INTRODUCTION OF AN ORDINANCE PROVIDING FOR A TEMPORARY REDUCTION OF THE MARIJUANA BUSINESS TAX March 3, 2020
2 OVERVIEW • Introduce the first reading of an ordinance providing for a 24-month temporary reduction of the business tax set forth in Article 5 (Administration) of Chapter I (Business Tax) of the Costa Mesa Municipal Code as authorized by Measure X v v
3 BACKGROUND: • November 8, 2016 – the electorate of the City of Costa Mesa voted on Measure X, and approved the Costa Mesa Medical Marijuana Measure. • April 8, 2018 – the City Council adopted Ordinance 18-04 (Attachment 3) that amended certain provisions of Measure X in order to allow for the manufacturing, processing, researching, testing and wholesale distribution of adult-use marijuana. • January 2019 – The City begins collecting gross receipts tax on marijuana businesses (2 in v v operation at that time) • November 11, 2019 – the City received a letter from the Cannabis Industry (Attachment 4) with several requests for the City’s consideration. One request referenced in the letter is to reduce the gross receipts tax on marijuana manufacturing, distribution and testing businesses to two percent (2%). • December 17, 2019 – the City Council approved the formation of an Ad Hoc Committee of the Council to evaluate the City’s marijuana tax rates and regulations and directed staff and the Cannabis Ad Hoc Committee to return with a fiscal analysis and recommendation on the potential reduction of the business tax rates across the varying business types.
4 BACKGROUND: Staff have been conducting ongoing research since July 2018 when businesses began opening: • Continuous discussions with the cannabis industry on the business economics, challenges and revenue expectations in the future. v v • Educating ourselves on operational models for cannabis companies to better understand where revenue is generated, how much in taxes are paid and challenges that the City’s revenue stream could face. • Engaging HdL, the City’s cannabis expert on both an operating and fiscal matters. • Paying close attention to what other cities around us were doing and how many were likely to add ballot measures in 2020. • Maintaining awareness of real estate vacancy rates in the Green Zone.
City of Costa Mesa CANNABIS TAX POLICY
The Siz ize of of The Ca California Ca Cannabis Industry
CA A CA CANNABIS IS RETAIL MARKET AN ANALYSIS
CA A CA CANNABIS IS RETAIL LIC ICENSES
CA CAN ANNABIS RE RETAIL & NO NON-STOREFRONT LICENSES
CA CAN ANNABIS RET ETAIL MARKET LI LICENSE SE SH SHORTAGE
CANNABIS LIC ICENSES BY TY TYPE AS AS OF 2/5/20 4203 Cultivation 986 Manufacturer 628 Retailers 278 Retailers Non-Storefront 940 Distributors 128 Distributor Transport Only 243 Microbusinesses 32 Testing Labs 86 Cannabis Event Organizers 7,524 Total
(California Cannabis Opportunity Report) CALIFORNI NIA’S CANNABIS MARKET *California Department of Food and Agriculture Database – February 5, 2020
GROSS RE RECEIPTS S BY Y COUNTY 2017 Q3 Q3 to 2019 Q2 Q2
CUM UMULATIVE CANNABIS TAXES HdL dL Analysis Current Scenario Manufacturing: 6.00% Distribution: 6.00% Retail: 6.00% Cumulative Tax Rate: 32.06%
CUM UMULATIVE CANNABIS TAXES HdL dL Analysis Scenario 1 Manufacturing: 2.00% Distribution: 2.00% Retail: 6.00% Cumulative Tax Rate: 29.94%
CUM UMULATIVE CANNABIS TAXES HdL dL Analysis Scenario 2 Manufacturing: 6.00% Distribution: 2.00% Retail: 6.00% Cumulative Tax Rate: 30.90%
17 OBSERVATIONS, CHALLENGES AND RECOMMENDATIONS
18 OBSERVATIONS AND CHALLENGES: Taxes • 15 percent state excise sales tax on retail sales; • Cultivation tax of $9.25 per ounce (recently increased to $9.65); • California State sales tax of 7.25 percent on all retail items, including marijuana, plus an automatic local sales tax of up to 1 percent; v v • Local businesses taxes (i.e. Costa Mesa 6 percent business tax); • State income tax (marijuana companies file tax returns just like any other California business, but the deductions, credits and payment methods may be different); and • Federal income tax on gross income, Pursuant to the Internal Revenue Code Section 280E * * T his federal statue mandates that marijuana companies must pay taxes on all of their revenue without the benefit of being able to use business expenses to reduce their taxable income
19 OBSERVATIONS AND CHALLENGES: Slow growth in cannabis businesses opening in Costa Mesa • In just under 2 years since adult-use marijuana became legal in Costa Mesa, only 8 have opened. • Of those eight, all of them are generating far less in gross receipts than originally expected. • 22 additional businesses are in varying states of the permit process. v v • Possible reasons for slow growth: • High tax rates increase the cost of doing business, which means businesses have to charge more to customers and can’t compete with businesses who operate in a lower tax city. • Limited retail outlets has caused challenges with competition for Manufacturers and Distributors. • Illegal market continues to operate due to minimal penalties, if caught • Businesses waiting to see what happens in 2020 and whether it would be better to move to a lower tax city, particularly because manufacturing/distribution companies can operate from anywhere in the state.
20 OBSERVATIONS AND CHALLENGES: Revenue Projections vs. Revenue Realities Fiscal Year Fiscal Year 2019-20 2018-19 (projected) Adopted Budget $1,560,000 $1,143,000 v v Revenues Received 163,803 647,185 Unrealized Revenue $1,396,197 $495,815
21 OBSERVATIONS AND CHALLENGES: Proposed Changes to the Tax Rate Company A Company B 6% (current) $3,825,000 Gross Receipts $525,000 Gross Receipts $229,500 Tax to City $31,500 Tax to City v v 2% (by 2022) $25,425,000 Gross Receipts $1,875,000 Gross Receipts $508,500 Tax to City $37,500 Tax to City
22 OBSERVATIONS AND CHALLENGES: Immediate Impact on Gross Receipts Tax Revenue Potential City Revenue Reduction Estimated (Based on Annual Tax Current Levels) Revenue v v $647,185 $0 Marijuana Gross Receipts Tax at 6% (Current) 431,457 215,728 Marijuana Gross Receipts Tax at 4% 215,728 431,457 Marijuana Gross Receipts Tax at 2% 107,864 539,321 Marijuana Gross Receipts Tax at 1% The chart above is based on the gross receipts tax received under the 6% tax and does not include potential increases due to new businesses opening or gross receipts of businesses increasing which may result in increased revenues to the City.
23 RECOMMENDATIONS 1. Staff recommends that the City Council introduce for first reading, by title only, Ordinance No. 20-xx (Attachment 1), providing for a 24-month temporary reduction of the business tax set forth in Article 5 (Administration) of Chapter I (Business Tax) of the Costa Mesa Municipal Code as authorized by Measure X, the Costa Mesa Medical v v Marijuana Measure, as amended, that is levied upon the lawful distribution, manufacturing, testing, and/or research and development of marijuana.
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