CITY OF SALINAS
Commercial Cannabis Taxation
Recommendation Report
August 2022
City of Salinas
Cannabis Taxation Reccomendation Report
August 2022
Page ii
Table of Contents
Introduction ................................................................................................................. 1 Background ................................................................................................................................ 1 Summary and Recommendations ............................................................................................. 1 Overview of the Salinas Cannabis Market .................................................................... 4 Commercial Cannabis Business Regulation and Permitting ...................................................... 4 Cannabis Tax Revenue ............................................................................................................... 6 Analysis of Current State and Local Tax Structure ........................................................ 9 State Cannabis Taxes ................................................................................................................. 9 Local Cannabis Tax Rate .......................................................................................................... 10
City of Salinas
Cannabis Taxation Reccomendation Report
August 2022
Page iii
List of Tables
Table 1 – Commercial Cannabis Permit (CCP) Quotas ..................................................................... 4 Table 2 – CCP: Operational Status ................................................................................................... 5 Table 3 – Administrative Permits: Operational Status ..................................................................... 6 Table 4 – Cannabis Tax Rates ........................................................................................................... 6 Table 5 – Salinas Cannabis Industry Tax Revenue by Business Type (2017-2022) .......................... 7 Table 6 – Salinas Cannabis Industry Tax Revenue (2017-2022) ....................................................... 7 Table 7 – Local Cannabis Tax Rates, Nearby and Selected Cities................................................... 11 Table 8 – Nearby Cannabis Retailers ............................................................................................. 12 Table 9 – Salinas Retail Cannabis Tax Revenue (2017-2022) ......................................................... 12 Table 10 – Gross receipt Tax Equivalent at $15 per sqft ............................................................... 14 Table 11 – Gross receipt Tax Equivalent at $10 per sqft ............................................................... 14 Table 12 – Gross receipt Tax Equivalent at $7 per sqft ................................................................. 14
City of Salinas
Cannabis Taxation Recommendation Report
August 2022
Introduction
Background
Commercial Cannabis is regulated in the City of Salinas by Municipal Code Chapter 5 – Public Peace and Morals under Article VII Cannabis. The City regulates the establishment and operation of a limited number of commercial cannabis businesses (23), including cultivation, distribution, manufacturing, retail storefront (dispensaries) and retail delivery services.
The City has an existing cannabis business tax, Measure L, which was approved by Salinas voters in November 2016. The tax rates vary by cannabis business type and were initially set at 5 percent of gross receipts for retail and manufacturing businesses , and $15 and $2 per square foot of canopy space for cultivation and nursery businesses. The original tax rates were scheduled to increase in 2020; however, in December 2019 the Salinas City Council voted to forgo the scheduled increase. Since 2017, the City has generated roughly $7.35 million in tax revenue.
The Salinas City Council has expressed interest in evaluating the current Salinas cannabis mark et to determine the strength of the businesses and identify impediments to growth including, but not limited to, taxation. To inform these discussions, the City has engaged SCI Consulting Group to perform a comprehensive, financially focused analysis of the cannabis industry in the City and prepare a Cannabis Taxation Recommendation Report which makes recommendations regarding the optimal approach to taxation.
This analysis considers existing sales revenue and taxation data, analyzes any financial constraints, and considers the best practices on taxation to maximize revenue, market stability, and economic growth. Additionally, this analysis evaluates tax rates regionally to better understand competitiveness and if this is a barrier to growing the industry in the City.
Summary and Recommendations
The analysis of Salinas’ local cannabis industry indicates that it remains viable, relatively stable with the likelihood of a reasonable, limited growth over time. This is a remarkably positive finding when compared with the dynamic and challenged state of the cannabis industry statewide.
City of Salinas
Cannabis Taxation Recommendation Report
August 2022
California’s cannabis industry is quite mature with existing consumer demand being met (and often exceeded) by healthy regulated and non -regulated (black market ) businesses. Hence, industry growth, and the associated m unicipal tax revenue growth, is limited to new consumers drawn to the regulated products by improved marketing, packaging, variety, effects, and safety, as well as existing consumers transitioning from the unregulated market to the regulated market.
These forces affect all links in the supply chain (cultivation, distribution , testing, manufacturing, and retail.)
Long term, the City should understand that high land values and the availability of real estate will likely constrain growth of cultivation and manufacturing businesses within City limits . Retail businesses are limited by a slowly growing local demand (affected by new and newly legal consumer transactions), with some special opportunities for Salinas as a somewhat isolated regional City along the busy US 101 corridor.
The greatest area for significant growth for the City is in the manufacturing sector. Although this sector has matured (and possibly peaked) statewide, there is still huge opportunity to develop, market, and package, new types of products. Salinas is well poised with its proximity to very active cultivation sites in Monterey, San Luis Obispo , and even Santa Barbara C ounties, along with its agricultural and industrial capacity and infrastructure.
The City’s current rates, rate structure, number and types of businesses are generally appropriate and well within California norms. The tax revenues are leveling out, becoming more predictable and reliable, with some additional growth projected as more permitted businesses become operational. The City should continue with current policies, making field condition informed, minor adjustments (as recommended below) to tax rates, permit numbers, and types of permits as the marketplace continues to evolve over the next 10 years.
Here are the primary recommendations:
Maintain the existing gross receipts tax rate of 5 percent 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.
Maintain the current limit on the number of retail businesses (three (3) delivery and = five (5) storefront).
Award the final cultivation permit.
Continue to support active permittees working towards becoming operational businesses.
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.
City of Salinas
Cannabis Taxation Recommendation Report
August 2022
Expand on Salinas’ unique history, character, and culture to optimize all facets of the cannabis industry.
Explore ways to increase opportunities for minority owned local businesses.
City of Salinas
Cannabis Taxation Recommendation Report
August 2022
Overview of the Salinas Cannabis Market
Commercial Cannabis Business Regulation and Permitting
The City of Salinas allows all types of commercial cannabis businesses. The City issues two types of commercial cannabis business permits: Commercial Cannabis Permits (CCP) and Administrative Permits (AP). CCPs are issued for Cultivation, Delivery, Dispens ary, Distribution, and Manufacturing. Administrative Permits are issued for Testing Laboratories, Small Distribution (business premises under 500 square-feet), Research and Development Facilities, and Nurseries.
Commercial Cannabis Permits
The City of Salinas allows for issuance of a maximum of 23 CCP’ s. Since the available permits are limited, the City accepts applications only during designated “rounds”, allowing for applicants to competitively apply for permits. “ Table 1” below shows permit quotas, active permits (permits for businesses that are either in operation or working towards operation), and operational businesses as of August 2022.
Table 1 – Commercial Cannabis Permit (CCP) Quotas
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
“Table 2” below shows the 21 businesses that have been awarded permits and are currently either operational or pursuing operational status. The updated status of the City’s 21 active CCP’ s is shown below.
City of Salinas
Cannabis Taxation Recommendation Report
August 2022
Table 2 – CCP: Operational Status
Business Name Type Business Status
1. CannaCruz Dispensary Operational
2. Compassionate Bay Delivery Operational
3. Golden Essentials Delivery Operational
4. Purple Trilogy Delivery Operational
5. Cypress Manufacturing Distribution Operational
6. Cypress Manufacturing Manufacturing Operational
7. Emerald Skyway, LLC Dispensary Operational
8. 710 Combinator (Grupo Flor) Manufacturing Operational
9. East of Eden (Grupo Flor) Dispensary Operational
10. Flor X (Grupo Flor) Distribution Operational
11. Flor Cultivation Cultivation Partially Operational
12. Emerald Skyway Manufacturing, LLC Manufacturing Not Operational
13. Emerald Skyway Cultivation, LLC Cultivation Not Operational
14. E7 Salinas, LLC Dispensary Not Operational
15. E7 Salinas, LLC Distribution Not Operational
16. E7 Salinas, LLC Manufacturing Not Operational
17. Horizon Salinas, LLC Dispensary Not Operational
18. Horizon Salinas, LLC Distribution Not Operational
19. Cypress Manufacturing Cultivation Cultivation Not Operational
20. Sanborn Distribution Distribution Not Operational
21. Sanborn Manufacturing Manufacturing Not Operational
Eleven (11) businesses are now operational, and ten (10) businesses are still working towards operational status, two of which have previous indefinite extensions. The delays have involved challenges related to physical building improvements and site selection as well as state licensing challenges and newly issued permits.
Administrative Permits
Unlike CCPs, there are no limits on how many administrative permits can be issued for Commercial Cannabis Businesses. Administrative permits can be applied for at any time and do not require review by the Cannabis Selection Committee. Obtaining and maintaining an Administrative Permit is considerably simpler and less expensive in comparison to the CCP process. Nonetheless, applicants for Administrative Permits are still required to obtain a state license. “ Table 3” below shows the Administrative P ermits that have been issued and remain active (business is operational or is working towards operational status).
City of Salinas
Cannabis Taxation Recommendation Report
August 2022
Table 3 – Administrative Permits: Operational Status
Business Name Type Business Status
1. OPM Holdings Dispensary Operational
2. ProForma Labs Delivery Operational
3. American Biotech Testing Delivery Operational
In addition to the three businesses listed above, a number of other applicants have been awarded Administrative Permits but have abandoned the venture prior to achieving operational status.
There have been no Administrative Permit submittals in 2022.
Canna bis Tax Revenue
Measure L, adopted by the voters of Salinas in November 2016, requires certain Commercial Cannabis Businesses to pay a commercial cannabis business tax every quarter, beginning January 1, 2017. The original tax rates were scheduled to increase in 2020; however, in December 2019 Council voted to forgo the scheduled increase. Therefore, the rates listed below remain in effect. “Table 4” lists the rates levied on each business type and the maximum tax rates.
Table 4 – Cannabis Tax Rates
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
“Table 5” below shows cannabis revenue by businesses type that conducted commercial cannabis operations from 2017 through 2022. The taxes collected to date have been generated by just nine (9) businesses. “Table 6” compares the total cannabis industry tax revenue from 2017 through 2022.
City of Salinas
Cannabis Taxation Recommendation Report
August 2022
Table 5 – Salinas Cannabis Industry Tax Revenue by Business Type (2017-2022) Business Type 2017 2018 2019 2020 2021 2022
Delivery $38,989 $102,917 $117,138 $197,395 $134,572 $16,600 Dispensary IA $285,475 $949,762 $1,124,674 $1,221,626 $333,647 Cultivation IA IA IA $8,679 $73,539 $19,200
Manufacturing $335,380 $482,057 $561,413 $511,284 $669,760 $168,926 Total $374,369 $870,449 $1,628,314 $1,842,033 $2,099,497 $538,373 IA = business type was inactive during this term, i.e. not yet conducting commercial operations and paying the cannabis business tax
Table 6 – Salinas Cannabis Industry Tax Revenue (2017-2022) 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)
The Cannabis Business Tax was a new tax revenue for the City beginning in 2017. The total cannabis tax revenue significantly increased between 2018 and 2019 as new business within the City became operational. In recent years, tax revenue has continued to increase, although at a much lower rate, increasing by approximately 13% from 2019 to 2020 and 10% from 2020 to 2021.
Analysis of the tax revenue collected through the first two quarters of 2022 indicate that the cannabis revenues are beginning to flatten out as detailed in the Figur e below. Tax revenues for Q1 and Q2 of 2022 are down 16% (-$153,138) compared to the previous two quarters in 2021 (Q3 and Q4). The reduction in revenue for 2022 is partially caused by late tax payments, as four business were late on their 2022 Q2 tax payments to the City at the time of writing this report.
City of Salinas
Cannabis Taxation Recommendation Report
August 2022
Figure 1 – Historic Tax Revenue
However, further analysis of the historical revenues by business type indicates a significant decline in retail revenues. Retail tax revenues for Q1 and Q2 of 2022 are down 21% (-$137,242) compared to the previous two quarters in 2021 (Q3 and Q4). This decline is most likely attributed to the current economic conditions and high interest rates, which may have resulted in the reduction of cannabis purchases. Nonetheless, r etail tax revenue should restore to previous levels when the economy recovers.
While tax revenues for 2022 are currently on a projection to decline, tax revenues for the remaining 2022 quarters (Q3 and Q4) and 2023 have the potential to surpass the previous year’s total if additional businesses initiate operations.
$0
$500,000
$1,000,000
$1,500,000
$2,000,000
$2,500,000
2017 2018 2019 2020 2021 2022
Cannabis Industry Tax Revenue by Quarter
Q1 Q2 Q3 Q4
City of Salinas
Cannabis Taxation Recommendation Report
August 2022
Analysis of Current State and Local Tax Structure
The legal, regulated cannabis industry in California has seen significant growth and investment over the past few years. Despite this growth, the regulated industry has fallen well below its initial projections due to its inability to eliminate the illegal market.
The combination of regulatory and licensing costs and administrative burdens; high taxes, and local bans affecting large areas of the S tate are all factors that have contributed to significant delay to full emergence of the legal industry. Further, legalization has resulted in huge increases in cultivation both legal and (albeit counter -intuitively) illegal, while demand has only grown slightly, resulting in an overproduction of wholesale cannabis and a huge drop in prices, thus a reduction in profitability.
Most estimates indicate that 65 percent to 80 percent of all cannabis commerce in California is still unregulated, and it will likely take 10 or more years of enforcement, incentives, and capitalistic forces to reduce that to a more reasonable 10%.
It is expected that the California cannabis industry will continue to undulate dynamically under market and regulatory forces, but that these will decrease over time.
State Cannabis Taxes
Approval of Proposition 64 in November 2016 by California voters imposed two new cannabis taxes: a state excise tax of 15% on purchases of cannabis or cannabis products and a wholesale cultivation tax of $9.25 per dry -weight ounce of cannabis flower and $2.75 dry-weight ounce of leaves or trim. The State cultivation tax, which is indexed for inflation, increased to $10.08 per ounce and $3.00 per ounce for the 2022 calendar year. In addition to the cultivation and excise tax, commercial cannabis sales are subject to the sales and use tax, which is 9.25% in the City of Salinas.
City of Salinas
Cannabis Taxation Recommendation Report
August 2022
Assembly Bill 195
On June 30, of 2022, California Governor Gavin Newsom signed Assembly Bill 195, which amends the California Revenue and eliminates the cultivation tax 1 . Effective July 1, 2022, harvested cannabis that enters the commercial cannabis market is no longer subject to the cultivation tax.
Under AB-195, the cannabis excise tax will be maintained at the current rate of 15% for the next three years but can be increased up to 19% beginning in 2025 to recoup losses from the elimination of the cultivation taxes. Furthermore, effective January 1, 2023, the collection of the excise tax will shift from distributors to retailers.
Local Cannabis Tax Rate
During the early years of legalization, high local cannabis tax rates were very common across the State and for the most part acceptable amongst the cannabis industry when profit margins were high. Some of the early adopters in the State to legalize cannabis, approved canna bis tax rates across all license types as high as 10% - 15% of gross receipts and $25/sf for cultivation. However, as the regulated cannabis industry has matured, the combination of increased market competition, rising licensing and regulatory costs , and the collapse of wholesale cannabis prices has pushed the industry to the brink of collapse.
Local tax rates have been trending downward and stabilizing to a sustainable rate across the State due in part to local governments trying to maintain a competitive edge with neighboring jurisdictions who have legalized commercial cannabis and recognizing the need to grant tax relief for cannabis businesses.
“Table 7” below compares the current Salinas cannabis tax rates to the rates of nearby jurisdictions. For the most part, Salinas’ current tax rates are comparable and competitive with nearby cities.
1 https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=202120220AB195 City of Salinas
Cannabis Taxation Recommendation Report
August 2022
Table 7 – Local Cannabis Tax Rates, Nearby and Selected Cities 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
Retailers
Retailers (Storefront and Delivery) are the most localized of all cannabis business types because they serve the needs of a particular geographic area. While cultiv ators, manufacturers, and distributors have the ability to sell their products to other businesses throughout the State, retailers serve the local community by selling cannabis products directly to customers. As a result, the growth and success of retailers in Salinas is directly related to the market demand for cannabis in the area.
For the purpose of determining how many retailers Salinas can support, it is reasonable to assume that demand for cannabis in the City will remain constant. Therefore, permitting too many cannabis retailers will not increase demand or create new consumers but will simply result in lower sales volumes per retailer. In other words, the local retail market will eventually reach a saturation point.
Cannabis retailers have been operating in the City since 2018. Retailers are currently capped at five (5) storefro nt businesses and three (3) delivery businesses. As of August 2022, the City has issued all available CCPs for both business types; however, two of the storefront businesses are not currently operational.
A common metric used to determine how many retail businesses a jurisdiction can support assumes one retailer for every 15,000 to 20,000 people. With eight (8) permitted retailers, the City currently has a population per retailer of 19,500. Under this assumption, the City has reached the market density of retailers that they can reasonably support.
City of Salinas
Cannabis Taxation Recommendation Report
August 2022
Table 8 – Nearby Cannabis Retailers
City/County Population Retailers Population per Retailer Capitola 10,090 2 5,045
Marina 40,100 3 13,367
Salinas 156,177 8 19,522
Santa Cruz 65,011 5 13,002
Seaside 34,063 7 4,866
Watsonville 52,398 3 17,466
Next, we analyzed the retail tax revenues collected by the City to determine whether the retail cannabis market has reached its saturation point. From 2017 to 2020, the tax revenue collected by the City steadily increased as six of the City’s eight permitted retail businesses became operational. Revenue from 2020 to 2021 increased by only 3 percent, which may indicate that the market is nearing the saturation point. Furthermore, tax revenues for Q1 and Q2 of 2022 are down 21 percent compared to the previous two quarters in 2021 (Q3 and Q4) ; however, this is most likely to due to current state of the economy which is impacting retail purchases by consumers as previously discussed.
Table 9 – Salinas Retail Cannabis Tax Revenue (2017-2022) Year Retail Delivery TOTAL + / -
2017 IA $38,989 $38,989
2018 $285,475 $102,917 $388,392 896%
2019 $949,762 $117,138 $1,066,900 175%
2020 $1,124,674 $197,395 $1,322,069 24%
2021 $1,221,626 $134,572 $1,356,199 3%
2022* $501,709 $16,600 $518,309
* Tax revenue reported through two quarters
Although the retail industry in Salinas as a whole has experienced growth up until this year, the delivery businesses have not been as successful in comparison to storefront retailers, as indicated by the tax revenue collected by the City. D elivery businesses are in direct competition with the storefront retailers in the City, licensed delivery services from other jurisdictions , and Salinas is somewhat isolated from other populous areas, which makes this a difficult business model to be successful.
City of Salinas
Cannabis Taxation Recommendation Report
August 2022
Based on the analysis above, there are indications that retail cannabis market in the City is reaching its saturation point. Given that there are two permitted retail businesses who are not yet operational, it is recommended that the City not consider permitting additional retail locations at this time and instead, continue to support the active permittees working towards becoming operational businesses. Lastly, SCI recommends that the City maintain the current gross receipts tax rate of 5 percent on retail. This rate is currently competitive with nearby municipalities as well as the standard rate SCI typically recommends to municipalities that we work with.
Cultivation
In recent years, the cannabis cultivation sector has faced some unprecedented challenges. An oversupply of cultivated cannabis has resulted in a crash in wholesale cannabis prices. This , combined with high local and state taxes has pushed the industry towards collapse. The elimination of the state cultivation tax provides much needed tax relief to cannabis cultivators .
However, tax reform may be required locally in Salinas as well.
Cannabis cultivation in Salinas is currently taxed at $15 per square-foot of canopy space, which is much higher than many neighboring jurisdictions as detailed in “Table 6” above. A square -footage tax has advantages and disadvantages for Salinas cannabis businesses. The advantage is that cultivators know their total annual tax liability upfront and have the ability to plan and budget accordingly. The downside is that a square-foot based tax can impact the cost of production and fails to account for profitability of the business since the business is required to pay the tax regardless of productive output.
To better understand overall impact of the square-f ootage tax, SCI has developed on model to convert the City’s square-foot tax to an equivalent gross receipt tax. A study conducted by BOTEC Analysis for the Washington State Liquor and Cannabis Board conservatively estimated the average indoor cultivation yield at 38.6 grams/ft
2 /harvest, or 0.085 pounds/ft2 /harvest2. Indoor
cultivators typically average four (4) harvest cycles per year, which equates to 0.34 pounds/f t2/year. For a 10,000 square foot cultivation facility, this means they can produce around 3,400 pounds per year.
2 Jonathan Caulkins, Matthew Cohen, and Luigi Zamarra, “Estimating Adequate Licensed Square Footage for Production,” Prepared by BOTEC Analysis Corporation for Washington State Liquor and Cannabis Board, https://lcb.wa.gov/publications/Marijuana/BOTEC%20reports/5a_Cannabis_Yields-Final.pdf.
City of Salinas
Cannabis Taxation Recommendation Report
August 2022
According to Cannabis Benchmarks, the current average indoor price of cannabis is $1,3 64 per pound3. For our model, we have conservatively estimated the price at $1,000 per pound which equates to roughly $3.4 million in gross receipts for a 10,000 square foot facility. At the City’s current tax rate of $15 per square foot , the annual canna bis tax owed is $150,000, so the gross receipt tax equivalent works out to roughly 4.41% ($3.4 million/$150,000).
The tables below model the gross receipt tax equivalent for tax rates at $15, $10, and $7:
Table 10 – Gross receipt Tax Equivalent at $15 per sqft Canopy
(sf)
Yield @
0.34lb/sf/yr
Price per
lb
Gross
Receipts
Tax @
$15/sf
Gross Receipt
Equivalent
10,000.00 3400.00 $1,000 $3,400,000 $150,000 4.41%
Table 11 – Gross receipt Tax Equivalent at $10 per sqft Canopy
(sf)
Yield @
0.34lb/sf/yr
Price per
lb
Gross
Receipts
Tax @
$10/sf
Gross Receipt
Equivalent
10,000.00 3400.00 $1,000 $3,400,000 $100,000 2.94%
Table 12 – Gross receipt Tax Equivalent at $7 per sqft
Our analysis indicates that the City’s current rate of $15 per square foot is much higher than nearby municipalities. Typically, SCI recommends a tax rate at $7 per square -foot for cultivation businesses. In order to remain competitive with nearby municipalities and to provide tax relief, SCI recommends that the City consider lowering the cultivation tax to a rate between $7 and $10 per square foot. While this reduction will result in a reduction in tax revenues from each business, it may incentivize the three non-operational businesses to commence operations.
3 https://www.cannabisbusinesstimes.com/cannabisindex/
Canopy (sf) Yield @
0.34lb/sf/yr
Price per
lb
Gross
Receipts
Tax @
$7/sf
Gross Receipt
Equivalent
10,000.00 3400. 00 $1,000 $3,400,000 $70,000 2.06%
City of Salinas
Cannabis Taxation Recommendation Report
August 2022
Manufacturing
The cannabis manufacturing industry continues to innovate and expand, offering the greatest area for significant growth within the cannabis industry . Although this sector has matured (and possibly peaked) very rapidly statewide, there is still significant opportunity to develop, market, and package new types of products . As the regulated market continues to slowly expand, we anticipate the demand for manufactured cannabis products to increase as well.
Due to Salinas’ close proximity to very active cultivation sites in Monterey, San Luis Obispo, and even Santa Barbara Counties, along with its agricultural and industrial- capacity and infrastructure make it an attractive location for prospective businesses. However, low vacancy rates within the industrial zones in the City may impede growth. Furthermore, expansion of the cannabis manufacturing sector could potentially create an increase d demand and price for the limited number of available properties, resulting in the displacement of existing businesses, which may not align with the City’s goals.
Cannabis manufacturing businesses are currently capped at five (5) business within the City. The City has issued all five permits, with two (2) operational businesses and three (3) businesses who have not yet started operations. Overall, the two manufacturing businesses have displayed steady growth with tax revenues fluctuating quarter to quarter but increasing each year. Despite this growth, these businesses have express ed concerns with profitability related to the existing tax rates associated with manufacturing in the City.
Manufacturing businesses are currently taxed at 5 percent of gross receipts. Our analysis indicates that this rate is comparable and competitive to other nearby municipalities, but there are surrounding cities with lower rates. Typically, SCI recommends a tax rate between 2% - 3% of gross receipts for manufacturing businesses. SCI recommends that the City consider lowering the manufacturing tax to a rate between 2.5% and 3%. While this reduction will result in a reduction in tax revenues from each business, it may incentivize the remaining three non-operational businesses to commence operations.