City Council
MEETING DATE: 9/11/2018
TITLE:
Title
Update from the Cannabis Task Force
End
FROM:
Charles McClendon, City Manger
RECOMMENDATION:
Recommendation
This item is provided for information, discussion and direction only.
Body
BACKGROUND:
Section 5.88.140 of the Municipal Code established the Cannabis Task Force and prescribes the composition of its membership. The ordinance provides for the appointment of the task force by the City Manager. After an open application period, the appointments were made and were reported to the City Council on December 14, 2016. The task force met earlier this year on January 22, 2018 and a report was made to Council on February 6, 2018. As a result of the task force recommendation, a code amendment was subsequently processed allowing regulated on-site consumption at licensed dispensaries. No license amendments to allow consumption have been issued to date. The most recent meeting of the task force was held on July 30, 2018. Topics discussed were the tax on manufacturing and employee background checks.
DISCUSSION:
The task force spent a considerable amount of time discussing the tax on manufacturing. Cathedral City currently charges a tax of 40 cents per gram on all types of oils produced. Industry representatives pointed out that the different classes of product manufactured sell for widely divergent prices resulting in an effective tax rate that is much higher on crude oils, which sell for a lower price, than on distillates or boutique products selling for a higher price.
The following definitions of the different types of oils were provided by an industry representative on the task force:
Crude- Raw, un-refined extract oil usually very dark amber to yellow/blonde hue that still contains all fats, lipids, and waxes. Usually tests between 40-75% total cannabinoids.
Distillate- Winterized, filtered, and ultra-refined extract oil usually light amber to yellow/blonde in hue that contains no fats, lipids, or waxes and is fully decarboxylated. Usually tests between 80-100% total cannabinoids.
Exotic/Boutique- Ultra-premium extract oil concentrates usually referred to as shatter, live resin, terp sauce, or diamonds that is usually amber to very light yellow/blonde hue. May or may not contain fats, lipids, or waxes (depending on process). Always high in terpene concentration. Usually tests between 75-100% total cannabinoids.
A tax proposal was submitted for consideration by the task force from one of the local manufacturers. The task force ultimately recommended Council consider establishing three tiers of taxes based on the product produced to maintain market competitiveness with other jurisdictions in the region.
|
Crude |
$0.05 per gram |
|
Distillate |
$0.10 per gram |
|
Exotic/Boutique |
$0.40 per gram |
At the rates proposed by the task force the effective tax rates on a percentage basis would vary based on what the product sells for. For example, if crude sells for $5.00 per gram, a 5-cent tax rate equates to 1%.
Staff has confirmed that Palm Desert, if the tax is approved by their voters in November, will charge a gross proceeds tax of 2% on manufacturing. Palm Springs currently charges a gross proceeds tax of 10% on manufacturing.
Staff proposes an alternate tax schedule as follows:
|
Crude$0.10 per gram |
|
|
Distillate |
$0.20 per gram |
|
Exotic/Boutique |
$0.40 per gram |
At this rate, on crude selling for $5.00 per gram manufacturers would pay a tax of 10 cents per gram, which equates to a 2% tax rate.
There was a brief discussion regarding the taxes on dispensaries. Cathedral City currently charges 10% sales at dispensaries as do the Cities of Palm Springs, Desert Hot Springs and Palm Desert (if their tax is approved by voters). It appears that our current tax is competitive and there was not a recommendation to change it at this time. Some industry representatives asked the Council to consider exempting non-cannabis products from the tax.
The task force also discussed background checks on employees. It is still the position of industry representatives that backgrounds should only be required on owners and managers. Staff reported, however, that Council did not accept that recommendation when made in February and for now that is a non-starter. Instead, staff recommended the issuance of an industry card to employees or potential employees who pass the background check making it easier for employers to hire employees who have already passed a background. The card could be transferrable among employers and even in the other Cities if they agreed to accept it. The Cathedral City Police Department is willing to issue the cards for a small fee, which would help our officers and inspectors if employees are then required to carry or wear the card when working. The idea was deemed to be worthy of consideration by the task force.
FISCAL IMPACT:
The City collected $130,023 in manufacturing taxes in FY17-18 on very limited manufacturing activity. Most manufacturers are currently producing small amounts while waiting to see what happens on the tax discussion. A reduced tax rate could result in reduced taxes paid to the City although industry representatives contend that the amounts produced will greatly increase, more than off-setting the loss from a reduced tax rate.
ATTACHMENTS:
Green Cross Pharma, Maria Scagliotti letter
Tax Sharing Agreement - 6.19.18
Cathedral City Tax Letter without signatures