City of La Mesa Cannabis Taxation Discussion February 28, 2018
ABOUT HDL COMPANIES Serves: 400 Cities 44 counties 79 transaction districts Partnered with over 100 local agencies to develop Cannabis Regulatory and Fiscal Polices Former policymakers, law enforcement staff and State & Local Government Cannabis Regulators HdL staff has experience conducting over 11,000 cannabis compliance reviews in California, Colorado and Nevada Has reviewed or evaluated over 1,000 cannabis business applicants and nearly $3 billion dollars in projects in behalf of cities/county agencies
WHO IS SUBJECT TO THE CANNABIS TAX? A Commercial Cannabis Tax is a tax on the business entity who is authorized to conduct these activities and holds a Commercial Cannabis Permit. This is not a tax on the consumer.
The Size of the Cannabis Industry in California
SAN DIEGO COUNTY RETAILS ANALYSIS There are 194 active cannabis retail sellers permits issued in the County The County generated $80.6 million in cannabis retail sales in the last four reported quarters (3 rd Qt 2016-2 nd Qt 2017) Twenty-three (23) of the cannabis retailers generated 92% of the revenue $74.4 million in Gross Receipts The average retailer generated $3.2 million in revenue in the County The median cannabis retailer generated $1.5 million in revenue in the County * Figures are calculated based only on all retailers that generated a minimum of $500K in gross receipts.
CALIFORNIA CANNABIS MARKET Total Statewide Cannabis Production 13.5 million pounds (CDFA Estimate) Total Statewide Cannabis Consumption 2.5 million pounds (CDFA Estimate) 1.6 million pounds (California Cannabis Opportunity Report)
TOP 12 COUNTIES Humboldt 184 Santa Barbara 147 Mendocino 85 Monterey 74 Calaveras 48 Riverside 26 Trinity 24 Yolo 21 San Bernardino 21 Sacramento 19 Santa Clara 19 Alameda 18 TOTAL 686 TEMPORARY CULTIVATION PERMITS ISSUED STATEWIDE PER COUNTY AS OF FEB 1, 2018
REGIONAL CANNABIS PRODUCTION
TAKEAWAYS Cannabis cultivation in California exceeds the size of the legal market by 5 to 8 times Interest in legal cultivation licenses exceeds the size of the legal market by 12 to 16 times California s entire market could potentially be supplied by as few as 200 Type 3 businesses Ability to obtain cultivation licenses in San Diego County appears to be low compared with the rest of the state
Impacts to the Cannabis Businesses in Fiscal Policy Decisions?
CANNABIS STATE AND LOCAL TAX RATES State Cannabis Excise Tax (Applies to medical and non-medical) Retail Tax 15% Gross Receipts of Retail Sales Cultivation Tax $9.25/oz. Flowers $2.75/oz. Leaves Sales and Use Tax: 7.25% + Adult-Use Subject to Tax Medicinal May be Subject to Tax State General Fund (3.9375%) Local Public Safety Fund (.50%) Local Revenue Fund (1.5625%) County Transportation Fund (.25%) City/County Operations Fund (1.00%) City Cannabis Tax (Medicinal /Adult Use) XX% of Gross Receipts $XX Per Square Feet $XX Flat Rate $XX Per Weight City Cost Recovery Fees (Prop 26) (Medicinal/Adult-Use) $XX Application Fee $XX License Fee $XX Renewal Fee $XX Administration Fee
PROP 64 TAXES Taxation Adult-Use Medical State Sales Tax Yes No* Local Sales Tax Yes No* Other Local Tax 1 Yes Yes State Excise Tax 2 Yes Yes State Cultivation Tax Yes Yes * H&S 11362.71 Exempts individuals from paying state and local sales tax if they have a State issued patient identification card. In 2016, there were approximately 600 individuals in San Diego County participating in the program and 6,800 statewide. 1 Rev & Tax 34021 2 Excise Tax and other taxes effective tax rate will be 25%
THINGS TO CONSIDER IN DEVELOPING TAX Adult Use Marijuana Act (AUMA) 15% Excise Tax Effective tax rate. Cultivation Excise Tax $9.25 per oz. (Flower) Cultivation Excise Tax $2.75 on (Leaves) Distribution and processing cost of 15% to 30%. State permit cost to be implemented. City regulatory permit fees which may be charged to offset staff costs to manage the program.
Taxes and Fee Strategies
TYPES OF BALLOT MEASURES General tax requires a simple majority vote 50+1 in order to pass Special tax requires 2/3 votes and must be used for a specific purpose as outlined in the ballot initiative
There were 63 Local Cannabis Measures on the ballot related to legalization, taxes and sensitive boundaries California had 39 Cannabis tax measures on the ballot of which only one failed-colfax The Northern part of the State had a 83% passing rate The Southern part of the State had a 76% passing rate 2016 LOCAL CANNABIS BALLOT MEASURES
SQUARE FOOTAGE TAX OPTIONS FOR CULTIVATION $XX sq. ft. (Fixed Rate) $XX sq. ft. w/initial tax with a not to exceed amount $XX sq. ft. w/initial tax with a not to exceed amount and then a CPI thereafter $XX sq. ft. w/cpi annual adjustment $XX sq. ft. on first XX sq. ft. and then reduce amount for additional sq. ft. $XX for total sq. ft. authorized based on permit type (i.e. Type 1A Permit 5,000 sq. ft.) Stacking prohibited vs stacking permitted (State may calculate this activity in the rules) No rate increase for three years
GROSS RECEIPTS TAX OPTIONS Gross Receipts (Flat rate) Gross Receipts (Initial rate then automatically adjusted annually up to the not to exceed limit) Gross Receipts (Initial rate then adjusted only if authorized by the City Council up to the not to exceed limit) No Rate Increase for the first three years
Cumulative Cannabis Taxes Category Amount Increase Cumulative Price Producer Price $1,000 $1,000 $1,000 State Cultivation Tax $9.25/oz $148 $1,148 Local Tax 2.50% $25 $1,173 Batch Testing $50/lb, + 0.50% $55 $1,228 Wholesale Price w/ Taxes $1,228 Total Tax at Wholesale $228 Tax as % 22.80% Manufacturer Markup 20.00% $246 $1,474 Local Tax 4.00% $59 $1,533 Total Manufacturer Price $1,533 Total Taxes at Manufacturer $287 Total Tax as % 18.72% Distributor Markup 30.00% $460 $1,992 Local Tax 3.00% $60 $2,052 Total Distributor Price $2,052 Total Taxes at Distributor $347 Total Tax as % 16.90% CUMULATIVE CANNABIS TAXES HdL Analysis Retailer Markup 100.00% $2,052 $4,104 Local Tax 5.00% $205 $4,309 State Excise Tax 15.00% $616 $4,925 Total Retailer Price $4,925 Total Taxes at Retail $1,168 Total Tax as % 23.71% CA Sales Tax 7.50% $369 $5,294 Local Sales Tax 1.00% $49 $5,344 Total Taxes at Retail $1,586 Total Tax as % 29.68% Total Local Tax 7.45% $398.17
MECHANICS OF TAX COLLECTION All cash industry what best practices should be implemented How often should the tax be collected monthly, quarterly or annually or by an administrative procedure How should the City deal with the security of cash at the businesses and at City Hall
PROCEDURE STEPS Community input Consideration of a Cannabis Business Tax Ordinance establishing the tax and requirements Create a resolution authorizing the City to establish a Cannabis Business Tax Community vote
NOVEMBER 6, 2018 BALLOT MEASURE POTENTIAL SCHEDULE March 29: Draft Tax Ordinance and conduct workshop to City Council to develop tax rates April 24: Aug 10: Aug 22: Aug 27: Nov 6: Reading of ordinance and Public Hearing Ballot Measure Resolution due to the County Primary Arguments due Rebuttal Arguments and City Attorney s Impartial Analysis Due Election Day
City of La Mesa Cannabis Taxation Discussion 23
Thank you! NAME EMAIL PHONE David McPherson dmcpherson@hdlcompanies.com 909-861-4335 Cannabis Compliance Director Matt Eaton Cannabis Compliance Manager meaton@hdlcompanies.com 909-861-4335 Tim Cromartie Cannabis Senior Advisor tcromartie@hdlcompanies.com 909-861-4335