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Cannabis businesses frustrated by $111-per-hour Bills for State Regulator Tasks

cannabis business

Steve Cantwell has been cultivating cannabis for the past seven years through Green Life Productions, his Pahrump-based farm, and had no problems with state regulators when Nevada’s health and taxation departments oversaw the industry.

But that all changed when the Cannabis Compliance Board took over two years ago. At a recent routine visit, Cantwell said, the inspector raised a litany of concerns about the company’s organic growing methods, kicking off an ongoing tug-of-war that’s forced the company to pay nearly $30,000 for regulators to carry out their oversight duties.

“He came in … really just guns a blazing,” he said. “They told us everything that we were doing, literally everything we were doing, was wrong, which was a huge surprise to us.”

Cantwell and his wife have been receiving monthly invoices from the agency, including some billing them for 75 hours of state worker research time, at a cost of $111 an hour. Because the situation is unresolved, they don’t know how many more months of bills are in the future, or if the agency will tack on a hefty fine at the end of the research process. 

But he and his wife pay all the so-called “time and effort” charges in full, he said. They need to renew their license, after all, and new regulations carry the business-killing penalty of license revocation for companies that don’t stay current.

Time and effort charges have rankled members of the industry and surfaced as a sore spot in numerous recent meetings of the Cannabis Compliance Board. Copies of time and effort invoices reviewed by The Nevada Independent generally show short descriptions such as “routine audit … work ongoing” or “spot check” on line items that can be hundreds or thousands of dollars.

Cantwell said a recent meeting he had with agency representatives to seek more detailed itemization of the bills did not go well.

But there are some signs of relief — the board issued a memo to licensees on Friday indicating it will reduce charges for some of the most scrutinized fees. It is cutting in half the amount it charges to have agents travel to and from cannabis businesses (the previous charge was $111 an hour per person for travel time), and it is eliminating hourly charges for “general correspondence from cannabis establishments resulting in follow up from CCB agents not related to ongoing audits, inspections, investigations or approvals.”

“The CCB monitors all its policies and procedures and makes changes when appropriate. Any changes are subject to further review or repeal,” the board said in a statement Monday when asked the rationale for the shift and if it came in response to licensee complaints.

History of the charges

Time and effort charges are not new, according to Cannabis Compliance Board Executive Director Tyler Klimas, and have been on the books starting from the time the Department of Health and Human Services regulated marijuana as medicine only, through when the Department of Taxation oversaw the industry to now. The policy may not always have been used, however, and that may be giving licensees the impression the charges are a recent development, Klimas said.

“As with all the policies that we implement, we implement that strictly,” he said in an interview in late June. “And so we charge time and effort for all oversight activities in the industry.”

The charges are now bringing in about $2.5 million a year out of an agency budget of $10.5 million a year.

But they are causing major heartburn in Nevada’s legal marijuana industry, according to Layke Martin, the executive director of the Nevada Cannabis Association. Not only are they coming at a time when cannabis sales have slowed down by about 20 percent, but they come as a 15 percent wholesale tax — which state law prioritize first for funding the CCB’s activities, then supporting local governments and then sending any leftovers to education — brought in nearly $66 million last fiscal year, far more than the agency needs to operate.

“Why are fees being billed for routine staff activities … when the regulator's already been fully funded because the Legislature made it a priority starting in 2017?” Martin said.

Klimas noted that gaming regulators — who served as a model in the creation of the Cannabis Compliance Board — also assess hourly charges. The Gaming Control Board has a fund set up to support the cost of investigating applications — an extensive process that includes a deep dive into an applicant’s marital, financial and criminal history as well as personal character and can sometimes require a team of investigators — and charges $155 an hour for the work.

The gaming investigation fund, which brings in upwards of $12 million a year, is supported by the hourly fees and other sources, including application fees. It makes up about 26 percent of the casino regulatory agency’s annual budget, officials said

However, in contrast to the cannabis board, activities such as responding to licensee emails, researching licensee business techniques and routine inspections and audits would not be subject to hourly billing and would instead be supported by money the Legislature allocates from the general fund, a control board spokesperson said.

Asked whether the Legislature’s allocations and marijuana licensing fees are insufficient to cover the Cannabis Compliance Board’s operating costs, Klimas pointed out that the industry is supposed to be self-funded, and to drive revenue to the state. Time and effort proceeds can bring close to $6 million to schools over a two-year budgeting cycle.

“That is real money that gets put into the State Education Fund,” he said. “So it's important that that's our policy, that we follow that policy. And you know, this is a highly regulated, privileged industry. And so there is a cost of doing business here. Time and effort is one of those costs.”

Klimas said the practice also helps ensure that businesses are responding in a timely fashion to regulators and staying organized, rather than taking weeks to return requests for financial records, for example.

“When you are being billed time and effort for an audit or an inspection or investigation, obviously being a more compliant licensee, to have a more compliant operation to be able to provide the information that we request in a much more timely manner, is going to directly result in a lower time and effort bill,” he said.

Industry reaction

Marijuana businesses have been reckoning with a change in fortunes that includes declining sales — a trend Martin said could be tied to inflation eating up consumers’ disposable income, and the end of COVID stay-at-home orders giving consumers more recreational options than at-home marijuana use.

Cantwell acknowledges that inflation and other issues beleaguering the Nevada cannabis industry are not all the CCB’s fault, but he feels the agency has taken more of an anti-cannabis than a pro-cannabis stance.

“They're definitely not helping us through these tough times,” he said. “Seems like it's definitely scaring off the growth of this industry.”

Martin called the fees an additional back-end tax assessed on an industry that already faces a high cost of compliance and tax disadvantages, such as the inability to write off business expenses on federal taxes because marijuana remains illegal at the federal level.

“We have more than 15,000 employees and many state and local budgets need this industry to succeed,” she said. “And so we’re hoping that we're creating the conditions for [a] healthy and successful industry.”

The 15 percent tax on the wholesale value of cannabis and a 10 percent tax on the final retail prices of recreational marijuana brought in nearly $158 million in the fiscal year that ran through June 2021, and $159 million was funneled to education from the industry that year (application fee revenue and penalty proceeds also flowed to schools). 

Will Adler, who represents the Sierra Cannabis Coalition, said that even if the time and effort revenue is flowing to education, the arrangement is problematic.

“The idea of additional fines or additional fees adds additional good to the pile for education — I think it's misguided,” he said. “At this point, the additional fines and fees could be trying to kill that golden goose that is the cannabis industry.”

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