Cannabis Cultivation Tax and Retail Tax
Feasibility Studies
Economic Development and Finance Committee - August 18, 2022 On March 15, 2022, the City Council directed City staff to investigate the feasibility of repealing the tax for cannabis cultivation (medical and adult-use) in Long Beach, including fiscal and workforce impacts.
On May 10, 2022, the City Council directed City staff to prepare a report exploring the feasibility of reducing the City's adult-use cannabis retail tax rate to align with the medical cannabis retail tax rate.
Background
Cannabis Cultivation Tax and Retail Tax Feasibility Studies 2 November 8, 2016
• Measure MM – Medical Cannabis Ordinance established by way of a voter-initiated ballot measure and adopted into the Long Beach Municipal Code (LBMC) as Chapter 5.90 – Medical Marijuana Businesses • Measure MA – Business License Tax Ordinance for cannabis businesses was established by way of Measure MA and adopted into the LBMC under Section 3.80.261 – Marijuana Businesses
July 10, 2018
• Adult-Use Cannabis Ordinance was adopted by the City Council into the LBMC as Chapter 5.92 – Adult-Use Cannabis Businesses and Activities
Background
Cannabis Cultivation Tax and Retail Tax Feasibility Studies 3 Type of Business Tax Rate
Medical/Adult-Use Cannabis Cultivation $13.41 per square foot under cultivation
Medical/Adult-Use Cannabis Manufacturing 1% of gross receipts Medical/Adult-Use Cannabis Distribution 1% of gross receipts Medical/Adult-Use Cannabis Lab Testing 1% of gross receipts *Adult-Use Cannabis Retail Storefront (Dispensary and/or Delivery) 8% of gross receipts *Medical Cannabis Retail Storefront (Dispensary and/or Delivery) 6% of gross receipts All cannabis businesses are required to pay a minimum tax of $1,000 annually.
Current Tax Structure in Long Beach
Cannabis Cultivation Tax and Retail Tax Feasibility Studies * Adult-Use/Medical Retail Storefront Business have the option to conduct delivery services 4 Cannabis Excise Tax
Effective Date Excise Tax Rate of
Average Market Price
Mark-Up Rate for
Arm’s Length Transactions
July 1, 2022 – Present 15% 75%
January 1, 2020 – June 30, 2022 15% 80%
J a n u a r y1 ,2 0 1 8–D e c e m b e r3 1 ,2 0 1 9 1 5 % 6 0 % Cultivation Tax
Effective Date Cannabis Flower Cannabis Leaves Fresh Cannabis Plants July 1, 2022 – Present Set to Zero Set to Zero Set to Zero January 1, 2022 – June 30, 2022 $10.08 per dry-weight
ounce $3.00 per dry-weight ounce $1.41 per ounce
J a n u a r y1 ,2 0 2 0–D e c e m b e r3 1 ,2 0 2 1 $ 9 . 6 5 p e r d r y - w e i g h t ounce $2.87 per dry-weight ounce $1.35 per ounce J a n u a r y1 ,2 0 1 8–D e c e m b e r3 1 ,2 0 1 9 $ 9 . 2 5 p e r d r y - w e i g h t ounce $2.75 per dry-weight ounce $1.29 per ounce State Tax Structure
Cannabis Cultivation Tax and Retail Tax Feasibility Studies California Department of Tax and Fee Administration (CDTFA) 5 Tax Structures in Other Cities
Cannabis Cultivation Tax and Retail Tax Feasibility Studies Comparable Large Cities
City Cultivation Tax Rate Adult-Use Retail Tax Rate
Long Beach
(For reference) $13.41 per sq. ft. of canopy space 8% of gross receipts Fresno $6 per sq. ft. of canopy space 4% of gross receipts Los Angeles 2% of gross receipts 10% of gross receipts
San Diego 2% of monthly gross receipts 8% of monthly gross receipts San Jose 4% of gross receipts 10% of gross receipts
San Francisco • $1M to $1.5M in gross receipts = 1%
• Over $1.5M = 1.5%
• $1M to $1.5M in gross receipts = 2.5%
• Over $1.5M = 5%
6 Tax Structures in Other Cities (cont’d)
Cannabis Cultivation Tax and Retail Tax Feasibility Studies Comparable Large Cities
City Adult-Use Retail Tax Rate
Oakland
General (Non-Equity)
Based on gross receipts:
$0-$750k = 0.12%
$750k - $1.5M = 4.00%
$1.5M - $5M = 5.00%
Over $5M = 5.00%
(non-marginal)
Equity
Based on gross receipts:
$0 - $1.5M = 0.12%
$1.5M - $5M = 5.00%
Over $5M = 5.00%
(non-marginal)
7 Tax Structures in Other Cities (cont’d)
Cannabis Cultivation Tax and Retail Tax Feasibility Studies Comparable Large Cities
City Cultivation Tax Rate
Oakland Outdoor
Cultivation
Equity
Based on gross receipts:
$0 - $1.5M = 0.12%
$1.5M - $5M = 4.50%
Over $5M = 5.00%
Indoor
Cultivation
Equity
Based on gross receipts:
$0 - $1.5M = 0.12%
$1.5M - $5M = 5.00%
Over $5M = 5.00%
(non-marginal)
General (Non-Equity)
Based on gross receipts:
$0-$750k = 0.12%
$750k - $1.5M = 3.50%
$1.5M - $5M = 4.50%
Over $5M = 5.00%
General (Non-Equity)
Based on gross receipts:
$0-$750k = 0.12%
$750k - $1.5M = 4.00%
$1.5M - $5M = 5.00%
Over $5M = 5.00%
(non-marginal)
8 Tax Structures in Other Cities (cont’d)
Cannabis Cultivation Tax and Retail Tax Feasibility Studies Neighboring Jurisdictions
City/County Cultivation Tax Rate Adult-Use Retail Tax Rate Long Beach
(For reference) $13.41 per sq. ft. of canopy space 8% of gross receipts Bellflower Cultivation: $15.00 per sq. ft. of canopy space 5% of gross receiptsNursery: $2.00 per sq. ft. of canopy space Costa Mesa N/A 7% of gross receipts
Los Angeles 2% of gross receipts 10% of gross receipts
Maywood 6% of gross receipts 10% of gross receipts
Santa Ana 6% of gross receipts or $10 per square foot
(annually), whichever is higher.
8% of gross receipts or $25 per
square foot (annually), whichever
is higher.
Stanton 8% of gross receipts or $25 per square foot
(annually), whichever is higher. 6% of gross receipts
9 Tax Structures in Other Cities (cont’d)
Cannabis Cultivation Tax and Retail Tax Feasibility Studies Neighboring Jurisdictions
City/County Cultivation Tax Rate Adult-Use Retail Tax Rate Unincorporated
Areas of Los
Angeles County
Proposed as November 2022 Ballot Measure
Starting July 2023:
• $7/sf of canopy (indoor artificial light)
• $4/sf of canopy (mixed light)
• $4/sf of canopy (outdoor)
• $2/sf of canopy space (nursery)
Proposed as November 2022 Ballot Measure
Starting July 2023:
• 4% of gross of receipts
Proposed as November 2022 Ballot Measure
Starting July 2026:
• $10/sf of canopy (indoor artificial light)
• $7/sf of canopy (mixed light)
• $4/sf of canopy (outdoor)
• $2/sf of canopy space (nursery)
Proposed as November 2022 Ballot Measure
Starting July 2026:
• 6% of gross of receipts
10 Roundtable Discussions
Cannabis Cultivation Tax and Retail Tax Feasibility Studies Cannabis businesses were asked if they believed
an elimination and/or reduction of the cultivation
and adult-use retail tax rates would:
• Encourage businesses operating in the illicit market to join the legal market
• Increase the number of legal cannabis businesses in Long Beach • Impact local cannabis industry, their business, and/or vertically integrated businesses
• Impact pricing of cannabis goods, consumer habits, sales at retail, and/or tax revenue
11 Feedback from Cultivators & Retailers
Cannabis Cultivation Tax and Retail Tax Feasibility Studies Common themes:
• Little to no impact on the illicit market
• Help reduce debt ceiling & provide financial stability • Minimal or no immediate impact on businesses’ workforce • Elimination of cultivation tax = greatest impact on price of cannabis goods and consumer habits
• Competitive tax rates with neighboring cities = best way to encourage consumers to participate in the legal market
• Lesser tax burden upfront may reduce start-up challenges for equity businesses, especially the eight new dispensaries 12 Measure MA Revenues
Cannabis Cultivation Tax and Retail Tax Feasibility Studies FY 18
Actuals
FY 19
Actuals
FY 20
Actuals
FY 21
Actuals
FY 22
Estimate
FY 23
Proposed
$1,321,479 $4,684,986 $9,979,940 $12,099,297 12,000,000 12,000,000 Summary of Measure MA Revenues FY 18 – FY 23
In FY 21, out of the 12 license categories, the adult-use cannabis retail storefront taxes generated the highest amount at $9,764,915 with medical cannabis cultivation taxes following at $1,072,214.
13 Impact on Cultivation Tax Revenues
Cannabis Cultivation Tax and Retail Tax Feasibility Studies Rate
per Square Foot
Rate Reduction
Scenario
Annual Revenue
Reduction
$13.41
(current effective rate) $-- $--
$12.66 $0.75 $62,103
$12.41 $1.00 $82,804
$11.41 $2.00 $165,608
$10.41 $3.00 $248,412
$9.41 $4.00 $331,216
14 The estimated revenue impact of repealing the cannabis cultivation tax for both medical and adult-use on FY 23 revenues is approximately $1.1 million in reduced revenue, or about 9% of total Measure MA revenue received by the City.
Impact on Retail Tax Revenues
Cannabis Cultivation Tax and Retail Tax Feasibility Studies Tax Rate Adult-Use Cannabis Retail
Tax Revenue Loss
Medical Cannabis Retail
Tax Revenue Loss
Total Adult-Use and Medical
Cannabis Retail Tax Revenue Loss
8% $ --
(current effective rate) N/A $ --
7% $1,220,614 N/A $1,220,614
6% $2,441,229 $ --
(current effective rate) $2,441,229
5% $3,661,843 $68,655 $3,730,498
4% $4,882,458 $137,309 $5,019,767
3% $6,103,072 $205,964 $6,309,036
2% $7,323,687 $274,619 $7,598,306
1% $8,544,301 $343,273 $8,887,574
15 Scenarios
Cannabis Cultivation Tax and Retail Tax Feasibility Studies Scenario Fiscal Impact
Scenario 1:
Elimination of cultivation tax a nd 1% reduction of adult-use retail tax rate
Total revenue loss of $2.3 million
Scenario 2:
Elimination of both the cultivation tax and adult-use retail tax Total revenue loss of $11 million
Scenario 3:
Deferral of all cannabis taxes for 1 year
Minimal fiscal impact; temporary relief
for businesses but deferred taxes + new
year’s taxes will be due at the same
time.
Scenario 4:
Annually adjust taxes such that revenues do not exceed an established baseline to maintain levels of service
No revenue loss assuming baseline is
set to $12 million or more
Scenario 5:
Reduce adult-use and medical cultivation and retail taxes for equity businesses
No revenue loss from the current
budget
Any reduction to Measure MA revenues will have an impact on General Fund funded programs and services in the FY 23
Proposed Budget.
This includes impacts to following programs that are
funded with Measure MA funding:
Potential Impact to Services
Cannabis Cultivation Tax and Retail Tax Feasibility Studies 17 Programs Funding
Cannabis Regulatory & Enforcement Program $2,222,052
Racial Equity Program Support $2,634,989
Public Health & Safety $7,022,959
Budget Stabilization Fund $120,000
Total $12,000,000
Potential Impact to Services (cont’d)
Cannabis Cultivation Tax and Retail Tax Feasibility Studies 18 Enhancements in Proposed FY 23 Budget Funding
Add a Restorative Engagement to Achieve Collective Health (REACH) team in the General Fund in the Health and Human Services Department to expand services for people experiencing homelessness (PEH). $471,721 Add two Counselor II positions in the General Fund in the Health and Human Services Department to provide support from a holistic perspective for PEH requesting help. $246,640 Structurally add funding in the General Fund in the Health and Human Services Department for the Proactive Homeless Initiative to support the activities of the City’s Interdepartmental Work Group, including rapid response, clean-ups, and outreach.
$255,000
Decrease the Towing Fund Transfer to the General Fund from $1 million to $750,000 to provide support for direct Homelessness Waivers and other unreimbursed costs. $250,000 Add structural support in the General Fund in the City Manager’s Office to increase interpretation and translation services. $20,000
Structurally add a Fire Captain (partially offset with other revenues) in the General Fund in the Fire Department to continue to lead Fire’s Diversity Recruitment Program. $163,248 Upgrade 0.5 FTE Community Program Specialist III to 1.0 FTE Public Health Professional III in the General Fund in the Health Department to lead the Office of Veteran’s Affairs. $70,938 Add six Maintenance Assistant III positions, one Building Services Supervisor position, and supplies/equipment budget in the General Fund in the Parks, Recreation, and Marine Department to staff the Park Safety Ambassador Program. $575,234 Add four Maintenance Assistant IIs in the General Fund in the Parks, Recreation ,and Marine Department to coordinate with the Park Safety Ambassadors to provide service requests for repairs, power washing, graffiti abatement, and miscellaneous maintenance.
$289,090
Total $2,341,871
Reduce the adult-use and medical cannabis cultivation
and retail taxes for equity businesses, which would
promote equity goals while not resulting in revenue loss from the current budget.
This recommendation utilizes an equity lens to support the City’s goal of creating equitable opportunities in the local cannabis industry in Long Beach.
Recommendation
Cannabis Cultivation Tax and Retail Tax Feasibility Studies 19 Thank you
Cannabis Cultivation Tax and Retail Tax Feasibility Studies Katy Nomura
Deputy City Manager
Valencia Mota
Cannabis Oversight Manager
20