Exhibit “A”
Cannabis Tax Analysis
Q4 2022 Survey and Interview Results
1 | P a g e
January 25, 2023
In November 2022, Charlie McClendon contacted forty-one Cathedral City cannabis businesses via email.
Mr. McClendon explained the City Council is evaluating current tax rates and wanted to learn more about the cannabis industry through the eyes of Cathedral City-based cannabis businesses. Thirteen business owners volunteered to participate in an on-line survey and follow up interview. Eleven businesses completed the survey.
In December 2022, the Economic Development Department and City Manager’s office created and circulated a 29-question survey. The survey consisted of multiple choice and short answer questions.
Questions were broken into the following four categories:
1) Background questions (size, time in business, and type of cannabis business) (four questions) 2) Financial health (four questions)
3) Financial analysis:
a. Cultivation businesses (eleven questions)
b. Retail (dispensary) businesses (seven questions)
4) Closing questions (three questions)
Either Mr. McClendon or Economic Development Director Stone James met with each survey participant (in-person, via zoom, or over the phone) and reviewed the completed survey. Interview comments provided by the business owner are noted at the bottom of this report. Not all business owners responded to all questions. The responses noted below are reported verbatim unless otherwise noted. Response numbers (Response 1, Response 2, and Response 3) present the number of responses to each question and is not intended to number a consistent respondent.
Business owners agreed to provide detailed confidential information based on the assurance of complete confidentiality and that no names or identifying labels would be included in the final reports.
Below is a summary of responses.
Exhibit “A”
Cannabis Tax Analysis
Q4 2022 Survey and Interview Results
2 | P a g e
January 25, 2023
GENERAL QUESTIONS: Questions 1-4 are general questions that apply to all cannabis businesses.
Question 1: How long have you operated your cannabis business in Cathedral City?
Question 2: What type of cannabis business do you operate?
Exhibit “A”
Cannabis Tax Analysis
Q4 2022 Survey and Interview Results
3 | P a g e
January 25, 2023
Question 3: How many people do you currently employ? In this employee count, please include those with an ownership interest who are actively involved in the operation of the business.
Question 4: Do you own or manage cannabis businesses in other cities?
FINANCIAL HEALTH: Questions 5-8 deal with the respective businesses’ financial health and apply to all cannabis businesses.
Question 5: Are you concerned about the condition of the current cannabis market? (Respondents were requested to rate their level of concern on a scale of 0-10, 10 being the most concerned. 54.5% of respondents selected “10”)
Exhibit “A”
Cannabis Tax Analysis
Q4 2022 Survey and Interview Results
4 | P a g e
January 25, 2023
Question 6: How many people have laid off in the last six months due to market conditions (lower than expected revenues, NOT due to performance issues)?
Exhibit “A”
Cannabis Tax Analysis
Q4 2022 Survey and Interview Results
5 | P a g e
January 25, 2023
Question 7: How many months of cash reserves does your business have?
Question 8: Given your experience in the industry, what would you want the City Council to know about the current state of affairs within the cannabis industry? Response 1: “Market conditions since December2021 are terrible, our sales are 15% of last years and I have had to inject cash into the business every month in 2022.” Response 2: “Almost worthless. Over taxation and regulation has made it a money losing business” Response 3: “Overtaxed Overregulated and unsustainable” Response 4: “The combination of over taxation & a thriving black market makes it extremely difficult to survive on the white market side.”
Response 5: “retailers are seriously in trouble, along with new excise tax requirements from the state, we will have a rough year and business will be forced to close. Once that happens it is almost impossible to have start again.”
Response 6: “Black market prices continue to go down, which causes us to lower our prices to compete. Our margins have been eliminated”
Response 7: “The pandemic economically hurt the dispensaries. Nearly overnight I lost nearly 40% of my customer base. Even though we were deemed essential services, people stopped coming. People lost their jobs and to save money, many turned to the black market, all reports showed it did and is flourishing. Many of the original dispensaries have closed or been sold. They were not sold because people made a profit, they were sold because owners were hemorrhaging money. The point of legal cannabis is to provide safe cannabis for consumption. If the effective tax rate was lowered, dispensaries would be able to offer a overall lower price and regain local customers since there is a seasonal flow for visitors. The largest cultivator in CA held taxes ransom in a trust account. Next thing, cultivators have the tax abated. Starting Jan 1, Gov Newsome has allowed us to collect and pay
Exhibit “A”
Cannabis Tax Analysis
Q4 2022 Survey and Interview Results
6 | P a g e
January 25, 2023
excise tax at point of sale, instead of pre-paying at time of delivery. The reason why these changes are happening is because the financial burden put on cannabis businesses is tremendous. This type of tax burden is not sustainable. When legal cannabis was conceived and the hype about how much money it would make, the price of anything cannabis (rent, remodel, repairs, advertising, accounting, etc) more than doubled for cannabis. CDTFA allows dispensaries to pay tax on products at their sold price, which includes taking into account products that are put on sale. The City applies the cannabis tax of FULL amount based on Metric. This does not take into account that there are so many licenses which makes it very competitive, and you have to offer daily deep discounts. Many of us offer 15-30% discounts and a loyalty program. On flower Friday, we have 30% discount, then the State getting 15% and the City taking 18.75% off the top, there is little profit left. Many of the original dispensaries that got a license have now closed or have been sold. Those business owners did not sell at a profit and made money. Instead, they sold or walked away to stop the hemorrhaging of money in a unsustainable business model.”
Response 8: “Major issues on the 'supply side' of the industry - too many cultivators and brands to be sustainable. On the 'demand side' consumers are definitely cutting back their spend, frequency of use, and some of the 'novelty' is wearing off.”
Response 9: “The current challenges are unprecedented. The macro-economics i.e., current crash of wholesale pricing, demand, lack of banking/financing etc. compounded with microeconomics of running a cannabis business, i.e., inability to write off certain expenses, taxes, wages etc. are compounding making the business extremely difficult to manage. For our cultivation business, we have been able shed as much expenses in order to survive and have been fortunate to not lose any harvest however we are one bad harvest away from illiquidity. I, as a principal in what I incorrectly anticipated to be a more passive investment find myself working two roles in order to make ends meet.
Look forward to further discussing any additional items or further expounding on any topic.” Response 10: “its oversaturated and over Taxed and it's not treated like all the other businesses, no real penalties for black market operators.”
Response 11: “The industry is starting to consolidate and there are many licensed retail dispensaries that are struggling throughout the state. The problem is that taxes are high, and we aren't afforded the same write-offs as normal businesses. It's hard for operators to set aside cash reserves when they are barely turning profits.”
FINANCIAL ANALYSIS (Cultivation Only): Questions 9-19 ask specific questions related to the operation of Cathedral City-based cultivation businesses.
Question 9: When did your cultivation business first open? Response 1) February 28, 2018
Response 2) June 1, 2018
Response 3) August 22, 2018
Response 4) November 8, 2018
Response 5) January 1, 2020
Response 6) August 24, 2021
Exhibit “A”
Cannabis Tax Analysis
Q4 2022 Survey and Interview Results
7 | P a g e
January 25, 2023
Question 10 and 11 apply to cultivation businesses:
Question 10: After first opening for business, how much per pound were you selling your cannabis product for?
Question 11: Currently, how much are you selling your cannabis product for?
Response
Question 10
Cannabis Sales Price
per Pound Upon
Opening for Business
Question 11
Current Cannabis
Sales Price per Pound
Percentage Change
1 $1,650.00 (big or small) $900.00 for big $400 for
small -45% to –76%
2 $2,500 $850 -66%
3 $2,800 $800 -71%
4 $1,800 $1,100 -39%
5 $1,500 to $1,800 $400 to $600 -73% to –67%
Questions 12 – 15 are summarized in the below table. Question order has been modified to improve the flow and readability of the below table. Again, these questions were asked only of cultivators and focused on the month of October 2022:
Question 12: In October 2022, what was your gross revenue? Question 15: In October 2022, how much were your other expenses (e.g., payroll, energy, water, other supplies, and utilities, etc.)?
Question 13: In October 2022, how much did you pay to Cathedral City in cannabis taxes?
Question 14: In October 2022, how much did you pay to the State of CA in cannabis taxes?
Question 12
(Cultivation)
Question 15
(Cultivation) Question 13
(Cultivation)
Question 14
(Cultivation) (Cultivation) (Cultivation)
Response October 2022
Gross Revenue
October 2022
Other
Expenses
October
2022
Net
Revenue
October 2022
Cathedral
City
Taxes Paid
October 2022
California
State
Taxes Paid
October 2022
Total Taxes
Taxes as a
Percentage of
Net Revenue
1 $17,350 $61,095 $(43,745) $3,461 $1,750 $5,211
Taxes Paid on
Negative Net
Revenue
2 $175,000 $170,000 $5,000 $17,000 $7,000 $24,000 480% 3 $184,625 $202,839 $(18,214) $10,726 Respondent
failed to provide $10,726
Taxes Paid on
Negative Net
Revenue
4 $131,499 $200,000 $(68,501) $24,964 Respondent
failed to provide $24,964
Taxes Paid on
Negative Net
Revenue
Exhibit “A”
Cannabis Tax Analysis
Q4 2022 Survey and Interview Results
8 | P a g e
January 25, 2023
Questions 16 – 19 are cultivation-focused, based on a 12-month fiscal period, and summarized in the below table:
Question 16: In your most recent 12-month fiscal period, what was your gross revenue? Question 17: In your most recent 12-month fiscal period, how much did you pay to Cathedral City in cannabis taxes?
Question 18: In your most recent 12-month fiscal period, how much did you pay to the State of California in cannabis taxes?
Question 19: In your most recent 12-month fiscal period, how much were your other expenses (e.g., payroll, energy, water, other supplies and utilities, etc.)?
Response
Question 16
(Cultivation)
Question 19
(Cultivation)
Question 17
(Cultivation)
Question 18
(Cultivation) (Cultivation) (Cultivation)
1 Last 12-
Months
Gross
Revenue
Last 12-
Months
Other
Expenses
Last 12-
Months
Net
Revenue
Last 12-
Months
Cathedral
City
Taxes Paid
Last 12-
Months
California
State
Taxes Paid
Last 12-
Months
Total Taxes
Taxes as a
Percentage
of Net
Revenue
2 $158,154 $781,180 $(623,026) $47,487 $21,000 $68,487 Taxes Paid on
Negative Net
Revenue
3 $1,950,000 $1,825,900 $124,100 $215,000 $115,000 $330,000 266% 4 $2,717,638 $2,411,577 $306,061 $128,715 $35,410 $164,125 54% 5 $2,112,064 $911,784 $1,200,280 $299,568 $94,934 $394,502 33%
FINANCIAL ANALYSIS (Retail or Dispensary Only): Questions 20-26 ask specific questions related to the operation of Cathedral City-based dispensary.
Question 20: When did your dispensary first open for business? Response 1: January 1, 2017
Response 2: January 20, 2017
Response 3: November 8, 2017
Response 4: September 9, 2017
Response 5: January 1, 2019
Response 6: August 19, 2019
Response 7: June 1, 2019
Response 8: May 11, 2022
Questions 21 – 26 are retail (dispensary) focused and summarized in the below table:
Exhibit “A”
Cannabis Tax Analysis
Q4 2022 Survey and Interview Results
9 | P a g e
January 25, 2023
Question 21: What were your gross revenues when you first opened Question 22: In October 2022, what were your gross revenues? Question 23: In October 2022, how much did you pay in State cannabis taxes? Question 24: In October 2022, how much did you pay in sales taxes (8.75%)? Question 25: In October 2022, how much did you pay in Cathedral City Cannabis taxes? Question 26: In October 2022, how much did you pay in other expenses (e.g., cost of goods sold, payroll, utilities, all other expenses)
See Exhibit “B” for responses
CLOSING QUESTIONS: Questions 27-29 ask general questions to all Cathedral City-based cannabis business owners. This section was intended to provide business owners a final opportunity to share their perspective with City Council and city staff.
Question 27: What would you want the Cathedral City Council to keep in mind when evaluating the appropriateness of the current tax levels? Recognizing this is an anonymous survey, please keep personally identifying information out of these closing responses.
Response 1: “Please lower the taxes and renewal fee as this market condition is unlikely to improve in the near future.”
Response 2: “Without immediate changes many businesses will close and leave a giant hole in the cathedral city real estate market. These businesses have very few other applicable uses. Should cultivation and manufacturing leave there will be 100's of thousands of square feet that will be empty. Look towards San Francisco (who suspended all cannabis taxes) or Santa Rosa which reduced all taxes and eliminated some.”
Response 3: “Keep in mind that your tax rate is restricting sales potential”
Response 4: “Cutting the city excise tax to 5% would give my business roughly $10k a month to help reduce the cost of products to consumer & help bring traffic from surrounding cities. Also allows the business to have more marketing dollars to advertise surrounding areas and bring cannabis dollars to Cathedral City.”
Response 5: “We understand that taxes are important to the city as citizens, we are just asking for a little break because we are all going to go under. There are businesses struggling to stay open”
Response 6: “They have the highest Retail tax in the state. They have one of the highest cultivation taxes in the state. If you do not find a more reasonable tax rate, we will all be forced to find new places to operate our business.”
Response 7: “5% if you keep the full price as the tax base and not allow taxing on actual sale price (discounts).”
Exhibit “A”
Cannabis Tax Analysis
Q4 2022 Survey and Interview Results
10 | P a g e
January 25, 2023
Response 8: “Needs to be a balance between taxing operators and making prices too high which is still forcing customers, especially heavy users, to frequent the illicit market.”
Response 9: “Considering market conditions, both parties need to be making every effort to work with each other in order to ensure a fair, equitable opportunity to succeed. Numerous other cities in the Coachella valley offer more attractive tax structures between $5-$10/sf of canopy. Is an important distinction that some cities charge on canopy space which is ultimately the main potential revenue generator. The tax should be targeted towards flower room space only, not vegetation space. Also lack of clear guidelines, consensus on exact detail of tax structure.”
Response 10: “We would like to see our taxes more in line with all the other industries in the City.”
Response 11: “I think the city council should chat more in depth with the finance people in cannabis. It'll allow them a deeper understanding into the financial burdens that we take on.”
Question 28: Is there anything else you would like to communicate to Cathedral City staff or the City Council?
Response 1: “I think it's unfair as a business owner to pay these excessive fees, compared to any other the business”
Response 2: “Please reduce taxes. The cultivation tax is killing the business.”
Response 3: “Your greediness is a major part of poor sales.”
Response 4: “We want to be able to continue business in Cathedral City”
Response 5: “Initial surveys have shown that Cathedral City residents would support a voter referendum that lowers the tax to 3%. If the city continues to do nothing, we will be forced to try a new route.”
Response 6: “If you lower the tax, I believe sales (tax) will increase in the long term to make up for any losses.”
Response 7: “It would be great for the council members to reach outside of the Coachella Valley to see all the concessions other City's are making for the Cannabis business to succeed as this wild west industry.”
Response 8: “I think this survey is the first step in better understanding our needs. We look forward to working with the city more in depth.”
Exhibit “A”
Cannabis Tax Analysis
Q4 2022 Survey and Interview Results
11 | P a g e
January 25, 2023
Question 29: Is there anything other comments you would like to add? Response 1: “The fear mongering that cannabis sales would increase crime has not happened.
Please do not hold us accountable to pay for policing. That was your reasoning 5 yrs. ago...there are more calls for service at Target, Henry's, and every other local bar vs all of your dispensaries combined.”
Response 2: “I understand the challenges any city must face with tax revenue and budgeting however it feels like cannabis has an outsized tax burden levied vs other business while lacking some essential support services and benefits. At the onset in order to create regulatory framework and ultimately receive the support or resident constituents, outsized tax benefits to the city for a potentially burgeoning new industry was a reasonable narrative / strategy. With today’s reality, vastly different from initial conception something has to change and we need more support or at least our tax burden to be in-line with any other sector in the city.”
Response 3: “It's Farming and not every harvest does the same thing, this is why it would be nice to pay a % of gross sales vs this flat fee, just like when the car dealership sales a car or NOT.”
Response 4: “No. Thank you for your time.”
Supplemental Responses from Business Owner Interviews:
From a dispensary owner: “Prior to January 1, 2023, the State of California charged cannabis retailers the 10% cannabis State tax when the retailers purchased wholesale products. The cannabis tax was calculated as follows: 10% tax on 80% of the wholesale purchase price (Cannabis tax = (total wholesale purchase price x 80%) x (10%) or Cannabis Tax=(WPP*.8)*(.10). If a product expired and was never sold, the tax on the sale of the product had already been paid and was unrecoverable. If a cannabis product was sold below 80% of the wholesale price, the effective tax was exceeded 10%. Lastly, paying the tax before the product was sold negatively impacted the cannabis retailer’s cash position.”
From a dispensary owner: “Death by a thousand cuts. There was not one bad policy or factor that is harming the cannabis industry. The challenges facing the cannabis industry are resulting from a confluence of factors such as:
i. Taxes: What business do you know pays federal taxes on gross income (gross revenue less cost of goods sold)? All other businesses in the United States pay federal taxes on net income after deducting cost of goods sold and reasonable business expenses. ii. Challenges with banking: A cannabis business cannot walk down and open an account at Wells Fargo. Cannabis businesses have to find a bank who is able and willing to provide banking services for the cannabis business.
iii. Costs to apply for banking: It costs around $7,000 to apply for a bank account.
Exhibit “A”
Cannabis Tax Analysis
Q4 2022 Survey and Interview Results
12 | P a g e
January 25, 2023
iv. Costs to maintain a bank account: Banks which serve cannabis businesses charge between 1% to 1.5%. This means I am spending $1,500 to $2,500 each month to maintain a bank account.
v. Loans: Since cannabis is still federally illegal, instead of being charged 6% to 10% for a business loan, loans for cannabis businesses range from 30% to 35%. vi. From construction contractors to equipment to service providers, everyone charges higher prices for cannabis related work because most people think cannabis businesses are rich”.