14-C
TO: Honorable Mayor and Members of the City Council
ATTENTION: Jeffrey L. Stewart, City Manager
FROM: Tae Rhee, Director of Finance/City Treasurer
SUBJECT: Consideration and possible action to adopt Resolution No. 22-18 – A Resolution ratifying Administrative Policy and Procedure No. 3 (“AP&P No. 3”), as amended, determining that the City of Bellflower’s cannabis tax applies to the sale of industrial hemp-derived products.
DATE: May 9, 2022
EXECUTIVE SUMMARY
In accordance with Bellflower Municipal Code (“BMC”) § 3.37.120, the Director of Finance reviewed the cannabis tax regulations within BMC Chapter 3.37 to determine whether the cannabis tax applies to retail establishments selling industrial hemp-derived products.
The cannabis tax regulations are separate from the BMC regulations governing cannabis business permits issued in accordance with BMC Title 14. After reviewing the matter and consulting with the City Attorney’s office, the Director of Finance promulgated administrative policy and procedure (“AP&P”) No. 3, which authorizes collection of cannabis taxes from the businesses selling industrial hemp-derived products effective July 1, 2019.
On April 20, 2022, the City received a request for refund for cannabis taxes paid by My CBD Hub, LLC totaling $39,761.85. While that request was denied in accordance with the BMC – and is not the subject of this agenda item – it prompted a reexamination of AP&P No. 3. The amended AP&P No. 3, issued on April 28, 2022, clarifies that only those businesses that sell industrial hemp-derived products exceeding 50% of their overall sales are required to pay the cannabis tax. The purpose of Resolution No. 22-18 is to retroactively ratify AP&P No. 3 effective July 1, 2019 and authorize its implementation since that date and as amended on April 28, 2022.
RECOMMENDATION TO CITY COUNCIL
1) Adopt Resolution No. 22-18 which ratifies AP&P No. 3 and authorizes collection of the cannabis tax from the businesses selling industrial hemp-derived products effective July 1, 2019 and amended April 28, 2022; or
2) Alternatively, discuss and take other action related to this item.
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Staff Report – Amended AP&P No. 3, Industrial Hemp-Derived Products May 9, 2022
FISCAL IMPACT
The amended AP&P No. 3, issued on April 28, 2022, clarifies that only those businesses that sell industrial hemp-derived products exceeding 50% of their overall sales are required to pay the cannabis tax. Based on the current cannabis tax collection data, the impact of the amended AP&P No. 3 may be approximately $100 per year in reduction in cannabis tax from exempting a business that sells below this 50% threshold.
DISCUSSION
AP&P No. 3 was administratively adopted on July 1, 2019, pursuant to BMC § 3.37.120(A). That section authorizes the Finance Director to promulgate administrative regulations needed to implement BMC 3.37 which governs the cannabis tax authorized by voters in 2017. These regulations are distinctly separate from BMC Title 14 which authorizes cannabis business permits; the cannabis tax is applicable regardless of whether a business is engaging in commercial cannabis activities as defined in BMC Title 14.
Currently, when applying the cannabis tax, retail establishments selling industrial hemp- derived products are considered a “dispensary” for purposes of tax collection under BMC § 3.37.060(D)(1) and must pay the applicable gross receipts tax if the establishment’s gross receipts are attributable to the sale of industrial hemp-derived products.
The change to AP&P No. 3 implemented on April 28th clarifies that to be classified a “dispensary” for purposes of tax collection only requires more than 50% of the establishment’s gross receipts are attributable to the sale of industrial hemp-derived products. Accordingly, if an establishment’s gross receipts attributable to the sale of industrial hemp-derived products are 50% or less, then no cannabis tax would be owed and payable by the business. In contrast, if an establishment’s gross receipts attributable to the sale of industrial hemp-derived products are more than 50%, then 100% of the establishment’s gross receipts (including non-cannabis items sold such as t-shirts, hats, etc.) would be subject to the cannabis tax.
Such retail establishments, however, are not necessarily required to obtain a cannabis business permit pursuant to BMC Title 14. As explained in greater detail by AP&P No. 3, the definition of “cannabis” in BMC Chapter 3.37 (the cannabis tax regulations) is broader since it does not exclude “industrial hemp” as defined by California law. BMC Title 14, however, contains a narrower definition of “cannabis” to determine whether a business is engaged in commercial cannabis activity and, therefore, is required to obtain a cannabis business permit (BMC § 14.08.010). As a result, a business may be required to pay the cannabis tax, but is not required to obtain a cannabis business permit.
ATTACHMENTS
Resolution No. 22-18 ...................................................................................................... 3 Amended AP&P No. 3 .................................................................................................... 5
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CITY OF BELLFLOWER
RESOLUTION NO. 22-18
A RESOLUTION RATIFYING ADMINISTRATIVE POLICY AND
PROCEDURE NO. 3 (“AP&P NO. 3”), AS AMENDED,
DETERMINING THAT THE CITY OF BELLFLOWER’S CANNABIS
TAX APPLIES TO THE SALE OF INDUSTRIAL HEMP-DERIVED
PRODUCTS
THE CITY COUNCIL RESOLVES AS FOLLOWS:
SECTION 1. The City Council finds and declares as follows:
A. Bellflower Municipal Code (“BMC”) § 3.37.120 authorizes the City Manager, or designee, to implement BMC Chapter 3.37 by, in part, promulgating administrative policies and procedures (“AP&P”) to facilitate collection of the cannabis tax authorized by voters in 2017.
B. On June 25, 2019, the City Manager promulgated AP&P No. 3 that was subsequently amended on April 28, 2022 and is attached as Exhibit “A,” and incorporated by reference. As set forth in AP&P No. 3, the cannabis tax imposed by BMC Chapter 3.37 applies to all retail establishments selling industrial hemp-derived products within the City’s jurisdiction. As further detailed within AP&P No. 3, while such retail establishments may be required to pay the cannabis tax, they may not be required to obtain a cannabis business permit contemplated by BMC Title 14.
SECTION 2. Ratification. The City Council finds that it is in the public interest to ratify the City Manager’s actions in promulgating AP&P No. 3 in order to properly implement the will of the voters as set forth in BMC Chapter 3.37 and assist in the collection of the cannabis tax. Accordingly, the City Council retroactively ratifies AP&P No. 3 effective July 1, 2019 and authorizes its implementation since that date and as amended April 28, 2022.
SECTION 3. This Resolution does not affect any penalty, forfeiture, or liability incurred before, or preclude prosecution and imposition of penalties for any violation occurring before, this Resolution’s effective date. Any such amended part will remain in full force and effect for sustaining action or prosecuting violations occurring before the effective date of this Resolution.
SECTION 4. If any part of this Resolution or its application is deemed invalid by a court of competent jurisdiction, the City Council intends that such invalidity will not affect the effectiveness of the remaining provisions or applications and, to this end, the provisions of this Resolution are severable.
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City of Bellflower
Resolution No. 22-18
SECTION 5. The Mayor, or presiding officer, is authorized to affix a signature to this Resolution signifying its adoption by the City Council of the City of Bellflower and the City Clerk, or her duly appointed deputy, is directed to attest thereto.
SECTION 6. Electronic Signatures. This Ordinance may be executed with electronic signatures in accordance with Government Code §16.5. Such electronic signatures will be treated in all respects as having the same effect as an original signature.
SECTION 7. This Resolution will become effective immediately upon adoption.
PASSED, APPROVED, AND ADOPTED BY THE CITY COUNCIL OF THE CITY OF BELLFLOWER ON THIS 9TH DAY OF MAY 2022.
________________________________
Ray Dunton, Mayor
ATTEST:
________________________________
Mayra Ochiqui, City Clerk
APPROVED AS TO FORM:
________________________________
Karl H. Berger, City Attorney
ATTACHMENT:
Amended AP&P No. 3
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- 5 -ADMINISTRATIVE POLICIES AND PROCEDURESAPP NO.: 3 (Revised 4/28/2022)WHEN THE GROSS RECEIPTS TAX ON CANNABIS DISPENSARIES APPLIES TOPERSONS ENGAGED IN THE BUSINESS OF SELLING CANNABIS PRODUCTSDERIVED FROM INDUSTRIAL HEMPI. Purpose and ApplicabilityEvery person who is engaged in business as a dispensary in the City of Bellflower mustpay an annual commercial cannabis tax based on a percentage of gross receipts perfiscal year. 1 For purposes of Title 3, Chapter 3.37 (the “Cannabis Tax Ordinance”),“dispensary” is defined as “a facility where cannabis, cannabis products, or devices forthe use of cannabis or cannabis products are offered, either individually or in anycombination, for retail sale, including an establishment that delivers cannabis andcannabis products as part of a retail sale.”2 For purposes of the Cannabis TaxOrdinance, “cannabis” is defined as:“[A]ll parts of the plant Cannabis sativa Linnaeus, Cannabis indica, orCannabis ruderalis, whether growing or not; the seeds thereof; the resin,whether crude or purified, extracted from any part of the plant; and everycompound, manufacture, salt, derivative, mixture, or preparation of the plant,its seeds, or resin. “Cannabis” also means the separated resin, whether crudeor purified, obtained from cannabis. “Cannabis” also means marijuana asdefined by Health and Safety Code Section 11018 and is not limited tomedical cannabis.” 3By contrast, for purposes of Title 14 (Cannabis-Related Businesses) “cannabis” isdefined as set forth in Business & Professions Code section 26001(f). That sectionprovides:‘“Cannabis’ means all parts of the plant Cannabis sativa Linnaeus, Cannabisindica, or Cannabis ruderalis, whether growing or not; the seeds thereof; theresin, whether crude or purified, extracted from any part of the plant; andevery compound, manufacture, salt, derivative, mixture, or preparation of theplant, its seeds, or resin. ‘Cannabis’ also means the separated resin, whethercrude or purified, obtained from cannabis. ‘Cannabis’ does not include themature stalks of the plant, fiber produced from the stalks, oil or cake madefrom the seeds of the plant, any other compound, manufacture, salt,derivative, mixture, or preparation of the mature stalks (except the resinextracted therefrom), fiber, oil, or cake, or the sterilized seed of the plantwhich is incapable of germination. For the purpose of this division, ‘cannabis’1 BMC § 3.37.060(D)(1).2 BMC § 3.37.020.3 BMC §3.37.020.Page 1 of 3
- 6 -ADMINISTRATIVE POLICIES AND PROCEDURESAPP NO.: 3 (Revised 4/28/2022)does not mean ‘industrial hemp’ as defined by Section 11018.5 of the Healthand Safety Code.”The definition of “cannabis” in the Cannabis Tax Ordinance is broader insofar as it doesnot exclude “industrial hemp.” Accordingly, references to “cannabis" and “cannabisproducts” in the Cannabis Tax Ordinance necessarily include industrial hemp andindustrial hemp-derived products.Health and Safety Code section 1 1018.5 defines “industrial hemp” as“a crop that is limited to types of the plant Cannabis sativa L. having no morethan three-tenths of 1 percent tetrahydrocannabinol (THC) contained in thedried flowering tops, whether growing or not; the seeds of the plant; the resinextracted from any part of the plant; and every compound, manufacture, salt,derivative, mixture, or preparation of the plant, its seeds or resin producedtherefrom.”In the Agriculture Improvement Act of 2018 (the “Farm Bill”), effective January 1, 2019,Congress removed industrial hemp-derived products from Schedule I status under theControlled Substances Act, provided that the hemp is produced in a manner consistentwith the Farm Bill, federal regulations, state regulations, and by a licensed grower.Division 24 of the California Food and Agriculture Code provides for the cultivation ofindustrial hemp by registered growers and established agricultural research institutions.Industrial hemp-derived products have soared in popularity recently, particularlycannibidiol (CBD) oil and products infused with CBD oil. An increasing number of retailestablishments are incorporating these industrial-hemp derived goods into their productmix and some retail establishments are choosing to specialize in the sale of industrialhemp-derived products, making them the focus of their business model.This policy addresses the question of when a retail establishment selling cannabisproducts derived from industrial hemp becomes a “dispensary” for purposes of theCannabis Tax Ordinance and, therefore, subject to the applicable gross receipts tax.This policy does not apply to any person or retail establishment engaged in thebusiness of selling cannabis or cannabis products that are not derived from industrialhemp.II. DefinitionsUnless the contrary is stated or clearly appears from the context, the words and phrasesused herein have the meaning set forth in BMC Chapter 3.37.Page 2 of 3
- 7 -ADMINISTRATIVE POLICIES AND PROCEDURESAPP NO.: 3 (Revised 4/28/2022)III. AdministrationFor purposes of the Cannabis Tax Ordinance, a retail establishment is a “dispensary”for purposes of BMC § 3.37.060(D)(1) 4 , and therefore subject to the applicable grossreceipts tax, if more than 50% of the establishment’s overall gross receipts 5 areattributable to the sale of cannabis products derived from industrial hemp.Reference: BMC § 3.37.060j£))(1Authority: BMC § 3.37.TO FORM:APPROVED ACity AttorneyO rig ination : 7/25/2019Revised : 4/28/2022APPROVED:.City Manager4 This does not mean the establishment would necessarily be classified as a “dispensary” for purposes ofTitle 14 and, therefore, require a Cannabis Business Permit to operate lawfully. Because “industrialhemp" is not within the definition of “cannabis” as used in Title 14, a cannabis business permit is notrequired for the sale of cannabis products derived from industrial hemp.5 In this context, “overall gross receipts” means the total gross receipts of the retail establishment.Page 3 of 3