12-A
TO: Honorable Mayor and Members of the City Council
FROM: Anna Garan, Director of Finance
SUBJECT: Consideration and possible action to conduct a public hearing to consider The Medicine Woman Group, LLC’s appeal of the Tax Administrator’s final determination related to the audit of dispensary operations for calendar years 2022–2024.
DATE: May 11, 2026
EXECUTIVE SUMMARY
The Medicine Woman Group, LLC (“Taxpayer”) has appealed the Tax Administrator’s Administrative Decision, which upheld a revised cannabis business tax assessment for the Taxpayer’s dispensary operations for calendar years 2022 through 2024. The audit was conducted primarily during the second half of 2025, with the original audit report finalized in November 2025 and distributed to all active dispensary permittees in December 2025. Permittees were provided an opportunity to review and respond to the audit findings prior to finalization.
The Taxpayer was given the opportunity to be heard at an administrative hearing on February 24, 2026, and to submit additional documentation, which the City reviewed.
Following this process, the Tax Administrator issued a final determination affirming the audit findings, with adjustments primarily related to delivery fee calculations based on the supplemental records.
The appeal contests the inclusion of (1) amounts labeled as “City Cannabis Tax” and (2) revenues from non-cannabis sales in taxable gross receipts.
RECOMMENDATION TO CITY COUNCIL
1) Open the public hearing; take testimonial and documentary evidence; and, after considering the evidence, uphold the Tax Administrator’s Administrative Decision dated April 15, 2026, in full, confirming that all assessed taxes, penalties, interest, and audit costs are due and payable; and
2) Direct staff to proceed with all authorized collection and enforcement actions if payment is not remitted promptly; or
3) Alternatively, discuss and take other action related to this item.
SUPPLEMENTAL MATERIAL
Staff Report – The Medicine Woman Group, LLC’s Appeal of Tax Administrator’s Final Determination Related to the Audit of Dispensary Operations for Calendar Years 2022–2024
May 11, 2026
FISCAL IMPACT
The total outstanding amount resulting from the audit of the Taxpayer’s dispensary operations for calendar years 2022 through 2024 is $57,957284.0140. This amount consists of $60,985.42 in tax, $12,892.93 in penalties, $13,925253.66 05 in interest, $9,000.00 for the Taxpayer’s proportionate share of audit examination costs and is net of the $38,847 payment made in January 2026.
The increase in interest of $2,900228.90 29 reflects additional accrual resulting from the Taxpayer’s failure to remit the assessed amount within 10 business days of the tax assessment letter. The original interest calculation included in the Tax Administrator’s letter was accrued only through November 2025, when the audit report was finalized; interest is now calculated through May 2026.
BACKGROUND AND DISCUSSION
The City conducts periodic cannabis business tax audits, generally every three years, covering the preceding three calendar years of operations. The purpose of each audit is to assess compliance with the City’s cannabis tax pursuant to Bellflower Municipal Code (BMC) § 3.37. The most recent prior audit of this Taxpayer, conducted in 2023 for calendar years 2019 through 2021, identified similar issues, including the exclusion of amounts labeled “City Cannabis Tax” collected from purchasers and delivery fees from taxable gross receipts. The Taxpayer subsequently paid the additional amounts due as a result of those audit findings in 2023.
The current audit covering calendar years 2022 through 2024 was conducted during the second half of 2025. The audit report was finalized in November 2025 and distributed to all active dispensary permittees in December 2025. Permittees were directed to remit any resulting liabilities by January 9, 2026, which coincided with the 2026 cannabis permit renewal deadline, for administrative efficiency.
On January 9, 2026, the Taxpayer submitted a payment which, consistent with City policy and prior notice to the Taxpayer, was applied first to outstanding tax liabilities, penalties, and interest resulting from the audit. As a result, the 2026 cannabis permit fee and other outstanding obligations remained unpaid.
On January 30, 2026, the City Attorney’s Office issued a formal demand for payment requiring satisfaction of all outstanding permit fees, audit liabilities, and delinquent taxes by February 9, 2026. The Taxpayer remitted only the permit and other permit-related fees, and an administrative hearing was initially scheduled for February 17, 2026, but was continued to February 24, 2026 at the Taxpayer’s request.
The Taxpayer disputed portions of the audit findings, presented evidence at the administrative hearing, and was granted the opportunity to submit supplemental documentation afterward, which was fully considered.
Staff Report – The Medicine Woman Group, LLC’s Appeal of Tax Administrator’s Final Determination Related to the Audit of Dispensary Operations for Calendar Years 2022–2024
May 11, 2026
BACKGROUND AND DISCUSSION – Continued
The Tax Administrator issued a final determination affirming the audit with minor adjustments, primarily related to delivery fee revenue based on supplemental records.
The original audit report included estimated delivery revenues because the Taxpayer did not provide the requested documentation or clarification by the established audit deadline.
The determination addressed three issues: (1) inclusion of amounts labeled “City Cannabis Tax” in gross receipts, (2) reporting of delivery fees, and (3) inclusion of non- cannabis sales in taxable gross receipts. The Taxpayer appeals issues (1) and (3) to the City Council.
With respect to the first issue on appeal, the record shows that the Taxpayer collected amounts from customers identified as “City Cannabis Tax” but excluded those amounts from reported gross receipts. The Taxpayer contends these amounts are excludable under BMC § 3.37.020 as taxes required by law to be included in or added to the purchase price and collected from the consumer, or amounts collected on behalf of others where the business is acting as an agent or trustee.
The determination concludes these amounts are properly included in taxable gross receipts because the City’s cannabis business tax is imposed directly on the operator as a tax on the privilege of conducting commercial cannabis activity, not on the consumer .
Unlike state sales tax or the cannabis excise tax, the City Cannabis Tax is not required by law to be passed through to customers or separately stated on receipts. Accordingly, the Taxpayer’s decision to itemize and collect a “City Cannabis Tax” charge d oes not alter its character as a business-level tax obligation or convert it into a pass-through tax.
Instead, amounts collected under this label represent consideration received in the course of business operations and are includable in gross receipts und er the BMC.
The “agent or trustee” exclusion also does not apply. The Taxpayer is not collecting funds on behalf of a third party but is recovering its own tax obligation as the licensed permittee.
Because no agency or fiduciary relationship exists under the ordinance, the statutory exclusion is inapplicable.
With respect to non-cannabis items, the second issue on appeal, the determination finds that receipts from these sales are properly included in taxable gross receipts. The cannabis business tax is imposed on the privilege of operating a commercial cannabis business as a whole, rather than on individual product categories.
Under BMC § 3.37.020, “commercial cannabis business” is defined to include any commercial activity relating to cannabis, including without limitation the selling of cannabis and ancillary products and accessories, whether conducted for gain or profit. Sect ion
3.37.020 states in relevant part as follows:
"Cannabis business" or "commercial cannabis business"
means any commercial business activity relating to cannabis including, without limitation, cultivating, transporting, distributing, manufacturing, compounding, converting, processing, preparing, storing, packaging, delivering, and selling (wholesale and/or retail sales) of cannabis and any ancillary products and accessories in the City, whether or not carried on for gain or profit.
Staff Report – The Medicine Woman Group, LLC’s Appeal of Tax Administrator’s Final Determination Related to the Audit of Dispensary Operations for Calendar Years 2022–2024
May 11, 2026
BACKGROUND AND DISCUSSION – Continued
"Gross receipts,"
except as otherwise specifically provided, means the total amount actually received or receivable from all sales; the total amount or compensation actually received or receivable for the performance of any act or service, of whatever nature it may be, for which a charge is made or credit allowed, whether or not such act or service is done as a part of or in connection with the sale of materials, goods, wares or merchandise; discounts, rents, royalties, fees, commissions, dividends, and gains realized from trading in stocks or bonds, however designated. Included in "gross receipts" is all receipts, cash, credits and property of any kind or nature, without any deduction there from on account of the cost of the property sold, the cost of materials used, labor or service costs, interest paid or payable, or losses or other expenses whatsoever, except that the following is excluded:
1. Cash discounts where allowed and taken on sales;
2. Credit allowed on property accepted as part of the purchase price and which property may later be sold, at which time the sales price is included as gross receipts;
3. Any tax required by law to be included in or added to the purchase price and collected from the consumer or purchaser;
4. Such part of the sale price of any property returned by purchasers to the seller as refunded by the seller by way of cash or credit allowances or return of refundable deposits previously included in gross receipts;
5. Receipts from investments where the holder of the investment receives only interest and/or dividends, royalties, annuities and gains from the sale or exchange of stock or securities solely for a person's own account, not derived in the ordinary course of a business;
6. Receipts derived from the occasional sale of used, obsolete or surplus trade fixtures, machinery or other equipment used by the taxpayer in the regular course of the taxpayer's business;
7. Whenever there are included within the gross receipts amounts which reflect sales for which credit is extended and such amount proved uncollectible in a subsequent year, those amounts may be excluded from the gross receipts in the year they prove to be uncollectible; provided, however, if the whole or portion of such amounts excluded as uncollectible are subsequently collected they are included in the amount of gross receipts for the period when they are recovered;
8. Receipts of refundable deposits, except that such deposits when forfeited and taken into income of the business must not be excluded when in excess of one dollar ($1.00);
9. Amounts collected for others where the business is acting as an agent or trustee and to the extent that such amounts are paid to those for whom collected. These agents or trustees must provide the finance department with the names and the addresses of the others and the amounts paid to them. This exclusion does not apply to any fees, percentages, or other payments retained by the agent or trustees.
Staff Report – The Medicine Woman Group, LLC’s Appeal of Tax Administrator’s Final Determination Related to the Audit of Dispensary Operations for Calendar Years 2022–2024
May 11, 2026
BACKGROUND AND DISCUSSION – Continued
This interpretation is further supported by City policy clarifying the scope of taxable operations. As reflected in the City’s Administrative Policy and Procedure No. 3 (as amended and ratified by the City Council in Resolution No. 22 -18), businesses engaged in qualifying cannabis-related retail activity are subject to the cannabis tax on their entire gross receipts when their cannabis-related sales exceed 50% of total gross receipts. The policy explicitly recognizes that once a business meets this threshold and is classified as operating within the cannabis sector for tax purposes, the tax applies to all receipts of the business, including non-cannabis merchandise such as apparel or accessories, because those revenues are generated through and in connection with the cannabis business operation.
Accordingly, receipts from non-cannabis items are properly included in taxable gross receipts because they are part of the total revenue derived from the Taxpayer’s commercial cannabis business activities and are not subject to any applicable exclusion under BMC § 3.37.020.
Staff concludes that the Tax Administrator’s Determination Letter is legally sound, supported by substantial evidence, and consistent with the Bellflower Municipal Code.
ATTACHMENTS
Appeal of Administrative Decision ................................................................................... 6 Response to Appeal of Administrative Decision ............................................................ 15 Tax Administrator’s Determination Letter ...................................................................... 21 The Medicine Woman Group, LLC Audit Report date d April 14, 2026 .......................... 25 Payment Demand and Notice of Suspension Letter dated January 30, 2026 ............... 33 The Medicine Woman Group, LLC Request for Hearing dated February 5, 2026 ......... 37 Notice of Tax Assessment Hearing for February 17, 2026 dated February 5, 2026 ...... 39 Hearing Extension Request Dated February 13, 2026 .................................................. 52 Notice of Tax Assessment Hearing for February 24, 2026 ............................................ 53 Agenda Item 14-C, Resolution No. 22-18
Ratifying Administrative Policies and Procedures No. 3 – Cannabis Tax Application to Sale of Industrial Hemp-Derived Monies ....................................................................... 54