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Staff Report
City Council
Item No. 6.D
Meeting Date: February 22, 2023
From: Stone James, Economic Development Director
Title: Cannabis Industry Analysis and Taxation Modification
City Council
RECOMMENDATION:
To adopt a resolution reducing the cannabis dispensary tax rate to 5% of gross proceeds, the cultivation rate to $10.00 per square foot, and the manufacturing per piece tax rate to $0.05 cents.
BACKGROUND:
This agenda item is the result of collaborative discussions between Cathedral City cannabis business owners, Cathedral City’s Cannabis Taskforce, and the City Council dating back to September 8, 2021. A total of ten meetings took place surrounding the issue of taxes on September 8, 2021, November 29, 2021, January 19, 2022, April 11, 2022, April 20, 2022, May 11, 2022, June 8, 2022, August 10, 2022, September 14, 2022, and November 30, 2022.
During the January 25, 2023, City Council study session, staff presented an analysis based on the culmination of these meetings, a police and fir e calls-for-service analysis, and the results from a mixed -methods analysis of Cathedral City cannabis businesses.
As a result of the meetings, feedback, and research over this 17 -month span, the Council directed Staff to (i) bring forward a resolution ame nding current tax rates to reflect a dispensary tax rate of 5%, cultivation tax rate of $10.00 per square foot, and a manufacturing per-piece tax rate of $0.05 cents per piece, and (ii) ensure the City has the ability to reduce the number of outstanding and unused licenses.
DISCUSSION:
Since the January 25, 2023, Cathedral City study session, the City of Palm Desert Economic Development subcommittee concluded their own research. During the February 16, 2023, Palm Desert City Council meeting, the subcommit tee plans on recommending the adoption of a 5% dispensary tax rate and a $10.00 per square foot cultivation tax rate. This new rate has been updated in the below table.
Neighboring Jurisdictions’ Taxes
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Staff reviewed cannabis taxes in the cities of Palm Springs, Palm Desert, Desert Hot Springs, and Coachella. Currently, La Quinta, Indian Wells and Rancho Mirage do not allow cannabis businesses. On July 20, 2022, the city of Indio authorized the opening of no more than five dispensaries within city limits. A dispensary tax rate has not been determined however, given other Valley cities’ 10% retail tax rate and City of Coachella’s 6% retail tax rate, the Indio City Council is discussing a retail fee approximating a tax rate of 5% or 6%. Dispensaries are the only type of cannabis business the Indio City Council has authorized.
Coachella Valley City Cannabis Tax Rates by Discipline
City Retail/
Dispensary Cultivation Manufacturing Distribution Testing Cathedral
City
10% on
Gross
Proceeds
$15.00 per sq.ft.
$.05/Crude gram
-
$.10/Distillate gram
-
$.40/Other type item*
Zero*** Zero
Coachella
6% on
Gross
Proceeds
In 2023: 3% of
Gross Receipts.
In 2024: 2% of
Gross Receipts
2% on
Gross Receipts Zero Zero
Desert
Hot
Springs
10% on
Gross
Proceeds
$10.20 per sq.ft. Zero Zero Zero
Palm
Desert
5%** on
Gross
Proceeds
$10.00** per sq.ft. 2% on
Gross Receipts Zero Zero
Palm
Springs
10% on
Gross
Proceeds
$10.00 per sq.ft. 2% on
Gross Receipts Zero Zero
Indio
Evaluating
5% or 6% on
Gross
Proceeds
Not allowed Not allowed Not allowed Not
allowed
Note:
*: Given current wholesale price of approximately $1.50 per item on pre-rolls, the .40 cent per item tax represents an effective tax rate of 27%.
**: On February 16, 2023, the Palm Desert Economic Development subcommittee will recommend to the Palm Desert City Council that they reduce the dispensary and cultivation taxes to 5% and $10.00 per square foot, respectively.
***: For cannabis products produced within Cathedral City, there is zero tax on distribution.
As it relates to the City’s ability to reduce the number of outstanding but unused licenses, CCMC Section 5.8.055.D. currently states,
“The local licensing authority shall renew a local license if the licensee has submitted a complete application and pa id the application processing fee, unless the local licensing authority finds that good cause exists to deny the license renewal. Notwithstanding the foregoing, the local licensing authority in its
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discretion may elect not to renew any local license if it determines that the licensed premises has not been used for a cannabis business, without reasonable cause as determined by the local licensing authority, for a period of at least one year.”
Staff believes this current provision addresses Council’s interes t in having the ability to reduce the number of renewed -but-unused licenses. City staff will be more proactive in addressing non-active licenses as they come up for renewal.
Recommendations:
Reduce the:
1) Dispensary or retail tax rate to 5% of gross proceeds; 2) Cultivation tax rate to $10 per square foot; and
3) Manufacturing-per-piece tax rate to $0.05 cents.
Additionally, the proposed resolution requires that businesses must be current on taxes due to the City to take advantage of the reduced rates.
FISCAL IMPACT:
In calendar year 2021, total cannabis taxes paid to Cathedral City were $4,971,001. In calendar year 2022, total cannabis taxes paid to Cathedral City were $3,693,000 (est.).
Based on 2022 collections, each 1% reduction in the retail t ax should result in a revenue loss of $125,000/year.
A reduction in the cultivation tax rate to from $15 to $10/square foot would result in a revenue loss of $710,000. The reduction assumes current cultivation activity remains constant and no Cathedral C ity businesses leave Cathedral City and relocate to lower - tax jurisdictions. Alternatively, a lowering of the tax rate may attract new businesses into Cathedral City and therefore increase total potential tax revenue.
A reduction in the per gram or per it em manufacturing tax would have a negligible cost impact as there are very few manufacturers left in the City. If manufacturers returned to Cathedral City to resume manufacturing operations, a reduction in manufacturing taxes could then result in additional tax revenue.
ATTACHMENTS:
2023-02-14 DRAFT Resolution Reducing Cannabis Tax (2023)