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Santa Rosa Council To Weigh Cannabis Tax Tuesday

By Kevin McCallum

Santa Rosa is proposing a tax on cannabis businesses that would be lower than what most other jurisdictions in the state have imposed — including the one going to Sonoma County voters Tuesday — but higher than what many in the emerging industry are comfortable paying.

The City Council on Tuesday will consider asking voters to tax marijuana growers, manufacturers and other marijuana businesses operating within city limits up to 8 percent of revenue, though initial rates would be much lower. That’s compared to the 10 percent cap Sonoma County is asking voters to consider in Measure A, which the industry has opposed as excessive, and maximum rates of 15 percent to 18 percent passed by several other cities in the state.

City officials say the lower cap is a reasonable compromise that encourages the cannabis industry to come out of the shadows while also allowing the city to raise the approximately $1 million a year it expects to spend regulating the growing industry.

“We wanted a rate that would generate the revenue we need but also not push people into the black market or discourage them from participating in the regulated market that Santa Rosa is setting up,” said David Guhin, director of the city’s planning and economic development department.

If approved, the tax measure would be placed on the ballot June 6, most likely alongside another measure asking voters whether they want to approve the city’s suspended rent control ordinance.

Industry officials say they are grateful the city has listened to their concerns and taken the time to craft a thoughtful ordinance. But concerns remain that 8 percent is excessive given the multitude of other government taxes, fees and regulations the industry is facing.

“A fair tax is a good thing,” said Craig Litwin, a Sebastopol consultant to cannabis organizations. “What we have to be cautious about is the combination of taxes and fees that are being called for from every direction.”

Litwin has estimated that when all the various federal, state and local tax taxes under consideration are layered on top of one another, some in the industry could find themselves paying tax rates nearing 40 percent.

Santa Rosa originally considered a tax capped at the same 10 percent rate as the county, but the council’s cannabis subcommittee agreed to reduce it following input from cannabis industry groups, who have been pushing for a 5 percent cap. If the county’s Measure A tax is approved, the tax would be paid by medical and nonmedical cannabis businesses operating in the unincorporated areas of Sonoma County.

The city’s review of 27 jurisdictions in the state with similar cannabis taxes showed most had caps between 10 and 18 percent, with only six below 10 percent. Many of those were implemented in a rushed fashion, whereas Santa Rosa has taken a more deliberate approach, Guhin said.

The subcommittee also lowered an alternate tax calculation for cannabis growers from $38 per square foot of cultivation area to $25 per square foot annually. Under that scenario, a business such as Fleuron Inc., which is planning about 5,000 square feet of cultivation area in its nearly 11,000-square-foot cultivation facility on Maxwell Court, would pay $125,000 a year to the city. Reductions are allowed for crop losses, another concession to growers.

“It’s moving in the right direction, but I’m still worried that it’s a little high,” Litwin said.

The city’s only fully permitted cannabis manufacturing operation, CBD Guild, is similarly pleased by the city’s efforts but concerned that 8 percent would prove untenable given the myriad other taxes and fees, CBD spokesman Nick Caston said.

If the rate ever gets to 8 percent, “there is no way the company would be able to survive,” Caston said.

A maximum tax of 3 percent is about as much as manufacturers, given their high capital costs, can reasonably be expected to bear, he said.

That said, the city appears to have built in numerous provisions that make the ordinance more palatable than others around the state, Caston said.

“Santa Rosa’s overall regulatory and tax scheme is a lot better thought through,” Caston said. “They have taken the time to understand the logistical and practical concerns of the industry.”

For example, the city is proposing low initial rates that are locked in for two years. Recreational dispensaries will initially pay 3 percent of revenue, cultivators 2 percent and manufacturers 1 percent. Distributors won’t pay anything initially until the city better understands how they intend to operate, Guhin said. Recreational dispensaries aren’t currently permitted by the city.

Assuming an average tax of 2 percent on $50 million in revenue, the city could generate the $1 million it projects needing to pay for regulations like code enforcement, permitting, policy development, public safety and public education. Guhin estimated the $50 million figure after sitting down with the various businesses that have applied for permits from the city and asking them to share their business plans, he said.

Twenty-three organizations have applied to start cannabis businesses in the city since it approved rules for commercial medical marijuana operations last winter. Eight have been approved, though not all have completed building permit processes. Two more, including Fleuron, are heading to the planning commission Thursday.

If future city councils choose to increase the tax rate, those changes also will be locked in for two years, except in the case of a fiscal emergency. The provision aims to give the industry some predictability.

Additionally, in order to increase rates to 5 percent or more, the City Council would have to do so by a super-majority, or five of seven votes.

To ensure full compliance in the still largely cash-based industry, the city will retain the right to audit the books of any cannabis business subject to the tax. The city expects to perform audits more regularly for the cannabis industry than for other businesses, which are subject to business license taxes that max out at $3,000 per year.

That’s because the city has little experience regulating the industry and, unlike retailers that pay sales tax to the state, there are fewer ways for auditors to fact-check information businesses submit, city CFO Debbi Lauchner said.

There’s also potentially more money at stake.

Caston declined to say what kind of revenue CBD forecasts, but last April, before the company was raided by federal and local law enforcement, it had 65 employees. Now it’s on track to have 200 by the end of the year, he said.