City Council
MEETING DATE: 5/11/2016
TITLE:
Title
Medical Cannabis Taxation
End
FROM:
Charlie McClendon, City Manager
RECOMMENDATION:
Recommendation
Consider medical cannabis taxation options and provide direction to staff.
Body
BACKGROUND:
Chapter 3.48 of the Cathedral City Municipal Code imposes a tax on "every person engaged in operating or otherwise conducting any medical cannabis business" a tax of fifteen cents for each dollar of gross receipts. "Gross receipts" is defined in Section 3.48.020(C), and generally includes anything of value received from sales by a medical cannabis business.
The City is authorized to impose this medical cannabis tax by Government Code section section 37101, authorizing business license taxes. Section 37101 does not require a business license tax to be calculated based on gross receipts. Section 37101 states that if a business license tax is calculated based on income or gross receipts, then non-profit organizations that are exempt from state or federal taxation must be exempted from the business license tax. Non-profits are not exempt from business license taxes that are calculated by another method.
The medical cannabis tax was adopted by the voters at a time when only medical cannabis dispensaries were allowed in the City. Now that the City Council has adopted ordinances expanding the types of medical cannabis businesses allowed in the City to include cultivation and manufacturing sites, the City should consider amending the tax to provide different taxation methods for the different business types. Continuing with the current tax could result in lost revenues for the City and competitive disadvantages for certain medical cannabis businesses. For example, under the current tax a cultivation business that sells its cannabis to a dispensary would be taxed based on the gross receipts of that sale, and then the dispensary would be taxed based on the gross receipts of its sale to the consumer. A vertically integrated business that grows and dispenses medical cannabis would only be taxed once, at the time of the sale to the consumer.
In addition to the City's tax on medical cannabis, medical cannabis sales are also presently subject to local sales taxes. It is likely that the State will begin imposing additional taxes on cannabis after the November 2016 election. The Adult Use of Marijuana Act (AUMA) will likely appear on the November 2016 ballot and would legalize adult recreational use of marijuana. The AUMA includes a 15% tax on retail sales of cannabis, a cultivation tax of $9.25 per dry ounce of flowers and $2.75 per dry ounce of leaves. Medical cannabis patients would be exempt from the 15% tax on retail sales. In addition, SB 987 is currently being considered by the Legislature and would impose a 15% tax on retail sales by medical cannabis businesses. SB 987 includes a proviso that if the AUMA is approved by the voters at the November 2016 election, the bill will not take effect.
DISCUSSION:
A memorandum prepared by Vicente Sederberg is attached to this Staff Report and outlines the various methods for levying taxes on cannabis cultivation, manufacturing and dispensing. The Vicente Sederberg memo recommends that the City continue to levy a tax based on gross receipts for dispensaries. For cultivation, they suggest that the City switch to a tax based on the square footage of the facility. For manufacturing, the memo recommends a tax based on the weight of concentrates produced or a per unit tax on cannabis infused products. Both of these recommendations are based on the relative ease of enforcing taxes calculated in these manners. However, there are secondary effects that may occur with both of these methods of taxation. Taxes based on square footage encourage the cultivators to tightly pack in the plants. Flat taxes based on the weight or number of units of manufactured product encourages the manufacturers to produce more potent products, which command higher retail prices. The Vicente Sederberg memo discusses in more detail the pros and cons of the various methods of levying taxes on cultivation and manufacturing.
In deciding how to amend the City's medical cannabis tax, the City Council should also consider the overall taxation of cannabis and the possibility that too many taxes could drive customers to the black market and have the unintended effect of reducing the City's tax revenue base. As discussed above, if the AUMA passes the State will begin imposing taxes on cannabis cultivation and manufacturing, and on the sale of non-medical cannabis. While the City always has the discretion to lower the amount of its tax levies from what was approved by the voters, the Council should consider that setting the maximum tax too high may cause the voters to reject the tax, especially since the voters will be asked to approve both the AUMA and the City's tax on the same ballot.
If the City decides to amend its medical cannabis tax it would have to be approved by the voters. The next possible election is the November 2016 election. Elections Code sections 9222 and 10403 allow the City Council to place an ordinance amendment on the ballot as an initiative measure and require the election to be held at least 88 days after the date the Council approves placing the amendment on the ballot. This means that that for the City to get an amendment to its medical cannabis tax on the November 2016 ballot, the Council must take action by August 12, 2016. Furthermore, because this is a tax measure, Government Code section 53724 requires the Council to approve putting the measure on the ballot by a 2/3rds vote. If the City does not put an amendment to the tax on the November 2016 ballot, it must wait until November 2018 because Article 13C, Section 2 of the California Constitution requires votes on general taxes to be consolidated with the regularly scheduled general election for members of the City Council.
FISCAL IMPACT:
Amending the medical cannabis tax will have a fiscal impact on the City. Until direction is received from the Council regarding the manner in which it desires to amend the tax, it is too speculative to estimate the extent of the fiscal impact.
ATTACHMENTS:
Vicente Sederberg memorandum