1. CALL TO ORDER AND ROLL CALL
A. Special Meeting Notice
2. ORAL COMMUNICATION - ITEMS LISTED ON THIS AGENDA
Any person wishing to speak on any items listed on this special meeting agenda, may do so at this time. The opportunity to speak is on a first come, first served basis. Each person may speak once for no more than 3 minutes for all Oral Communications at this time. Public comments may be submitted by emailing [email protected] before or during the meeting, prior to the close of public comment. Under the Brown Act, members of the City Council and staff can respond only with a brief reply to issues raised in Oral Communications, and no action on such matters may take place at this meeting.
3. WORKSHOP FOR CITIZENS' PETITION - DUARTE MARIJUANA RETAIL SALES
REGULATION AND TAXATION MEASURE
AGENDA
SPECIAL MEETING OF THE CITY
COUNCIL OF THE CITY OF DUARTE
TUESDAY, MAY 14, 2024
5:00 PM
CITY COUNCIL CHAMBERS,
1600 HUNTINGTON DRIVE,
DUARTE, CALIFORNIA 91010
MISSION STATEMENT
With integrity and transparency, the City of Duarte provides exemplary public services in a caring and fiscally responsible manner with a commitment to our community's future
VINH TRUONG, MAYOR
CESAR GARCIA, MAYOR PRO TEM
MARGARET FINLAY, COUNCILMEMBER
SAMUEL KANG, COUNCILMEMBER
TONEY LEWIS, COUNCILMEMBER
JODY SCHULZ, COUNCILMEMBER
TERA MARTIN DEL CAMPO, COUNCILMEMBER
City/Agency/Authority Staff:
Brian Villalobos, City Manager
Kristen Petersen, Assistant City Manager and Director of Administrative Services Craig Hensley, Director of Community Development
Manuel Enriquez, Director of Parks and Recreation
Larry Breceda, Director of Public Safety Services
Thai Viet Phan, City Attorney
Annette Juarez, City Clerk
1 A. Supplemental Analysis
4. ADJOURNMENT - To Scheduled Regular City Council Meeting .
I, Annette Juarez, City Clerk, hereby certify that the foregoing notice of special meeting was posted on May 9, 2024 at the following locations: City Hall – 1600 Huntington Drive Avenue, Duarte Public Safety Department – 1042 Huntington Drive, Duarte Library – 1301 Buena Vista Street, and the City of Duarte website (www.accessduarte.com) not less than 24 hours prior to the meeting and delivered to each member of the Duarte City Council.
Annette Juarez, MMC
City Clerk
2 ITEM: 1.A
Special Meeting Notice
Recommended Action:
Attachments:
05-14-24 - Special Meeting Notice.pdf
3 NOTICE AND CALL OF SPECIAL MEETING OF THE
CITY COUNCIL OF THE CITY OF DUARTE
NOTICE IS HEREBY GIVEN that the majority of the City Council have called for a special meeting of the City Council of the City of Duarte to be held in the City Council Chambers on Tuesday, May 14, 2024, at 5:00 p.m.
The Special Meeting will be for the purpose of holding the Workshop for Citizens’ Petition – Marijuana Retail Sales Regulation and Taxation Measure. Visit the City website at https://www.accessduarte.com/home for all details and agenda.
Dated: May 9, 2024
Annette Juarez, MMC
City Clerk
I, Annette Juarez, City Clerk, hereby certify that the foregoing notice of special meeting was posted on May 9, 2024 at the following locations: City Hall – 1600 Huntington Drive Avenue, Duarte Public Safety Department – 1042 Huntington Drive, Duarte Library – 1301 Buena Vista Street, and the City of Duarte website (www.accessduarte.com) not less than 24 hours prior to the meeting and delivered to each member of the Duarte City Council.
Annette Juarez, MMC
City Clerk
1 4
ITEM: 3.A
Supplemental Analysis
Recommended Action:
Attachments:
3.A - Supplemental Analysis.pdf
5 Findings Overview
The number of cannabis retailers that might be appropriate for the City of Duarte and revenue projections at 5%, 6%, and 7%.
• Applying a rate of 5.0% would yield a little over $1 million. A rate of 6.0% would yield $1.3 million, and applying a rate of 7.0% would yield a little over $1.5 million in annual cannabis tax revenue.
• Projections do not assume a particular number of retailers, as the number of retailers does not increase the number of cannabis consumers nor the amount of local spending on cannabis.
• It is anticipated that the Duarte retail service area could accommodate perhaps 3 average sized storefront retailers.
Discussion of tax rates and potential revenues.
• Cannabis retail tax rates should be set at a level that is generally consistent with the surrounding area.
• Regional survey indicates a range from 4.0% up to 10.0% for adult-use cannabis. • The average rate for adult-use cannabis is a little above 6.1%.
Considerations of different rates for adult use and medicinal use and considerations for medicinal cannabis vs. adult use.
• Medicinal cannabis accounts for less than 5% of retail cannabis sales in California. • Medicinal marijuana identification card (MMIC) purchases are low in California. • Projected tax revenue from proposed initiative rates (4.0% for adult-use sales and
0.5%) would take in around $38,000 less than implementing a 4.0% adult-use tax.
More detailed discussion of cost recovery fees
• The City can recover fees via Initial permitting fees, and annual permit renewal fees. • Average cost recover range is between $16,000 to $20,000. • The City could reimburse the General Fund for costs related to developing and placing tax measure on ballot if the measure passes.
Discussion of zoning considerations, setbacks and sensitive uses. • By right cannabis retailers conflict with the City’s Commercial General (CG) zone. • The best placement for retailers is at the end of the 210 corridor. • The City can increase the list of sensitive uses and/or to increase or decrease the setback distance for sensitive uses such as parks, residential neighborhoods, or houses of worship. The City should consider not being too restrictive.
Considerations for walk-in sales vs. sales by delivery
• Storefront retailers may capture local sales tax and cannabis tax dollars from customers who reside outside of the host jurisdiction, delivery services may not, subject to apportionment law.
6 Findings Overview
• If a cannabis retailer in Duarte delivers to a destination in a nearby city that has its own tax on retail cannabis sales, Duarte cannot assert its cannabis tax. • To capture cannabis tax from deliveries, delivery services must be required to obtain a permit from the City.
Discussion of the City’s ability to limit the products that may be sold, specifically live plants.
• Retailers may sell live, cannabis plants and seeds, if they are shorter and narrower than 18 inches, are not flowering, and originated from a licensed cannabis nursery. • A licensed microbusiness may carry and sell live plants or seeds from its own operation, if its license includes cultivation.
• A city or county may condition the license for retailers to disallow the sale of live plants or to limit or prohibit the sale of other types of products.
Discussion of the City’s ability to prohibit or allow on-site consumption. • Permitting and regulating on-site consumption is left to the local jurisdiction. • Cannabis consumption lounges must comply with California’s smoke-free workplace law. However, the smokefree workplace law exempts retail or wholesale tobacco shops and private smokers’ lounges, which extends to cannabis.
Discussion of the City’s ability to require design review or other site requirements and limit signage and billboard advertising.
• Cities and counties can impose stringent design standards including scoring or ranking in part on their design and appearance.
• Cities may also impose conditions to ensure businesses maintain their outward appearance and take responsibility for sidewalks and landscaping. • Cities have ample authority to limit and regulate outside advertising, including store signs, window displays and sandwich boards.(size, location, operating hours, etc). • Cities can disallow use of digital signs, moving signs, signs erected on poles, or other specific types.
General figures on success rates for general taxes vs. special taxes. • 172 local cannabis tax measures in California since 2016, approval rate of 87.3%. • Vast majority of these measures were placed on the ballot as general taxes (162 tax measures) while a much smaller portion were placed on the ballot as special taxes (11 tax measures).
Examples of City’s that have placed advisory measures on the ballot. • Advisory measures generally ask the voters if they would support the city (or county) using the revenues for a particular purpose. Only advisory and not binding. • Advisory measures are not common. Only Mendocino County and City of Watsonville have placed an advisory measure on the ballot.
7 120 S. State College Blvd. Suite 200 | Brea, CA 92821 | 714.879.5000 | hdlcompanies.com May 7, 2024,
Kristen Petersen
Assistant City Manager
City of Duarte
1600 Huntington Dr.
Duarte, CA. 91010
Re: Supplemental Impact Report on the Duarte Marijuana Retail Sales Regulation and Taxation Measure
Introduction
In 2023 the City of Duarte received a citizens’ petition titled "The Duarte Marijuana Retail Sales Regulation and Taxation Measure" (“the Initiative”). The Initiative would allow up to five retail cannabis businesses within the City, which would be permitted by right within certain zoning designations, including the Commercial General (CG) and Commercial Freeway zones along with certain specific zone areas, subject only to a ministerial approval. The Initiative also includes a tax of up to 4.0% on both medicinal and adult-use cannabis sales. The initiative was initially intended to be placed on the March 2024 ballot but has since been held in abeyance by its proponents, pending potential action by the City.
To better understand the potential impacts of the Initiative, the City of Duarte requested that HdL Companies prepare a report examining the Initiative’s potential impacts on land use, neighborhoods, public safety and the local economy, as well as fiscal impacts and potential revenues. HdL provided our report to the City on September 18, 2023, and presented the report to the City Council at its February 13th meeting. Following the presentation and discussion, the Council requested additional analysis from HdL, including the following topics:
The number of cannabis retailers that might be appropriate for the City of Duarte. Revenue projections considering 1, 2 or 3 retailers and rates of 5%, 6% and 7%. Discussion of tax rates and potential revenues.
Considerations of different rates for adult use and medicinal use. Considerations for medicinal cannabis vs. adult use.
More detailed discussion of cost recovery fees
Discussion of zoning considerations, setbacks and sensitive uses. Considerations for walk-in sales vs. sales by delivery Discussion of the City’s ability to limit the products that may be sold, specifically live plants. Discussion of the City’s ability to prohibit or allow on-site consumption. Discussion of the City’s ability to require design review or other site requirements Discussion of the City’s ability to limit signage and billboard advertising. General figures on success rates for general taxes vs. special taxes. Examples of City’s that have placed advisory measures on the ballot.
We have grouped and reordered these topics in the report that follows. 8 1. The number of cannabis retailers that might be appropriate for the City of Duarte.
2. Revenue projections considering 1, 2 or 3 retailers and rates of 5%, 6% and 7%.
As discussed in our initial report, HdL commonly assumes a market concentration of one retailer per every 18,000 to 20,000 people as a very general baseline for considering a community as being “served”. Our reasoning and methodology for using that figure is described in that prior report. However this figure is not intended to be a mathematical target for the appropriate number of retailers. HdL uses this metric as a very general benchmark to gauge whether an area could be considered as being served but, as with any average, that metric is derived from a range. In the case of cannabis retailers, that range is quite large.
The City of San Jose, for example, has a population of 971,000 and only allows 16 cannabis retailers, or one for every 61,000 people. However, there are no other jurisdictions in the surrounding area that allow cannabis retailers, so those 16 businesses are the only ones serving a total regional population of 1.8 million, or one retailer for every 112,500 people. Even with this, 2 of those retailers have recently closed, though this is believed to be due to the concentration of those businesses in too few allowable locations. This point illustrates how the ability of retailers to effectively serve a given population depends not only on their number but also on their locations and geographic distribution across the area they are intended to serve. The San Jose City Council recently voted to relax the zoning requirements and to increase the number of allowable retailers to 37.
As a counterpoint, the City of Needles has a population of 5,000 people and has 6 retailers, with 3 more in the permitting process. In short, the appropriate number of retailers for any jurisdiction will vary depending upon the population of the overall service area, the number of existing retailers in other jurisdictions, how well they are located to serve the entire population, tourism, ease of access for through traffic, signage and advertising, marketing efforts, and other free-market factors which are not generally controlled by regulation.
HdL’s previous report provided revenue projections based on the 4.0% tax rate proposed by the Initiative. Our analysis detailed the various assumptions that were used to determine the total size of the service area population, the amount of leakage to existing retailers in other nearby jurisdictions, additional leakage to unlicensed delivery services, and a number of other considerations. We estimated total adjusted gross receipts of $21.5 million which would yield approximately $867,000 in annual cannabis tax revenue for the City of Duarte, assuming the
4.0% rate proposed by the Initiative. We noted that the City would also receive an additional $217,000 from the 1.0% Bradley-Burns portion of the local sales tax and an additional 0.75% from the Measure D transactions and use tax, for a total of a little over $1.2 million in annual revenue to the City.
The City has requested that we provide additional revenue projections assuming cannabis tax rates of 5.0%, 6.0% and 7.0%, and considering scenarios of 1, 2 or 3 retailers within the City.
In Figure 1, below, we have provided revenue estimates based upon the same assumptions used in our previous model. Applying a rate of 5.0% would yield a little over $1 million. A rate of 6.0% would yield $1.3 million, and applying a rate of 7.0% would yield a little over $1.5 million in annual cannabis tax revenue for the City of Duarte. 9 Figure 1:
Our model does not assume a particular number of retailers, as the number of retailers does not increase the number of cannabis consumers nor the amount of local spending on cannabis. Rather, our model is based on the size of the market and assumes an adequate number of retailers which are located so as to maximize market penetration. Above a certain level, more retailers would mean greater competition and thus lower average gross receipts for each business.
Research by HdL has found that storefront retailers average around $6.5 million in sales1, and that non-storefront delivery services average a much lower $1.3 million. Given our estimate of $21.5 million in annual gross receipts for the service area, we anticipate that the Duarte retail service area could accommodate perhaps 3 average sized storefront retailers. While the City could potentially support more retailers than this figure, exceeding this amount would likely not increase the total sales, meaning that some retailers would cannibalize sales from others. Effectively, all retailers would divide the same pie, so more retailers means a smaller slice for each.
3. Discussion of tax rates and potential revenues.
Most jurisdictions which generate revenue from cannabis businesses through a cannabis tax desire to maximize the amount of revenue they are able to bring in from that tax. However, setting tax rates that are too high can have the opposite effect. A city or county will generate zero revenue from businesses that choose not to locate there or that close their doors due to overly high and uncompetitive tax rates.
The degree to which tax rates affect cannabis retailers is subject to conjecture. As with transient occupancy taxes, it is unlikely that consumers investigate local tax rates before deciding where to make their purchases. Local cannabis retail taxes are assessed on the gross receipts of the retailer, not on the individual sale of each product, so the tax is incorporated into the purchase price, rather than being added on to it. The consumer never sees the tax itemized on their receipt.
HdL recommends that cannabis retail tax rates be set at a level that is generally consistent with those in the surrounding area so that neighboring jurisdictions cannot be played one 1 We note that the average of $6.5 million is based on a broad range from as little as $500,000 to over $36 million.
Estimate
Adjusted annual gross receipts (from pervious report) $21,682,752 Cannabis Business Tax: 4.0% (from previous report) $867,310 Cannabis Business Tax: 5.0% $1,084,138
Cannabis Business Tax: 6.0% $1,300,965
Cannabis Business Tax: 7.0% $1,517,793
Bradley-Burns local sales tax (1.0%) and Measure D (0.75%) $379,448 Revenue Projections Using a Range of Rates
10 against the other in a race to the bottom. Though we generally recommend retail taxes fall within a range of 4.0% to 6.0%, we have recommended higher or lower rates when the regional average falls outside of that range.
Figure 2, below, shows the current and maximum rates for a number of jurisdictions in the Duarte region. The range runs from 4.0% up to 10.0% for adult-use cannabis. The cities of Los Angeles, Long Beach and Baldwin Park all assess different rates for medicinal and adultuse sales. The average rate for adult-use cannabis is a little above 6.1%, or just slightly higher than the high end of HdL’s commonly recommended range.
Figure 2:
4. Considerations of different rates for adult use and medicinal use.
5. Considerations for medicinal cannabis vs. adult use.
A city or county may provide different tax rates for sales of medicinal cannabis and adult-use cannabis. A city or county may also choose to exempt medicinal sales from their cannabis tax completely. The proposed Initiative provided initial rates of 4.0% for adult-use sales and 0.5% for medicinal sales, but allowed that the City could adjust either rate up to the maximum of
4.0% without voter approval.
Medicinal cannabis generally accounts for less than 5% of retail cannabis sales in California2.
In places where only medicinal sales are allowed and adult-use sales are prohibited, this figure can be expected to be considerably higher. This figure may also be higher in places where there is a higher concentration of persons in the 18 to 20 age group, such as college towns, or places that attract younger people for outdoor recreation, music events or other activities.
While one may presume that this indicates people may feign a medical need for cannabis when a doctor’s recommendation is necessary to be able to purchase it, this may also reflect 2 MJ Biz Daily “State-by-State Cannabis Sales Estimates for 2023” Marijuana Business Factbook 2023 City Retail;
Maximum
Retail;
Current
# of
Retailers
Notes
Los Angeles County 6.0% 4.0% 0 County program still in development Los Angeles (City) 5.0% / 10.0% 5.0% / 10.0% 554 Different rates for Medicinal / Adult use Long Beach 8.0% / 12.0% 6.0% / 8.0% 38 Different rates for Medicinal / Adult use Pasadena 4.0% 4.0% 3
Baldwin Park 0.5% / 4.0% 0.5% / 4.0% 0 Different rates for Medicinal / Adult use Commerce 5.0% + $52K 5.0% + $52K 6 Development agreements instead of a tax Montebello Varies Varies 14 Development agreements; amount varies Maywood 10.0% 10.0% 6
El Monte 9.0% 5.0% 6
Pomona 6.0% 6.0% 4
West Hollywood 7.5% 7.5% 15
Duarte Initiative (proposed) 4.0% 0.5% / 4.0% 5 Proposed 0.5% initial rate for medicinal sales Regional Average (adult use) 7.0% 6.0% N/A
HdL Recommended 4.0% - 6.0% 4.0% - 6.0% N/A
Cannabis Retailers and Tax Rates in the Duarte Area
11 that many people with a legitimate doctor’s recommendation may not bother registering as a medicinal user when they can conveniently purchase cannabis in the adult use market.
Under California’s regulatory program, there is little benefit to maintaining a doctor’s recommendation3 for persons 21 years and older. Adult-use consumers are limited to purchasing no more than 1 ounce of cannabis per day, but a medicinal consumer may exceed this amount if so recommended by their doctor. Medicinal sales to a person who presents a valid state-issued medical marijuana identification card (MMIC) at the time of purchase are also exempt from the state’s base sales tax of 7.25%, but as noted in our previous report, there are just over 3,000 such cards in all of California, making their impact insignificant. It is important to note that a person with a valid doctor’s recommendation is not required to also obtain the MMIC. The card is only necessary for the state sales tax exemption.
In Figure 3, below, we have estimated the amount of cannabis tax revenue that would be generated using rates of 4.0% for adult-use sales and 0.5% for medicinal sales, as proposed by the Initiative. This table uses the adjusted annual gross receipts as projected in Figure 5 from our previous report. Assuming that 95% of sales would be adult-use and only 5% would be medicinal, the City would take in around $38,000 less in cannabis tax revenue using these different rates. Revenue from regular sales tax and the City’s Measure D transactions and use tax would be unaffected4.
Figure 3:
Were the City to apply different rates for medicinal and adult-use cannabis, the City would have to determine whether the medicinal rates would apply to all medicinal sales or only to those very few where a customer presents a state issued MMIC. The different rates would have to be reflected in the City’s tax reporting forms and would be an additional consideration to be included in annual audits. However, the additional time or effort involved is generally 3 While cannabis may be recommended by a physician to provide relief for a number of conditions, cannabis is not recognized or regulated by the Food and Drug Administration as medicine and therefore cannot be formally prescribed. The terminology used in California and other states is therefore a doctor’s recommendation, and not a prescription.
4 It is conceivable that some very small portion of sales may be made to a person or persons presenting a valid medical marijuana identification card. Even assuming a generous total of $10,000 in such sales annually, the City would only lose $100 in Bradley-Burns local sales tax revenue.
Estimate
Adjusted annual gross receipts (from previous analysis) $21,682,752 Adult-use sales (assumes 95% of all sales) $20,598,614
Medicinal sales (assumes 5% of all sales) $1,084,138
Adul- use tax rate: 4.0% $823,945
Medicinal tax rate: 0.5% $5,421
Total cannabis tax revenue; different rates $829,365
Total cannabis tax revenue; single rate $867,310
Difference in cannabis tax revenue -$37,945
Revenue Projections for Medicinal and Adult-Use
12 inconsequential. Some businesses may object to the additional burden they would carry in having to assess, report and remit taxes based on different rates but, again, this is likely not significant.
6. More detailed discussion of cost recovery fees.
As discussed in our previous report, the City would be able to recover almost all of its costs for development, implementation, monitoring and enforcement of a cannabis tax and regulatory program through cost recovery fees. These fees would typically be divided into 2 categories: Initial permitting fees, which would be paid by the cannabis business applicants, and annual permit renewal fees, which would be paid by licensees.
The amount of the fees would be determined through a fee study, which would analyze the number of hours (or portion thereof) spent by each City staff position at their fully-loaded rate, along with consultant time and any other direct costs. These costs would be developed separately for both the initial permitting fees and the annual permit renewal fees.
The one part of a regulatory and tax program that cannot be recovered through fees would be the City’s costs associated with the development of a cannabis tax measure and placing it on the ballot. Those costs would have to be borne by the City, though the City could reimburse the General Fund for those costs through cannabis tax revenues, assuming the measure passed.
Our previous analysis provided examples of annual permit renewal fees from 27 jurisdictions around the state. These fees ranged from a low of $2,606 in Calaveras County to a high of $147,645 in San Jose. Excluding San Jose’s fees as an outlier, the average among these jurisdictions was a little over $16,000 per year. A fee in this range would likely include the permit renewal process itself, along with annual compliance inspections and revenue audits, to ensure that businesses are meeting all of their regulatory obligations and are reporting and remitting the proper amount of revenue to the City.
HdL is not able to provide a more detailed estimate of the cost recovery fees that would be appropriate for the City of Duarte as those fees would be determined based on the City’s regulatory program. However, the range of $16,000 to $20,000 is fairly common. Similarly, the amount of initial permitting fees would be dependent upon the City’s application process, which has yet to be defined, as well as the number of applicants.
7. Discussion of zoning considerations, setbacks and sensitive uses.
The Initiative would allow cannabis retailers by right in the Commercial General (CG) and Commercial Freeway zones along with certain specific zone areas, subject only to a ministerial approval. In our analysis, we found that a number of these zones were problematic for a variety of reasons. The language for most of these zones did not allow liquor stores (as our closest proxy for cannabis stores) by right, but rather required that they obtain a conditional use permit (CUP) or a minor use permit (MUP). Some of the specific zones did not allow alcohol sales at all, suggesting that cannabis stores would be inconsistent with the purposes of the zone. Still other specific zones appeared to be fully occupied with long-term tenants.
13 Assuming the City wished to maximize revenues from cannabis retailers, the best placement for retailers would be at each end of the 210 corridor, as anticipated by the Initiative. However, the City would likely want to conduct its own analysis of the locations that would be the best fit for the City.
Our analysis of the Initiative also noted a number of potential sensitive uses that could limit the location of cannabis retailers within some zones. Should the City wish to develop a cannabis regulatory program, the City would have to consider the list of sensitive uses and the required setback distance. As noted previously, the City would have the discretion to increase the list of defined sensitive uses and/or to increase or decrease the setback distance.
It is fairly common for cities or counties to add greater detail to the list of sensitive uses defined by the state and to include additional sensitive uses such as parks, residential neighborhoods or houses of worship.
Defining too many sensitive uses, and/or providing too large of a setback from those uses, could potentially leave the City with too few allowable or available locations. In working with other cities, we have seen cases where a too-restrictive approach to zoning, sensitive uses and setbacks effectively prohibited the establishment of cannabis businesses because there were no available locations, or none that were attractive to businesses. We have also seen how too few allowable locations can lead to property owners greatly increasing the lease rates for those parcels, to the point that businesses choose not to locate there.
8. Considerations for walk-in sales vs. sales by delivery.
Sales tax is collected at the point of purchase, which allows storefront cannabis retailers to capture sales tax dollars from outside of their host city or county. For purchases made via delivery however, the point of purchase is defined differently. For purposes of the base 1.00% Bradley-Burns local tax, the point of purchase would be determined by the principal place of negotiation which, in the case of online or phone purchases, would generally be the licensee’s premises. For any additional transactions taxes imposed by a city or county, including a cannabis retail tax, the place of purchase would be determined by the location where the goods trade hands.
Thus, while storefront retailers may capture local sales tax and cannabis tax dollars from customers who reside outside of the host jurisdiction, delivery services may not, subject to apportionment law. For this reason, revenue projections for storefront retailers would include walk-in customers from other nearby communities as well as tourists, visitors and throughtraffic, while revenue projections for cannabis delivery services are limited to the resident population of the host jurisdiction.
Cannabis sales made by delivery to addresses outside of Duarte would still collect the base
1.00% local tax, but may not be subject to any City cannabis tax or the 0.75% transactions and use tax (Measure D). If a cannabis retailer in Duarte delivers to a destination in a nearby city that has its own tax on retail cannabis sales, then the destination city may assert its right to collect its own cannabis tax on the sale. In such a case, the cannabis tax imposed by the destination city would take precedence over the cannabis tax imposed by the host city (Duarte). However, if the destination city does not have its own cannabis tax, then the City of Duarte may exercise its authority to collect its cannabis tax on the sale. 14 For the City of Duarte to be able to capture cannabis tax from deliveries made into the City from other jurisdictions, the City would have to require all such delivery services to obtain a permit from the City and to pay all applicable City taxes. Determining correct apportionment between the two cities may not be possible without conducting annual revenue audits of each cannabis business, as the business’s Point of Sale (POS) system may not be set up to correctly track and report each local tax imposed by each jurisdiction.
9. The City’s ability to limit the products that may be sold, specifically live plants.
State law allows local jurisdictions to permit medicinal cannabis retailers, adult-use cannabis retailers, or retailers that sell both medicinal and adult-use cannabis products. A city or county may also choose to allow storefront retailers, or non-storefront delivery-only retailers, or both.
State law allows storefront retailers to also conduct sale via delivery, but the local jurisdiction may choose to disallow such deliveries.
State law limits cannabis retailers to selling only cannabis and cannabis products, as well as cannabis accessories and branded merchandise such as hats, t-shirts or hoodies. Retailers may also sell live, immature cannabis plants and cannabis seeds, provided the plants are shorter and narrower than 18 inches and are not flowering, and that all plants or seeds originated from a licensed cannabis nursery. A licensed microbusiness may carry and sell live plants or seeds from its own operation, if its license includes cultivation. Retailers are prohibited from applying any pesticides to live plants.
A city or county may condition the license for retailers to disallow the sale of live plants or to limit or prohibit the sale of other types of products. However, a city or county cannot allow the sale of any additional types of products beyond those that are expressly permitted by state law and DCC regulations.
10. Discussion of the City’s ability to prohibit or allow on-site consumption.
Cannabis consumption lounges as either a use or a permit type are not directly addressed by the regulations promulgated by the Department of Cannabis Control (DCC). Instead, the authority and responsibility for allowing, permitting and regulating on-site consumption is left to the local jurisdiction. On-site consumption of cannabis or cannabis products is prohibited on retail premises unless specifically allowed by the local jurisdiction.
The DCC’s regulations state that a local jurisdiction may allow for the smoking, vaping and ingesting of cannabis or cannabis products on the premises of a retailer or retailing microbusiness5. The regulations limit access to persons 21 years of age or older, require that cannabis consumption not be visible from any public place or non-age-restricted area, prohibit sale or consumption of alcohol or tobacco on the licensed premises, and prohibit the smoking of cannabis goods in any areas where smoking is otherwise prohibited by law.
In addition to the DCC’s regulations, cannabis consumption lounges must also comply with California’s smoke-free workplace law6 which prohibits the smoking of tobacco products in all 5 California Business and Professions Code S 26200 (g)
6 California Labor Code Division 5 Safety in Employment § 6404.5 15 enclosed places of employment in the state. Specifically, the law prohibits an employer or owner-operator of a business from permitting the smoking of tobacco products at a place of employment or in an enclosed space. The term “smoking” is defined broadly to include “inhaling, exhaling, burning, or carrying any lighted or heated cigar, cigarette, or pipe, or any other lighted or heated tobacco or plant product intended for inhalation, whether natural or synthetic, in any manner or in any form7.”
However, the smokefree workplace law exempts retail or wholesale tobacco shops and private smokers’ lounges. While it does not specifically reference cannabis, this exemption appears to be commonly interpreted as applying to cannabis consumption lounges. Cannabis consumption lounges would likely not be allowable without such an interpretation.
In almost all cases, the income stream for cannabis lounges appears to be limited almost solely to the related receipts from the retail space. The consumption lounge is typically an extension of the cannabis retail area and use of the lounge is limited to retail patrons, with some variation on how much the customer must spend to access the lounge. A few lounges charge a fee for reserving a booth or cabana, but this is not necessary for accessing the general lounge area.
A licensed retailer that operates a consumption area on the licensed premises may also sell prepackaged, non-cannabis-infused, non-alcoholic food and beverages if the applicable local jurisdiction allows such sales. Many lounges allow food service from a restaurant or food truck partner, but those sales are made through a separate business and not through the lounge or the retailer. A number of lounges also sell prepackaged food and beverages, but we anticipate that the sales of such products would likely not provide a significant income stream. From a business perspective, it appears that the lounge exists to drive retail sales rather than to generate its own direct revenue.
11. Discussion of the City’s ability to require design review or other site requirements to ensure the retailer maintains a quality appearance.
12. Discussion of the City’s ability to limit signage and billboard advertising.
The state of California grants local jurisdictions broad land use authority. In the case of cannabis retailers, cities and counties have the ability to be highly prescriptive about where those businesses can be located, how many, under what conditions, their hours of operation, signage and other factors. Cities and counties can also impose stringent design standards to ensure that cannabis retailers are attractive and a good visual fit for their location.
Many cities require that a cannabis business provide architectural design sketches as a part of the application process. Depending upon the specifics of the city’s application process, applicants may be scored or ranked in part on their design and appearance. While some retailers have been compared with Apple stores for their clean, modern appearance, others can appear more like a health food store or a small “Mom and Pop” liquor store. Cities may also impose conditions to ensure businesses maintain their outward appearance and take responsibility for sidewalks and landscaping.
7 California Business and Professions Code § 22950.5
16 Cities also have the ability to limit and regulate outside advertising, including store signs, window displays and sandwich boards. Cities can disallow use of digital signs, moving signs, signs erected on poles, or other specific types. They can limit the size, location, lighting, operating standards and other physical factors, and can also limit the content to the business’ name, logo, address, hours and contact information.
California law prohibits advertising cannabis on billboards that are located along highways that cross state borders or within 1,000 feet of a youth center, daycare, or school. In addition, cannabis ads can only be placed where at least 71.6% of the audience is estimated to be at least 21 years old. This includes ads on TV, cable, radio, print, and in digital communications.
The City of Los Angeles has further limited cannabis advertising on billboards through a billboard ordinance. The ordinance prohibits billboards from advertising cannabis if they are located within 700 feet of “any School, Public Park, Public Library, Alcoholism or Drug Abuse Recovery or Treatment Facility, Day Care Center, and Permanent Supportive Housing”, greatly expanding the list of sensitive uses outlined in state law. The ordinance is intended to reduce children’s exposure to cannabis advertising. It should be noted that such limitations become a limitation on the owner or operator of the billboard, rather than on the advertiser. It should also be noted that the City of Duarte would only be able to regulate billboards that are within the City’s jurisdiction, which may not include all billboards along state highways.
13. General figures on success rates for general taxes vs. special taxes.
All local taxes in California must be approved by the voters at a general election. Cities or counties have the option of placing a measure on the ballot as either a general tax or a special tax. Revenue from a general tax is placed in the city’s (or county’s) general fund and may be used for any legitimate governmental expenditures. Revenues from a special tax are dedicated for a special purpose, such as for law enforcement, roads and infrastructure, or special projects. A general tax may be approved by a simple majority of the voters (50% plus one). A special tax requires approval by 2/3 of the voters, or 66.67%.
HdL has tracked 172 local cannabis tax measures in California since 20168. 151 of these cannabis tax measures were approved by voters, for an approval rate of 87.3%. The vast majority of these measures were placed on the ballot as general taxes (162 tax measures) while a much smaller portion were placed on the ballot as special taxes (11 tax measures).
Of the 162 general taxes, 146 were approved by the voters, for an approval rate of 90.1%. Of the 11 special taxes, only 5 were approved, for an approval rate of 45.5%. These figures are shown below in Figure 4.
8 These figures were compiled through November of 2020 and do not include the results for 24 cannabis tax measures that appeared on the November 2022 ballot.
17 Figure 4:
14. Examples of City’s that have placed advisory measures on the ballot.
Due to the poor approval record for special taxes, some jurisdictions wanting to provide some assurance to voters as to how cannabis tax revenues would be used have chosen to place an accompanying advisory measure on the ballot. Advisory measures generally ask the voters if they would support the city (or county) using the revenues for a particular purpose, but the measure is only advisory and is not binding. So long as the tax was placed on the ballot as a general tax, the revenues remain available for any legitimate governmental purpose.
Such advisory measures are not common. In our research, we were only able to identify 13 advisory measures in California related to cannabis since 2016. Of these, only 2 measures regarded how cannabis tax revenues would be expended. The other 11 were asking voters whether they supported allowing cannabis businesses within the city.
Mendocino County’s Measure AJ (November 2016) asked voters whether they were in support of the County using revenue from the cannabis tax measure appearing on the same ballot (Measure AI) to fund enforcement of marijuana regulations, mental health services, county road repair, and fire and medical emergency services. The advisory measure was approved with 68.54% of the vote.
The City of Watsonville’s Measure N (November 2016) asked voters whether they were in support of the City using revenue from its accompanying cannabis tax measure (Measure L) to fund law enforcement, fire services, parks and community services, libraries, and nonprofit social and community services. The measure passed with 74.19% of the vote.
Tax Measure Type Number of
Measures
Number
Passing
Percentage
Passing
General Taxes (50% +1) 162 146 90.1%
Special Taxes (66.67%) 11 5 45.5%
Total 173 151 87.3%
Local Cannabis Tax Measures Since 2016
18