City of Salinas – Cannabis
Taxation Recommendation
Report
KYLE TANKARD, SENIOR CONSULTANT
SCI CONSULTING GROUP
AUGUST 23, 2022
Overview of Salinas Cannabis Industry
• The City issues two types of commercial cannabis permits: Commercial Cannabis Permits (CCP) and Administrative Permits (AP)
oCPPs are applicable to Cultivation, Delivery, Dispensary, Distribution, and Manufacturing (Capped at 23 permits)
o APs applicable to Testing Laboratories, Small Distribution (premise under 500 sqft), Research and Development Facilities, and Nurseries
Commercial Cannabis Permit Status
• The City has issued 21 permits out of a total of 23
o11 operational businesses
o10 businesses working on land use entitlements or building permits Business Type Permit Quota Active Permits Operational Businesses Cultivation 5 3 1
Delivery 3 3 3
Dispensary 5 5 3
Distribution 5 5 2
Manufacturing 5 5 2
Total 23 21 11
Cannabis Business Tax (SMC Chapter 19A)
• Cannabis Business Tax effective January 1, 2017
o Tax imposed on Retail (Dispensary & Delivery), Cultivation (including Nurseries), and Manufacturing o Council voted to forgo scheduled tax increase under SMC Sec. 19A.10.070 (December 2019) Business Type Current Rate Maximum Rate
Retail (Dispensary) 5% of Gross Receipts 10% of Gross Receipts Retail Delivery 5% of Gross Receipts 10% of Gross Receipts Manufacturing 5% of Gross Receipts 10% of Gross Receipts Cultivation $15/sf of Canopy $25/sf of Canopy
Nursery $2/sf of Canopy $5/sf of Canopy
Distribution No Tax No Tax
Testing No Tax No Tax
Tax Revenue (2017-2022)
• $7.5 million in tax revenue since 2017
oTax revenues have increased each year, but are beginning to flatten out oTax revenues are on a projection to decrease in 2022
Year Q1 Q2 Q3 Q4 TOTAL + / -
2017 $374,369
2018 $120,737 $143,839 $328,894 $276,979 $870,449 133%
2019 $343,833 $432,000 $409,701 $442,779 $1,628,314 87% 2020 $470,916 $503,765 $357,502 $509,849 $1,842,033 13% 2021 $536,363 $525,501 $514,153 $449,941 $2,025,958 10% 2022 $448,552 $362,404 $810,956
Q = Quarter (three month period)
Tax Revenue (2022)
• Through two quarters in 2022:
o Tax revenues are down 16% compared to the previous two quarters o Four businesses late on 2022 Q2 tax payments
California Cannabis Industry
• Significant growth in the regulated cannabis industry since 2016, but has fallen short of initial projections
o State tax revenues are down in 2022
• Key industry challenges:
o High fees, taxes, and regulatory burdens
o Robust illegal market is undercutting regulated market sales o Oversupply of cultivated cannabis and the lack of retail locations statewide has resulted in the collapse of wholesale cannabis prices
Changes to State Tax Structure
• 15% excise tax on retail cannabis purchases
• Cultivation tax of $10.08 per ounce
• Assembly Bill 195 (June 2022):
o Effective July 1, 2022, the cultivation tax has been eliminated o Excise tax maintained at 15% for next three years
o Excise tax can be increased up to 19% in 2025
Local Tax Structure
• High local tax rates common during early years of legalization and regulation o Acceptable amongst cannabis industry when profit margins were high • Local tax rates trending downward as:
o Local governments recognize the need for tax relief
o Matching of tax rates by neighboring jurisdictions
Local Cannabis Tax Rates
Cultivation Nursery Manufacture Distributor Testing Retail Hollister $7/sf 5% 5% 5% 5% 5%
Marina 5% 5% 5% 5% 5% 5%
Merced 2.5% 2.5% $2.50/sf 2% $0/sf 7%
Monterey1 2% 2% 2% 2% 1% 4%
Pacific
Grove1 NA NA NA NA NA 6%
Salinas $15/sf $2/sf 5% NA NA 5%
Santa Cruz 7% 7% 7% 2% 1% 7%
Seaside 2% 2% 2% 2% 2% 6%
Watsonville $10/sf $1/sf 2.5% NA NA 5%
1 Measures on November 2022 General Election
Taxation Recommendations
• Maintain the existing gross receipts tax rate of 5% on retail businesses • Reduce the existing tax to a rate between 2.5% and 3% on manufacturing businesses • Reduce the existing tax to a rate between $7 to $10 per square foot of canopy on cultivation businesses.
Permitting Recommendations
• Maintain the current limit on the number of retail businesses (3 delivery and 5 storefront)
• Award the final cultivation permit
• Continue to support active permittees working towards becoming operational businesses
Economic Development Recommendations
• Take steps to foster and support growth in the manufacturing business sector, which has the greatest growth potential
• Continue to carefully facilitate the transition from unregulated cannabis markets to regulated cannabis businesses
• Work on expanding cannabis opportunities to minority owned, local businesses. • Expand on Salinas’ unique history, character, and culture to optimize all facets of the cannabis industry.