijuana business and create the Responsible Use of Marijuana Public Education Committee.

The auditors’ recommended 13 steps to be taken to improve the regulatory powers of the taxation department and METRC, including a program to monitor for irregular activity in METRC and ensure the THC content of products is reported correctly.

The taxation department accepted all of the recommendations.