Staff/Subcommittee Recommendation: Board approval of an ordinance levying a general, gross receipts tax at a rate of 1-15% of gross receipts on all commercial cannabis activities. Cultivation would be taxed at an initial rate of 4% of gross receipts, effective July 1, 2018, and increasing to a rate of 5% of gross receipts on July 1, 2020. However, the Board retains the discretion to continue the 4% rate or set a lower or higher rate in the previously described range. All other commercial cannabis activities including but not limited to nurseries, dispensing/retailing, processing, manufacturing, laboratory testing, distributing, or delivery of cannabis in the unincorporated area would be taxed at an initial rate of 5%, effective July 1, 2018. The Board would have discretion to set the rate at any amount within the previously described range, but the Board could not alter the rate more than once in a 12 month period or by more than two percentage points.
Revenues generated by the tax could be used to mitigate the impacts of cannabis and provide net public benefit, in alignment with the County’s Strategic Plan goals of Safe Communities, Thriving Residents, Sustainable Environment, and Flourishing Agriculture, as well as any other discretionary general purpose as decided by the Board of Supervisors. The Board should consider adding examples of the types of efforts it may choose to fund with the general fund revenue.
Per the Board’s direction at the November 7 meeting, staff is returning to the Board to provide a more detailed framework for a potential cannabis cultivation tax. The November 7 staff report is attached for the Board’s edification (Att. A).
In terms of the framework, after conferring with cultivator representatives, staff and the subcommittee are recommending a general, gross receipts tax at a rate range of 1-15% of gross receipts on all commercial cannabis activities. Cultivation would be taxed at an initial rate of 4% of gross receipts, effective July 1, 2018, and increasing to a rate of 5% of gross receipts on July 1, 2020. All other commercial cannabis activities including but not limited to nurseries, dispensing/retailing, processing, manufacturing, laboratory testing, distributing, or delivery of cannabis in the unincorporated area would be taxed at an initial rate of 5%, effective July 1, 2018. The Board would have discretion to set the rate within the previously described range, but the Board could not alter the rate more than once in a 12 month period or by more than two percentage points.
A tax in this range is estimated to generate between $3-10 million in revenue annually depending on wholesale price, productivity, and number of businesses; the estimated revenue generated by other commercial activities is unknown as the County either does not currently permit those activities or the regulations for those activities are still under consideration. A partial summary of the recommended framework is summarized in the chart below:
| General or Special Tax |
Area of Tax |
Affected Activity |
Rate and Mechanism of Tax |
Estimated Revenue Generated by Tax |
| General |
Unincorporated Area |
Cultivation (Gross Receipts) |
4% of gross receipts effective July 1, 2018 and increasing to 5% effective July 1, 2020 |
$3-10m annually |
| All other commercial activities (Gross Receipts) |
5% of gross receipts effective July 1, 2018 |
Unknown |
Staff previously stated that in order to address the impacts of cannabis consumption and provide a net public benefit tax revenues would need to be in the range of $5-10 million. This amount is informed by outreach staff conducted to County departments and other public service agencies and reflected in chart below. More detailed department and agency requests are attached (Atts. B- F).
| Department/Agency |
Program/Need |
Annual Cost |
| District Attorney |
Staff for Enforcement:
- Deputy DA V (1)
- Legal Secretary (1)
- Paralegal (2)
- DA Investigator (1)
- DA Enforcement Officers (2)
|
$1,005,000 |
| Sheriff |
Staff for Enforcement:
|
$390,000-$815,000 |
| Agriculture Department |
Staff for Enforcement |
$250,000 |
| HHSA |
Community Health |
$350,000 |
| |
Child, Youth, and Family |
$350,000 |
| |
Adult and Aging |
$830,000 |
| |
Diversion Program Treatment Services |
$150,000 |
| HHSA Total |
|
$1,680,000 |
| First Five |
Evidence-Based Intensive Home Visiting Family Support |
$500,000-$600,000 |
| First Five |
Evidence-Based Parent Education |
$525,000 |
| First Five Total |
|
$1,025,000-$1,125,000 |
| County Counsel |
Staff for Enforcement
- Senior Deputy County Counsel
|
$200,000 |
| DJUSD, WJUSD, WUSD |
Additional Counselor and Nursing Capacity |
$675,000 |
| Third-Party Cannabis Research Entity |
Cannabis impacts research |
$500,000 |
| Total |
|
$5,725,000-$6,250,000 |
Board members had also expressed concern that a 5-10% tax on cannabis cultivation could result in a cumulative rate of taxation in excess of 30% as HDL’s fiscal analysis stated that, “Conversations with cannabis industry trade groups suggest that the cumulative tax rate on the end product should remain at or under 30%”. While staff is unaware of any data that would suggest a similar threshold for the cumulative rate of taxation/fees at cultivation, HDL cautions of the potential for noticeable cultivation market attrition if cultivation tax rates exceed 5%. The attached chart (Att. G) shows the cumulative rate of taxation (including annual fees, assuming an indoor grow with 3 growing cycles, and a production rate of 1lb/10 SQFT) at several different tax rates. The County’s proposed cultivation tax is highlighted in green, other local discretionary taxes- distribution, retail, etc.- which are not set by the County, as the County currently does not permit those activities, are highlighted in yellow, and the cumulative tax rate is highlighted in orange. A tax in the 5-10% range results in a cumulative tax rate ranging from 25-29% depending on the variability of other local taxes. This analysis excludes sales tax, as the County only permits the cultivation of medical cannabis which is not subject to sales tax.
Staff and the subcommittee shared the cumulative tax calculation chart with industry representatives. Industry representatives provided the following feedback:
- Current wholesale per pound prices are falling and could fall as low as $500. This would result in a higher cumulative tax rate (and significantly lower tax revenue) as fixed state cultivation taxes and other fees would not scale. Staff recalculated the cumulative tax rate using this assumption, at a 5-10% County cultivation tax and a 5% local retail tax, the cumulative tax rate is 28-29% (Att. H).
- Many individuals who purchase cannabis for medical purposes do not have a state cannabis card and therefore are still required to pay state sales tax on the purchase. Applying this assumption would also result in a higher cumulative tax rate. Staff contends that state sales tax should not be included in the calculation as the County’s ordinance explicitly only allows for the cultivation of medical cannabis, which is exempt from state sales tax.
- The chart does not take into account other “hidden” taxes and fees, such as the inability to deduct operational expenses from federal tax returns. Staff contends that while such costs do exist, such costs are outside the scope of a state/local cumulative tax calculation.
Staff needs Board direction as to whether the Board will move forward with a general or special tax, as a special tax will require the Board to identify the specific services and purposes for which the tax revenue will be used. As discussed in the November 7 staff report, a general tax would require a 4/5 vote of the Board to be placed on the ballot and would require a majority vote of voters to pass. A special tax would require a 3/5 vote of the Board to be placed on the ballot and would require a 2/3 vote of the voters to pass.
A cannabis special tax expenditure plan could be as straightforward as holding all of the cannabis tax revenue in a special fund that could then be allocated by the Board for the purposes of addressing the impacts of cannabis and providing net public benefit, as identified in the County’s Strategic Plan goals of Safe Communities, Thriving Residents, Sustainable Environment, and Flourishing Agriculture, as well as any other discretionary general purpose as decided by the Board of Supervisors. This is similar to the model the City of Sacramento employed with their cannabis special tax, in which the revenue was placed in a special children’s fund, 70% percent of which had to be dispersed to non-profits providing programs and services benefiting children (Att. I). Alternatively, the measure could include a more detailed program or department specific allocation. However, staff cautions against an expenditure plan that stipulates specific allocations given the potential for revenue fluctuations, evolving public needs, and other potential market and regulatory shocks as the cannabis market matures.
Pending Board direction, staff will return to the Board on January 9 for a first reading of the ordinance with a second reading of the ordinance on January 23. The deadline to have the measure approved by the Board and a copy given to the Elections office in order for the measure to be placed on the June 2018 ballot is February 6. A draft general tax ordinance and a draft special tax ordinance are attached (Atts. J and K, respectively).
Additionally, beyond the tax measure itself, cultivator representatives expressed an interest in the Board considering multi-year permits and other permit categories as to allow other commercial activities. Staff recommends the Board consider these issues in a future workshop in early 2018. |