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Staff Report
City Council
Item No. 3.A
Meeting Date: May 11, 2022
From: Charles McClendon, City Manager
Title: Cannabis Regulation and Tax Update
City Council
RECOMMENDATION:
This item is presented for information, discussion and direction only.
BACKGROUND:
With the passage of Proposition 64 by California voters, C annabis businesses became fully legal for both medicinal and adult use. The full implementation of Prop 64 became effective January 1, 2018. The industry continues to grow and mature in Cathedral City.
On September 8, 2021, Staff provided an update to the City Council at their study session, covering the history of tax collections in Cathedral City and discussed a request from a business owner to consider a retail “tax holiday”. At that time, Council declined to proceed with a tax holiday.
After the Cannabis Task Force meeting held on November 29, 2021, staff provided an update to the City Council in study session on January 12, 2022 and reviewed the discussions of the Task Force. As result of that meeting, Council asked staff to conduct a full review of the City’s Municipal Code provisions related to Cannabis, the tax and fee structure and related data.
The data and staff suggestions resulting from that review were presented to the Cannabis Task Force during a meeting on April 11, 2022. All task force members were present for the discussion and the primary topics of the meeting will be reviewed with Council during the presentation on this item.
The recommendations from the s taff and task force were presented to the City Council during a study session meeting on April 20, 2022. Council agreed with many recommendations related to the regulations, asked for more information on others and asked for a follow -up discussion on taxa tion. Details on direction provided by Council are included in the discussion section below.
DISCUSSION:
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A staff working group was formed, consisting of staff involved in cannabis licensing, enforcement and tax collection, with the assignment to review in detail the current ordinances governing the operation of cannabis businesses in Cathedral City.
PART I MUNICIPAL CODE
Following is a summary of the issues related to the ordinance that were identified and related policy questions that need to be addressed:
• Under 5.88.025 Definitions there is a definition of Good Cause to deny or suspend a local license. The current language is as follows:
“Good cause” for purposes of denying an initial local license issuance, for suspending or revoking a local li cense, or for denying a local license renewal, means:
1. The applicant or licensee has violated any of the terms, conditions or provisions of this chapter, of state law, of any regulations and rules promulgated pursuant to state law, any applicab le local rules and regulations, or any special terms or conditions placed upon its conditional use permit, state license, or local license;
Staff recommends that the language be modified as follows:
1. The applicant or licensee has been cited for violating any of the terms, conditions or provisions of this chapter, of state law, of any regulations and rules promulgated pursuant to state law, any applicable local rules and regulations, or any special terms or conditions placed upon its conditional use permit, state license, or local license;
Council agreed with the recommended change, and it is reflected in the draft ordinance.
• In the same section, also under the Good Cause definition is the following:
6. The applicant or licensee, or any owner of the applica nt or licensee, operated a cannabis business in violation of this chapter or Chapter 9.108 of the code;
Staff recommends this be deleted as it is covered under t he proposed language in item 1 above.
This change also is reflected in the draft ordinance.
• The following language is under the definition of Owner:
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1. A person with an aggregate ownership interest of ten percent or more in the person applying for a license o r a licensee, unless the interest is solely a security, lien, or encumbrance.
State law uses 20 percent and staff recommends aligning with state law.
Council agreed and the proposed change is reflected in the draft ordinance revision.
• Under 5.88.035 Local license required there is the following language:
B. Beginning January 1, 2018, it is unlawful for a cannabis business to operate in the city unless it has been granted the appropriate temporary or permanent state license(s) for its commercial cannabis a ctivities. Notwithstanding the foregoing, any licensee operating in the city prior to January 1, 2018, may continue to operate without a state license provided that it applies for the appropriate temporary or permanent license(s) from the state no later th an forty- five days from the date that the state begins accepting applications. If the state denies the application for a temporary or permanent license(s) for any reason, the cannabis business must cease operations until such time as it obtains the appropriate temporary or permanent state license(s).
This was part of the initial transition to legal cannabis in California after the passage of Prop 64. The transition language is no longer necessary, and staff recommends this section be modified to read as follows:
B. It is unlawful for a cannabis business to operate in the city unless it has been granted the appropriate temporary or permanent state license(s) for its commercial cannabis activities. If the state denies the application for a temporary or perm anent license(s) for any reason, the cannabis business must cease operations until such time as it obtains the appropriate temporary or permanent state license(s).
Council agreed with the recommendation and the proposed change is included in the draft ordinance.
• Under 5.88.040 Local license application process there is the following language:
A. The local licensing authority shall not accept an application for a dispensary proposed to be located south of Interstate 10 after November 23, 2016.
This language was adopted when the retail industry was rapidly expanding in Cathedral City and the Council was concerned about the density of businesses that might develop.
The retail sector is no longer expanding, and the current number of retail licenses is below those authorized in 2016. Council may want to have a policy discussion on whether or not they feel it is necessary to continue with the moratorium.
Council provided direction to continue with the current moratorium on new retail licenses south of I-10. The existing language will remain in the ordinance.
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• Also under 5.88.040 Local license application process is the following language:
E. The chief of police or designee shall conduct a background check of any owner of the cannabis business, as “owner” is defined in MAUCRSA, and shall prepare a report to the local licensing authority on the acceptability of the background of the owner(s).
F. The local licensing authority shall issue a license to any applicant who has submitted a complete application and paid th e application fee unless the local licensing authority finds that good cause exists to deny the license. A local license shall not be issued to a dispensary that is proposed to be located south of Interstate 10 unless the application for the license was made on or before November 23, 2016.
If the language related to ownership definition is revised and/or if the moratorium is lifted these sections will need to be revised to be consistent with those revisions.
No change is required in this section. The chang e in definition of owner will align the City code with MAUCRSA and the moratorium language will remain in the code.
• Under 5.88.050 Changes and modifications of local licenses is the following language:
C.3. The local licensing authority may permit a dispensary that is located south of Interstate 10 to relocate to a new location north or south of Interstate 10. A dispensary that is located north of Interstate 10 may only relocate to a new location that is north of Interstate 10. (Ord. 800 § 1, 2017) Based on Council direction this language will remain. No change is necessary. • Under 5.88.055 Renewal of a local license is the following language:
4. For licensees that have ten or more full -time equivalent non -supervisorial employees, proof that the licensee has entered into and abided by the terms of a labor peace agreement.
State law sets the threshold for requiring a labor peace agreement at 20 employees.
The policy question for Council is do they wish to continue with a provision that is more restrictive than the state.
Council provided direction to leave the threshold at ten employees but asked for more information. No change is included in the draft ordinance.
Staff has contacted the cities of Banning, Desert Hot Springs, Coachella, Perris, Palm Desert and Palm Springs. Of those cities, all defer to the state law except Palm Springs which requires a labor peace agreement for all businesses with five or more employees.
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• Under 5.88.065 Cannabis business operational requirements is the following language:
D. Background Checks. Prior to commencing any work within a cannabis business, any individual who will work within a licensed premises or have access to cannabis or cannabis -products must submit to a background check that demonstrates they are of good moral character and receive a cannabis industry worker identification card from the city. The background check must include fingerprinting for criminal history conducted by the Cathedral City police department or any other entity determined to be satisfactory by the Cathedral City police department. Each cannabis industry worker identification card issued shall expire after two years unless renewed. A decision to deny or not renew a cannabis industry worker identification card may be appealed in accordance with Section 5.88.060. A cannabis industry worker identification card may be revoked or suspended by the city at any time, in accordance with the procedures in Chapter 13.150 of this code, if it is determined that the card holder is no longer of good moral character. A cannabis business shall not employ or utilize the services of any individual who is required to have a city -issued cannabis industry worker identification card less that individual possesses a valid city -issued cannabis industry worker identification card at all times, regardless of whether the individual is an employee, independent contractor, or volunteer. The city may charge a fee to recover its reasonable costs of processing and issuing cannabis industry worker identification cards in an amount established by resolution of the city council.
E. Worker Register. Cannabis businesses must maintain a complete register of all persons that work at the licensed premises or have access to cannabis or cannabis products, whether as an employee, independent contractor, or volunteer. This register must include:
1. The individual’s complete name, address, and last known telephone number;
2. The individual’s hire date and, if applicable date of termination;
3. A copy of the individual’s city -issued cannabis industry worker identification card;
The register and required records must be made available for inspection by any city officer or official for purposes of determining compliance with the requirements of this chapter during standard business hours of the licensed facility or at any other reasonable time.
These provisions cover background requirements for employees of a cannabis business. Requirements for owners are covered elsewhere. Requirements related to all non -management or ownership employees are costly for the businesses and cumbersome for the City to administer and enforce. The policy question is should the City continue to place such requirements on the businesses related to all employees or does a business have adequate incentives on their own to screen and monitor their
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employees. Based on the policy decision made these sections may be deleted from the code.
Council asked for more information before making a determination on the need for background information on non -management employees. No change is included in the draft ordinance as it currently stands.
Staff received information from the cities of Banning, Desert Hot Springs, Coachella, Perris, Palm Desert and Palm Springs. It appears that Banning and Palm Desert do not require backgrounds on all employees. All others have la nguage similar to the current Cathedral City provisions.
• Also under 5.88.065 Cannabis business operational requirements is the following language:
P. Seed to Sale Tracking Required. Until such a time that the state of California fully implements the t rack and trace program required by Section 26067 of the Business and Professions Code , a cannabis business must utilize seed to sale software, third -party software that trac ks all sales, transfers, purchases, receipts, deliveries of cannabis and cannabis products. The software must be capable of producing electronic shipping manifests, tracking all cannabis inventory in possession of the cannabis business, promptly identifyin g a discrepancy in the stock, and tracking cannabis from the end purchaser back to its source in the event of a serious adverse event.
The state program described is in place and this section of the code can now be deleted.
Council agreed with the recommendation to delete this item from the Code. • Also under 5.88.065 Cannabis business operational requirements is the following language:
R.2. Cannabis Waste. Cannabis waste must be made unusable and unrecognizable prior to leaving the licensed premises by gr inding it and incorporating it with fifty percent non -medicinal cannabis waste. If necessary to protect the health and safety of individuals working on a licensed premises, a cannabis business may grind the stalk of a cannabis plant outside of its licensed premises provided all grinding activities occur within twenty feet of the licensed premises and cannot be seen from any public street.
R.3. Composting. A cannabis business may compost cannabis waste onsite, in accordance with this provision and all oth er applicable laws, rules, and regulations.
Staff has encountered some issues with odors that have been traced to the handling of waste. It is recommended that language be added reinforcing that waste and cannabis
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operations must be done in accordance wit h the conditional use permit which will consider placement of containers and impose odor control requirements.
Council agreed with the recommendation to add language indicating the waste handling and composting must be done in accordance with the Condition al Use Permit.
• Under 5.88.070 Dispensary operational requirements is the following language:
A. Limited Hours of Operation. A dispensary may only be open to the public and engage in sales between the hours of eight a.m. and ten p.m.
1. Product Not Visible T o Public. The display of cannabis and cannabis products for sale shall not be visible from outside the licensed premises.
State law allows businesses to operate from 6 a.m. to 10 p.m. The policy question is does the City want to be more restrictive than s tate law. Additionally, the Planning Commission has recommended the elimination of item B. They believe that the requirement makes buildings less aesthetically pleasing and inhibits the use of windows and glass as design features. The same provision rel ated to visibility exists related to cultivation businesses in 5.88.080 Cultivation operational requirements in section D.
Council agreed with aligning the hours of operation with state law and that is included in the ordinance revision. Council also agre ed with the Planning Commission recommendation to eliminate the provision requiring that the product not be visible to the public. They asked legal staff, however, to develop language indicating the visible displays cannot include cartoon characters or other images designed to appeal to children.
• Also under 5.88.070 Dispensary operational requirements is the following language:
I. Sale of Untested Products. A dispensary may sell cannabis or cannabis products that have not been tested by a testing laboratory f rom January 1, 2018 until such time as determined by the state. Thereafter, all cannabis and cannabis products sold by a dispensary must be tested by a testing laboratory prior to sale to a purchaser in accordance with MAUCRSA.
Testing facilities are now available and operational, and this provision can be deleted.
Council agreed with the recommendation to eliminate this provision. • Also under 5.88.070 Dispensary operational requirements is the following language:
2. Cannabis consumption must occur within the i nterior building space of the dispensary. Consumption may not occur on patios, in parking areas, or in any other space that is not fully enclosed.
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This is a policy question for the Council. Currently outdoor lounges are not permitted, and Council has expressed concern over odor control. An alternative is to allow outdoor lounges with appropriate odor control which is already required.
Council indicated an openness to considering outdoor lounges but wanted to discuss further.
Councilmembers raised the idea of limiting outdoor lounges to only certain zoning districts. The most limiting option would be to allow outdoor lounges in the I -1 zone.
There are currently three retail licenses in the I -1 zone with two currently operating. All the other retail licenses are in the PCC or CBP-2 zones.
Another idea was to allow a temporary outdoor lounge license. The downside to this is that businesses my be hesitant to invest in the odor control and other capital expenses necessary to build an outdoor lounge if the license is only temporary.
Additional regulations do not appear to be necessary as odor control and screening provisions already exist in the code and CUP conditions of approval. • Under 5.88.095 Packaging and labeling is the following language:
D. State-Mandated Warnings and Information. All cannabis and cannabis product labels and inserts shall include the state -mandated warnings and information contained in Business and Profe ssions Code Section 26120(c).
Notwithstanding the foregoing, during the period of time that the state permits untested cannabis and cannabis products to be sold to purchasers, all cannabis and cannabis products must have a label affixed to each package th at clearly states “This product has not been tested as required by the Medicinal and Adult - Use Cannabis Regulation and Safety Act” and must comply with any other labeling requirements imposed by the state. (Ord. 800 § 1, 2017) The transition period is over , and testing is a state requirement. The text in red above can now be deleted.
Council agreed with the recommendation.
• Under 5.88.120 Civil fines is the following language:
Any person convicted of an infraction or misdemeanor violation shall, for each separate violation of this chapter, be subject to the following civil fines in addition to any infraction or misdemeanor penalties:
A. A fine in an amount not to exceed two hundred fifty dollars for a first conviction of an offense;
B. A f ine in an amount not to exceed five hundred dollars for a second conviction of the same offense within a twelve -month period of the date of the first offense;
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C. A fine in an amount not to exceed seven hundred fifty dollars for a third conviction of the same offense within a twelve -month period of the date of the first offense; and
D. A fine of one thousand dollars for the fourth and subsequent convictions of the same offense within a twelve-month period of the date of the first offense.
The City is converting from having fines listed in the code to have fines adopted through a companion resolution and Council may want to consider a similar approach here.
Council agreed with this provision and a companion resolution on fines will need to be brought forward when the ordinance revision is considered.
Chapter 9 of the Municipal Code deals with land use and includes a section related to cannabis 9.108 CANNABIS BUSINESSES
The following provisions in Chapter 9 were reviewed by the working group a nd should be considered for revision:
• Under 9.108.030 Definitions is the following language:
“Excessive concentration” means either of the following: (1) for proposed dispensaries south of Interstate 10, the approval of the conditional use permit would result in more than twenty dispensaries being approved to operate south of Interstate 10; or (2) for proposed dispensaries north of Interstate 10, the proposed dispensary is located less than five hundred feet from another approved dispensary, measured in accordance with Section 9.108.070(C).
If Council decides to lift the moratorium on dispensaries the language in red above should be deleted.
Council asked that the moratorium remain in place so this change is unnecessary.
• Under 9.108.050 Conditional use permit application is the following language:
B.1. Proof that the applicant has received a local license for the proposed premises, and the local license is in good standing, or a statement that the applicant is applying for a local license for the proposed premises concurrently with the conditional use permit application.
Staff recommends that this provision be eliminated. Requiring a local license prior to the Condition Use Permit process increases the time necessary to get a business approved and operating. The CUP process is related to land use and can be considered in advance of a license being issued. Many times, the applicant for a CUP is a developer a nd this provision requires them to get a license that they will never use since the ultimate licensee will be another party.
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Council agreed with this recommendation and the draft ordinance includes the revision.
• Also under 9.108.050 Conditional use permit application is the following language:
a. An environmental plan indicating how cultivation and/or manufacturing will be conducted in accordance with state and local laws related to hazardous material disposal, land conversion, grading, electricity usage , water usage, and agricultural discharges.
b. An emergency response plan which complies with Title 8 of this code and California Fire Code Section 401, and sets out standard operating procedures to be followed by all individuals in case of a fire, chemical release, chemical spill, or other emergency.
Staff recommends that these provisions be eliminated as permit and inspection requirements from the water agencies, County and State cover these items and the information is duplicative and is not necessary for the City CUP application.
Council agreed with this recommendation.
• Under 9.108.070 Locational requirements is the following language:
A. 2. Within two hundred fifty feet of East Palm Canyon Drive or a residential zone.
B. 3. Within two hundred fifty feet of East Palm Canyon Drive.
C. 2. Setbacks from East Palm Canyon Drive shall be measured to the nearest edge of the right-of-way for East Palm Canyon Drive.
Staff recommends that the 250 -foot setback from East Palm Canyon (EPC) be eliminated. There is no other street in the City with a similar prohibition and the design standards applied to cannabis businesses have resulted in facilities of at least as high quality as surrounding businesses. If the EPC setback is eliminated the language in red above should be deleted.
Council was supportive of removing the 250 -foot setback provision from East Palm Canyon and ordinance revisions will include the necessary changes. • Under 9.108.080 Conditions of approval is the following language:
A. 6. From a pub lic right -of-way, there should be no exterior evidence of the cannabis business except for any permitted on-site signage.
If the decision is made to accept the Planning Commission recommendation related to visibility into a business, this provision should be eliminated.
Council agreed with this recommendation coupled with the regulations suggested under 5.88.070.
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Definition of Residential Zone – Council asked for a future discussion on language to revise the definition of a residential zone for the purposes of the setback requirements.
Currently Resort Residential and Mobile Home Park zones are not subject to the setback requirement. Adding these areas can be accomplished, but would result in at least two licensed businesses becoming legal non-conforming.
PART II TAXES AND FEES
In calendar year 2021, total cannabis taxes paid to Cathedral City were $4,971,001.
Retail cannabis taxes collected in 2021 declined compared to the previous year:
Total cannabis taxes collected in 2021 were the highest ever:
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Taxes in Neighboring Jurisdictions
Staff reviewed the taxes charged to cannabis businesses in the cities of Palm Springs, Palm Desert, Desert Hot Springs and Coachella. Indio, La Quinta, Indian Wells and Rancho Mirage do not currently allow cannabis businesses.
Retail Taxes:
City Tax Rate
Cathedral City – 10% tax on gross proceeds
Palm Springs - 10% tax on gross proceeds
Palm Desert - 10% tax on gross proceeds
Desert Hot Springs - 10% tax on gross proceeds
Coachella - 6% tax on gross proceeds
Cultivation Taxes:
Note: Since some cities have variable rates based on the size of the facility a calculation is included showing the annual tax on a 6,000 square foot facility which is the average among all currently operating cultivation facilities in Cathedral City.
City Tax Rate Tax on 6000 sq. ft.
*Desert Hot Springs - $10.20/sq.’ $61,200
*Coachella - $15/sq.’ up to 20k; $7.50/sq.’ over $90,000
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Cathedral City $15/sq.’ $90,000
Palm Desert $13/sq.’ $78,000
Palm Springs $10/sq.’ $60,000
*In addition to the square foot tax Coachella also charges a gross proceeds tax of 4% *Desert Hot Springs previously had a two -tiered rate structure and recently eliminated the tiers resulting in a rate of $10.20 per square foot regardless of size.
Manufacturing Taxes:
Coachella - $15/sq.’ up to 20k; $7.50/sq.’ over plus 2% gross proceeds Cathedral City - $.05/gram on crude; $.10/gram on distillate; $.40/gram other Palm Springs 2% tax on gross proceeds
Palm Desert 2% tax on gross proceeds
Desert Hot Springs 0
*The Cathedral City enabling legislation requires a per gram tax on products manufactured. The current schedule was designed to approximate the 2% gross proceeds level. The mix of products produced will affect taxes paid.
Distribution and Testing Taxes:
Coachella - 2% gross proceeds on distribution, 1% gross proceeds on testing Cathedral City - 0 on product cultivated or manufactured (and taxed) in CC Palm Springs - 0
Palm Desert - 0
DHS - 0
Previous discussions with the task force and the Council have indicated a need to review the City tax structure. Staff has narrowed the realistic options for revisions to the following for ease of discussion:
1. Cultivation Taxes – Cathedral City cultivation taxes are very consistent in terms of collection and payment and represent the most reliable component of the tax base. If a revision in cultivation taxes is desired, staff recommends limiting it to the definition of the taxable area. Questions and con cerns have arisen over time regarding taxing the entire facility (our current practice) as opposed to just the canopy space. Most of the regional cities report taxing the canopy space only (which we would define as the grow rooms). Changing the definitio n of cannabis cultivation space in section 3.48.020 would apply equally to all businesses regardless of size and would treat existing cultivators consistently with future operators. If Cathedral City adopted a provision to tax only the grow rooms themselves, staff estimates the result would be a reduction in the taxable area of 10 to 15% which would result in a revenue reduction (based on 2021 taxes paid) of approximately $246,000 to $369,000 annually.
Staff has also received a request to consider a delay in the start date for when taxes must be paid. Currently cultivation taxes become due when a business receives its certificate of occupancy (COO). The argument is that it takes time to load in the plants and then time for the crop to mature before the b usiness generates any revenue. An alternative is making taxes due 60 days after COO.
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This would not affect any existing business and would not reduce existing revenues.
2. Retail Taxes – In general the retail industry reports they are struggling due to continued competition with the black market and due to the proliferation of retailers in Palm Springs. Cathedral City’s tax rate currently is consistent with all the other Coachella Valley cities except for Coachella. Each 1% reduction in the tax rate would result in a reduction in revenue to the City of approximately $150,000 based on 2021 collections.
Council asked for further information including data on tax rates in other jurisdictions beyond the Coachella Valley. A complete summary is attached.
3. Manufacturing Taxes – Manufacturing taxes represent the smallest part of the City’s tax collections. Manufacturing taxes have already been reduced two times on the promise that reduced taxes would result in increased activity. This has not proven to be the case and staff recommends no further reductions.
4. Fees – The costs associated with the Condition Use Permit process, background checks and initial licenses are recovered on a deposit basis where the business makes an initial deposit of $7,500 and actual c osts of services are charged against the deposit. If additional costs are incurred the applicant is charged and any overpayment is refunded once the permits are all issued, and the review process is completed. Renewal fees are $5,900 per renewal. Fees are all based on actual costs incurred and may not generate a “profit” for the City. Reducing ordinance requirements, such as the number of background checks required would have the effect of reducing fees accordingly.
FISCAL IMPACT:
In calendar year 2021, total cannabis taxes paid to Cathedral City were $4,971,001.
ATTACHMENTS:
Chapter 5.88 Cannabis Regulations
Chapter 9.108 Cannabis Land Use
California Local Cannabis Taxes
Cannabis Ordinance Amendments (May 2022)