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Staff Report
City Council
Item No. 6.B
Meeting Date: August 10, 2022
From: Charles McClendon, City Manager
Title: Cannabis Regulation and Tax Update
City Council
RECOMMENDATION:
To approve a resolution amending the cannabis cultivation tax stru cture and definitions, and to approve a resolution establishing exemptions to the cannabis cultivation tax for pre-operational and non-operational businesses.
BACKGROUND:
With the passage of Proposition 64 by California voters, C annabis businesses becam e 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 the ir 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 meet ing 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 were reviewed with Council during the presentation on this item.
The recommendations from the staff and task force were presented to the City Council during a study session meeting on April 20, 202 2. Council agreed with many recommendations related to the regulations, asked for more information on others and asked for a follow -up discussion on taxation. An additional discussion on taxation and other outstanding issues was held during study session on May 11, 2022. The result is
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Council asked staff to bring forward a resolution to provide some clarification on taxable areas for cultivators and on a startup period for cultivators prior to taxes becoming due.
Resolutions implementing a change in the definitions of taxable area for the cultivation tax and allowing for a pre -operational exemption and a temporary non -operational exemption were considered by Council on June 22, 2022. Council tabled the item and asked for further information on the pract ical effects of the change in the definition of taxable area as there were concerns expressed and Council felt they needed more information in order to make an informed decision.
Recommended changes in the ordinances, based on the Council study sessions, are being processed through separate action including required Planning Commission consideration of change s to provisions in the zoning ordinance related to cannabis.
Additionally, consideration of outdoor lounges and the regulations necessary are being processed separately.
DISCUSSION:
Two resolutions are attached for consideration.
1. The first exempts rooms in a cultivation facility where cannabis is not physically present on a regular basis from the square foot tax:
SECTION 1. The gross square foo tage of the cannabis cultivation space, as defined in the Cathedral City Municipal Code (‘CCMC”) Section 3.48.020, subject to taxation pursuant to Chapter 3.48 of the CCMC shall be reduced to exempt from taxation those rooms where cannabis is not physicall y present on a regular basis, including but not limited to nutrient rooms, storage rooms, hallways, offices, employee lounges, and restrooms.
SECTION 2. The exemption provided in Section 1 of this Resolution becomes effective for each licensee upon th e renewal of each cultivation license or upon issuance of any new cultivation license.
2. The second provides for a phase -in period for new cultivation operations prior to the tax being due and provides for a non -operating exemption for existing businesses:
SECTION 1. Except as provided in Section 2 of this Resolution, every cannabis business operating in the City shall pay the cannabis tax imposed in Section 3.48.010 of the Cathedral City Municipal Code, as such tax may be adjusted from time to time by the City Council pursuant to Section 3.48.040 of the Cathedral City Municipal Code.
SECTION 2. The cannabis tax imposed in paragraph B of Section 3.48.010 of the Cathedral City Municipal Code, as it may be adjusted from time to time by resolution of the C ity Council pursuant to Section 3.48.040 of the Cathedral City Municipal Code, shall not apply to a legal cannabis cultivation business during the following time periods:
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A. Early Operations. A legal cannabis cultivation business shall not be subject to taxation under paragraph B of Chapter 3.48 of the Cathedral City Municipal Code until 90 days after a certificate of occupancy (whether temporary or final) is issued for the business or any portion thereof.
B. Suspended Operations. A legal cannabis culti vation business shall not be subject to taxation under paragraph B of Chapter 3.48 for a period of no more than ninety (90) days if the cannabis licensee provides the City with written notice that it will be suspending all cultivation operations under its local license for a period of at least ninety (90) days but no longer than the remaining term of the local license issued by the City pursuant to Chapter 5.88 of the Cathedral City Municipal Code. This exemption may be invoked one (1) time per license.
SECTION 3 . All definitions in Chapters 3.48 and 5.88 of the Cathedral City Municipal Code shall apply to this Resolution.
SECTION 4. This Resolution shall take effect immediately.
Council requested additional information regarding the actual effects of the redefinition of cultivation space related to the first resolution described above. Staff took a sample of the floor plans for cultivation businesses and calculated the space allocated to various functions. The calculations confirmed that, on average , the nutrient, irrigation and water rooms comprise 3.2% of the floor space. Exempting those areas would result in a corresponding reduction in taxes to most businesses. This is what is included in the attached resolution as currently written. The result to the City would be a loss of about $79,000 annually based on calendar year 2021 collections.
A further exemption of areas used for drying, trimming and cannabis storage would equate to about 4% of the taxable area, based on the sample evaluated. Th is is not included in the resolution as provided, but if added would save the average business an additional 4% and would result in a corresponding additionally loss of revenue to the City equaling about $99,000 again based on calendar year 2021 collections.
Since this item was last discussed by Council on June 22, another change has occurred that is relevant to the discussion. The adopted State budget eliminated the state tax on cannabis cultivation. Assembly Bill 195 (2021 -2022) and California Revenue and Taxation Code Sections 34011.2 and 34012 . The bill was signed into law July 1, 2022 with the cannabis tax provisions becoming effective January 1, 2023.
In short, AB 195 changes the existing multilevel cannabis taxation system into a single point excise tax of 15% on retail cannabis sales. That tax can be adjusted after July 2025 by the State, but the current maximum would be 19%.
Below is a summary by the Legislative Counsel’s Digest related to the cultivation tax:
(7) AUMA, as additionally am ended by statute, imposes a weight -based cultivation tax on harvested cannabis that enters the commercial market and a separate excise tax on purchasers of cannabis or cannabis products sold in this
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state at the rate of 15% of the average market price of a ny retail sale by a cannabis retailer, as specified. Existing law defines average market price in an arm’s length transaction to mean the average retail price determined by the wholesale cost of the cannabis or cannabis products sold or transferred to a cannabis retailer, plus a mark -up, as determined by the California Department of Tax and Fee Administration (CDTFA) on a biannual basis in 6 -month intervals.
Existing law requires the distributor to collect the excise tax from the cannabis retailer and to re mit the tax to CDTFA. Existing law requires revenues from the cultivation and excise taxes to be deposited into the California Cannabis Tax Fund, and continuously appropriates that tax fund for specified purposes.
This bill, beginning on January 1, 2023, w ould discontinue the imposition of the cultivation tax. The bill, beginning on January 1, 2023, would impose the cannabis excise tax on purchasers of cannabis or cannabis products sold in this state at the rate of 15% of the gross receipts of any retail sa le by a cannabis retailer. The bill, for the 2025 –26 fiscal year and every 2 years thereafter, would require CDTFA, in consultation with the Department of Finance, on or before May 1 of the fiscal year immediately preceding the applicable fiscal year, to a djust the cannabis excise tax rate by a percentage that will generate an amount of revenue that would have been collected pursuant to the cultivation tax imposed prior to its discontinuation under this bill, as specified, except that the bill would prohibit the cannabis tax rate from exceeding 19% of the gross receipts of retail sale.
FISCAL IMPACT:
In calendar year 2021, total cannabis taxes paid to Cathedral City were $4,971,001.
The redefinition of taxable cultivation space as provided in the proposed resolution would result in a revenue decrease to the city of approximately $79,000 annually.
ATTACHMENTS:
Resolution establishing cannabis tax exemption for nonop businesses August 2022 Resolution Establishing Cannabis Tax Exemption - Canopy Portion of the Cannabis Cultivation Space August 2022