City of Corona
Staff Report
400 S. Vicentia Ave.
Corona, CA 92882
File #: 22-0603
REQUEST FOR CITY COUNCIL ACTION
DATE: 07/06/2022
TO: Honorable Mayor and City Council Members
FROM: Legal and Risk Management
SUBJECT:
Resolutions calling for the placement of a commercial cannabis business tax measure at the November 8, 2022 General Municipal Election, requesting consolidation of the General Municipal Election with the Statewide General Election, and adopting regulations for the filing of arguments regarding such measure.
EXECUTIVE SUMMARY:
As directed by the City Council at the June 22, 2022 Study Session, the attached resolutions will authorize the placement of a general tax measure on the November 8, 2022 ballot for the approval of a commercial cannabis business tax. As currently written, the ordinance to be submitted to the voters for approval, which is attached as Exhibit “A” to Resolution No. 2022-102, would add Chapter
3.38 to the Corona Municipal Code and would authorize a maximum tax rate of 9% for retail sales, 7% for manufacturing and distribution, and 3% for testing laboratories. The ordinance would also add a maximum tax rate of 15% for “all other” cannabis businesses as a means to capture any cannabis business type not currently allowed to operate within the City (e.g., an illegal cultivation/nursery business), as well as any cannabis business within a regulated sector that is operating in the City without a permit duly approved and authorized by the City (e.g., an illegal retail business).
As was requested at the June 22, 2022 Study Session, staff will be ready to discuss alternative maximum tax rates and will have alternative language for Resolution No. 2022-102 to implement such policy direction if so desired by the City Council.
As a general tax, the measure must be approved by a majority of the voters voting at the election, and the attached Resolution Nos. 2022-103 and 2022-104 are required to place the measure on the ballot.
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Please note that there is a blank in the ballot language, as staff is still working on developing an estimate of the amount of revenue that might be generated by a proposed tax. This information is required to be included within the ballot language. It is somewhat difficult to estimate since we have no current cannabis sales on which to calculate such an amount.
RECOMMENDED ACTION:
That the:
a. City Council adopt Resolution No. 2022-102 calling for the placement of a general commercial cannabis business tax measure on the November 8, 2022 General Municipal Election ballot. b. City Council adopt Resolution No. 2022-103 requesting the County of Riverside to consolidate this election with the Statewide General Election also to be held on November 8, 2022. c. City Council adopt Resolution No. 2022-104 setting deadlines and rules for the submission of primary and rebuttal arguments for and against the proposed commercial cannabis business tax measure.
Please note that these resolutions must be approved by a two-thirds (2/3) vote of the membership of the City Council.
BACKGROUND & HISTORY:
In October 2020, the City Council enacted Chapter 5.36 of the Corona Municipal Code to permit and regulate certain commercial cannabis businesses within the City. The City Council also adopted Resolution No. 2020-126 (now superseded by Resolution No. 2021-022) establishing rules and regulations to govern the permitting of commercial cannabis businesses (“Rules & Regs”). The Rules & Regs require the owner of a commercial cannabis business to enter into an operational agreement with the City, which requires the owner, among other things, to pay an operating fee to the City.
Operating Fee Range
The Rules & Regs authorized the following operating fee ranges:
Retailers: 0-9% of gross receipts
Manufacturing/Distribution: 0-7% of gross receipts
Testing Laboratory 0-5% of gross receipts
Initial Operating Fee
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The City Council also authorized the City Manager to negotiate an initial operating fee, or a combination of additional consideration/benefits and a proportional operating fee, equal to the following:
Retailers: 7% of gross receipts
Manufacturing/Distribution: 5% of gross receipts
Testing Laboratory 2% of gross receipts
Study Session Direction - Ballot Placement
At the City Council’s Study Session on June 22, 2022, City staff requested direction on whether a tax measure should be placed on the ballot for the November 8, 2022 election and, if so, direction on the proposed tax rates. The City Council directed staff to prepare the necessary documents for the City Council to consider placing a commercial cannabis tax measure on the November 8, 2022 ballot.
Study Session Direction - Tax Rates
The City Council also directed staff to initially set the proposed maximum tax rates at the same amount as the operating fee range set forth in the Rules & Regs, but to also provide additional information regarding the tax rates imposed by other agencies in Riverside County. As discussed further below, in Exhibit 1 attached hereto (Research Estimating Cannabis Tax Rates in Riverside County), staff has done our best to research and estimate the amounts required by the other jurisdictions.
There was also some discussion at the Study Session regarding potentially setting the maximum tax rates a bit lower, perhaps at the amounts of the initial operating fee (outlined above), as well as perhaps not taxing distribution and testing labs. That discussion was to be further explored at this City Council meeting, and as discussed further below, staff is prepared for that discussion and will come prepared with alternative language for Resolution No. 2022-102 to implement any such desired policy direction.
ANALYSIS:
California Elections Code Section 9222 authorizes the City Council to place a tax measure on the ballot for consideration by the voters. California Constitution Article XIIIC, Section 2 (Proposition 218) requires that the voters approve such general tax by majority vote.
Attached are the three resolutions, which the Council must adopt by a 2/3 vote, to place the measure on the ballot.
Resolution No. 2022-102
Resolution No. 2022-102 is the principal resolution which calls the election and places the measure on the November 8, 2022 ballot. It contains the language of the proposed commercial cannabis tax measure (and adopting ordinance) to be submitted to the voters and directs the City Attorney to City of Corona Page 3 of 6 Printed on 6/30/2022
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prepare an impartial analysis of the measure pursuant to California Elections Code Section 9280.
Potential Tax Rates
As directed by the City Council at the June 22 Study Session, the tax measure, as currently drafted, sets the maximum tax rate at the same percentage as the operating fee range set forth in the Rules & Regs (i.e., 0-9% for retail; 0-7% for manufacturing/distribution; 0-3% for testing). Importantly, however, the ordinance also gives the City Council - at any time - the authority to upwardly or downwardly adjust the tax rates as often as it so chooses within these ranges, as well as to repeal, suspend, or amend the ordinance without a vote of the people.
As directed, City staff has also researched the tax rates for other agencies in Riverside County that permit cannabis businesses. In Exhibit 1 attached hereto (Research Estimating Cannabis Tax Rates in Riverside County), staff did their best to research and estimate the amounts required by the other jurisdictions. While it is not always easy to decipher the current imposed amounts, we believe the rates we have provided fairly represent the amounts currently being imposed.
You will note that while Riverside County does not have a cannabis business tax, it does negotiate a fee within its development agreements based upon the square footage of each business. Since comparing a gross receipts tax with a square footage fee is difficult, it is thus not possible to compare our situation on an apples-to-apples basis with the County.
Looking at just those cities that impose a tax based upon a percentage of gross receipts (as you will see, some use square footage like the County), the average tax for each type of commercial cannabis business is as follows:
COUNTY AVERAGE RATES
BUSINESS TYPE MAX RANGE CURRENT RATE
Retail 12% 10%
Manufacturing 11% 8%
Distribution 11.6% 7.4%
Testing 12% 8%
The initial maximum tax rates directed by the City Council to be included in the proposed ordinance appear to be in line with the above averages:
CITY DRAFT ORDINANCE RATES
BUSINESS TYPE MAX RANGE
Retail 9%
Manufacturing 7%
Distribution 7%
Testing 5%
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However, as indicated by the brief discussion at the Study Session, there are policy reasons why the City Council might wish to consider a different rate structure. Such policy reasons might include, for instance:
ü To avoid an argument of over taxation of the industry, since this cannabis business tax is in addition to applicable sales taxes and the 15% state cannabis excise tax; ü To create a more competitive business structure within the region; ü To encourage the location of business types that might be more tax sensitive (e.g., distribution); and
ü To encourage the location of higher paying jobs (e.g., laboratories) Based upon the Study Session discussion, staff is prepared to discuss potential alternative maximum tax rates and will have alternative language for Resolution No. 2022-102 to implement such policy direction if so desired by the City Council.
Catch-All for “All Other” and Illegal Cannabis Businesses Staff is also proposing a “catch-all” tax rate of 15% for all other commercial cannabis businesses not otherwise expressly provided a tax rate within the ordinance (i.e., retail, manufacturing, distribution, and testing), as well as any cannabis business within a regulated sector that is operating in the City without a permit duly approved and authorized by the City (e.g., an illegal retail business). The intent is in part to ensure that the City has the ability to tax other commercial cannabis businesses that the City may choose to regulate in the future without having to place another tax measure on the ballot.
Additionally - and perhaps more importantly and likely - this tax rate would apply to any commercial cannabis businesses that choose to operate illegally within the City.
As with the other proposed tax rates, the City Council may wish to establish a different rate for all other commercial cannabis businesses and staff will be prepared to make changes to this provision based on the Council’s direction.
Operating Fee
At the June 22, 2022 Study Session, the Council expressed a desire not to collect the operating fee required by the Rules & Regs if the commercial cannabis business tax is approved. To implement this direction, Resolution No. 2022-102 includes a provision indicating that the City will not require the payment of or collect the operating fee if the commercial cannabis business tax is approved by the voters.
Resolution Nos. 2022-103 and 2022-104
Resolution Nos. 2022-103 and 2022-104 are largely boilerplate resolutions to help set up the election on the measure. One resolution consolidates the City’s commercial cannabis tax measure with the November Statewide General Election on November 8, 2022, effectively allowing the Riverside County Registrar of Voters to conduct the election on the City’s behalf. The other resolution sets deadlines and rules for how and when interested persons may submit arguments for or against the City of Corona Page 5 of 6 Printed on 6/30/2022
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deadlines and rules for how and when interested persons may submit arguments for or against the proposed City commercial cannabis tax measure.
Under California Proposition 218, the upcoming November 8, 2022, Municipal General Election is an appropriate date to place a local, general tax measure on the ballot. Pursuant to California Government Code Section 53724(b) (Proposition 62), a two-thirds vote of the membership of the City Council is required to adopt these resolutions.
FINANCIAL IMPACT:
The estimate provided by the County to the City Clerk for placing the measure on this November’s ballot is $88,000. Please note, as indicated above, that staff is also currently working on developing an estimate of the amount of revenue that might be generated by a proposed tax, since such an estimate must be included within the ballot language.
ENVIRONMENTAL ANALYSIS:
This action is exempt under the California Environmental Quality Act (“CEQA”) Guidelines Section 15378(b)(5), which states that a project is exempt from CEQA if the activity relates to organizational or administrative activities of governments that will not result in direct or indirect physical changes in the environment, and therefore is not a project within the meaning of CEQA. The recommended action simply would place a proposed tax measure on the November ballot, and there is no possibility that this action will have a significant effect on the environment. Therefore, no further environmental analysis is required.
PREPARED BY: JAMIE RAYMOND, CHIEF DEPUTY CITY ATTORNEY
REVIEWED BY: DEAN DERLETH, CITY ATTORNEY/LRM DIRECTOR
Attachments:
1. Exhibit 1 - Research Estimating Cannabis Tax Rates in Riverside County
2. Exhibit 2 - Resolution No. 2022-102
3. Exhibit 3 - Resolution No. 2022-103
4. Exhibit 4 - Resolution No. 2022-104
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