CITY OF PACIFICA
COUNCIL AGENDA SUMMARY REPORT
11/14/2022
1 SUBJECT:
Authorization to extend contract with HdL to provide cannabis inspections/audit services.
RECOMMENDED ACTION:
Move to authorize the City Manager to sign a contract extension with Hinderliter, de Llamas and Associates (HdL), and additional (2) years to provide cannabis inspection compliance and financial audit services.
STAFF CONTACT:
Bill Glasgo, Police Captain
(650) 738-7314
[email protected]
Yulia Carter, Assistant City Manager
(650) 738-7402
[email protected]
BACKGROUND/DISCUSSION:
In November 2017, Article 48 of Chapter 4 of Title 9 of the Pacifica Municipal Code was enacted regarding the regulation of cannabis business operations in the City of Pacifica. The complexity and uniqueness of cannabis business operations were understood by staff and City Council, with the understanding that inspections to assure compliance with state and local law, as well as fiscal audits were desired. The following municipal code section allows for these activities to occur:
Pacifica Municipal Code Sec. 9-4.4803. - Cannabis operations-General provisions. e) City access to and inspection of required records. A duly designated City Police Department or Finance Division representative may enter and shall be allowed to inspect the premises of every cannabis operation as well as the financial and membership records of the cannabis operation required by this article at any time during the cannabis operation's designated business hours, or at any appropriate time to ensure compliance and enforcement of the provisions of this article. It shall be unlawful for any owner, operator, or any other person having any responsibility over the operation of the cannabis operation to refuse to allow, impede, obstruct or interfere with an inspection of the cannabis operation or the required records thereof. A cannabis operation shall not conceal, destroy, deface, damage, or falsify any records, recordings or other documents required to be maintained by a cannabis operation under this article.
Also in November 2017, Chapter 18 of Title 3 of the Pacifica Municipal Code was enacted relating to cannabis business operation tax. The following section relates to the enforcement component of the cannabis business operation tax:
Sec. 3-18.13. - Enforcement
(b) The City Manager shall have the power to examine and audit all financial and operational records of cannabis operations as well as persons engaged in the retailer of a cannabis Pacifica City Council 2
November 14, 2022
operation, including both state and federal income tax returns, California sales tax returns, or other evidence documenting the gross receipts of a cannabis operation or persons engaged in the operation of a cannabis operation, for the purpose of ascertaining the amount of tax, if any, required to be paid by the provisions of this chapter, and for the purpose of verifying any statements or any item thereof when filed by any person pursuant to the provisions of this chapter. If such cannabis operation or person, after written demand by the City Manager, refuses to make available for audit, examination or verification such books, records, or equipment as the City Manager requests, the City Manager may, after full consideration of all information within the City Manager's knowledge concerning the cannabis operation and its business and activities of the person so refusing, make a determination of the tax due using the procedures set forth in this chapter. Said assessment shall include the reasonable costs and expenses borne by the City in conducting an audit and examination pursuant to this section.
Currently, the City contracts with HdL for services related to sales tax, business license and transient occupancy taxes. Hdl was also utilized as a consultant for the City during the creation of cannabis business ordinances.
The HdL cannabis services team has experience implementing medicinal and adult use cannabis regulatory programs including land-use regulations and permit processes, developing regulatory ordinances, staffing plans, cost recovery fees, business tax fees, and audit programs to ensure businesses are maintaining regulatory and tax compliance. Hdl has conducted over 10,000 cannabis compliance inspections and investigations in California, Colorado and Nevada.
Under the proposed amendment, HdL will conduct two on-site compliance inspections annually for each permitted cannabis business to determine compliance with State and/or local laws, including but not limited to PMC 4.4803 (e) and recognized best practices. In addition, HdL will conduct an annual financial audit of each permitted cannabis business as directed by the City Manager, or his designee, pursuant to PMC 3-18.13 (B) to verify the accuracy of the revenue reported to the City during the review period and will recommend a tax/fee assessment should the audit reveal any unreported revenue.
ALTERNATIVE ACTION:
There is no reasonable alternative to this action as the City staff has no capacity to provide these services in-house. Also, finding an alternative service provider will result in operational delays in conducting annual audits of the cannabis businesses that are currently underway.
RELATION TO CITY COUNCIL GOALS AND WORK PLAN:
Contracting for compliance inspection and fiscal audits of cannabis business operations supports the City Council goals of maintaining a Healthy and Compassionate Community and Fiscal Sustainability.
FISCAL IMPACT:
The maximum yearly expenditure under this contract is $84,000. For FY 2022-23, staff anticipates only $70,000 will be expended from this contract, given that only five of the City’s six cannabis business licensees are actually open. These contract expenditures will be offset by the $23,000 per business cannabis public safety licensing fees the City will receive during FY 2022-
23. ORIGINATED BY:
Pacifica City Council 3
November 14, 2022
Police
Assistant City Manager
Police
ATTACHMENT LIST:
Attachment A: Second Amendment to Agreement - Hinderliter, De Llamas and Associates (HdL) (PDF)