City of
Law and Legislation Committee
915 I Street Sacramento, CA
www.cityofsacramento.or
File ID: 2023-00751 9/5/2023
Discussion Item 1.
City Cannabis Business Operation Taxes Update and Options File ID: 2023-00751
Location: Citywide
Recommendation: 1) City Council and Law and Legislation Committee to receive a report on City cannabis business operations tax (CBOT); and 2) Pass a Law and Legislation Committee Motion to forward a policy proposal to implement a Phased Tax model for CORE businesses, which reduces CBOT to 0% for the first year, and annually, thereafter, increase the CBOT by 1% each year until it reaches 4% to Council for consideration of adoption.
Contact: Davina Smith, Cannabis Program Manager, 916-808-4772, [email protected]; Zarah Cruz, Program Specialist, 916-808-8925, [email protected] ; N han Pham, Administrative Analyst, 916-808-4775, [email protected], Office of Cannabis Management, Office of the City Manager
Presenter: Davina Smith, Cannabis Program Manager, 916-808-4772, [email protected], Office of Cannabis Management, Office of the City Manager Attachments:
1-Description/Analysis
2-Number and Name Additional Attachments
Description/Analysis
Issue Detail: As part of a series of workshops on the results of the comprehensive cannabis study conducted by EPS (the EPS Study), the CBOT rate in Sacramento was discussed by the Law & Legislation Committee (Committee) and then by the City Council. The EPS Study showed that Sacramento’s CBOT was consistent with other jurisdictions in the region, and there was legislation at both the federal and state levels that could impact cannabis business’ tax rates. For those reasons, staff recommended that no action be taken at that time to adjust the CBOT rate and the Committee and Council agreed.
While no action was taken on CBOT, industry representatives continued to request changes in the current CBOT rate. Cannabis businesses have cited the total tax rate, along with the inability to write off business expenses under the IRS 280E rule, the high expenses associated with access to banking and other business costs, and competition from the illicit market as the primary challenges facing the profitability of cannabis businesses.
File ID: 2023-00751 9/5/2023
Discussion Item 1.
On February 21, 2023, during a Committee meeting on cannabis-related policy development and programs, Committee members requested that the Office of Cannabis Management (OCM) conduct research and return with information on whether the City’s CBOT was still competitive in our region, along with options on modifying the current CBOT rate, and how any changes would impact the City’s General Fund, Measure L funding, and individual businesses.
Current Cannabis Taxes
Cannabis businesses in Sacramento currently pay four percent (4%) of their gross receipts in CBOT.
Gross receipts are self-reported by the businesses monthly and are due at the end of the following month, so March 2023 CBOT would have to be reported and paid by the end of April 2023. Transfers of cannabis from one licensed business to a separate licensed business are deemed taxable events and incur a 4% CBOT on the gross receipt at each transfer point in the supply chain. In addition, Cannabis retailers collect and remit a state excise tax of 15% and a sales tax of 8.75% (the sales tax breakdown can be found at Sales Tax Rate - City of Sacramento) <https://www.cityofsacramento.org/Finance/Budget/Sales-Tax-Rate> on each cannabis transaction.
Sacramento vs. Local Jurisdictions in the Region
Compared to other jurisdictions in the region, which includes the cities of Woodland, Stockton, Davis and the County of Yolo, the City of Sacramento offers the most competitive rate in CBOT among local jurisdictions. If the cannabis businesses in the City of Sacramento were to operate in these jurisdictions, they would face tax increases ranging from 15% to 141% compared to the CBOT in Sacramento. Cannabis businesses in West Sacramento pay a tax rate of 2.5% to 5%, which is comparable to Sacramento’s, but the rate is negotiated through a development agreement, as opposed to a voter-approved tax rate. The development agreement also establishes the terms and conditions for the development of the cannabis businesses .
Sacramento Woodland Stockton Yolo Davis
CBOT % 100% 194% 120% 115% 241%
Variance 0% 94% 20% 15% 141%
Sacramento vs. Local Region
File ID: 2023-00751 9/5/2023
Discussion Item 1.
Sacramento vs. Similar Sized Jurisdictions in the State Compared to other jurisdictions of similar size, the City of Sacramento's CBOT is in the median when placed side by side with San Francisco, Fresno, Long Beach, Oakland, and Vallejo. If cannabis businesses were to operate in the City of Long Beach and Vallejo, they would face a higher CBOT; however, operating in the City of Oakland and the City of San Francisco would result in a lower CBOT compared to Sacramento.
However, in the City of Oakland, businesses earning over $5 million in gross receipts are subject to a non-marginal tax rate of 5%. This can pose a disadvantage for businesses that exceed the $5 million threshold in gross receipts. On the other hand, Oakland provides tax rebates to businesses that hire a minimum number of local equity participants and support equity-focused incubators, and it offers a Graduated-Rate Tax Model for equity businesses.
Sacramento San Francisco Oak land Fresno Long Beach Vallejo CBOT % 100% 76% 99% 78% 143% 178%
Variance 0% -24% -1% -22% 43% 78%
Sacramento vs. Similar Sized Jurisdictions
CBOT Alternative Scenarios
Below are four scenarios illustrating a reduction in the current CBOT rate of 4%. With each option, a calculation is shown to demonstrate the impact on the General Fund and Measure L, as well as to the "average” business.
1. Across-the-Board Reduction for All Cannabis Business Types This model demonstrates the impact of reducing the 4% CBOT to a 1% CBOT rate for all businesses, a 2% CBOT rate for all businesses, or a 3% CBOT rate for all businesses.
File ID: 2023-00751 9/5/2023
Discussion Item 1.
An across-the-board reduction would address industry concerns about tax rates while preserving the ease of understanding, calculation, and collection of CBOT.
The following analysis looks at what the projected CBOT revenue would be for both Measure L and the City’s General Fund if an across-the-board cannabis tax rate of 3%, 2%, or 1% were adopted.
Impact on Measure L and General Fund
Actual 3% 2% 1%
FY21/22 FY21/22 FY21/22 FY21/22
Measure L (40%) 9,511,251.02$ 7,133, 438.27$ 4,755,625.51$ 2,377,812.76$ General Fund (60%) 14,266,876.54$ 10,700, 157.40$ 7,133,438.27$ 3,566,719.13$ Total of General Fund
and Measure L (100%) 23,778,127.56$ 17,833,595.67$ 11,889, 063.78$ 5,944,531.89$ -25% -50% -75%
The 3% tax rate would result in a total reduction of 25% in collected CBOT, a 2% tax rate would result in a 50% total reduction in collected CBOT, and 1% tax rate would result in 75% less total CBOT being collected. Those reductions in CBOT would result in substantial reduction in both Measure L funding and the General Fund.
Impact on a Business based on Average Gross Receipts
To determine the impact of a rate reduction on an “average” business, the gross receipts of each business type have been divided by the number of those businesses to arrive at the average gross receipts and what a business would pay on the average gross receipts at the current 4% CBOT, 3%, 2%, and 1% CBOT rates.
Business Type FY21/22 CBOT @ 4% CBOT @ 3% CBOT @ 2% CBOT @ 1% Cultivation 5,837,639.39$ 4,378,229.54$ 2, 918,819.69$ 1,459,409.85$ Delivery 3,114,459.33$ 2,335,844.50$ 1,557,229.67$ 778,614.83$ Dispensary 8,768,096.53$ 6,576,072.40$ 4,384,048.26$ 2,192,024.13$ Distribution 4,757,106.44$ 3,567,829.83$ 2,378,553.22$ 1,189,276.61$ Manufacturing 744,448.07$
558,336.05$ 372,224.04$ 186,112.02$
Microbusiness 250,186.95$
187,640.22$ 125,093.48$ 62,546.74$
Testing Lab 306,190.85$
229,643.14$ 153,095.42$ 76,547.71$
Grand Total 23,778,127.56$ 17,833,595.67$ 11,889,063.78$ 5,944,531.89$ CBOT Loss -$
(5,944,531.89)$ (11,889,063.78)$ (17,833,595.67)$
File ID: 2023-00751 9/5/2023
Discussion Item 1.
Business Type No. of
Businesses
Total Gross
Receipts Avg Gross Receipts 4% 3% 2% 1%
Cultivation 77 145,940,984.66$ 1,895,337.46$ 75,813.50$ 56,860.12$ 37,906.75$ 18,953.37$ Delivery 64 77,861,483.33$ 1,216,585.68$ 48,663.43$ 36,497.57$ 24,331.71$ 12,165.86$ Dispensary 31 219,202,413.18$ 7,071,045.59$ 282,841.82$ 212,131.37$ 141,420.91$ 70,710.46$ Distribution 44 118,927,660.91$ 2,702,901.38$ 108,116.06$ 81,087.04$ 54,058.03$ 27,029.01$ Manufacturing 34 18,611,201.83$ 547,388.29$ 21,895.53$ 16,421.65$ 10,947.77$ 5,473.88$ Microbusiness 6 6,254,673.84$ 1,042,445.64$ 41,697.83$ 31,273.37$ 20,848.91$ 10,424.46$ Testing Lab 4 7,654,771.17$ 1,913,692.79$ 76,547.71$ 57,410.78$ 38,273.86$ 19,136.93$ Total 260 594,453,188.92$ 2,286,358.42$ 91,454.34$ 68,590.75$ 45,727.17$ 22,863.58$ CBOT for 1 business based on Avg Gross Receipts
This analysis demonstrates that any reduction ultimately befits the higher grossing business types, such as dispensaries, but is less impactful for lower grossing business types, such as manufacturing.
2. Phased In Tax Rates for CORE Businesses
This option would only apply to CORE-owned businesses and would result in all currently operating CORE businesses being reduced to 0% CBOT for the first year of implementation and then going up 1% each year until they reach 4% CBOT over five years.
As this tax model unfolds, its underlying impetus becomes increasingly apparent: to reduce barriers faced by CORE businesses while entering the regulated market. It is undeniable that the 30 CORE businesses holding cannabis business operating permits (BOPs) lacked the initial resources and generational wealth often accessible to their non-CORE counterparts. These resource disparities hindered their ability to sustain and expand business operations during their first few years.
Recognizing this disparity, CORE participants advocate for relief from the current 4% CBOT that applies to CORE businesses.
Impact of CORE CBOT at 4% vs Phased Tax Model
In the fiscal year 2021/22, the total cannabis BOT amounted to $23,777,893.97. Of this, CORE businesses contributed $641,320.03, which equates to 2.6% of the total BOT. Had the CORE CBOT component been omitted from the calculations, it would have led to a reduction of $384,792.01 in the General Fund and a decrease of $256,528.12 in Measure L funds, assuming Measure L had been enacted during that period. Given the small contribution of CBOT from CORE businesses, the proposed tax model's impact on the General Fund and Measure L is expected to be minimal.
Should this model be adopted, each subsequent CORE business will follow a personalized timeline for transitioning from 0% to 4% tax rates. Considering there are 30 permitted CORE businesses and 230 non-CORE businesses with permits, the proposed adjustments to CORE tax rates are unlikely to significantly impact the General Fund and Measure L funding.
The amount of CBOT from CORE businesses over the FY18/23 period was only 2.41% of all the CBOT remitted to the City. If the Phased Tax Rate model had been used for the CORE CBOT, there would only have been a reduction in CORE CBOT of 0.77% or $753k over that five-year period.
File ID: 2023-00751 9/5/2023
Discussion Item 1.
Impact on One Business based on Average Gross Receipts - Phased Tax Rates for CORE Businesses
The following table provides an overview of the effects of the Phased Tax Rate model on CORE businesses. The analysis takes into consideration various business types, presenting the impact over a five-year period. It's important to note that the dataset encompasses 93 CORE businesses spanning FY18/23, with some businesses being redundantly counted. The findings highlight a notable reduction in tax payments for an average CORE business. Over the course of five years, the tax payments for the average CORE business are projected to decrease from approximately $25,000 to $17,000, based on the total number of CORE businesses during FY18/23 and the corresponding CBOT for that period.
Business Type
FY18/23
No. of
CORE
Businesses
FY18/23 CBOT FY18/23 CORE
Phased Model
FY18/23
CBOT for 1
CORE
business
based on 4%
FY18/23 CBOT
for 1 CORE
bussiness
based on CORE
Phased Model
Cultivation 28 919,522.98$ 688,770.27$ 32, 840.11 $ 24,598.94$ Delivery 26 996,166.27$ 657,009.02$ 38,314.09 $ 25,269.58$ Dispensary 5 276,170.03$ 194,734.76$ 55,234.01 $ 38,946.95$ Distribution 19 92,652.09$ 14,856.14$ 4,876.43$ 781.90$ Manufacturing 11 57,876.83$ 37,805.00$ 5,261.53$ 3,436.82$ Microbusiness 4 21,193.60$ 17,386.60$ 5,298.40$ 4,346.65$ Testing Lab 0 -$
-$
-$
-$
Grand Total 93 2,363,581.80$ 1,610,561.78$ 25,414.86 $ 17,317.87$
3. Graduated Tax Rate by Annual Volume of Business/Gross Receipts
1. Up to $100,000 = 0.5%
2. $100,000.01 - $250,000 = 1%
3. $250,000.01 - $500,000 = 2%
4. $500,000.01 - $1,000,000 = 3%
5. $1,000,000.01 and over = 4%
This model would result in greater tax relief for those businesses that have the least amount of gross receipts and would provide little or no benefit to those businesses with high gross receipts. Although gross receipts often correspond to how well the business is doing financially or the size of the businesses, it is not always an indicator of business size or financial health.
File ID: 2023-00751 9/5/2023
Discussion Item 1.
Impact of Graduated Tax Rate
This table shows the differences between the Graduated Tax rate and the current tax rate on the CBOT. The Graduated Tax rate would result in a loss of approximately $509,000 in the total amount of CBOT remitted to the City with a loss of $305,618 to the General Fund and $203,746 in Measure L funding.
Impact of Graduated Tax Rate on One Business based on Average Gross Receipts Tax Rate No. of
Businesses Gross Receipts CBOT @ Tiered
Rate CBOT @ 4% Rate Avg CBOT Saved
per Business
0.5% 80 1,511,276.79$ 7,556.38$ 60,451.07$ 661. 18$
1.0% 17 2,746,391.19$ 27,463.91$ 109,855.65$ 4,846.57$
2.0% 22 7,858,030.46$ 157,160.61$ 314,321.22$ 7,143.66$
3.0% 29 21,691,753.89$ 650,752.62$ 867,670.16$ 7,479.92$
4.0% 112 560,645,736.59$ 22,425,829.46$ 22,425,829.46$ 0.00$
260 594,453,188.92$ 23,268,762.98$ 23,778,127.56$
Gross Receipts Range
$1,000,000.01+
Total
$0.00 - $100,000.00
$100,000.01 - $250,000.00
$250,000.01 - $500,000.00
$500,000.01 - $1,000,000.00
The data presented in this table indicates that the implementation of the Graduated Tax Rate model would lead to tax savings for businesses that have reported gross receipts under $1 million. This subset constitutes 43% of the total number of businesses. Within this model, individual businesses might experience tax savings ranging up to $7,400, with a minimum saving of $661.
4. Different Tax Rates for Different Cannabis Business Types, up to 4%
1. Cultivation = 2%
2. Manufacturing = 2%
3. Distribution = 2%
4. Storefront dispensaries = 4%
5. Delivery/non-storefront dispensaries = 3%
6. Testing Labs = 2%
7. Microbusinesses = 2%
Gross Receipts Range Tax Rate No. of
Businesses
No. of CORE
Businesses Gross Receipts CBOT @ Tiered Rate CBOT @ 4% Rate VAR $0.00 - $100,000.00 0.5% 80 11 1,511,276.79$ 7,556.38$ 60, 451.07$ (52,894.69)$ $100,000.01 - $250,000.00 1% 17 3 2,746,391.19$ 27,463.91$ 109, 855.65$ (82,391.74)$ $250,000.01 - $500,000.00 2% 22 3 7,858,030.46$ 157,160.61$ 314,321.22$ ( 157,160.61)$ $500,000.01 - $1,000,000.00 3% 29 3 21,691,753.89$ 650,752.62$ 867,670.16$ (216,917.54)$ $1,000,000.01+ 4% 112 4 560,645,736.59$ 22,425,829.46$ 22,425,829.46$ -$
FY21/22 594,453,188.92 23,268,762.99 23,778,127.56 (509,364.57) Total Number of Businesses 260 24 Total % loss -2.14%
File ID: 2023-00751 9/5/2023
Discussion Item 1.
This model preserves the 4% tax rate for storefront dispensaries, reduces the tax rate for delivery companies to 3% and to 2% for all other businesses, which would lessen the impact to the total CBOT, while still resulting in a reduction in CBOT for a majority of cannabis businesses.
Impact of Different Tax Rates by Business Type
This tax model preserves storefront retailers tax rates’ and reduces all others is an attempt to provide tax relief to the most businesses, while limiting the impacts to the CBOT remitted to the City. The above table shows that the Different Tax Rate model would result in nearly a 30% reduction in CBOT.
Impact on General Fund and Measure L: Different Tax Rates for Different Cannabis Business Types The nearly 30% reduction, or $6.726 million, would result in a loss of just over $4 million to the General Fund and approximately $2.69 million to Measure L funding, using FY21/22 figures.
Business Type No. of
Businesses
Avg Gross
Receipts
Actual FY21/22
CBOT
Cultivation
2% Delivery 3% Dispensary
4%
Distribution
2%
Manufacturing
2% Micro 2% Lab 2% Avg Saved
Cultivation 77 1,895,337.46$ 75,813.50$ 37,906.75$ 37,906.75$ Delivery 64 1,216,585.68$ 48,663.43$ 36,497.57$ 12,165.86$ Dispensary 31 7,071,045.59$ 282,841.82$ 282,841.82$ -$ Distribution 44 2,702,901.38$ 108,116.06$ 54,058.03$ 54,058.03$ Manufacturing 34 547,388.29$ 21,895.53$ 10,947.77$ 10,947.77$ Microbusiness 6 1,042,445.64$ 41,697.83$ 20,848.91$ 20,848.91$ Testing Lab 4 1,913,692.79$ 76,547.71$ 38,273.86$ 38,273.86$ Impact on One Business based on Average Gross Receipts: Different Tax Rates for Different Cannabis Business Types
The data presented in this table indicates the outcome of adopting the Different Tax Rates model across business types. This would result in tax savings for majority of the business types, aside from dispensaries, which would continue to pay 4% in CBOT.
File ID: 2023-00751 9/5/2023
Discussion Item 1.
Summary
The City’s CBOT rate is less than other cannabis-regulating jurisdictions in our region. The CBOT rate is also comparable to similarly sized jurisdictions, particularly when the costs of doing business, limitations on permit availability, and similar factors are taken into consideration. Given the City’s current competitive tax rate and the potential consequences of reductions of the CBOT to the General Fund and Measure L, staff is not recommending major modifications to the CBOT tax rates.
However, the Phased Tax model would provide tax relief to CORE businesses during their first 4 years of operation. This model would meet the City’s policy objectives of helping those most impacted by disparate policing of cannabis succeed in the regulated cannabis industry and would result in less than 1% impact on the City’s General Fund and Measure L funding. As such, staff is recommending that the Committee pass a motion forwarding the implementation of a Phased Tax model for CORE businesses to the Budget and Audit Committee for consideration.
Policy Considerations: While all the options provided above involve a change in the City’s tax rate, voter approval is not required and can be implemented through an ordinance to be adopted by Council.
Economic Impacts: None at this time. If this Committee forwards the proposed policy to make CORE a permanent program and/or to provide tax relief as a CORE Program benefit to Council, staff will work with the appropriate City Departments to provide an analysis of the potential economic impacts.
Environmental Considerations: This action is exempt from the California Environmental Quality Act (CEQA) because it is the adoption of an ordinance, rule, or regulation that requires discretionary review, including environmental review, and approval of permits, licenses, or other authorizations to engage in commercial cannabis activity (CEQA Guidelines sections 15061(B)(1)) and because it does not have the potential for causing a significant effect on the environment (CEQA Guidelines section15061(b)(3)).
Sustainability: Not applicable.
Commission/Committee Action: On February 21, 2023, during a Committee meeting on cannabis- related policy development and programs, Committee members requested OCM conduct research and return with information on whether the City’s CBOT remains competitive in our region, along with scenarios modifying the current CBOT rate, and how any changes would impact the City’s General Fund, Measure L funding, and individual businesses.
On August 22, 2023, after receiving a staff report and public comment, the Racial Equity Committee voted to advance to the City Council a policy proposal to add cannabis business operations tax relief as a CORE Program benefit.
Rationale for Recommendation: CBOT collected from the cannabis industry has been a stable source of revenue for the General Fund. The services funded by cannabis taxes further expanded in File ID: 2023-00751 9/5/2023
Discussion Item 1.
2022 to include youth programming with the passage of Measure L. While cannabis businesses have asked for tax relief, the City’s CBOT rate is less than other cannabis-regulating jurisdictions in our region and comparable to similarly sized jurisdictions. Given the City’s modest tax rate compared to the State’s excise tax and the impact of IRS requirements, it appears that pursuit of tax relief at the state and federal levels remains a viable option for the cannabis industry.
The City is committed to reducing barriers and providing help to those most impacted by disparate policing of cannabis to succeed in the regulated cannabis industry. Given the minimal financial impact to the City and the potential expansive benefits to CORE businesses as they’re working to establish a strong financial framework, staff is recommending the Committee pass a motion forwarding the Phased Tax option to the Budget and Audit Committee for consideration.
Financial Considerations: A Phased Tax model for CORE businesses would result in less than 1% impact on the City’s General Fund and Measure L funding.
Local Business Enterprise (LBE): Not applicable.