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HomeMy WebLinkAbout05-15-2018 Item 18 Cannabis Busines Tax Ballot Measure ReviewMeeting Date: 5/15/2018 FROM: Greg Hermann, Interim Deputy City Manager Prepared By: Ryan Betz, Interim Assistant to the City Manager Alex Ferreira, Budget Manager SUBJECT: REVIEW OF A BALLOT MEASURE AND DRAFT ORDINANCE REGARDING A CANNABIS BUSINESS TAX RECOMMENDATION Review and consider the following items and provide direction to staff. 1.Review proposed ballot measure for the upcoming November 2018 municipal election to establish a cannabis business tax; and 2.Review proposed amendments to Municipal Code adding Chapter 5.10 (Cannabis Business Tax) to Title 5 to be adopted only if the proposed ballot measure is approved by the voters in November, 2018. DISCUSSION Background On November 8, 2016, the voters of California passed Proposition 64, “Medicinal and Adult Use Cannabis Regulation and Safety Act”, which legalized the adult use of recreational cannabis. Proposition 64 was strongly supported by City voters (15,447 total yes votes or 67.52% of the ballots cast). On, March 14, 2017, the Council chose to maintain a prohibition on all commercial cannabis business activity until a comprehensive program could be developed. On May 1, 2018, the City Council introduced an ordinance creating “Chapter 9.10 - Cannabis Regulations” of the City’s Municipal Code, repealing the current ban on commercial cannabis business activity and establishing standards to protect public health and safety applying to personal cannabis cultivation, cannabis business operators and permitted cannabis business activities in the City. The ordinance also includes zoning amendments, to be codified as Chapter 17.99 of the Municipal Code, providing for land use regulation and permitting of cannabis uses. The Council also directed staff to return with additional implementing measures, including the criteria for the ranking of cannabis business operator applications, an overlay zone, a fee schedule for applications and annual licenses, and more information about a cannabis revenue measure. The ordinance includes a provision that no land use, operator permit, or commercial cannabis business operations shall be allowed in the City unless and until the voters approve a cannabis revenue measure. Staff has worked with HdL Companies (Consultant), a leader in providing local government agencies guidance and directio n on cannabis taxation, as well as legal counsel with expertise in the constitutional and statutory requirements governing cannabis tax measures, to develop draft Packet Page 423 Item 18 ballot language and an ordinance for a cannabis business tax to be brought to the voters in t he November 2018 General Election. If directed by Council to be placed on the ballot the proposed measure would allow the voters to decide if the City can tax commercial cannabis activities. Personal cannabis cultivation, as defined in Proposition 64, is exempt from a cannabis business tax. Cities that permit commercial cannabis activities, however, have the ability to tax all business areas connected to the industry. In order to obtain revenue from those activities, a tax must be approved by the majority of the voters and then adopted through an Ordinance by the City Council. The purpose of this study session is to present draft language for the cannabis business tax and review potential methods of taxation. Results from a recent statistical ly valid resident survey conducted in March 2018 showed that 68% of the survey participants would support a cannabis business tax measure. State Cannabis Excise & Cultivation Taxes Beginning January 1, 2018, under Prop. 64, the State applies two cannabis taxes: an excise tax that is imposed on the purchaser of cannabis and cannabis products and a cultivation tax. Specifically, the two cannabis taxes are: 1) A 15% excise tax on purchasers of cannabis and cannabis products. Retailers of cannabis and cannabis products are required to collect the 15% excise tax from the purchaser based on the average market price of any retail sale and pay it to their cannabis distributor. 2) A cultivation tax is imposed upon cannabis cultivators on all harvested cannabis that enters the commercial market. Cannabis cultivators are required to pay the cultivation tax to either their distributor or their manufacturer. The rates range from $1.29 per ounce of fresh cannabis plant to $9.25 per dry-weight ounce of cannabis flowers It should be not ed that sales of medicinal cannabis are exempt from State and local sales and use tax. General Purpose Tax vs. Special Purpose Tax A general-purpose tax is imposed to raise general-purpose revenues and the City Council has the authority to use these reve nues for any general purpose, such as projects, programs and staffing ; general purpose measures require a simple majority (50% + 1) approval of voters. These revenues would be deposited in the General Fund and then appropriated as part of the financial planning process. A special purpose tax is a tax imposed for a purpose specified by the measure itself, such as public safety, open space or transportation projects; special purpose measures require a 2/3 approval of voters. Special purpose revenues would be deposited in a separate fund to be used for a specific purpose. The proposed Cannabis Business Tax ballot measure is a general tax enacted solely for general governmental purposes of the City and not for specific purposes. Should the ballot measure be approved by the voters, the revenue would be placed in the City's general fund and be available for appropriation by the City Council for any city purpose. Packet Page 424 Item 18 General Purpose Tax Options The following are options for general purpose cannabis taxes that cities and counties in California have passed and their rate levels. The activities that could be subject to the tax include, but are not limited to, cultivating, distributing, manufacturing, testing, dispensing, and retailing of cannabis. The cities that have previously enacted tax measures or are in the process of placing a measure on the November ballot, have taken various approaches to the methodology that would be applied to the tax calculations. The two most common, gross receipts tax and cultivation tax are taxes imposed on cannabis businesses, not customers. Many cities have adopted a combination of these methods for cannabis tax activity. Gross Receipts Gross receipts, sometime s referred to as an excise tax, is a tax that is assessed at every st age of cannabis production within city limits, but generally not on the cultivation process. Most cities have adopted this methodology. Proposition 64 imposes a 15% excise tax on purchases of cannabis and cannabis products paid to the State. Many cities are also proposing or have passed gross receipt taxes on cannabis. Cities that currently have a gross receipts tax for medical cannabis businesses include Santa Cruz (7%), Palm Springs (10%), San Jose (10%), Sacramento (4%), Oakland (5%), and Grover Beach (5%). Grover Beach also has a gross receipt tax of 10% on non-medical commercial cannabis activities. In 2016, Santa Barbara voters passed a cannabis tax by 68%, at a rate of up to 20% of gross receipts for cannabis businesses. Based upon local government trends, staff is recommending the ballot language include a cap of 10% of gross receipts for retail cannabis businesses, and 6% for all other cannabis businesses. Should the ballot measure pass, the gross receipt tax would be lower for the first two years (beginning January 1, 2019) and incrementally increase to the capped amount on January 1, 2022. The City Council, however, would have the authority to lower the tax rates, or not increase them, should they determine that it is in the best interest of the businesses and the City. Cultivation Tax Cultivation tax is a tax based upon the size of the canopy or license issued by the State. Cities that have a cultivation tax include Greenfield, King City, Salinas, Desert Hot Springs, Adelanto, Marysville, Gonzales, California City and Grover Beach. Based upon local government trends and the analysis provided by the consultant, staff is recommending the ballot language include a cap of $10.00 per canopy square foot for cultivation, which would be adjusted annually for inflation. Should the ballot measure pass, the cultivation tax would be lower in the first year and incrementally increase to the capped amount on January 1, 2022. The City Council would have the authority to lower the tax rate or not increase them should they determine it is in the best interest of the businesses and the City. It should be noted that there is pending State legislation (AB 3157) to suspend state cultivation tax until June 2021 and reduce the State excise tax from 15% to 11% for the same period to enable the cannabis industry time to keep cannabis businesses competitive in the market . Packet Page 425 Item 18 Draft Ballot Measure Language & Cannabis Tax Ordinance Based upon the review of cities in California that have adopted or have recently placed cannabis business tax measures on the June 5, 2018 and November 6, 2018 ballots, staff is recommending ballot language (Attachment A) with a combination of a gross receipt and cultivation tax to be considered by the City Council: Shall the measure to maintain and improve essential City services, including without limitation: public safety; senior, youth and park services; and programs to retain and attract businesses and address homelessness, by imposing a cannabis business tax at yearly rates up to 10% of gross receipts for retail and businesses and up to $10.00 per square for cultivation, raising approximately $1,500,000 annually, until ended by voters, with all funds used locally, be adopted?” Should the ballot measure pass, the Cannabis Tax Ordinance (Attachment B) includes the definitions of cannabis activity, tax imposed, administration and payment procedures, etc. It also identifies that the City Council has the authority to repeal or amend the tax to a lesser amount. However, as required by Article XIII C of the California Constitution, voter approval is required for any amendment that would increase the capped rate of the cannabis tax. Though the ballot measure language identifies a not to exceed $10.00 per canopy square foot for cultivat ion, not to exceed 10% of gross receipts for retail and businesses, the initial tax is established at lower rates during the first two years after the adoption of the ordinance. Below is a summary of the recommended tax and the years in which they take effect. Cannabis Activity Annual Initial Rate Beginning January 1, 2019 Annual Initial Rate Beginning January 1, 2021 Annual Initial Rate Beginning January 1, 2022 Cultivation Square foot of canopy space in a facility $7.00 $10.00 $10.00 + CPI Gross Receipts For every person who engages in the operation of a testing laboratory 1% 1% 2.5% For every person who engages in the retail sales of cannabis as a retailer (dispensary) or non -store front retailer (delivery) or microbusiness (retail sales) 6% 6% 10% For every person who engages in a cannabis distribution business 2% 2% 3% For every person who engages in a cannabis manufacturing, processing, or microbusiness (non-retail), or any other type of cannabis business 2.5% 2.5% 6% Packet Page 426 Item 18 Other Policy Considerations Concentrates Cannabis products come in a variety of forms including concentrates. Cannabis products that come in concentrate forms are generally more potent than the others. For example, the potency range in cannabis flowers can be 10-25% Tetrahydrocannabinol (THC), while concentrates typically fall between 50%-80% THC levels. Cannabis concentrates can be a helpful option for customers who use cannabis for medical related pain-relief. Regulation of cannabis products, including concentrates, are overseen by the State’s Bureau of Medical Cannabis while THC levels for edibles are regulated under California Code of Regulations 40305. Though regulation of concentrated cannabis products is administered by the State, cities and counties can impose a hig her tax on cannabis concentrates. Based upon review of cities and counties throughout the State, and feedback from the consultants, staff is not recommending a higher tax specifically for cannabis concentrates. CONCURRENCES The Community Development Department and City Attorney’s office concur with the draft ballot measure and the draft ordinance on a Cannabis Business Tax. ENVIRONMENTAL REVIEW This project is exempted under the California Environmental Quality Act (CEQA). Until July 1, 2019, Business and Professions Code section 26055, subdivision (h), as amended by SB 94, provides that CEQA does not apply to the adoption of an ordinance, rule, or regulation by a local jurisdiction that requires discretionary review and approval of permits, licenses, or other authorizations to engage in commercial cannabis activity, so long as the discretionary review includes any applicable environmental review pursuant to CEQA. The proposed ordinance is subject to a statutory exemption from CEQA because the City req uires discretionary review and approval, including applicable environmental review pursuant to CEQA, of permits, licenses or other authorizations to engage in commercial cannabis activity. FISCAL IMPACT As legal cannabis sales and production is an emergin g industry, staff has worked with two different consultants, HdL and MuniServices, to develop an estimated amount of revenue to expect from a cannabis business tax. Optimistically, cannabis business activities would begin at the earliest in January 2019. However, it is expected to take some time for the City to establish its permitting and regulatory protocols, and for businesses to find appropriate properties and obtain the necessary permits to operate. As a result, tax revenues from Cannabis are anticipated to increase through the next several years as businesses mature. The annual projected revenue from cannabis related businesses is expected to increase over the next several years to an estimate of $1,500,000. Packet Page 427 Item 18 Cannabis tax revenue estimates have been included in the City’s Fiscal Health Response Plan presented to Council on April 17, 2018. The plan includes an estimate of $100,000 in FY 2018- 2019 in cannabis tax revenue. Should a cannabis tax not be authorized by the Council and subsequently approved by the voters than alternative revenue strategies would have to be pursued or staff would need to return to the City Council for further direction to adjust the components of the plan to balance future revenues and expenditures. ALTERNATIVE The City Council could choose not to direct staff to draft a ballot measure for the upcoming November 2018 municipal election to establish a cannabis business tax. However, staff does not recommend this alternative because projected revenue from the tax, is part of t he City’s Fiscal Health Response Plan. In addition, the City Council adopted an ordinance on cannabis operators’ permit and land use regulations with the stipulation that the ordinance would only go into effect if a ballot measure for cannabis was approved by the voters Attachments: a - Draft Cannabis Business Tax Resolution b - Draft Cannabis Tax Ordinance Packet Page 428 Item 18 RESOLUTION NO. _____ A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF SAN LUIS OBISPO, CALIFORNIA APPROVING BALLOT MEASURE TEXT TO BE SUBMITTED TO THE VOTERS OF THE CITY IMPOSING A CANNABIS BUSINESS TAX; REQUESTING THE ASSISTANCE OF THE COUNTY OF SAN LUIS OBISPO IN CONNECTION WITH THAT ELECTION; AND REQUESTING CONSOLIDATION OF THAT ELECTION WITH ANY OTHER ELECTION HELD ON THAT DATE WHEREAS, Sections 37101 and 37100.5 of the California Government Code authorize the City to levy a license tax, for revenue purposes, upon business transacted in the City; and WHEREAS, as a result of recent voter-approved changes to state law, there has been a very strong interest by cannabis businesses to open in the City; and WHEREAS, cannabis businesses are likely to create dema nds upon City services, and the City does not currently impose any taxes upon cannabis businesses, aside from generally applicable municipal taxes; WHEREAS, the City Council desires to seek to impose a supplemental license tax upon cannabis businesses, to be known as the “Cannabis Business Tax”; and WHEREAS, the Cannabis Business Tax cannot be imposed without voter approval; and WHEREAS, the City Council desires to submit a Cannabis Business Tax measure to the voters of the City at the General Municipal Election to be held on Tuesday, November 6, 2018, and to be consolidated with any other election to be held on that date; and WHEREAS, the proposed Cannabis Business Tax is more completely described in the ordinance attached hereto as Exhibit “A” and incorporated herein by reference (the “Tax Ordinance”). NOW, THEREFORE, BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY OF SAN LUIS OBISPO AS FOLLOWS: Section 1. Recitals. The City Council hereby finds and determines that the foregoing recitals are true and correct. Section 2. Proposal. The City Council hereby proposes the Cannabis Business Tax. Section 3. Election. The City Council hereby calls a General Municipal Election for Tuesday November 6, 2018 (the “Election”) and orders, pursuant to Section 9222 of the Elections Code, that the Tax Ordinance be submitted to the voters at that election. Packet Page 429 Item 18 Section 4. Ballot Question. The question submitted by Section 3 of this Resolution shall appear on the ballot as follows: Shall the measure to maintain and improve essential City services, including without limitation: public safety; senior, youth and park services; and programs to retain and attract businesses and address homelessness, by imposing a cannabis business tax at yearly rates up to 10% of gross receipts for retail and businesses and up to $10.00 per square for cultivation, raising approximately $1,500,000 annually, until ended by voters, with all funds used locally, be adopted?” YES NO Section 5. Approval. Pursuant to Section 2(b) of Article XIII A of the Constitution, this measure requires approval by a majority of those casting ballots on the measure. Section 6. Consolidation. Pursuant Section 10400 et seq. of the Elections Code, the Board of Supervisors of San Luis Obispo County is requested to consolidate the Election with other elections held on the same day in the same territory or in the territory that is in part the same. Section 7. Canvass. The Board of Supervisors is authorized to canvass the returns of the Election pursuant to Section 10411 of the Elections Code. Section 8. Conduct of Election. Pursuant to Section 10002 of the Elections Code, the Board of Supervisors is requested to permit the County Clerk to render all services specified by Section 10418 of the Elections Code relating to the election, for which services the City agrees to reimburse the County, in accordance with current County pro -rations and allocation procedures. Section 9. Filing with County. The City Clerk shall file a certified copy of this Resolution with the County Clerk. Section 10. Analysis and Argument. The City Attorney shall prepare an impartial analysis of the measure. Any person or persons may file an argument either for or against the ballot measure. An argument for or against the measure shall not exceed 300 words in length. If more than one argument is submitted for the measure, or more than one argument against the measure, the City Clerk shall select the argument to be included with the ballot materials. Rebuttal arguments shall be permitted pursuant to applicable law. Section 11. Effective Date. This Resolution shall be effective immediately upon adoption. Packet Page 430 Item 18 APPROVED and ADOPTED this __the day of June, 2018. __________________________ XXX, Mayor ATTEST: _____________________________ City Clerk Packet Page 431 Item 18 Draft Cannabis Tax Ordinance Page 1 EXHIBIT A ORDINANCE NO. _____ AN ORDINANCE OF THE CITY OF SAN LUIS OBISPO, CALIFORNIA ADDING CHAPTER 5.10 (CANNABIS BUSINESS TAX) TO TITLE 5 OF THE SAN LUIS OBISPO MUNICIPAL CODE THE PEOPLE OF THE CITY OF SAN LUIS OBISPO DO ORDAIN AS FOLLOWS: SECTION 1. CODE AMENDMENT. Chapter 5.10 of Title 5 of the San Luis Obispo Municipal Code to read as follows: CHAPTER 5.10 CANNABIS BUSINESS TAX Sections: 5.10.010 Title. 5.10.020 Authority and Purpose. 5.10.030 Intent. 5.10.040 Definitions. 5.10.040A Registration of Cannabis Business 5.10.050 Tax imposed. 5.10.060 Reporting and remittance of tax. 5.10.070 Payments and communications –timely remittance. 5.10.080 Payment – when taxes deemed delinquent. 5.10.090 Notice not required by City. 5.10.100 Penalties and interest. 5.10.110 Refunds and credits. 5.10.120 Refunds and procedures. 5.10.130 Personal cultivation not taxed. 5.10.140 Administration of the tax. 5.10.150 Appeal procedure. 5.10.160 Enforcement –action to collect. 5.10.170 Apportionment. 5.10.180 Constitutionality and legality. 5.10.190 Audit and examination of premises and records. 5.10.200 Ot her licenses, permits, taxes or charges. 5.10.210 Payment of tax does not authorize unlawful business. 5.10.220 Deficiency determinations. 5.10.230 Failure to report – nonpayment, fraud. 5.10.240 Tax assessment –notice requirements. 5.10.250 Tax assessment – hearing, application, and determination. Packet Page 432 Item 18 Draft Cannabis Tax Ordinance Page 2 5.10.260 Relief from taxes-disaster relief. 5.10.270 Conviction for violation – taxes not waived. 5.10.280 Violation deemed misdemeanor. 5.10.290 Severability. 5.10.300 Remedies cumulative. 5.10.310 Amendment or repeal. 5.10.010 Title. This ordinance shall be known as the Cannabis Business Tax Ordinance. 5.10.020 Authority and Purpose. The purpose of this Ordinance is to impose a tax, for revenue purposes, pursuant to section 203 of the City charter and sections 37101 and 37100.5 of the California Government Code, upon persons who engage in cannabis business in the City. The Cannabis Business Tax is a general tax enacted solely to raise revenue for general governmental purposes of the City and not for regulation. All of the proceeds from the tax imposed by this Chapter shall be placed in the City's general fund and be available for a ny lawful municipal purpose in the discretion of the City. 5.10.030 Intent. The intent of this Ordinance is to levy a tax on all Cannabis Businesses that operate in the City, regardless of whether such business would have been legal at the time this Or dinance was adopted. Nothing in this Ordinance shall be interpreted to authorize or permit any business activity that would not otherwise be legal or permissible under laws applicable to the activity at the time the activity is undertaken. 5.10.040 Definitions. The following words and phrases shall have the meanings set forth below when used in this Chapter: A. “Business” shall include all activities engaged in or caused to be engaged in within the City, including any commercial or industrial enterprise, trade, profession, occupation, vocation, calling, or livelihood, whether or not carried on for gain or profit, but shall not include the services rendered by an employee to his or her employer. B. “Cannabis” means all parts of the plant Cannabis sativa Linnaeus, Cannabis indica, or Cannabis ruderalis, whether growing or not; the seeds thereof; the resin, whether crude or purified, extracted from any part of the plant; and every compound, manufactur e, salt, derivative, mixture, or preparation of the plant, its seeds, or resin. “Cannabis” also means cannabis as defined by Section 11018 of the California Health and Safety Code, by Section 26001, subdivision (f) of the Business and Professions Code, and by other State law. Packet Page 433 Item 18 Draft Cannabis Tax Ordinance Page 3 C. “Cannabis product” means raw cannabis that has undergone a process whereby the raw agricultural product has been transformed into a concentrate, an edible product, or a topical product. “Cannabis product” also means marijuana products as defined by Section 11018.1 of the California Health and Safety Code and by other State law. D. “Canopy” means all areas occupied by any portion of a cannabis plant whether contiguous or noncontiguous on any one site. When plants occupy multiple horizontal planes (as when p lants are placed on shelving above other plants) each plane shall be counted as a separate canopy area. E. “Cannabis business” means any business activity involving cannabis, including but not limited to cultivating, transporting, distributing, manufact uring, compounding, converting, processing, preparing, storing, packaging, delivering, testing, dispensing, retailing and wholesaling of cannabis, of cannabis products or of ancillary products and accessories, whether or not carried on for gain or profit , whether for medical or recreational use, and whether or not such business is licensed by the State. F. “Cannabis business tax” or “business tax,” means the tax due pursuant to this Chapter for engaging in cannabis business in the City. FF. “City Manager” means the City Manager of the City under section 703 of the charter or his or her designee under section 1.08.070 of this Code. G. “Commercial cannabis cultivation” means cultivation in the course of conducting a cannabis business. Commercial cannabis cu ltivation does not include personal medical cannabis cultivation, or cultivation for personal recreational use as authorized by the Medicinal and Adult - Use Cannabis Regulation and Safety Act (MAUCRSA) for which the individual receives no compensation whatsoever. H. “City permit” means a permit issued by the City to a person to authorize that person to operate or engage in a cannabis business. I. “Cultivation” means any activity involving the planting, growing, harvesting, drying, curing, grading, or trimming of cannabis and includes, but is not limited to, the operation of a nursery. J. “Delivery” means the transfer for any form of compensation of cannabis or cannabis products to a customer or caregiver at a location that is not a dispensary. K. “Dispensary” means a place at which cannabis, cannabis products, or accessories for the use of cannabis or cannabis products are offered, either individually or in combination, for retail sale, including an establishment that engages in delivery, whether or not from a fixed place of business. L. “Distributor” means a person engaged in procuring cannabis and/or cannabis products for sale to a dispensary or other point of retail sale. “Distribution” means engaging in that conduct. Packet Page 434 Item 18 Draft Cannabis Tax Ordinance Page 4 M. “Employee” means each and every person engaged in the operation or conduct of any business, whether as owner, member of the owner's family, partner, associate, agent, manager or solicitor, and each and every other person employed or working in such business for a wage, salary, commission, barter or any other form of compensation. N. “Engaged in business as a cannabis business” means the commencing, conducting, operating, managing or carrying on of a cannabis business, whether done as owner, or by means of an officer, agent, manager, employee, or otherwise, whether operating from a fixed location in the City or coming into the City from an outside location to engage in such activities. A person shall be deemed engaged in business within the City if: 1. Such person or person’s emplo yee maintains a fixed place of business within the City for the benefit or partial benefit of such person; 2. Such person or person’s employee owns or leases real property within the City for business purposes; 3. Such person or person’s employee regular ly maintains a stock of tangible personal property in the City for sale in the ordinary course of business; 4. Such person or person’s employee regularly conducts solicitation of business within the City; or 5. Such person or person’s employee performs work or renders services in the City. The foregoing specified activities shall not be a limitation on the meaning of “engaged in business.” O. “Evidence of doing business” means evidence such as, without limitation, use of signs, circulars, cards or any o ther advertising media, including the use of internet or telephone solicitation, or representation to a government agency or to the public that such person is engaged in a cannabis business in the City. P. “Calendar year” means January 1 through December 31 of the following calendar year. Q. “Gross Receipts,” except as otherwise specifically provided, means, whether designated a sales price, royalty, rent, commission, dividend, or other designation, the total amount (including all receipts, cash, credits and property of any kind or nature) received or payable for sales of goods, wares or merchandise or for the performance of any act or service of any nature for which a charge is made or credit allowed (whether such service, act or employment is done as pa rt of or in connection with the sale of goods, wares, merchandise or not), without any deduction therefrom on account of the cost of the property sold, the cost of materials used, labor or service costs, interest paid or payable, losses or any other expense whatsoever. However, the following shall be excluded from the definition of Gross Receipts: Packet Page 435 Item 18 Draft Cannabis Tax Ordinance Page 5 1. Cash discounts where allowed and taken on sales; 2. Any tax required by law to be included in or added to the purchase price and collected from the consumer or purchaser; 3. Such part of the sale price of any property returned by purchasers to the seller as refunded by the seller by way of cash or credit allowances or return of refundable deposits previously included in gross receipts; 4. Receipts derived from the occasional sale of used, obsolete or surplus trade fixtures, machinery or other equipment used by the taxpayer in the regular course of the taxpayer's business; 5. Cash value of sales, trades or transactions between departments or units of the same business; 6. Whenever there are included within the gross receipts amounts which reflect sales for which credit is extended and such amount proved uncollectible in a subsequent year, those amounts may be excluded from the gross receipts in the year they prove to be uncollectible; provided, however, if the whole or portion of such amounts excluded as uncollectible are subsequently collected they shall be included in the amount of gross receipts for the period when they are recovered; 7. Receipts of refundable deposits, except that such deposits when forfeited and taken into income of the business shall not be excluded when in excess of one dollar; 8. Amounts collected for others where the business is acting as an agent or trustee and to the extent that such amounts are paid to those for whom collected. These agents or trustees must provide the finance department with the names and the addresses of the others and the amounts paid to them. This exclusion shall not apply to any fees, percentages, or other payments retained by the agent or trustees. 9. Retail sales of t -shirts, sweaters, hats, stickers, key chains, bags, books, posters, rolling papers, cannabis accessories such pipes, pipe screen, vape pen batteries (without cannabis) or other personal tang ible property which the Tax Administrator has excluded in writing by issuing an administrative ruling per Section 5.10.140 shall not be subject to the cannabis business tax under this chapter. However, any retail sales not subject to this Chapter as a resu lt of the administrative ruling shall be subject to the appropriate business tax under Chapter 5.01 or any other Chapter or Title as determined by the Tax Administrator. R. “Manufacturer” means a person who engages in the production, preparation, propagation, or compounding of cannabis or cannabis products either directly or indirectly or by extraction methods, or independently by means of chemical synthesis, or by a combinat ion of extraction Packet Page 436 Item 18 Draft Cannabis Tax Ordinance Page 6 and chemical synthesis. S. “Nursery” means a facility or part of a facility that is used only for producing clones, immature plants, seeds, and other agricultural products used specifically for the planting, propagation, and cultivation of cannabis. T. “Person” means an individual, firm, partnership, joint venture, association, collective, corporation, limited liability company, estate, trust, business trust, receiver, syndicate, or any other group or combination acting as a unit, whether organized as a nonprofit or for-profit entity, and includes the plural as well as the singular number. U. “Sale” means and includes any sale, exchange, or barter. V. “State” means the State of California. W. “Tax Administrator” means the Finance Director of the City of San Luis Obispo or his or her designee. X. “Testing Laboratory” means a cannabis business that (i) offers or performs tests of cannabis or cannabis products, (ii) offers no service other than such tests, (iii) sells no products, excepting only testing supplies and materials, (iv) is accredited by an accrediting body that is independent from all other persons involved in the cannabis industry in the state and (v) is licensed by the Bureau of Cannabis Control. 5.10.040A Registration of Cannabis Business. A. All persons engaging in a cannabis business, whether an existing, newly-established or acquired business, shall register with the Tax Administrator’s office by the later of: 1. 30 days after commencing operation or 2. January 1, 2019 and shall annually renew such registration on or before the anniversary of the initial registration for that business. B. Registrants shall furnish to the Tax Administrator a statement sworn under penalty of per jury, upon a form provided by the Tax Administrator, setting forth: 1. Every name under which the business engages in commercial cannabis activity in the City; 2. The names and addresses of every person who is an owner, principal or manager of the business; 3. The nature or kind of all business activity to be conducted; 4. The place or places, whether or not in the City, where such business is to be conducted; and 5. Any further information which the Tax Administrator may require to administer the tax under this Chapter. Packet Page 437 Item 18 Draft Cannabis Tax Ordinance Page 7 C. Registrants shall pay an annual registration fee in an amount established from time to time by resolution of the City to recover the City’s costs to implement the registration requirement of this section, and the other provisions of this chapter other than the duty to pay tax when due. As a regulatory fee, such fee shall be limited to the City’s reasonable costs for those activities. 5.10.50 Tax imposed. A. Beginning January 1, 2019, there is imposed upon each person who is engaged in business as a cannabis business a cannabis business tax whether the business has been issued a permit to operate lawfully in the City or is operating unlawfully. B. The initial rate of the cannabis business tax shall be as follows, unless adjusted: 1. For every person who is engaged in commercial cannabis cultivation in the City: a. Seven dollars ($7.00) annually per square foot of canopy space in a facility. For purposes of this chapter, the square feet of canopy space for a business shall be rebuttably presumed to be the maximum square footage of canopy allowed by the business’s City permit for commercial cannabis cultivation, or, in the absence of a City permit, the square footage shall be the maximum square footage of canopy for commercial cannabis cultivation allowed by the business’ state license. Should a City permit be issued to a business which cultivates only for certain months of the year, the City shall prorate the tax as to s ufficiently reflect the period in which cultivation is occurring at the business. In no case shall canopy square footage which is authorized by the City commercial cannabis permit but not utilized for cultivation be deducted for the purpose of determining the tax for cultivation, unless the Tax Administrator is informed in writing and authorizes such reduction for the purpose of relief from the tax prior to the period for which the space will not be used, that such space will not be used. 2. For every person who engages in the operation of a testing laboratory: one percent (1%) of gross receipts. 3. For every person who engages in the retail sales of cannabis as a retailer (dispensary) or non-store front retailer (delivery) or microbusiness (retail sales): Six percent (6%) of gross receipts. 4. For every person who engages in a cannabis distribution business: two percent (2%) of gross receipts. 5. For every person who engages in a cannabis manufacturing, processing, or microbusiness (non-retail), or any other type of cannabis business not described in Section (B) (1), (2), (3) or (4): Two and half percent (2.5%) of gross receipts. C. The City Council may, by resolution or ordinance, adjust the rate of the cannabis business tax. However, in no event may the City Council set any adjusted rate that exceeds the maximum Packet Page 438 Item 18 Draft Cannabis Tax Ordinance Page 8 rate calculated pursuant to Subdivision (D) of this Section for the date on which the adjusted rate will commence. D. The maximum rate shall be calculated as follows: 1. For every person who is engaged in commercial cannabis cultivation in the City: a. Through January 1, 2021, the maximum rate shall be: i. Ten dollars ($10.00) annually per square foot of canopy space in a facility. b. On January 1, 2022 and on each January 1 thereafter, the maximum annual tax rate per square foot of each type of canopy space shall increase by the percentage change between January of the calendar year prior to such increase and January of the calendar year of the increase in the Consumer Price Index (“CPI”) for all urban consumers in the Los Angeles-Long Beach-Anaheim area as published by the United States Government Bureau of Labor Statistics. However, no CPI adjustment resulting in a decrease of any tax imposed by this subsection shall be made. 2. For every person who engages in the operation of a testing laboratory, the maximum tax rate shall not exceed two and a half percent (2.5%) of gross receipts. 3. For every person who engages in the retail sales of cannabis as a retailer (dispensary) or non-store front retailer (delivery business), or microbusiness (retail sales activity) the maximum tax rate shall not exceed ten percent (10%) of gross receipts. 4. Fo r every person who engages in a cannabis distribution business, the maximum tax rate shall not exceed three percent (3%) of gross receipts. 5. For every person who engages in a cannabis manufacturing, processing, or microbusiness (non-retail activity) or any other type of cannabis business not described in Section (D) (1), (2), (3) or (4), the maximum tax rate shall not exceed four percent (4%) of gross receipts. 5.10.060 Reporting and remittance of tax. A. The cannabis business tax imposed by this Chapter shall be paid, in arrears, on a monthly basis. For commercial cannabis cultivation, the tax due for each month shall be based on the square footage of the business’s canopy space during the month and the rate shall be 12% of the applicable annual rate. For all other cannabis businesses activities, the tax due for each month shall be based on the gross receipts for the month. Packet Page 439 Item 18 Draft Cannabis Tax Ordinance Page 9 B. Each person owing cannabis business tax for a month shall, no later than the last day of the following month, file with the tax administrator a statement of the tax owed for that month and the basis for calculating that tax. The Tax Administrator may require that the statement be submitted on a form prescribed by the Tax Administrator. The tax for each month shall be due and payable on that same date as the statement for the month is due. C. Upon cessation of a cannabis business, tax statements and payments shall be immediately due for all months up to the month during which cessation occurred. D. The Tax Administrator may, at his or her discretion, establish shorter report and payment periods for any taxpayer as the Tax Administrator deems necessary to ensure collection of the tax. The Tax Administrator may also require that a deposit, to be applied against the taxes for a month, be made by a taxpayer at the beginning of that month. In no event shall the deposit required by the Tax Administrator exceed the tax amount he or she projects will be owed by the taxpayer for the month. The Tax Administrator may require that a taxpayer make payments via a cashier’s check, money order, wire transfer, or similar instrument. 5.10.070 Payments and communications – timely remittance. Whenever any payment, statement, report, request or other communication is due, it must be received by the Tax Administrator on or before the final due date. A postmark will not be accepted as timely remittance. If the due date would fall on a Saturday, Sunday or a holiday, the due date shall be the next regular bu siness day on which the City is open to the public. 5.10.080 Payment - when taxes deemed delinquent. Unless otherwise specifically provided under other provisions of this Chapter, the taxes required to be paid pursuant to this Chapter shall be deemed delinquent if not received by the Tax Administrator on or before the due date as specified in Sections 5.10.060 and 5.10.070. 5.10.090 Notice not required by the City. Failure of the Tax Administrator to send a notice or bill shall not affect the validity of any tax or penalty due under the provisions of this Chapter. 5.10.100 Penalties and interest. A. Any person who fails or refuses to pay any cannabis business tax required to be paid pursuant to this Chapter on or before the due date shall pay penalties and interest as follows: 1. A penalty equal to ten percent (10%) of the amount of the tax, in addit ion to the amount of the tax, plus interest on the unpaid tax calculated from the due date of the tax at the rate of one percent (1.0%) per month. 2. If the tax remains unpaid for a period exceeding one calendar month beyond the due date, an additional penalty equal to twenty-five percent (25%) of the amount Packet Page 440 Item 18 Draft Cannabis Tax Ordinance Page 10 of the tax, plus interest at the rate of one percent (1.0%) per month on the unpaid tax and on the unpaid penalties. 3. Interest shall be applied at the rate of one percent (1.0%) per month on the first day of the month for the full month and will continue to accrue monthly on the tax and penalty until the balance is paid in full. B. Whenever a check or electronic payment is submitted in payment of a cannabis business tax and the payment is subsequently returned unpaid by the bank for any reason, the taxpayer will be liable for the tax amount due plus any fees, penalties and interest as provided for in this Section, and any other amount allowed under state law. 5.10.110 Refunds and credits. A. No refund shall be made of any tax collected pursuant to this Chapter, except as provided in Section 5.10.120. B. No refund of any tax collected pursuant to this Chapter shall be made because of the discontinuation, dissolution, or other termination of a business. 5.10.120 Refunds and procedures. A. Whenever the amount of any cannabis business tax, penalty or interest has been overpaid, paid more than once, or has been erroneously collected or received by the City under this Chapter, it may be refunded to the cla imant who paid the tax provided that a written claim for refund is filed with the Tax Administrator within one (1) year of the date the tax was originally due and payable. B. The Tax Administrator, his or her designee or any other City officer charged with the administration of this Chapter shall have the right to examine and audit all the books and business records of the claimant in order to determine the eligibility of the claimant to the claimed refund. No claim for refund shall be allowed if the claimant refuses to allow such examination of claimant's books and business records after request by the Tax Administrator to do so. C. In the event that the cannabis business tax was erroneously paid, and the error is attributable to the City, upon a timely claim the City shall refund the amount of tax erroneously paid in the year preceding the date the claim was received. 5.10.130 Personal Cultivation Not Taxed. The provisions of this Chapter shall not apply to personal cannabis cultivation as defined in the “Medicinal and Adult Use Cannabis Regulation and Safety Act”. This Chapter shall not apply to personal use of cannabis that is specifically exempted from the City state licensing requirements, that meets the definition of personal use or equivalent terminology under state law, and for which the individual receives no compensation whatsoever related to that personal use. Packet Page 441 Item 18 Draft Cannabis Tax Ordinance Page 11 5.10.140 Administration of the tax. A. It shall be the duty of the Tax Administrator to collect the taxes, penalties, fees, and perfor m the duties required by this Chapter. B. For purposes of administration and enforcement of this Chapter generally, the Tax Administrator may from time to time promulgate such administrative interpretations, rules, and procedures consistent with the purpose, intent, and express terms of this Chapter as he or she deems necessary to implement or clarify such provisions or aid in enforcement. He or she shall give notice of those regulations in the manner required by law for publication of ordinances of t he City Council and the regulations shall take effect 30 days after such notice unless otherwise provided in a particular regulation. C. The Tax Administrator may take such administrative actions as needed to administer the tax, including but not limited to: 1. Provide to all cannabis business taxpayers forms for the reporting of the tax; 2. Provide information to any taxpayer concerning t he provisions of this Chapter; 3. Receive and record all taxes remitted to the City as provided in this Chapter; 4. Maintain records of taxpayer reports and taxes collected pursuant to this Chapter; 5. Assess penalties and interest to taxpayers pursuant to this Chapter; 6. Determine amounts owed and enforce collection pursuant to this Chapter. 5.10.150 Appeal procedure. Any taxpayer aggrieved by any decision of the Tax Administrator with respect to the amount of tax, interest, penalties and fees, if any, due under this Chapter may appeal to the City Manager by filing a notice of appeal with the City Clerk within thirty (30) days of the serving or mailing of the determination of tax due. The City Clerk, or his or her designee, shall fix a time and place for hearing such appeal, and the City Clerk, or his or her designee, shall give notice in writing to such operator at the last known place of address. The finding of the City Manager shall be final and conclusive as to the City, but subject to judicial review under Code of Civil Procedure section 1094.5 and shall be served upon the appellant in the manner prescribed by this Chapter for service of notice of hearing. Any amount found to be due shall be immediately due and payable upon the service of the notice. 5.10.160 Enforcement - action to collect. Any taxes, penalties and/or fees required to be paid under the provisions of this Chapter shall be deemed a debt owed to the City. Any person owing money to the City under the Packet Page 442 Item 18 Draft Cannabis Tax Ordinance Page 12 provisions of this Chapter shall be liable in an action brought in the name of the City for the recovery of such debt. 5.10.170 Apportionment. If a business subject to the tax is operating both within and outside the City, it is the intent of the City to apply the cannabis business tax so that the measure of the tax fairly reflects the proportion of the taxed activity actually carried on in the City. To the extent federal or state law requires that any tax due from any taxpayer be apportioned, the taxpayer may propose an apportionment on his or her tax return. The Tax Administrator may accept or reject that apportionment and, if the latter, shall establish an appropriate apportionment on such evidence as is provided by the taxpayer or otherwise available to the Tax Administrator. The Tax Administrator may promulgate administrative procedures for apportionment as he or she finds useful or necessary. 5.10.180 Constitutionality and legality. A. This tax is intended to be applied consistently with the United States and California Constitutio ns, state law and the City Charter. The tax shall not be applied so as to cause an undue burden upon interstate commerce, a violation of the equal protection and due process clauses of the Constitutions of the United States or the State of California, to constitute a special tax, or to cause a violation of any other provision of applicable law. B. The taxes imposed under this chapter are excises on the privilege of engaging in commercial cannabis activity in the City. They are not sales or use taxes and shall not be calculated or assessed as such. Nevertheless, at the option of a cannabis business, the tax may be separately identified on invoices, receipts and other evidences of transactions. 5.10.190 Audit and examination of premises and records. A. For the purpose of ascertaining the amount of cannabis business tax owed or verifying any representations made by any taxpayer to the City in support of his or her tax calculation, the Tax Administrator shall have the power to inspect any location where commercial cannabis cultivation or commercial business activity occurs, whether or not located in the City, and to audit and examine all books and records (including, but not limited to bookkeeping records, state and federal income tax returns, and other r ecords relating to the gross receipts of the business) of persons engaged in cannabis businesses. In conducting such investigation, the tax administrator shall have the power to inspect any equipment, such as computers or point of sale machines, that may contain such records. B. It shall be the duty of every person liable for the collection and payment to the City of any tax imposed by this Chapter to keep and preserve, for a period of at least three (3) years, all records as may be necessary to determine the amount of such tax as he or she may have been liable to or pay to the City, which records the Tax Administrator or his/her designee shall have the right to inspect at all reasonable times. 5.10.200 Other licenses, permits, taxes, fees or charges. Packet Page 443 Item 18 Draft Cannabis Tax Ordinance Page 13 A. Nothing contained in this Chapter shall be deemed to repeal, amend, be in lieu of, replace or in any way affect any requirements for any permit or license required by, under or by virtue of any provision of any other Chapter of this code or any other ordin ance or resolution of the City, nor be deemed to repeal, amend, be in lieu of, replace or in any way affect any tax, fee or other charge imposed, assessed or required by, under or by virtue of any other Chapter of this code or any other ordinance or resolution of the City. Any references made or contained in any other Chapter of this code to any licenses, license taxes, fees, or charges, or to any schedule of license fees, shall be deemed to refer to the licenses, license taxes, fees or charges, or schedule of license fees, provided for in other Chapter of this Code unless the context is plain that another meaning is attended. B. Notwithstanding subdivision (A) of this Section, a cannabis business shall not be required to pay the license fee required by Chapter 5.01 of Title 5 of this Code so long as all of business’s activities within the City that would require payment of a license fee are subject to the cannabis business tax. C. The Tax Administrator may revoke or refuse to renew the license required by Chapt er 5.01 of this Code for any business that is delinquent in the payment of any tax due pursuant to this Chapter or that fails to make a deposit required by the tax administrator pursuant to Section 5.10.060. 5.10.210 Payment of tax does not authorize unlawful business. A. The payment of a cannabis business tax required by this Chapter, and its acceptance by the City, shall not entitle any person to carry on any cannabis business unless the person has complied with all of the requirements of this Code and all other applicable state laws. B. No tax paid under the provisions of this Chapter shall be construed as authorizing the conduct or continuance of any illegal or unlawful business, or any business in violation of any local or state law although businesses illegal under other law are nevertheless subject to tax under this Chapter according to its terms. 5.10.220 Deficiency determinations. If the Tax Administrator is not satisfied that any statement filed as required under the provisions of this Chapter is correct, or that the amount of tax is correctly computed, he or she may compute and determine the amount to be paid and make a deficiency determination upon the basis of the facts contained in the statement or upon the basis of any information in his o r her possession or that may come into his or her possession within three (3) years of the date the tax was originally due and payable. One or more deficiency determinations of the amount of tax due for a period or periods may be made. When a person discontinues engaging in a business, a deficiency determination may be made at any time within three (3) years thereafter as to any liability arising from engaging in such business whether or not a deficiency determination is issued prior to the date the tax would otherwise be due. Whenever a deficiency determination is Packet Page 444 Item 18 Draft Cannabis Tax Ordinance Page 14 made, a notice shall be given to the person concerned in the same manner as notices of assessment are given under Section 5.10.240. 5.10.230 Failure to report—nonpayment, fraud. A. Under any of the following circumstances, the Tax Administrator may make and give notice of an assessment of the amount of tax owed by a person under this Chapter at any time: 1. If the person has not filed a complete statement required under the provisions of this Chapter; 2. If the person has not paid the tax due under the provisions of this Chapter; 3. If the person has not, after demand by the Tax Administrator, filed a corrected statement, or furnished to the Tax Administrator adequate substantiation of the information contained in a statement already filed, or paid any additional amount of tax due under the provisions of this Chapter; or 4. If the Tax Administrator determines that the nonpayment of any business tax due under this Chapter is due to fraud, a penalty of twenty-five percent (25%) of the amount of the tax shall be added thereto in addition to penalties and interest otherwise stated in this Chapter and any other penalties allowed by law. B. The notice of assessment shall separately set forth the amount of any tax known by the Tax Administrator to be due or estimated by the Tax Administrator, after consideration of all information within the Tax Administrator's knowledge concerning the busines s and activities of the person assessed, to be due under each applicable section of this Chapter and shall include the amount of any penalties or interest accrued on each amount to the date of the notice of assessment. 5.10.240 Tax assessment - notice requirements. The notice of assessment shall be served upon the person either by personal delivery, or by a deposit of the notice in the United States mail, postage prepaid thereon, addressed to the person at the address of the location of the business or to such other address as he or she shall register with the Tax Administrator for the purpose of receiving notices provided under this Chapter; or, should the person have no address registered with the Tax Administrator for such purpose, then to such person's last known address. For the purposes of this Section, a service by mail is complete at the time of deposit in the United States mail. 5.10.250 Tax assessment - hearing, application and determination. Within thirty (30) days after the date of service the person may apply in writing to the Tax Administrator for a hearing on the assessment. If application for a hearing before the City is not made within the time herein prescribed, the tax assessed by the Tax Administrator shall become final and conclusive. Within thirty (30) days of the receipt of any such application for Packet Page 445 Item 18 Draft Cannabis Tax Ordinance Page 15 hearing, the Tax Administrator shall cause the matter to be set for hearing before him or her no later than thirty (30) days after the receipt of the application, unless a later date is agreed to by the Tax Administrator and the person requesting the hearing. Notice of such hearing shall be given by the Tax Administrator to the person requesting such hearing not later than five (5) days prior to such hearing. At such hearing said applicant may appear and offer evidence why the assessment as made by the Tax Administrator should not be confirmed and fixed as the tax due. After such hearing the Tax Administrator shall determine and reasse ss the proper tax to be charged and shall give written notice to the person in the manner prescribed in Section 5.10.240 for giving notice of assessment. 5.10.260 Relief from taxes -disaster relief. (a) If a business is unable to comply with any tax requ irement due to a disaster, the business may notify the Tax Administrator of this inability to comply and request relief from the tax requirement; (b) The Tax Administrator, in its sole discretion, may provide relief from the cannabis business tax requirement for businesses whose operations have been impacted by a disaster of such tax liability does not exceed five thousand ($5,000) dollars. If such tax liability is five thousand one ($5,001) dollars or more than such relief shall only be approved by the City Manager; (c) Temporary relief from the cannabis tax may be relieved for a reasonable amount of time as determined by the Tax Administrator in order to allow the cannabis business time to recover from the disaster; (d) The Tax Administrator may require that certain conditions be followed in order for a cannabis business to receive temporary relief from the cannabis business tax requirement; (e) A cannabis business shall not be subject to an enforcement action for a violation of a cannabis business requ irement in which the licensee has received temporary relief from the tax administrator; (f) For purposes of this section, “disaster” means fire, flood, storm, tidal wave, earthquake, or similar public calamity, whether or not resulting from natural causes. (1) The cannabis business must notify the Tax Administrator in writing a request for temporary relief from imposition of the tax requirement pursuant to subsection (a) of this section of such disaster clearly indicates why relief is requested from, the time period for which the relief is requested, and the reasons relief is needed for the specified amount of time; Packet Page 446 Item 18 Draft Cannabis Tax Ordinance Page 16 (2) The cannabis business agrees to grant the tax collector or his/her designee access to the location where the cannabis business has been impacted due to a disaster. 5.10.270 Conviction for violation - taxes not waived. The conviction and punishment of any person for failure to pay the required tax shall not excuse or exempt such person from any civil action for the tax debt unpaid at the time of such conviction. No civil action shall prevent a criminal prosecution for any violation of the provisions of this Chapter or of any state law requiring the payment of all taxes. 5.10.280 Violation deemed misdemeanor. Any person violating any of the provisions of this Chapter shall be guilty of a misdemeanor punishable under Chapter 1.12 of this Code unless the Tax Administrator provides by regulation that violation of a particular provision of this Chapter ought to be enforced as an infraction or if t he City Attorney determines in his or her discretion that a particular violation ought to be enforced as an infraction in the interests of justice. 5.10.290 Severability. If any provision of this Chapter, or its application to any person or circumstance, is determined by a court of competent jurisdiction to be unlawful, unenforceable or otherwise void, that determination shall have no effect on any other provision of this Chapter or the application of this Chapter to any other person or circumstance and, t o that end, the provisions hereof are severable. 5.10.300 Remedies cumulative. All remedies and penalties prescribed by this Chapter or which are available under any other provision of the San Luis Obispo Municipal Code and any other provision of law or eq uity are cumulative. The use of one or more remedies by the City shall not bar the use of any other remedy for the purpose of enforcing the provisions of this Chapter provided only that the City not recover any sum due under this Chapter, including penalt ies and interest, more than once. 5.10.310 Amendment or repeal. This Chapter may be repealed or amended by the City Council without a vote of the people to the extent allowed by law. However, as required by Article XIII C of the California Constitution, voter approval is required for any amendment that would increase the maximum rates of any tax established pursuant to this Chapter. The people of the City of San Luis Obispo affirm that the following actions shall not constitute an increase of the rate of a tax: A. The restoration of a tax to a rate or amount that is no higher than that set by this Chapter; Packet Page 447 Item 18 Draft Cannabis Tax Ordinance Page 17 B. An action that interprets or clarifies the methodology of the tax, or any definition applicable to the tax, so long as interpretation or clarificatio n (even if contrary to some prior interpretation or clarification) is not inconsistent with the language of this Chapter; or C. The collection of the tax imposed by this Chapter even if the City had, for some period of time, failed to collect the tax. 5.10.320 Enforcement consistently with business license tax Except as otherwise provided in this Chapter, the taxes due under this Chapter may be enforced in the manner provided by Chapter 5.01 of this case and any policy or regulation adopted or implement pursuant to that Chapter. SECTION 2. SEVERABILITY. If any section, subsection, sentence, clause or phrase of this ordinance is for any reason held to be invalid, such decision shall not affect the validity of the remaining portions of this ordinance. T he People of the City of San Luis Obispo hereby declare that heyt would have passed this ordinance and each section, subsection, sentence, clause and phrase thereof, irrespective of the fact that any one or more sections, subsections, sentences, clauses, o r phrases be declared invalid. SECTION 3. CALIFORNIA ENVIRONMENTAL QUALITY ACT REQUIREMENTS. This Ordinance is exempt from the California Environmental Quality Act (CEQA), Public Resources Code Section 21000 et seq., because it can be seen with certainty that there is no possibility that the enactment of this Ordinance would have a significant effect on the environment (Pub. Resources Code § 21065; CEQA Guidelines §§ 15378(b)(4), 15061(b)(3)) and because the Ordinance involves the approval of government revenues to fund existing services (Pub. Resources Code § 21080, subd. (b)(8); CEQA Guidelines § 15273(a)(4)). It does not make any commercial activity lawful and does not commit the City to fund any particular activit y. SECTION 4. EFFECTIVE DATE. This Ordinance shall take effect 10 days after the certification of its approval by the voters at the Election pursuant to article III of the City Charter and Elections Code section 9217. SECTION 5. CERTIFICATION; PUBLICATION. Upon approval by the voters, the City Clerk shall certify to the passage and adoption of this Ordinance and shall cause it to be published according to law. It is hereby certified that this Ordinance was duly adopted by the voters at the November 6, 2018 Election and took effect 10 days following adoption of a resolution declaring the results of the election at a regular meeting of the City Council held on [date] by the following vote: AYES: NOES: ABSENT: Packet Page 448 Item 18 Draft Cannabis Tax Ordinance Page 18 ABSTAIN: ATTEST: ____________________________ City Clerk ____________________________________ XXX, Mayor Packet Page 449 Item 18 5/15/2018 1 Study Session Cannabis Tax Ballot Measure & Ordinance Recommendations 1)Review proposed ballot measure for the upcoming November 2018 municipal election to establish a cannabis business tax 2)Review proposed amendments to Municipal Code adding Chapter 5.10 (Cannabis Business Tax) to Title 5. 2 5/15/2018 2 Overview Background State Cannabis Excise & Cultivation Taxes General Purpose Tax vs. Special Purpose Tax General Purpose Tax Options Draft Ballot Measure Language & Cannabis Tax Ordinance 3 Background Proposition 64, “Medicinal and Adult Use Cannabis Regulation and Safety Act” Passed by 57.1% in the state Passed by 67.5% voters in the city Commercial Cannabis Business City land-use regulations introduced 5/1/18 2nd reading 5/15/18 4 5/15/2018 3 Fee vs. Tax A Fee is a charge paid to the City that is specifically applied for the use of the service. It’s intended to recover all or part of the administrative regulation cost and cannot exceed the cost for providing the service it is charged. Examples: Planning Application Fees and Utility Services Fees. A Tax is a charge paid to the City that is used for the costs of government. Examples: Local Revenue Measure (Measure G) and Transient Occupancy Tax (TOT). 5 State Cannabis Excise & Cultivation Taxes A 15% excise tax on cannabis and cannabis products. A cultivation tax of up to $9.25 per ounce on harvested cannabis that enters the commercial market. All sales of medicinal cannabis are exempt from State and local sales tax. 6 5/15/2018 4 General Purpose Tax vs. Special Purpose Tax General Purpose Tax Raises revenues for general purpose use Example:Local Revenue Measure (Measure G) Requires 50% + 1 voter approval Special Purpose Tax Raises revenues for specific purpose use Example: Transportation Sales Tax Measure (Measure J) Requires 2/3 voter approval Staff Recommendation - A general purpose tax for cannabis business activity in the city. Proposed Measure – “Tax Fairness, Transparency and Accountability Act of 2018”. 7 Commonly Used General Purpose Tax Options for Cannabis Gross Receipts Referred to as an excise tax A tax assessed at specific stages of cannabis production within city limits Revenue projections are less predicable because it is based upon cannabis production Cultivation Tax Based upon the size of the canopy Revenue projections are more predictable, stable revenue stream for financing on-going City costs 8 5/15/2018 5 Examples of Other Cities & Counties Cities with Gross Receipts Tax for cannabis 1.Santa Cruz: Up to 10% 2.Palm Springs: Up to 15% 3.San Jose: Up to 10% 4.Sacramento: Up to 4% 5.Oakland: Up to 5% (medicinal), Up to 10% (recreational) 6.Grover Beach: Up to 5% (medicinal), Up to 10% (recreational) Considering lowering recreational tax to 5% 7.County of San Luis Obispo’s proposed tax (Measure B-18): Up to10% 9 Draft Ballot Measure Language Shall the measure to maintain and improve essential City services, including without limitation: public safety; senior, youth and park services; programs to retain and attract businesses and address homelessness, by imposing a cannabis business tax up to 10% of gross receipts for retail and businesses and up to $10.00 per canopy square foot for cultivation (adjustable annually for inflation), raising approximately $1,500,000 annually, until ended by voters, with all funds used locally, be adopted?” 10 5/15/2018 6 Draft Cannabis Tax Ordinance Cannabis Activity Annual Initial Rate Beginning January 1, 2019 Annual Initial Rate Beginning January 1, 2021 Annual Initial Rate Beginning January 1, 2022 Cultivation Square foot of canopy space in a facility $7.00 $10.00 $10.00 + CPI Gross Receipts For every person who engages in the operation of a testing laboratory 1% 1% 2.5% For every person who engages in the retail sales of cannabis as a retailer (dispensary) or non-store front retailer (delivery) or microbusiness (retail sales) 6% 6% 10% For every person who engages in a cannabis distribution business 2% 2% 3% For every person who engages in a cannabis manufacturing, processing, or microbusiness (non-retail), or any other type of cannabis business 2.5% 2.5% 6% 11 12State and Local Cannabis Taxes Category Max Cap Amount Increase Cumulative Price Producer Price $1,000 $1,000 $1,000 State Cultivation Tax $9.25/oz $148 $1,148 Local Cultivation Tax 2.50% $25 $1,173 Batch Testing $50/lb, + 0.50% $55 $1,228 Wholesale Price w/ Taxes $1,228  Total Tax at Wholesale $228  Tax as %22.80% Manufacturer Markup 20.00% $246 $1,474 Local Tax 2.50% $37 $1,510 Total Manufacturer Price $1,510  Total Taxes at Manufacturer $265  Total Tax as %17.53% Distributor Markup 30.00% $453 $1,964 Local Tax 2.00% $39 $2,003 Total Distributor Price $2,003  Total Taxes at Distributor $304  Total Tax as %15.18% Retailer Markup 100.00% $2,003 $4,006 Local Tax 6.00% $240 $4,246 State Excise Tax 15.00% $601 $4,847 Total Retailer Price $4,847  Total Taxes at Retail $1,145  Total Tax as %23.63% CA Sales Tax (non‐medical)6.25% $303 $5,150 Local Sales Tax 1.50% $73 $5,223 Total Taxes at Retail $1,521 Total Tax as %29.12% Total Local Tax 7.93% $414.16 Initial Cumulative Cannabis Taxes 5/15/2018 7 Estimated Fiscal Impact Begin collection of cannabis tax in spring, 2019. Based upon the full number of businesses allowed, over the next several years, an estimate of $1,500,000 in revenues. Fiscal Health Response Plan: Cannabis tax revenue is included in the Plan 13 Assumptions Business Type Permits Rate Jan. 2019 Rate Jan. 2021 Rate Jan. 2022 Cultivation Sq. Ft.70,000 $7.00 $ 10.00 $ 10.00 Delivery 3* 6.0% 6.0% 10.0% Manufacturing 3* 2.5% 2.5% 6.0% Retailer Up to 3 6.0% 6.0% 10.0% Distribution 3* 2.0% 2.0% 3.0% Testing Lab 2* 1.0% 1.0% 2.5% 14 * Based upon assumed number of businesses 5/15/2018 8 Projected Annual Revenue Business Type Permits Revenue Jan. 2019 Rate Jan. 2021 Rate Jan. 2022 Cultivation Up to 70,000 Sq. Ft.$490,000 $700,000 $700,000 Delivery 3*$25,160 $25,160 $41,933 Manufacturing 3*$150,000 $150,000 $360,000 Retailer Up to 3 $88,236 $88,236 $147,060 Distribution 3*$120,000 $120,000 $180,000 Testing Lab 2*$24,000 $24,000 $60,000 $897,396 $1,107,396 $1,488,993 15 * Based upon assumed number of businesses Recommendations Review proposed ballot measure for the upcoming November 2018 municipal election to establish a cannabis business tax Review proposed amendments to Municipal Code adding Chapter 5.10 (Cannabis Business Tax) to Title 5. 16 5/15/2018 9 17 Thank You