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CC - ACTION ITEM: (1) Consideration of the Finance Advisory Committee’s Recommendation to Decrease the Cannabis Business Tax Rate for Cannabis Distribution from 2% to 0%; (2) If Desired, Introduction of an Ordinance Amending Culver City Municipal Code Section 11.32.025.E to Decrease the Cannabis Business Tax Rate for Cannabis Distribution from 2% to 0%, Effective January 1, 2024; and (3) Direction to the City Manager as Deemed Appropriate.
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Meeting Date: October 23, 2023
Contact Person/Dept.: Jesse Mays, Assistant City Manager
Lisa Soghor, Chief Financial Officer
Phone Number: City Manager’s Office: (310) 253-6000
Finance Department: (310) 253-5865
Fiscal Impact: Yes [X] No [] General Fund: Yes [X] No []
Attachments: Yes [X] No []
Commission Action Required: Yes [X] No [] Date: 10/12/2023
Commission Name: Finance Advisory Committee
Public Notification: (E-Mail) Meetings and Agendas - City Council (10/17/2023)
Department Approval: John Nachbar, City Manager (10/XX/2023)
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RECOMMENDATION
Staff recommends the City Council (1) consider the recommendation from the Finance Advisory Committee (FAC) to decrease the Cannabis Business Tax rate for Cannabis Distribution from 2% to 0%; (2) if desired, introduce an ordinance amending Culver City Municipal Code (CCMC) Section 11.32.025.E to decrease the Cannabis Business Tax Rate for Cannabis Distribution to 0% effective January 1, 2024; and (3) provide other direction to the City Manager, as deemed appropriate.
BACKGROUND
At the April 10, 2018 General Municipal Election, the Culver City voters approved Measure A, a cannabis business tax. The ballot measure added Chapter 11.32 to the CCMC, which governs the cannabis business tax. The initial and maximum rates for the tax, as approved by voters, are as follows:
• Retail (medicinal): range of 5 -8% with an initial rate of 5%
• Retail (adult-use): range of 6-10% with an initial rate of 6%
• Manufacturing: range of 4-6% with an initial rate of 4%
• Distribution: range of 2-6% with an initial rate of 2%
• Testing: 1-1.5% with an initial rate of 1%
• Cultivation: $12 per square foot of canopy
The initial rates were put in place for a minimum of two years, after which, beginning on July 1, 2020, the City Council had the authority to increase, by resolution, the initial tax rate, provided such increase does not exceed the maximum rates approved by the voters, as set forth in Chapter 11.32. To date, the City Council has not adjusted the initial rates approved by voters. Cannabis distribution tax rates in other California cities are included in Attachment 1.
On August 28, 2023, the City Council, in response to a request by a representative from a permitted Culver City cannabis manufacturing, distribution, and delivery-only retail business, requested that staff agendize a discussion of whether to lower the cannabis business tax rate from 2% to 0%.
On September 11, 2023, the City Council discussed whether to decrease the Cannabis Business Tax Rate for Cannabis Distribution from 2% to 0% and referred this matter to the FAC for consideration and a report back to the City Council.
DISCUSSION
Breez CA, LLC (formerly Promontory Holdings, LLC) is the Culver City permitted cannabis manufacturing, distribution, and delivery-only retail business that requested City Council review the cannabis distribution tax rate. The business would like the City to consider the tax payments and permit fees paid by the company for both cannabis and business license. Private business tax information is confidential, and the City does not release this information. Attachment 2 is a letter specifically authorizing the City to release Breez CA, LLC’s tax information pertaining to calendar year 2022.
The table below outlines the taxes and fees paid by Breez CA, LLC. The business license certificate fees and the cannabis permit fees represent the total in permit fees for all three business lines for 2022. Breez CA, LLC is currently the largest contributor to Cannabis Distribution Tax in Culver City.
Permit fees are intended to cover all or a portion of a government’s costs for providing a service and may not exceed the estimated reasonable cost of providing that service. Taxes are used to generate revenue to support the general purposes of the government.
On October 22, 2023, the FAC discussed the assignment from the City Council to consider decreasing the Cannabis Business Tax Rate for Cannabis Distribution from 2% to 0%. The Finance Advisory Committee, by a vote of 4-1, recommended to the City Council to “reduce the rate from 2% to 0%.” As part of that vote, the FAC also recommended that there should be “monitoring mechanisms to ensure the commitment of the company to stay…[in Culver City, which] should be checked periodically so… [the tax rate can be adjusted] if that [commitment] is not lived up to.”
If desired, City Council can move forward with the FAC’s recommendation, by introduction of an Ordinance amending CCMC Section 11.32.025.E to decrease the tax on commercial cannabis distribution businesses from 2% to 0%, effective January 1, 2024 (Attachment 3). Chapter 11.32 may be amended by the City Council without a vote of the people as it does not increase the rate of any tax levied pursuant to Chapter 11.32.
The “monitoring mechanisms” as suggested by the FAC are not appropriate for inclusion in the draft Ordinance, since they apply to a specific business. In addition, staff would need to look into this further to determine the details and enforceability of such a monitoring program for Breez CA, LLC. If City Council is interested in pursuing the recommended monitoring mechanisms, it can direct staff as deemed appropriate.
FISCAL ANALYSIS
The fiscal impact of decreasing the Cannabis Business Tax for cannabis distribution from 2% to 0% will result in a reduction in General Fund Revenues. If Council decreases the rate from 2% to 0%, staff will continue to monitor all cannabis related revenues and adjust revenue projections accordingly.
ATTACHMENTS
1. 2023-10-23 ATT Cannabis Distribution Tax Rates in Other California Cities
2. 2023-10-23 ATT Authorization Letter from Breez CA, LLC to Release Tax Information
3. 2023-10-23 ATT Draft Ordinance Amending CCMC Section 11.32.025.E
MOTIONS
That the City Council:
1. Consider the Finance Advisory Committee’s recommendation to the City Council that the City decrease the Cannabis Business Tax rate for Cannabis Distribution from 2% to 0%;
2. If desired, introduce an ordinance amending Culver City Municipal Code Section 11.32.025.E to decrease the Cannabis Business Tax Rate for Cannabis Distribution to 0%; and
3. Provide other direction to the City Manager as deemed appropriate.