City Council
Report
City Council Meeting: July 26, 2022
Agenda Item: 11.C
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To: Mayor and City Council
From: Gigi Decavalles-Hughes, Director, Finance Department, Revenue Subject: Ballot measure for business license tax on the sale, distribution, delivery, and consumption of cannabis.
Recommended Action
Council could either direct staff to develop a cannabis study program that includes research to support the preparation of a comprehensive ordinance governing nonmedicinal commercial cannabis activity, a community outreach component, and a proposal to place a measure for a cannabis business license tax on the November 2024 general election ballot or adopt a resolution to place a cannabis business license tax measure on the November 2022 general election ballot.
Summary
On June 14, 2022, Council directed staff to provide a recommendation on whether the City should place a measure on the ballot for the November 8, 2022 election that would enact a tax on businesses conducting cannabis related activities in the City, or alternatively, to propose a program to bring such a measure forward in a future election.
Staff reviewed the possibility of placing a cannabis tax measure on the upcoming November 2022 ballot and considered several factors, including the potential effect a cannabis tax measure could have on other significant City revenue measures planned for the same election, the likely process and timing to decide on and potentially approve nonmedicinal cannabis sales in Santa Monica, the results experienced by other cities that enacted similar measures, and the estimated amount and timing of revenue associated with a potential commercial cannabis tax.
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Staff recommends not placing a cannabis tax measure on the November 8, 2022 ballot due to the following factors:
• Risk of losing voter support for other City tax measures appearing on the same ballot that are likely to provide significantly more revenue than a cannabis tax; • Likelihood that material cannabis tax revenues from a successful 2022 ballot measure would not be received any sooner than if the measure were to be placed on the November 2024 ballot;
• Evolving State regulations and potential over-taxation are important considerations for determining the appropriate tax level; both will become more clear in the next 12-24 months;
• Lack of community process and/or polling; and
• Sales taxes and existing business license taxes will continue to be applied to existing medicinal cannabis businesses until a new business license tax measure is approved.
Staff recommends that the City move forward as directed by Council on May 10, 2022 to examine and analyze steps needed to implement a comprehensive program to manage commercial nonmedicinal cannabis activity in Santa Monica with the goal of placing a tax measure on the November 2024 ballot either as a standalone measure or as part of a comprehensive modernization of the City’s business license tax ordinance.
However, Council could choose the option of placing the measure on the November 8, 2022 ballot. If Council chooses this option, the following actions are required:
1. Adopt the attached resolution placing a cannabis business license tax measure on the November 8, 2022 ballot
2. Designate councilmembers to prepare ballot arguments
3. Direct the City Attorney to prepare an impartial analysis of the measure 3 of 11
Background
California was the first state to legalize cannabis for medicinal use in 1996 (Proposition 215) and made marijuana legal for recreational use in 2016 (Proposition 64). Over 120 California cities have established local laws to tax cannabis. Starting January 1, 2018, the State imposed a 15 percent excise tax upon retail purchasers of all cannabis and cannabis products, including medicinal cannabis. Until July 1, 2022, the State also imposed a tax on cultivation. However the cultivation tax has since been suspended indefinitely with the recent passage of AB 195. In general, local governments have the authority to impose additional taxes – most often through business license – on commercial cannabis activities.
In June 2015, the City Council adopted a comprehensive Zoning Ordinance Update which included Santa Monica Municipal Code (SMMC) Section 9.31.185, Medical Marijuana Dispensaries. The section permitted a maximum of two medical marijuana dispensaries no larger than 2,500 square feet with location and operational restrictions.
Santa Monica subsequently approved two medicinal dispensaries which are scheduled to open in 2022.
On May 10, 2022, the City Council directed the City Manager to return with a study session as soon as practicable on various items (including municipal code changes, taxes, permitting process, etc.) that are necessary to be part of any future action taken by the City Council to allow for any business or businesses involved in the sale, delivery, themed special events, and/or consumption of nonmedicinal cannabis in the City of Santa Monica.
On June 28, 2022, Council approved placing a transient occupancy tax measure on the November 8, 2022 ballot.
Discussion
On June 14, 2022, Council directed staff to explore and provide a recommendation on whether the City should place a ballot measure enacting a tax on businesses 4 of 11
conducting cannabis related activities in the City on the November 8, 2022 ballot, prior to consideration and potential implementation of regulatory changes that would be required to allow the opening of dispensaries in Santa Monica, or alternatively to propose a pathway to bring such a measure forward in a future election. This staff report analyzes the proposal based on the context (financial need and other ballot measures), timing, and industry operating environment.
Financial Need & Other Ballot Measures
As Santa Monica continues its economic recovery from the COVID-19 pandemic, the City requires additional revenue streams to respond to emerging challenges, especially in public safety, homelessness, and restoration of other City services reduced or eliminated during the pandemic-related restructuring. To help restore funding for these needs, Council voted to place a measure on the November 8, 2022, ballot increasing the Transient Occupancy Tax (hotel tax) that is estimated to bring in an additional $4.1 million in revenue annually. In addition, on July 26, 2022, Council will vote on whether or not to place an increase in the Real Property Transfer Tax on the ballot (with an accompanying advisory measure) that could generate additional revenue to restore and expand services.
The two Council-led measures – if passed by Santa Monica voters - could together raise an additional $13-$25 million annually to help fund unmet needs in the community.
In addition, the ballot is expected to include a competing citizen’s initiative raising the Real Property Transfer Tax and a Santa Monica College general obligation bond measure which would require an increase to property taxes to pay for the debt service.
Based on the limited time to review a cannabis proposal and insufficient time to conduct polling, staff does not have information on how Santa Monica voters would respond to multiple tax measures on one ballot. Discussions with polling and revenue consultants suggest that when multiple tax measures appear on the same ballot, there is a risk that voters may reject some or all of the measures rather than voting for all. 5 of 11
A successful cannabis business license tax measure on the November 2022 ballot would produce only a fraction of the revenue generated by the other two measures, and would likely not produce any material revenue in the near term. If the City chose to legalize commercial non-medicinal cannabis, the time needed for the City to develop a regulatory program, and for interested companies to obtain State licenses, would place the earliest non-medicinal cannabis business opening in 2024. It should be noted that the first medicinal cannabis businesses in Santa Monica are expected to open in summer/fall 2022, approximately seven years after initial approval. These considerations support staff’s recommendation to postpone a cannabis business license tax measure to 2024.
Council direction for a proposed cannabis tax would be to set various initial business license tax rates, levied against gross receipts, by business type as detailed in the table in the “Alternative” section below. Using those initial rates and assuming two retail providers - consistent with Santa Monica’s size and location – a very rough estimate of potential revenue based on regional market trends is $0.5-$1 million annually.
However, these estimates are very preliminary; other cities’ experience indicates that cannabis tax revenue has not always met expectations. As previously noted, even if passed by voters, retailers will likely not be able to open for at least 12-18 months following the election (based on City and State licensing requirements) resulting in revenues not only lower, but received much later than the amounts expected from the TOT and documentary transfer tax measures, should voters pass either or both.
Since cannabis taxes are generally very popular with voters, and since the City does not have the benefit of polling related to a cannabis tax either on its own or appearing with multiple other tax measures, the City must consider the possibility that voters may choose to support the cannabis tax rather than the other ballot measures, resulting in delayed City revenues that, when eventually received, preliminary estimates suggest would be far below what is expected from the other tax measures. 6 of 11
Polling
Polling is typically an important aspect of determining whether, when, and how to place a tax measure on a ballot. Because the August 12, 2022 statutory deadline for placing measures on the ballot leaves staff with insufficient time to properly poll the Santa Monica community about a cannabis tax, staff does not have any direct information about its likelihood of passage or potential effect on the other ballot measures.
Recent history has shown that ballot measures’ success could change depending on what else voters consider at the same time. For example, 2020 polling (shared with Council along with the June 9, 2020 Staff Report) indicated strong support for both a Documentary Transfer Tax and Business License Tax individually; but when polled about both appearing together, voter support for the Business License Tax dropped significantly and the City chose to not place it on the ballot (the Documentary Transfer Tax passed with strong support). Recent polling for the TOT and Library Parcel Tax measures (shared with the Council along with the proposed budget at the May 24, 2022 meeting) indicated that voters, while they highly value Library services, were not prepared to vote for a tax to support them. Thus, voters may choose only one measure or choose to reject all when faced with the proposed four tax measures.
Process and Timing
Santa Monica has not yet gone through the policy and community processes usually undertaken to allow for commercial nonmedicinal cannabis. Following Council direction in May 2022, staff is preparing to do the necessary research for returning to Council for a study session on this topic, which would include a review and analysis of the actions required to allow businesses involved in the sale, delivery, production of themed special events, and/or consumption of nonmedicinal cannabis, to operate in the City of Santa Monica. This would involve an extensive community process, zoning code changes, licensing framework, and other regulatory aspects.
In addition to the City’s process, cannabis businesses must meet a series of State permitting requirements before beginning operations. There is no standard timeline for the State licensing process, but based on the experiences of other cities that have 7 of 11
legalized nonmedicinal cannabis, these businesses are unlikely to receive approval before 2024, and this assumes the City being able to move through its own processes very quickly.
Based on the anticipated City process and the State’s requirements, staff estimates that it is unlikely that a fully licensed and permitted cannabis business could begin operations in Santa Monica before 2024. This means that a 2024 cannabis tax measure, if voters approved it, would likely be effective close to the time retailers would be prepared to open, thus resulting in minimal (if any) lost revenue to the City. While a tax would also cover other activities – delivery, events, manufacturing, distribution – it is likely that most potential revenue would be related to retail.
Industry
Cannabis is a new and evolving industry in California. The State is considering changing its tax structure and other regulations to assist legal businesses and help ensure that consumers choose legal and regulated retailers for purchases. This is ongoing, and the outcome will likely impact the tax rate and type and structure of operations that makes sense for Santa Monica – for example, with the recent passage of Assembly Bill 195, State law changed, effective July 1, 2022, so that cultivation tax no longer applies to harvested cannabis entering the commercial market. The law also shifts the responsibility of collecting and remitting certain taxes from the distributor onto the retailer who must now collect directly from the consumer. To the extent that other cities that already tax commercial cannabis activity may need to modify their existing tax laws to accommodate this new direction by the State of reducing tax burdens on legal cannabis businesses, the City could benefit from observing and possibly incorporating some of their ideas into its own tax ordinance and study process where necessary. And while a measure placed on the 2022 ballot would allow for future modification of the tax rate once more analysis had been conducted, the additional time to observe the State’s direction for cannabis taxation and learn from other cities’ responses would result in a tax rate that would better support both Santa Monica businesses and provide a fair level of revenue.
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Current Taxes
If nonmedicinal facilities were able to open before the City established a discrete business license tax rate for these facilities, the City would still be able to collect revenue on potential sales, as follows:
• The City’s current sales tax rate of 10.25%, of which the City receives one percentage point as its standard allocation and an additional one percentage point from the City’s transaction and use tax (Measure GSH). • The City would also collect its existing business license tax from these establishments, which ranges from 0.125% to 0.5% of a business’s gross receipts depending on the specific activity.
Under existing law, the City’s two medicinal cannabis dispensaries will pay Santa Monica business license tax, and sales will contribute to sales tax receipts for the City (certain medicinal cannabis sales are exempt from sales tax under State law).
Recommendation
Based on the risk to other potential November 2022 ballot measures, the nominal revenue that would be generated in the short term, the lack of information from community surveying, the State’s new direction regarding cannabis taxation, the City’s intent to place a business license tax modernization measure on the November 2024 ballot, and the fact that sales of cannabis within the City can and will be taxed under existing law, staff believes that the best time to have a cannabis tax measure on the ballot is for it to be part of the November 2024 ballot, either as part of a planned business license modernization measure or as a standalone item.
Staff’s recommendation for the November 2024 general election follows State law, which generally requires that cities bring tax measures to voters in the context of a general election for members of the governing body of the local government (Article XIII C, Section 2). However, cities may include a tax measure on another election date by unanimous declaration of an emergency by the governing body. While this means that it 9 of 11
would be possible for Santa Monica to bring a cannabis tax measure to voters with a special election – for example, the June 2024 primary election – this would cost the City approximately $800,000, offsetting any revenue advantage from bringing the tax a few months in advance of the regular election.
Alternative
Notwithstanding staff’s analysis and recommendations above, the Council could still place a measure on the November 2022 ballot to establish a tax on nonmedicinal cannabis related activities, contingent on Council direction for these activities in Santa Monica.
Following Council direction, staff has prepared required ordinance changes and a draft resolution for placing the tax on the November 8, 2022 ballot (Attachment A). The proposal includes various rates by business type as detailed below. Council would have discretion to adjust the rates by resolution as long as they did not exceed the maximum rate.
Based on very preliminary analysis, as noted above, staff estimates that this proposal could generate up to $0.5-$1 million annually from retail operations (assuming two retail Activity
Rate (% of gross receipts)
Initial Rate Maximum Rate
Adult-use Retailers 3% 10%
Distribution 1% 10%
Manufacturing 1% 10%
Cultivation 1% 10%
Testing Laboratory 1% 10%
Medicinal 2% 10%
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facilities) once operations begin. This estimate does not take into account non-retail activities due to a lack of data necessary to make this projection.
A comparison to other city rates is shown below:
Other Cities
City Rates (Adult-use retail)
Los Angeles • $100 per $1,000 in Gross Receipts
Long Beach • 8% gross receipts
Malibu • 2.5% gross receipts
Culver City • Range of 6-10% with an initial rate of 6% gross receipts Santa Barbara • 6% of gross receipts
The proposed ballot language is as follows. This is included with the resolution (Attachment A).
Cannabis Tax Measure
Shall the measure to establish a
business license tax on commercial
adult-use nonmedicinal cannabis
retailers up to 10% of gross receipts, and
to tax medicinal cannabis retailers up to
10% of gross receipts, and to tax
cannabis distribution, manufacturing,
cultivation, and laboratory testing up to
10% in gross receipts, which all together
could generate an estimated $1 million
annually until repealed, be adopted?
YES ________
NO _________
The proposed resolution (Attachment A) includes the recommended ballot language and measure language and authorizes designated City Council members to submit arguments and rebuttals concerning the measure. Finally, the resolution directs the City Clerk to transmit a copy of the measure to the City Attorney and directs the City 11 of 11
Attorney to prepare an impartial analysis of the effects of the measure on the existing law as well as on the operation of the measure.
Arguments and rebuttals shall be submitted in accordance with State Elections Code Sections 9280-9287 and Santa Monica Municipal Code Section 11.04.125. The Elections Official will set the deadline for submitting arguments as 14 days from the date the election is called on the measure and the deadline for submitting rebuttals to arguments as 10 days after the deadline for submitting arguments on the measure.
Financial Impacts & Budget Actions
There is no immediate financial impact associated with staff’s recommended action. If Council chooses the alternative, staff estimates potential for up to $0.5-$1 million annually, beginning most likely in 2025 at the earliest. The cost of placing the measure on the November 8, 2022 ballot would be covered by the FY 2022-23 election budget.
Prepared By: David Carr, Assistant City Treasurer
Approved Forwarded to Council
Attachments:
A. 7-20-22 Cannabis Tax Reso and Ordinance
B. Written Comments
C. PowerPoint Presentation