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(1) Discuss the Committee’s Recent Assignment from the City Council to Consider Reducing the Cannabis Business Tax Rate for Cannabis Distribution from 2% to 0%; 2) Develop a Plan to Examine Cannabis Distribution Tax Rates, Form a Recommendation and Prepare a Report for City Council; 3) If Desired, Establish a Cannabis Distribution Tax Ad Hoc Subcommittee; and 4) Provide Direction to Staff.
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Meeting Date: October 11, 2023
Contact Person/Dept.: Jesse Mays/City Manager’s Office
Phone Number: (310) 253-6000
Fiscal Impact: Yes [X] No [] General Fund: Yes [X] No []
Attachments: Yes [X] No []
Public Notification: (E-Mail) Meetings and Agendas -Finance Advisory Committee (10/05/2023), Cannabis (10/05/2023)
Department Approval: Lisa Soghor, Chief Financial Officer (10/05/2023)
RECOMMENDATION
Staff recommends the Finance Advisory Committee discuss the Committee’s recent assignment from the City Council to consider reducing the Cannabis Business Tax Rate for Cannabis Distribution from 2% to 0%; 2) Develop a plan to examine cannabis distribution tax rates, form a recommendation and prepare a report for City Council; 3) If desired, establish a Cannabis Distribution Tax Ad Hoc Subcommittee; and 4) Provide direction to staff.
BACKGROUND
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 reduce the Cannabis Business Tax Rate for Cannabis Distribution from 2% To 0% and voted to send the item to the Finance Advisory Committee for consideration with direction to return to the City Council with a report.
On the April 10, 2018 municipal election ballot, Culver City voters approved Measure A, a cannabis business tax. The ballot measure added Chapter 11.32 to the Culver City Municipal Code, 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 they have been able to be adjusted by City Council resolution. Cultivation rates were to be adjusted according to the consumer price index after a two-year initial period. 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.
DISCUSSION
Some policy arguments in favor of eliminating the cannabis distribution tax are:
• The legal cannabis industry is struggling under the weight of taxation and regulation, which is allowing the illegal industry to thrive.
• Cannabis distributors are uniquely impacted by taxes, compared to other types of cannabis businesses, because they are not able to pass along the tax to customers, since wholesale customers demand wholesale prices without added taxes.
• Some other California jurisdictions have eliminated the distribution tax.
Some policy arguments in favor of maintaining the distribution tax are:
• Culver City’s 2% distribution tax is already lower than the distribution tax in many other jurisdictions.
• Vertically integrated cannabis businesses, which in Culver City have both manufacturing and distribution permits, typically only pay one tax rate in cities that have a special cannabis tax. Because the transfer of the cannabis from manufacturer to distributor is within the same company, there is no “gross receipts” generated and therefore no tax due. Tax is only due when the company distributes the tax to retailers, at which point there is a third-party transaction generating gross receipts that is taxable as cannabis distribution tax.
The Culver City Ad Hoc Cannabis Subcommittee (Mayor Vera and Council Member Eriksson) met in April 2023 to discuss this issue. The Subcommittee has not made a recommendation to the City Council on this issue.
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.
|
Revenue Type |
Calendar Year 2022 Taxes |
|
Business License Tax Manufacturing |
$ 1,020 |
|
Business License Tax Delivery |
$ 0 |
|
Business License Tax Distribution |
$ 1,706 |
|
Business License Certificate Fees |
$ 675 |
|
Cannabis Permit Fees |
$ 53,347 |
|
Cannabis Tax Manufacturing |
$ 0 |
|
Cannabis Tax Delivery |
$ 10,171 |
|
Cannabis Tax Distribution |
$126,020 |
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.
ATTACHMENTS
1. Cannabis Distribution Tax Rates in Other California Cities
2. Authorization letter from Breez CA, LLC to release tax information
MOTIONS
That the FAC:
1. Discuss the Committee’s recent assignment from the City Council to consider reducing the Cannabis Business Tax Rate for Cannabis Distribution from 2% to 0%.
2. Discuss develop a plan to examine cannabis distribution tax rates, form a recommendation and prepare a report for City Council.
3. Establish a Cannabis Distribution Tax Ad Hoc Subcommittee, if desired.
4. Provide direction to staff.