Cannabis Tax
July 26, 2022
• Consider placing a commercial cannabis tax on the November 8, 2022 ballot
• Tax would be contingent on future City Council actions regarding legalization of sale of non-medicinal cannabis.
Council Direction
• Develop a comprehensive set of regulations to allow for the sale, distribution, delivery, and consumption of nonmedicinal cannabis in Santa Monica.
• Plan to place a cannabis business license tax ballot measure on the November 2024 general election ballot.
or
• Approve a resolution placing a cannabis tax measure on the November 8, 2022 ballot.
Options
Cannabis Tax Measure - Background
June 2015 Council approved permitting two medical marijuana dispensaries (legal in State since1996)
Nov. 2016 California voters legalized recreational cannabis Fall 2022 Approved medical establishments expected to open May 2022 Council direction to pursue steps towards allowing nonmedicinal cannabis activity in Santa Monica
June 2022 Council direction to consider placing a cannabis tax on the ballot
• The state has taxed cannabis retail and cultivation since 2018. Recent state law (AB 195) has suspended tax on cultivation as of July 2022; the 15% retail excise tax remains. • Voter support for multiple tax measures on the same ballot • Timing and amount of potential revenue
• Cannabis state-level tax & regulatory environment
• Lack of community process
Cannabis Tax Measure - Items for Consideration
Voter Support for Multiple Tax Measures
• Santa Monica urgently requires additional funding for public safety, homelessness/ housing displacement programs, and restoration of other City services • Having multiple tax measures on the ballot could jeopardize success of one or all • The ballot will include a TOT measure and possibly two competing transfer tax measures
• Council-directed ballot measures for TOT and DTT could together bring in $13-$25M annually (if voters approve)
• Rough revenue estimate for proposed cannabis tax is $0.5-$1M annually • The ballot will also include a SMC bond measure
Potential Revenue Timing – Cannabis Tax
• Community process & Council vote to legalize
commercial nonmedicinal cannabis
12-24 months
at earliest
• Regulatory program developed
• City & state licensing requirements met
• Retail establishments begin sales
Staff believes the City is unlikely to receive any material revenue benefit from presenting a cannabis tax in 2022 vs. 2024 State Regulatory Environment
• The State is in the process of reviewing and changing its tax structure and other regulations to assist legal businesses (AB 195 removes cultivation tax & shifts collecting/ remitting responsibilities) • Additional time to study state activity and other city’s responses to changing regulations/ taxes could improve the City’s future tax and regulatory structure
Business License and Sales Tax application
Sales Tax 10.25% (the City receives two percentage points from standard allocation and Measure GSH).
Business
License Tax
0.125% to 0.5% of a business’s gross receipts
Affected businesses would pay existing taxes on sales happening prior to the City establishing a cannabis tax (in the unlikely event any occur).
Alternative-Proposed Tax
Activity
Rates (% of gross receipts)
adjustments above rate cap must go to voters
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%
• Council could adjust rates by resolution up to the maximum rate • Rates above could generate $0.5-$1M based on two establishments Alternative-Other City Comparisons
City Rates (Adult-use retail)
Los Angeles • 10% gross receipts
Long Beach • 8% gross receipts
Malibu • 2.5% gross receipts
Culver City • 6-10% with an initial rate of 6% gross receipts Cannabis Tax
“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?” Proposed Ballot Language
Recommendation
• Approve staff recommendation to continue with research and activity towards a comprehensive nonmedicinal commercial cannabis program, including a proposed tax in November 2024
Alternative Action
• Approve the resolution to place the cannabis tax on the November 8, 2022 ballot, designate Council member(s) to prepare ballot arguments, and directing the City Attorney to prepare an impartial analysis
Recommendation