Nevadans Get a Taste of the Parasitic 3 Tier System — Not So Tasty

Posted by Tom Wark on Jul 25, 2017

One of the best ways to evaluate the efficacy of a system or process is to present it to someone who has not spent time engaged with the system. That’s exactly what happened in Nevada when advocates of marijuana legalization and those overseeing implementation of recreational marijuana’s regulatory system were confronted with the 3 Tier System that governs alcohol distribution. That same 3 Tier System was adopted when Nevada voters approved Question 2, the initiative that legalized recreational marijuana sales and use.

However, Nevadans saw what happened when wholesalers were stuck in the middle of the distribution system for no other reason than they had the political clout to weasel their way in. Marijuana shortages occurred. The State had to take emergency measures to keep pot on the retail shelves and not lose millions in tax revenue. Wholesalers gummed up the system with lawsuits. All this led to a very interesting evaluation of the three-tier system for marijuana distribution in Nevada in a story published in the Nevada Independent:

Is the three-tier system relevant?

The dispute has raised questions about the importance of the three-tier system, which was established in the wake of Prohibition as a way to avoid business arrangements that policymakers believed led to aggressive sales and excessive alcohol consumption. Prior to Prohibition, manufacturers could operate restaurants that exclusively sold their liquor in an arrangement called a tied house, but policymakers thought it would encourage temperance to add distance between the tiers.

Distributors argue that voters intended to set up a system closer to the one that governed liquor as a way to ensure integrity in the tax collection process. They say the vertically integrated marijuana system is a case of the fox guarding the henhouse.

“The reason the alcohol distributors were included in the distribution chain to begin with in Question 2 was to provide a check and balance so the Department could make sure that we would validate what was being picked up at the supply side was exactly what was being delivered at the retail side,” said Allan Nassau of the Independent Alcohol Distributors of Nevada. “This would assure that the Department would have another link in the supply chain to verify what was being sold so they could collect the proper amount of excise tax and no impropriety would occur.”

Question 2 campaign spokesman Joe Brezny argues that the integrity check comes from a “seed to sale” tracking system, and that vertical integration is an effective system for marijuana because it allows retailers to maintain tight quality control over their products. He said the streamlined model also helped lower prices.

Brezny pointed out that sometimes, marijuana cultivation and production are on the same site as a retail store, so distribution would involve moving a package from one room or floor to the next in the same building.

“What happens if you put an independent distributor in the middle of that? That’s the definition of a bottleneck,” he said. “Other than the three-tier system in alcohol where that has a historical reference from ending alcohol prohibition, I don’t know any other product in the product chain where that is a requirement.”

Besides, he argues, even the three-tier system for liquor has deteriorated in recent years. Microbreweries brew and sell their product at the same site without distributors, and wine tasting rooms at vineyards do the same.

“It’s a dinosaur,” he said. “Microbreweries and craft vineyards with tasting rooms are the proof that the three-tier system is a relic of the past.”

It’s the easy acknowledgment of the 3 Tier System’s utter absurdity and uselessness that most comes through in Brezny’s comments. He’s only worked within the system for a short while and he immediately notices that it’s a complete outlier from nearly every other method of product distribution.

It’s sometimes difficult to explain alcohol distribution law to someone not working in the alcohol business. You explain the product MUST go to a wholesaler. You explain the retailer may not conduct business with the restaurant. And you get a blank stare back at you. It’s not that you aren’t explaining the system well. It’s that the system is so absurd, useless and obviously a racket aimed at enriching a small collection of parasitic businesses that those outside it can’t fathom its meaning and purpose. But them in the middle of it and they immediately understand the problem.