Direct staff to report back to the PSFSS Committee within the next three months on the following topics:
a. The possibility of aligning our city’s regulations with state regulations, including but not limited to Identification Badge Requirements, while maintaining the age of purchase at 21 years in San Jose;
b. How San Jose compares with other jurisdictions on the annual fees for cannabis operations;
c. The possibility of expanding the scope of Department of Cannabis Regulations to include Vape and Smoke shops.
As we return to PSFSS Committee on February 15th to discuss the pressing issues facing the cannabis industry, with the backdrop of two cannabis retailers closed in recent months due to financial strain, we are presented with a Staff report that ignores the very spirit and direction of Chair Jiminez's memorandum as adopted by the PSFSS Committee and its Members.
The local cannabis industry is made up of responsible compliant businesses that contribute approximately $15 million to the general fund, employ almost 1,000 direct and indirect employees and contribute to local charities and organizations.
On the whole the Cannabis Industry, as represented by the Silicon Valley Cannabis Alliance, is deeply disappointed with the Staff response to Chair Jiminez's Memorandum and the direction of the PSFSS Committee. Staff's memorandum dated January 31, 2024 is written to obfuscate people rather than enlighten them. It is full of red herrings, incomplete information, presentation of selective information to bias the reader and in one case a factual inaccuracy (lie). Attached below is the Staff Memo with industry rebuttals inserted into the document.
According to a Gallup Poll article dated October 13, 2023 local government satisfaction is at 67% (https://news.gallup.com/poll/512651/americans-trust-local-governmentcongress-least.aspx.) In letter grade terms that is a D (a D+ if one is generous). Either way it is an epic fail and much lower that anyone should expect from government, as you are well aware since you are on the frontline of interacting with the residents of the City - citizen distrust and dissatisfaction of government is palpable. Creating trust in government is difficult and harder still with Staff work like this.
We respectfully ask that at the upcoming PSFSS Committee hearing you do the following:
1) Reject the staff report
2) Reduce of the annual fee
3) Refocus of the Division of Cannabis Control away from paperwork and toward stopping illegal cannabis delivery into San Jose and the sale of illegal cannabis at smoke and vape shops
Sincerely,
-Sean
San Jose was a leader in cannabis-related land use and regulations long before the state and other jurisdictions followed suit. Being at the forefront of the legal industry has had its benefits, but it’s also caused our policies to grow stale as evidenced by the fines structure that we are now changing. The industry is evolving, and San Jose needs to evolve with it.
I share the sentiment that this industry should be treated as any other business entity operating with the city. Last year, the legal industry paid upward of $18 million dollars in taxes. Given the precarious financial outlook for city finances in the next couple of years, we should do all we can to streamline and ensure success of this industry so that the city continues to maintain and grow this crucial tax revenue that allows us to adequately serve our residents.
Changing the schedule of fines for violations is a step in the right direction, but I think a deeper analysis needs to be done related to how the city regulations around cannabis align with the state regulations. Time and again we as Council have taken up the issue of “cleaning up” regulations that seemingly should be aligned with the state, and this issue is no different. Where there is alignment, no further action is necessary. Where alignment does not exist, we should have a debate as to why and whether such misalignment makes sense. As an example, aligning the hours of operation with the state seems to be a logical approach that the Council should discuss, and that is why I have included it in the direction when cross-referenced to full Council.
Along the same lines, there is a debate as to whether the annual fee is appropriate when compared to other jurisdictions along with issues around requirements for badging. My hope is that staff can bring back information on these topics so that we can make informed decisions as a committee before referring to the full Council for discussion.
Lastly and potentially most important, a conversation about expanding the scope of the Department of Cannabis Regulations to include Vape and Smoke shops is warranted. There are many stories tied to Vape and Smoke shops selling Hemp-based THC, which is illegal.
Considering that this is happening, it begs the question: should we provide compliance oversight to these shops? The scope exploration for Vape and Smoke shops is not meant to be a path forward to legalization of these establishments. The 16 cannabis retailers along with the second locations and the equity licenses granted by the City Council shall be the only retailers allowed to sell cannabis in the City of San Jose.
PUBLIC SAFETY, FINANCE AND STRATEGIC SUPPORT COMMITTEE
January 31, 2024
Subject: Cannabis Business Regulations and Annual Operating Fee Comparisons Page 2 BACKGROUND
Based on the Public Safety, Finance, and Strategic Support Committee’s direction on October 19, 2023,1 staff is providing an update on the following topics:
1. The possibility of aligning San José’s regulations with State regulations, including but not limited to, Identification Badge Requirements while maintaining the age of purchase at 21 years in San José; and
2. Comparing San José’s annual fees for cannabis operations with other jurisdictions.
ANALYSIS
The City of San José’s Cannabis Regulations were originally approved in July 2014, making the City one of the first in the State of California (State) to develop this type of program. Since 2015, 16 cannabis businesses successfully registered and have been operating in the City.2 The State implemented a regulatory program for adult-use (recreational) and medicinal cannabis in January 2018.
Comparison of San José’s Medical and Non-medical Cannabis Regulations to State Regulations
Age – Purchase, Employment, and Verification
Purchase
Under San José’s regulatory program, only persons aged 21 or older are allowed on a cannabis business’s location or premises, or to purchase cannabis from San José’s cannabis businesses (whether on-site or via delivery). Under State regulations, adults aged 21 and older are allowed to possess, purchase, cultivate, and consume cannabis in limited quantities for personal use (“Adult Use”). Additionally, adults aged 18 and older are allowed to possess, purchase, cultivate, and consume cannabis for medicinal purposes with a valid physician’s recommendation (“Medicinal Use”). San José’s regulatory program predates the State’s regulations and established the higher minimum age for purchase to help ensure cannabis and cannabis products do not easily make their way into the hands of San José’s youth.
If San José were to align its regulations with the State’s by allowing persons under 21—which would include many area high school students—to remain on a cannabis business’s property and/or purchase medicinal cannabis from San José retailers, it would facilitate easier access to 1 October 19, 2023 Public Safety, Finance and Strategic Support Committee Meeting, Item (d)3. CC 23-221 Memorandum from Jimenez 10192023.pdf (legistar.com) 2 Cannabis Regulation information can be viewed here: https://www.sjpd.org/about-us/organization/chiefexecutiveofficer/cannabis-regulation
PUBLIC SAFETY, FINANCE AND STRATEGIC SUPPORT COMMITTEE
January 31, 2024
Subject: Cannabis Business Regulations and Annual Operating Fee Comparisons Page 3 cannabis and products containing cannabis for area high schoolers. These concerns are heightened by the fact that under the State’s regulations qualified medicinal patients can purchase more cannabis daily than an adult-use customer, and are allowed access to concentrated cannabis products that contain higher concentrations of THC (the psychoactive component in cannabis) per package than adult-use products. By maintaining the aged 21 or older restriction to be on a cannabis business’s property for both medical and adult use customers, San José’s regulatory program limits access to these high concentration products which could be easily diverted to our youth.
REBUTTAL
Sta$ begins this Memo with confirming that the Committee’s direction was to address how to align the State’s regulations with the City’s regulations while maintaining the age of 21 for purchase of cannabis. Despite the Committee’s clear instruction that the age for purchase would not be changing, Sta$ begins their Memorandum address why the age for purchase to remain 21. This is a red herring to make the Committee believe that a reduction is age is being sought by the industry.
It is not. No business and no Committee member has requested a change in the age for purchase.
Instead, Sta$ is being asked to enforce the age restriction against unregistered businesses who are selling cannabis to people under the age of 21.
In October 2023, a list of unregistered delivery businesses was provided to Sta$. If Sta$ is really concerned about underage persons gaining access to cannabis, has Code Enforcement cited any of these unregistered business for violation of any of the following? • 6.88.300(A-D) – Registration Required?
• 6.88.320(D) Registration Submittal?
• 6.88.400(C) Operating Regulations and Conditions
• 6.88.410 Compliance with the Code?
• 6.88.440(I) [No Medical Cannabis Transfers shall be made by a Cannabis Business to a person under the age of twenty-one (21).]?
• 6.88.440(J) [No Medical Cannabis shall be provided, sold, or transferred to any person who is not a Qualified Patient or Primary Caregiver, and who is not age twenty-one (21) or older.]?
• 6.88.440(K) [No Non-medical Cannabis shall be provided, sold, or transferred to any person who is not age twenty-one (21) or older.]?
Solely as a result of Code Enforcement’s failure to cite unregistered businesses, persons under the age of 21 are getting access to cannabis. This must stop.
Employment
In regard to employment, San José’s regulations align with the State’s in that both require persons retained to work within or at a cannabis business’s location or premises to be at least 21 years of age.
PUBLIC SAFETY, FINANCE AND STRATEGIC SUPPORT COMMITTEE
January 31, 2024
Subject: Cannabis Business Regulations and Annual Operating Fee Comparisons Page 4 Verification
Both San José’s and the State’s regulations require age verification prior to purchase; however, they differ in how that is accomplished. San José regulations require use of an electronic age verification device which scans a government-issued identification (driver license, identification card, passport, etc.) and displays the person’s age. The State’s regulations require “inspecting” a valid form of identification (ID). This leaves it up to the person inspecting the ID to know the “age 21 by” date, and/or to do the math to determine if the presenter of the ID is under 21 years old. In addition to the requirement for San José businesses to use electronic age verification, they are required to provide the results of age scans (date, time, and age) to San José’s Division of Cannabis Regulation (Division) staff for analysis. Combined with the Division’s ability to monitor video surveillance (discussed below), staff routinely confirms businesses are turning away persons (and parties with persons) under the age of 21.
In summary, aligning San José’s age requirements to the State’s would make it easier for high school students to obtain cannabis in San José by befriending or becoming an 18- to 20-year-old qualified medical patient. It would also remove the Division’s ability to effectively review and monitor the presence of underage individuals purchasing cannabis at San José’s dispensaries by removing the age verification logs routinely audited by Division staff.
San José Regulations State
Regulations
Alignment
Age (Adult Use Purchase) 21 and older 21 and older Aligned Age (Medicinal Use
Purchase)
21 and older 18 and older Not aligned
Age (Employment) 21 and older 21 and older Aligned
Age (Verification Method) Electronic ID scanning Inspecting ID Not aligned
REBUTTAL
This is another red herring. Neither the Committee nor the industry has requested a change in how age is verified. Cannabis businesses are happy to continue using age verification software. What is an issue is that the DCR seeks to justify its existence based upon their reviewing video footage of customers to ensure that customers are over the age of 21. There are several issues with this: (1) the age verification software is the best tool to determine the validity of an ID; (2) while the cameras are of the highest quality, it is nearly impossible to tell the di$erence between a 20 year old and a 21 year old through video surveillance; and (3) the DCR has not established that any business has ever allowed a person under the age of 21 on site.
Recently, the DCR, has been personally visiting cannabis businesses to request age verification logs. This information can be emailed to them (the same as it is emailed to the Department of Cannabis Control). Why is the DCR wasting resources by personally visiting cannabis businesses
PUBLIC SAFETY, FINANCE AND STRATEGIC SUPPORT COMMITTEE
January 31, 2024
Subject: Cannabis Business Regulations and Annual Operating Fee Comparisons Page 5 to obtain a report they can get by email? Again, this shows that the DCR’s enforcement and the State’s enforcement are the same – they are both reviewing reports. The city does not need to duplicate this work.
Identification Badge - Background and Display Requirements
Background Checks
San José requires a criminal background investigation on all persons involved in the cannabis business – inclusive of owners (more than 10% aggregate interest, legal or equitable, or otherwise), managers (including but not limited to officers of a corporation and/or board members) and employees. This criminal background investigation reviews State criminal histories. The State evaluates state and federal criminal histories of owners (aggregate ownership interest of 20% or more) and individuals who manage, direct, or control a cannabis business (including but not limited to corporate officers or a member of the board of directors of a nonprofit).
San José Regulations State
Regulations
Alignment
Background Required
• Owners more than 10% 20% or more Not Aligned
• Board Members Yes Yes Aligned
• Corporate Officers Yes Yes Aligned
• Managers Yes Yes Aligned
• Drivers Yes No Not Aligned
• Employees Yes No Not Aligned
San José regulations prohibit persons from owning, managing, or working at a cannabis business if the person has a disqualifying conviction3
within the last ten (10) years or in their lifetime for a crime of moral turpitude. The State may deny a license to an owner if they have a disqualifying felony conviction4. The State does not specify a time frame for the conviction but does take into consideration the number of years that have elapsed since the date of the offense. The crimes for which convictions could lead to disqualification or denial of a license are similar between San José and the State, and include crimes such as violence, force, fear, fraud, deception, theft, embezzlement, firearms, illicit drugs (excluding cannabis). Both San José and the State require all persons with a financial interest in the business be disclosed; however, only those persons who meet the above-described criteria are backgrounded. 3 San Jose Municipal Code Section 6.88.450.A.2 and 6.88.450.A.3 4 California Business and Professions Code Section 26057 and Department of Cannabis Control Medicinal and AdultUse Commercial Cannabis Regulations (November 2023)
PUBLIC SAFETY, FINANCE AND STRATEGIC SUPPORT COMMITTEE
January 31, 2024
Subject: Cannabis Business Regulations and Annual Operating Fee Comparisons Page 6 As a part of the City’s criminal history background check of specified persons working at or for the cannabis business, for delivery drivers, the Division verifies the driver has a valid driver license and insurance before issuing the identification badge. Another check important to delivery operations is the verification that the owner of the delivery vehicle (some are owned by the cannabis business, but many are not) knows the vehicle will be used to deliver cannabis.
Similar to the requirement that property owners acknowledge the use of their property for cannabis operations, the Division thinks it is important for vehicle owners to know how their vehicles will be used.
People working in these businesses have behind-the-scenes access to cannabis, money, and sensitive business information such as building layouts and security measures. One of the concerns raised by the industry is the number and extent of burglaries associated with cannabis businesses, both here and in other cities. Including employees and managers – not just owners – in these background checks promotes a safer work environment in a sensitive industry.
Display of Identification Badges
Both San José’s regulations and the State’s regulations require persons working at certain cannabis businesses to wear a specific identification badge; however, they differ greatly in purpose. The identification badge issued by the Division is issued after an individual has been fingerprinted as part of the criminal background investigation. By wearing the badge, it allows for quick and easy identification of those persons who have initiated the background process versus those who have not. The State requires an identification badge issued by the cannabis business be displayed by all employees working for a retail sales licensee or participating in a temporary cannabis event. This badge does not assist Division staff in determining who is undergoing the background check and who is not.
If San José’s criminal background check and identification display requirements were removed, it would adversely disrupt the business’ normal operations. Persons with identified criminal convictions involving violence, theft, or unlawful possession of firearms in the past ten years or crimes of moral turpitude at any point in time would have behind-the-scenes access to business operations, cannabis, and cash. During inspections, Division staff would need to contact each employee individually and have them stop working so they could retrieve their government issued identification for comparison to our list of persons who have started the background process. For smaller businesses with less employees, this would be disruptive in their ability to conduct daily operations and assist customers. An additional benefit of the current identification badge issuance process is it affords the Division the opportunity to ascertain accurate employee counts to ensure compliance with Labor Peace Agreement requirements. The Division-issued badge serves as a simple visual indicator of whom the Division has processed as an owner, manager, or other employee, and who has not.
PUBLIC SAFETY, FINANCE AND STRATEGIC SUPPORT COMMITTEE
January 31, 2024
Subject: Cannabis Business Regulations and Annual Operating Fee Comparisons Page 7 REBUTTAL
There are several issues here:
1. The current city-issued identification badges violate State law. State law allows for businesses to issue identification badges. These badges must meet the following criteria:
• Be laminated or plastic-coated
• Include the licensee's “doing business as” name
• Include the licensee's license number
• Include the employee's first name
• Include an employee number exclusively assigned to that employee for identification purposes, and
• Include a color photograph of the employee that clearly shows the full front of the employee's face and that is at least 1 inch in width and 1.5 inches in height.
2. The city requires these badges to be renewed every year. As a result, businesses are unnecessarily spending thousands of dollars each year on badges.
3. Thousands of businesses throughout the State issue their own badges to employees without issue – the city can just as easily identify a cannabis business employee from their business-issued badge as they can from a city-issued badge.
4. The city pays currently pays one employee approximately $87,248.17 to issue badges to cannabis businesses.
5. Businesses should be permitted to hire who they choose. Persons who have committed crimes involving violence, theft or unlawful possession of firearms should not be precluded from the workforce if they have served the time for their crime. The decision on whether to hire such persons who have rehabilitated themselves is not only in line with the city's equity program but should be the decision of the business - not the city. There is no data provided that a person with a criminal history violence, theft or unlawful possession of firearms is a threat to public safety because they are hired by a cannabis business to cultivate cannabis.
The DCR should not be permitted to issue badges.
Security – Alarms, Secure Storage, Video Surveillance, Personnel
Alarms
In the area of property and product security, there are a few key differences between San José’s regulations and the State’s. San José requires each business to install and maintain a UL (Underwriters Laboratories) listed burglar alarm system. A UL-listed alarm system with a
PUBLIC SAFETY, FINANCE AND STRATEGIC SUPPORT COMMITTEE
January 31, 2024
Subject: Cannabis Business Regulations and Annual Operating Fee Comparisons Page 8 “Mercantile” certificate – a standard similar to jewelry stores – is required. The UL listing is a certification that indicates a product is safe to use and has undergone rigorous testing to meet specific safety standards. A UL burglar alarm system uses extensive sensors to detect any intrusion and trigger the alarm. San José’s regulations also prescribe a specific response by the business: a security guard must respond within 20 minutes and attempt to verify the alarm, and the alarm company must also notify a representative of the business who must be available to respond to the location within one hour of being notified. In the event a break-in is verified (either by the guard or by video surveillance monitored by the business), the police department must be notified for a response. These regulations are intended to ensure alarm systems are robust and any response to the alarm is timely, to minimize loss. The State’s regulations also require an alarm monitored by an alarm company or agent but do not specify the standards of the alarm system (i.e.: extensive motion detection throughout the premises versus merely placing sensors on doors and windows) or the timeliness and nature of the response to an alarm activation.
REBUTTAL
Despite having these systems in place, SJPD has never stopped a burglary from occurring. Indeed, despite having these systems in place SJPD rarely respond when the alarms are triggered. As such, there is no reason to require a UL certified system.
Secure Storage
Both San José’s regulations and the State’s regulations require cannabis and cannabis products be stored indoors; however, San José additionally requires cannabis and cannabis products be stored in a safe, vault, or other secure storage inside the premises. This additional requirement is meant to make it more difficult to obtain and divert cannabis and cannabis products in the event of burglary. While alarm and secure storage regulations cannot prevent persons from breaking into a business, they can make it difficult and slow would-be burglars down. Staff have reviewed surveillance video of burglaries at San José businesses and it was apparent that perpetrators obtained less product than they would have obtained without a secure storage requirement.
Video Surveillance
Video camera systems are required by both San José and the State; however, video storage is another area in which San José’s regulations differ from the State’s. San José requires video be stored and made available to regulators or law enforcement for thirty (30) days, while the State requires video be retained and made available for ninety (90) days. Since the State’s requirement is more restrictive, all San José businesses must follow the State’s storage requirement of 90 days.
PUBLIC SAFETY, FINANCE AND STRATEGIC SUPPORT COMMITTEE
January 31, 2024
Subject: Cannabis Business Regulations and Annual Operating Fee Comparisons Page 9 Personnel
Another difference in San José’s security requirements versus the State’s is the area of delivery vehicles. San José requires delivery vehicles employ a dual facing video camera system which records the view in front of the vehicle as well as inside the passenger compartment. This regulation is intended to provide a measure of safety and security in the event of theft or robbery.
It also serves as a tool to assist the Division in determining if a delivery was made to a park or school. Delivery vehicle video is not required by the State and is therefore subject to San José’s 30-day retention requirement.
REBUTTAL
Video surveillance is not required because there are also GPS devices which can also confirm whether cannabis was delivered to a park or school. Again, this is another example of the DCR’s being too far-reaching. To date, not a single delivery has been made by a registered business to a park or a school. Again, cannabis businesses have the most to lose therefore they have many checks and balances in place to ensure that cannabis is not being delivered to unauthorized locations.
Comparison of San José’s Cannabis Business Annual Operating Fee to Other Jurisdictions Cannabis Regulation Responsibilities
The Annual Operating Fee is intended to recover 100% of the costs incurred by the City to pay for the multi-department staff for their professional responsibilities and other costs needed to sustain the full scope of the City Council's policy direction for the Program, as set forth below. • City-Wide Policy Coordination, Implementation, and Sustainment: Cannabis policy analysis requires coordination of multiple departments, including: each division of the Department of Planning, Building and Code Enforcement, the Fire Department, the Finance Department, the Police Department, and the City Attorney's Office. The Police Department’s Division of Cannabis Regulation provides Program oversight and serves as the point of contact for the registered businesses and the policy development and implementation lead.
• Non-criminal Law Enforcement and Investigation: The Division of Cannabis Regulation is responsible for the coordination of the regulatory law enforcement and compliance work, administering internal enforcement procedures and training on such procedures, and serving as a liaison between the City and other law enforcement agencies. Staff are responsible for performing the day-to-day regulation of the businesses, including conducting inspections, and regulating and taking civil action against businesses if they are not in compliance with the Program regulations. • Code Enforcement and Zoning: Planning and Code Enforcement staff provide resources for the necessary ongoing inspections for compliance with the Program
PUBLIC SAFETY, FINANCE AND STRATEGIC SUPPORT COMMITTEE
January 31, 2024
Subject: Cannabis Business Regulations and Annual Operating Fee Comparisons Page 10 regulations as they relate to both land use and business operations. Staff conduct repeated inspections of business sites, meet with business representatives to ensure compliance with Program regulations, issue administrative citations and/or compliance orders to noncompliant businesses, and appear before administrative bodies and in court to support the City in its enforcement actions.
• Financial and Compliance Review: Staff review the financial records of all businesses and coordinate with the City Manager's Office, the City Attorney’s Office, the Police Department, and the Code Enforcement Division on financial investigations and financial audits of the businesses to ensure fiscal compliance with the Program regulations. • Legal: The City Attorney’s Office staff provide legal advice, support in interpreting the regulatory ordinances, and support in drafting updates to ordinances and policies related to the Program. In addition, the attorneys are charged with bringing legal civil action against businesses operating in violation of the Program regulations. Those actions could include preparing cases for and representing the City at administrative officer hearings, hearings before the Appeals Hearing Board, and civil court.
Comparison of Operating Fees or Permits
Staff reviewed the annual operating fee for cannabis business activities for notable neighboring California cities (Mountain View, Oakland, Sacramento, and San Francisco). The information is provided below. The operating fees vary between being charged per permit type, cannabis activity, or business. When the fee is based on permit type or activity, it is important to note one business may hold multiple permits or conduct multiple activities, and the total fee each business pays is based on the number of permits/activities.
Number of Businesses
or Permits Annual Operating Fee
San José 16 Businesses
(plus up to 10 equity allowed)
Per Business $139,406
Mountain View 1 Business
(maximum of 3 non-storefront
allowed)
Per Business $139,619
$1,942
Oakland 266 Businesses
(including 106 equity)
Per Permit ranging from $509.75
to $17,618*
Sacramento 291 Permits
(including 41 equity)
21 Permit Types ranging from
$2,590 to $36,800 each*
San Francisco 108 Permits
(including 40 equity)
Per Activity $5,000*
* one business may hold multiple permits or have multiple activities; the fee paid by each business varies based on the number of permits/activities
PUBLIC SAFETY, FINANCE AND STRATEGIC SUPPORT COMMITTEE
January 31, 2024
Subject: Cannabis Business Regulations and Annual Operating Fee Comparisons Page 11 REBUTTAL
As shown by the notations above, this chart is incorrect. Though Mountain View's Fee Schedule shows what a storefront retail store would pay if registered, the reality is that the Mountain View Code prohibits storefront locations. See Mountain View Municipal Code Section 36.30.55 and https://www.mv-voice.com/news/2019/05/24/council-votes-to-ban-storefront-pot-shops-inmountain-view-allowing-only-delivery-services/. Only non-storefront (delivery) locations are permitted and the fee is $2,150 for the registration and then $1,942 annually.
The DCR ignores the following jurisdictions, including the nearest comparably jurisdictions of Redwood City and Hayward.
Wildomar $71,307.80
Culver City $27,771.00
Redwood City $19,599.00
Modesto $18,732.00
South San Francisco $16,931.00
San Bernardino $15,015.55
Perris $15,008.45
Barstow $14,107.85
Tracy $13,100.00
Santa Ana $12,968.00
Hayward $10,000.00
Coalinga $8,576.00
Adelanto $8,460.00
Vallejo $8,288.00
Merced $8,209.00
Alameda $7,770.00
Los Angeles $7,691.00
Palm Springs $7,656.00
Shasta Lake $5,445.02
Long Beach $3,435.00
Sonoma (County) $2,163.00
Salinas $1,443.25
Grover Beach $500.00
Greenfield Admin. Fee $200.00 plus Actual Costs ($5,000 initial deposit) San Carlos Actual cost with $3,000 deposit
Hollister $0.00
Santa Rosa $0.00
Union City $0.00
Vista $0.00
PUBLIC SAFETY, FINANCE AND STRATEGIC SUPPORT COMMITTEE
January 31, 2024
Subject: Cannabis Business Regulations and Annual Operating Fee Comparisons Page 12 San José’s Annual Operating Fee Per Business
As stated above, San José’s cannabis regulation staffing is based on regulatory and enforcement operations related to the 16 registered cannabis businesses. The costs for the program are paid by the registered businesses in their annual operation fee and other fees for service. Since the cannabis regulatory program was moved to the Police Department, the annual operating fee regulatory staffing levels have decreased from 11.33 to 7.25. The annual operating fee is currently based on 16 registered businesses.
Fiscal Year 16-17 17-18 18-19 19-20 20-21 21-22 22-23 23-24 Police 3.94 3.38 4.89 5.17 5.11 5.11 5.07 5.02
Finance 1.75 1.69 1.69 1.54 1.34 1.19 0.98 0.98
CMO 0.14 0.10 0.22 - - - - -
CAO 3.50 2.70 2.27 1.15 1.15 1.04 1.04 0.74
PBCE 2.00 1.91 0.94 1.09 0.81 0.81 0.33 0.51
Total FTE 11.33 9.78 10.01 8.95 8.41 8.15 7.42 7.25
Annual Fee $149,132 $131,846 $150,610 $138,148 $143,333 $147,645 $130,345 $139,406 TOTAL
COLLECTED
$2,386,112 $2,109,536 $2,409,760 $2,210,368 $2,293,328 $2,362,320 $2,085,520 $2,230,496
COMPENSATION
PER EMPLOYEE
$210,601 $215,699 $240,735 $246,968 $272,691 $289,855 $281,067 $307,656
In addition to the regulations themselves, San José, the State, and other municipalities each take different approaches to their programs. San José’s regulatory structure is one of full cost recovery and is reflected in the fees. The State’s fee structure is based on the size and type of business and is not based on full cost recovery. Other cities devote staff to regulate cannabis businesses, but their fees are also not based on a full cost recovery model. A robust set of regulations paired with an appropriately staffed oversight program helps ensure these businesses are operating as expected. Additionally, having local staff in addition to State regulators monitoring cannabis businesses provides additional oversight and more robust safety protections.
REBUTTAL
As shown by the notations above, it is disingenuous for the DCR to tout the reduction in sta$ing levels from 11.33 FTE to 7.25 FTE when, despite this decrease, they have not decreased the fees they collect from the cannabis businesses.
As is shown above, despite a decrease in the number of FTE, the salary of each FTE has increased from $210,601 to $307,656 – the DCR’s salaries have increased of over 46% in 8 years! If the current 7.25 FTE were earning what the 11 FTE earned in 2016-2017, then the total operating cost would be $1,526,857.25 or $95,429 per business (with 16 businesses) – a savings to the businesses of over $43,977.
PUBLIC SAFETY, FINANCE AND STRATEGIC SUPPORT COMMITTEE
January 31, 2024
Subject: Cannabis Business Regulations and Annual Operating Fee Comparisons Page 13 Cannabis Regulatory Code Violations in Fiscal Year 2022 – 2023
Division Staff routinely monitor registered businesses in San José to ensure compliance with the Code, State laws, and regulations. This monitoring includes keeping track of identification badges issued and returned; ensuring delivery drivers hold valid driver licenses, delivery vehicles are registered, insured, and are equipped with secure storage containers; cannabis deliveries are not made to schools or parks; government-issued identifications are scanned by age verification devices and persons under age 21 are turned away; video cameras remain operational and function as required; and business operations and premises are not modified without notice or required building permits. Additionally, Division Staff are being trained in the State’s Track-andTrace system, which will allow Division Staff to supplement State regulators with tracking product through San José’s cannabis businesses. During this routine monitoring, violations can be addressed informally in conversations with the businesses, formally via written warnings, or by issuance of a citation. Division Staff prefer to educate business operators through informal or formal warnings rather than by citation. Since Division Staff have 24/7 access to video camera and delivery vehicle GPS systems of San José’s registered businesses, staff can do much of this monitoring without visiting each business in person. Video monitoring and GPS tracking of delivery vehicles can be done daily. State regulators do not have direct access to these video or GPS systems; therefore, State regulators must visit each business to ensure compliance. In conversations with businesses, it appears the State visits San José businesses about once a year, versus Division Staff constantly monitoring the businesses remotely throughout the year.
Staff formally reviewed 25 potential code violations which occurred during Fiscal Year 2022- 2023. Some of the incidents investigated were violations of multiple code sections. For example, San José has a code section requiring compliance with all State codes; thus, a violation of a State code is also a violation of San José’s Municipal Code. In reviewing these incidents, Staff issued 13 warning notices for violations ranging from repositioned cameras to inadequate camera failure notification systems or video storage to persons not displaying identification or visitor badges as required under local and State regulations. Three violations resulted in citations issued to two registered businesses, one of which is no longer operating. Additionally, there were three citations issued to registered businesses which Division Staff did not seek or investigate, but which Division Staff worked with another City Department to reevaluate and cancel.
Compliance is the goal of regulation. When violations of regulations occur, staff prefers to work with the businesses to develop a plan to ensure these violations are not repeated rather than to issue citations. The annual renewal of each business includes a thorough review of all forms, plans, a walk-through of each location and premises, and verification of tax compliance. Any issues uncovered during this review are typically addressed informally with business representatives to further the goal of ensuring our regulated businesses are operating as our community expects.
Under the State’s regulatory program, cannabis businesses are required to have local approval to operate in addition to a State license. This allows local jurisdictions to draft and enforce local
PUBLIC SAFETY, FINANCE AND STRATEGIC SUPPORT COMMITTEE
January 31, 2024
Subject: Cannabis Business Regulations and Annual Operating Fee Comparisons Page 14 regulations of importance to our communities. If San José were to rely solely on State regulators to monitor cannabis businesses in San José, it is highly unlikely that many of the previously discussed potential violations would have been discovered or addressed. State regulators must manage over 9,700 active licenses across all jurisdictions in California. Having local regulators monitor local businesses allows the City to maintain focus on those issues most important to the concerns of our community. Additionally, each business in San José has dedicated local personnel to whom they can ask questions and get timely answers.
REBUTTAL
There are many issues with the above section.
The DCR says its monitoring includes:
• Keeping track of identification badges issued and returned – This is unnecessary monitoring. How is this improving public safety? Why does this need to be done each year?
• Ensuring delivery drivers hold valid driver licenses – This is unnecessary monitoring.
Businesses have a vested interest in making sure their delivery drivers licensed and insured. Businesses already do this on their own and can continue to do so, they do not need SJPD's assistance. Is SJPD making sure every Doordash, Ubereats, Instacart, etc. has a valid driver's license?
• Delivery vehicles are registered, insured, and are equipped with secure storage containers – This is unnecessary monitoring. Businesses have a vested interest in making sure the vehicles used for delivery are registered and insured. Businesses already do this and can continue to do so. Is SJPD making sure every vehicle used for Doordash, Ubereats, Instacart, etc. is insured and registered?
• Cannabis deliveries are not made to schools or parks – As noted above, this is unnecessary monitoring and businesses will be compliant without the DCR. There is no evidence that businesses would delivery to schools or parks. There are other checks and balances available such as GPS tracking to ensure compliance - there is no need for video surveillance monitoring.
• Government-issued identifications are scanned by age verification devices and persons under age 21 are turned away – As noted above, this is unnecessary monitoring.
Businesses have a vested interest in complying with age verification measures. • Video cameras remain operational and function as required – This is unnecessary monitoring.
• Business operations and premises are not modified without notice or required building permits – This is unnecessary monitoring.
Division Sta$ being trained in the State’s Track-and-Trace system – This is unnecessary. The State already has a robust Track and Trace team for this purpose. Why is the DCR wasting resources on duplicating a job the State already does?
PUBLIC SAFETY, FINANCE AND STRATEGIC SUPPORT COMMITTEE
January 31, 2024
Subject: Cannabis Business Regulations and Annual Operating Fee Comparisons Page 15 During this routine monitoring, violations can be addressed informally in conversations with the businesses, formally via written warnings, or by issuance of a citation. – The lack of citations confirms that businesses are operating in compliance with the law. Business owners more than anyone have a vested interest in making sure they comply with the law - they are the ones that will lose their life savings if their businesses are not in compliance.
State regulators do not have direct access to these video or GPS systems; therefore, State regulators must visit each business to ensure compliance. – This is false. The State has the right to ask for video surveillance footage. They routinely do so to review for compliance. SJPD does not need to duplicate this work.
In conversations with businesses, it appears the State visits San José businesses about once a year, versus Division Sta$ constantly monitoring the businesses remotely throughout the year. – This is false. Depending on the licenses held, businesses can be visited multiple times a year by the State. Further, the State routinely requests reports, video data, and other information from licensees. This is another area where SJPD is duplicating what the State already does.
Sta$ formally reviewed 25 potential code violations which occurred during Fiscal Year 2022-2023. – How many involved an actual public safety issue?
Verification of tax compliance – False. If that were the case, why did no one catch Herbs' issue? If San José were to rely solely on State regulators to monitor cannabis businesses in San José, it is highly unlikely that many of the previously discussed potential violations would have been discovered or addressed. – False and overreaching. Is DCR saying that all the cannabis businesses would be willfully violating the law and the only one stopping them is DCR? Many local jurisdictions don't have this overreaching oversight and businesses are in compliance.
Again, the business owners have the most vested interest in staying compliant - they don't need the threat of SJPD to remain complaint.
Future Cannabis Regulatory Program Review
Staff is scheduled to review and discuss the possibility of expanding the San José Police Department Division of Cannabis Regulation’s responsibilities to include regulating licensed tobacco retailers at the Public Safety, Finance, and Strategic Support Committee meeting on April 18, 2024.
REBUTTAL
This is incorrect. Sta$ was directed to expand regulations to vape and smoke shops which are not necessarily tobacco retailers.
PUBLIC SAFETY, FINANCE AND STRATEGIC SUPPORT COMMITTEE
January 31, 2024
Subject: Cannabis Business Regulations and Annual Operating Fee Comparisons Page 16 EVALUATION AND FOLLOW-UP
Staff will continue to provide the City Council with updates via informational memoranda regarding the progress of the City’s cannabis regulatory program, changes in state law, and other developments potentially impacting the regulatory landscape.
COST SUMMARY/IMPLICATIONS
The costs associated with the cannabis regulatory functions are 100% recovered by the registered businesses for a net-zero impact on the General Fund.
COORDINATION
This memorandum was coordinated with the City Attorney’s Office and the City Manager’s Office.
PUBLIC OUTREACH
This memorandum will be posted on the Public Safety, Finance and Strategic Support Committee Agenda website for the February 15, 2024, Committee meeting.
COMMISSION RECOMMENDATION AND INPUT
No commission recommendation or input is associated with this action.
CEQA
Not a Project, Public Project File No. PP17-008, General Procedure and Policy Making resulting in no changes to the physical environment.
PUBLIC SUBSIDY REPORTING
This item does not include a public subsidy as defined in section 53083 or 53083.1 of the California Government Code or the City’s Open Government Resolution.
PUBLIC SAFETY, FINANCE AND STRATEGIC SUPPORT COMMITTEE
January 31, 2024
Subject: Cannabis Business Regulations and Annual Operating Fee Comparisons Page 17 ANTHONY MATA
Chief of Police
For questions, please contact Wendy Sollazzi, Division Manager, Division of Cannabis Regulation, San José Police Department, at [email protected] or (408) 537-9890.
Other Pertinent Information:
San Jose Police Department Budget
For 2023-2024, the San Jose Police Department’s budget for cannabis regulation was $1,511,417:
PUBLIC SAFETY, FINANCE AND STRATEGIC SUPPORT COMMITTEE
January 31, 2024
Subject: Cannabis Business Regulations and Annual Operating Fee Comparisons Page 18 The Annual Operating Fee was intended to be a “cost recovery” fee that was to be used, along with other fees noted below, to pay the salaries, bonus, and other compensation of the Department of Cannabis Regulation within the city of San Jose.
It is unclear why the San Jose Police Department is collecting $2,230,496 from cannabis businesses when the budget for cannabis regulation is $1,511,417. That is an excess of $719,079.
Total Pay and Benefits for Department of Cannabis Regulation (Source: https://transparentcalifornia.com/)
The Department of Cannabis Regulation within the San Jose Police Department has six full time employees as follows. The salaries of these individuals since 2018 are set forth below:
Name Title 2018 2019 2020 2021 2022
Wendy
Sollazzi
Division
Manager
$309,421.42 $363,508.71 Not
Available
$232,796.57 $238,535.43
David
Woolsey
Police
Sergeant
$348,226.73 $378,142.03 $258,263.15 $255,166.78 $263,162.02 Dat Vu Analyst II $202,306.93 $199,639.51 $126,100.53 $126,278.10 $129,794.71 Stephen
GaLaney
Analyst II $181,057.41 $199,295.72 $119,608.76 $130,268.82 $133,921.45 Carla
Sargent
Analyst I/II $154,035.84 $171,341.23 $114,379.23 $119,720.25 $125,684.47 Inderpal
Kaur
StaL
Specialist
N/A $62,448.91 $86,431.81 $80,686.66 $87,248.17
TOTAL $1,195,048.33 $1,374,376.11 $704,783.48
+ Wendy
$944,917.18 $978,346.25
The San Jose Police Department’s 2022-2023 budget for cannabis regulation was $1,444,536. The total compensation paid to the six employees was actually $978,346.25. It is unclear why an additional $466,189.75 was requested in the budget – and paid by the San Jose cannabis businesses.
PUBLIC SAFETY, FINANCE AND STRATEGIC SUPPORT COMMITTEE
January 31, 2024
Subject: Cannabis Business Regulations and Annual Operating Fee Comparisons Page 19 A reduction in the Annual Operating Fee for cannabis business as follows is proposed. Unlike the current model where each business pays one Annual Operating Fee but can have multiple locations, the proposal is that each business will pay an Annual Operating Fee per location based upon use. This will also entice new businesses to open in San Jose as the annual fee as currently structured has been a barrier to entry for most cannabis businesses:
License Type Annual Operating Fee
Storefront Retail $30,000
Microbusiness1 with Storefront Retail $30,000
Microbusiness1 without Storefront Retail $2,500
Non-storefront retail $2,500
Manufacturing $2,500
Distribution $2,500
Cultivation $2,500
Manufacturing/Distribution/Cultivation (2-3 uses at same site) $2,500 Testing Laboratory $2,500 1
Microbusiness license is a state license type where a business operates at least 3 of the following uses at one location: retail, distribution, cultivation, and/or manufacturing.
PUBLIC SAFETY, FINANCE AND STRATEGIC SUPPORT COMMITTEE
January 31, 2024
Subject: Cannabis Business Regulations and Annual Operating Fee Comparisons Page 20 Currently there are 14 cannabis businesses that are open and operational. All of these cannabis businesses are storefront retail or microbusiness with storefront retail. This would result in revenue of approximately $420,000.
At least 3 of the existing cannabis businesses have secured a location for their second retail store, this will result in additional revenue of $90,000.
At least 1 of these existing cannabis businesses has a standalone manufacturing/distribution facility which will result in revenue of $2,500.
Also, pursuant to the city’s equity program there will be an additional 5 storefront and 5 nonstorefront retail registrations that will be issued. It should be noted that the fees for these businesses can be paid from the grants received by the city from the Department of Cannabis Control. It is estimated that these grants total at least $709,382.67. See Department of Cannabis Control – Grant Funding at https://cannabis.ca.gov/about-us/grant-funding/.
In addition to cannabis businesses, all vape shops and smoke shops should also pay a registration fee of $2,500. There are an estimated 150 vape and/or smoke shops in San Jose – most of which do not have a business license.
With this new fee schedule, the city will receive approximately $800,000 in revenue which is su$icient to compensate Wendy Sollazzi, Police Sergeant David Woolsey, and at least two analysts.
Source Estimated Revenue
Cannabis Business (14 Existing Storefront Retail/Microbusiness with Storefront Retail)
$420,000
Cannabis Business (3 New Storefront Retail) $90,000
Manufacturing/Distribution (1 Existing) $2,500
Cannabis Business (5 Equity Storefront Retail) $150,000 Cannabis Business (5 Equity Non-Storefront Retail) $12,500 Vape/Smoke Shops (Assuming 50 out of 150 to be registered) $125,000 TOTAL $800,000
These fees may increase per year per the Consumer Price Index (CPI) not to exceed 3%.