City Council
MEETING DATE: 10/28/2015
TITLE:
Title
Compliance Review/Audit of Gross Receipts for Cannabis Dispensaries
End
FROM:
Tami E. Scott, Administrative Services Director
RECOMMENDATION:
Recommendation
Staff recommends the City Council authorize staff to engage MuniServices to complete a compliance review and audit the gross receipts for cannabis dispensaries for compliance with City Ordinance 742. The estimated annual expense to the City is $86,250 for three dispensaries. Subsequent years will cost the City $7,750 per existing dispensary.
Body
BACKGROUND:
Voters approved Measure N at the November 4, 2014 General Election. The passage of Measure N resulted in ordinances 738 and 742 that added Chapters 3.48 and 9.108 to the Cathedral City Municipal Code. Ordinance 742 authorizes the City to impose a tax on the proceeds of cannabis and marijuana collectives, as defined in the Ordinance, in the amount of fifteen cents (15) for every dollar of proceeds. Ordinance 742 allows the Council to set the tax at a rate that is less than 15%. On August 26, 2015 the City Council set the rate at 10%, as well as establishing penalties and interest charges for late payment. On August 12, 2015 the City Council decided to reverse the ban on cash transactions that was written into Ordinance 738, with the additional requirement that software approved by the City Manager or designee be utilized to allow for tracking of all marijuana products from "seed to sale". The change went into effect October 9, 2015.
DISCUSSION:
Many businesses in this industry are heavily cash based because of difficulties with banking due to federal laws. They have weak internal controls, lack fluent audit trails and have inadequate books and records. It is critical that the correct software, processes and controls are implemented to track the flow of cash and products. The dispensaries are required to use a software package for tracking all marijuana products from seed to sale. Staff recommends we implement a tiered compliance and audit program to assure the dispensaries provide accurate and complete records. The Initial Compliance Review will be to educate and advise the business on necessary measures of compliance with laws and regulatory provisions applicable to their operation, particularly as it pertains to taxes levied by the City. The goal is to instill and implement a foundation of groundwork of compliance (systems and controls) and operations (processes and procedures) from which the businesses in this industry can develop and augment as they mature. The review will be performed within the first 30 days of business. The goal is to address any issues or concerns early on and avoid lost tax revenue to the City in the future. Subsequent audits will be performed at 90 days, 6 months and 1 year, and will be full compliance audits. The audits are designed to monitor whether the existing businesses are properly implementing and adhering to compliance measures designed to ensure complete recognition of proceeds and calculation and remittance of the taxes levied thereon. They will audit the records for accuracy by searching for unreported income, inventory tracking, and by reconstructing sales. MuniServices intends to ensure that the City receives its due amount of revenues from this levy both at the forefront and annually from the cannabis collectives.
MuniServices has performed audits for several municipalities with regard to medical marijuana dispensaries thus providing us with the institutional knowledge of regulations, taxation, acquisition, cultivation, production and distribution of medical marijuana
FISCAL IMPACT:
The total impact to the General Fund in the 1st year is $86,250 for 3 dispensaries and $7,750 per each existing dispensary per year thereafter. This is new budget item.
ATTACHMENTS:
Proposal from MuniServices
Price Schedule Based on Proposal