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Home My WebLink About8.2 - 3201 Info Report Commercial Cannabis Delivery R Page 1 of 4 STAFF REPORT CITY COUNCIL DATE: May 19, 2020 TO: Honorable Mayor and City Councilmembers FROM: Linda Smith, City Manager SUBJECT: Informational Report on Commercial Cannabis Delivery Regulation and Taxation Prepared by: John Stefanski, Assistant to the City Manager EXECUTIVE SUMMARY: The City Council will receive a report about regulations for commercial cannabis deliveries and general cannabis taxation. This report provides an overview of regulations regarding cannabis deliveries, cannabis taxation structure, and a potential approach to tax and regulate illegal cannabis deliveries. STAFF RECOMMENDATION: Receive the report and provide feedback and direction on potential next steps, if any. FINANCIAL IMPACT: None. DESCRIPTION: At the February 4, 2020 City Council meeting, the City Council directed Staff to prepare an informational report on regulations for commercial cannabis deliveries and general cannabis taxation. BACKGROUND Cannabis Delivery Controversy In 2016 voters approved Proposition 64, the Control, Regulate, and Tax Adult Use of Marijuana Act (AUMA), legalizing the recreational use of cannabis throughout the state. Following this, in 2017, the State legislature enacted the Medicinal and Adult -Use Cannabis Regulation and Safety Act (MAUCRSA) to serve as the framework to regulate commercial cannabis activities. Under this framework, cannabis testing, cultivation, manufacturing, distribution, retail sale, delivery, and microbusinesses would be allowed to operate only after they had successfully received approval from the local jurisdiction for which they were to operate and then the Bureau of Cannabis Control (BCC). This Page 2 of 4 “dual licensing” structure allows local agencies to ultimately determine if commercial cannabis businesses can operate within their boundaries. In 2018, the BCC adopted permanent regulations to interpret and implement MAUCRSA. This action included the adoption of Regulation 5416(d) which provided that a “delivery employee may deliver to any jurisdiction within the State of California provided that such delivery is conducted in compliance with all delivery provisions…” of the BCC’s permanent regulations. In other words, cannabis deliveries would be permitted throughout the state, regardless of local restrictions in place. Regulation 5416(d) has created some controversy as well as ambiguity toward cannabis delivery. The rule directly conflicts with Proposition 64 and MAUCRSA which provide that local jurisdictions have the authority to adopt and enforce local o rdinances to regulate commercial cannabis businesses, including cannabis delivery services, or prohibit them outright. As a result of this conflict, several cities have filed lawsuits against the BCC to overturn Regulation 5416(d). Outside of the controversy surrounding Regulation 5416(d), commercial cannabis deliveries do continue to take place in jurisdictions which ban them. This is due, largely, to cities not having an ability to effectively restrict the sale of the products on web -based delivery platforms which facilitate the transactions. For most jurisdictions, regulation of cannabis businesses, outside of mandated annual audits/inspections and undercover police operations, is driven by resident, consumer, or competitor complaints. As an agency that prohibits any commercial cannabis activity, the City of Dublin’s enforcement activities by Dublin Police Services include performing self-initiated traffic stops or being detailed to an unrelated event. In the last year alone, the City has issued five cannabis related citations, three for possession of more than 28.5 grams of marijuana, and two for possession of marijuana for sale. Cannabis Taxes Proposition 64 included a 15% statewide excise tax on retail sale of cannabis. On top of this tax rate, cannabis sales are subject to local sales taxes (9.25%) as well as cannabis taxes levied at the municipal level. Cities levy a variety of commercial cannabis tax es with gross receipts taxes being one of the most common. Similarly, some cities structure their commercial cannabis taxes as a business license tax. For jurisdictions that permit cultivation, some levy taxes on a per square foot of authorized space basis. Table 1 below provides a sample of the local cannabis taxes levied in Alameda County: Table 1: Sample of Cannabis Tax Rates in Alameda County Jurisdiction Tax Rate Application Berkeley 5% Gross Receipts Non-medical cannabis businesses. 2.5% Gross Receipts Medical cannabis businesses. Page 3 of 4 Emeryville 1% Gross Receipts Cannabis testing laboratories & distribution businesses. 2% Gross Receipts Cannabis manufacturing. 3% Gross Receipts Cannabis delivery and storefront retail. Hayward 7% Gross Receipts Cannabis businesses. Oakland .012% Gross Receipts Cannabis businesses with less than $500,000 in annual gross receipts. ($1.5M for Equity businesses) 5% Gross Receipts Medical cannabis businesses with more than $500,000 in annual gross receipts. 6.5% Gross Receipts Non-medical cannabis businesses with annual gross receipts between $500,000-$5M in annual gross receipts. 9.5% Gross Receipts Non-medical cannabis businesses with more than $5M in annual gross receipts. San Leandro 6% Gross Receipts, increasing to 8% in 2022 Cannabis businesses. Union City $2-$8 per square foot Cannabis cultivation, based on type of lighting. 1% Gross Receipts Cannabis testing laboratories. 4% Gross Receipts Cannabis manufacturing, retail, or other type of cannabis business. 2% Gross Receipts Cannabis distribution Options for the City The City currently prohibits any commercial cannabis activity. However, the City could pursue taxing cannabis deliveries while still prohibiting deliveries. In order to do this, the City would need to take the following steps: 1. Submit to voters a commercial cannabis gross receipts tax. The tax would be written to apply to all adult, medical, and illegal cannabis use and operations . Payment of the tax would not authorize unlawful business. According to the HdL Companies’ Cannabis Consulting team, if the City were to permi t cannabis deliveries and levy a 4-6% gross receipts tax on cannabis deliveries, the City Page 4 of 4 could generate an estimated $50,000-$75,000 annually. This figure would be substantially less if the City continued to prohibit cannabis deliveries. 2. Adopt a companion regulatory ordinance to permit delivery, only if the State of California were to mandate it. The regulatory program would be akin to a business license application; however, it would require the delivery companies to provide information on their vehicles (make, model, license plate number, etc.) for enforcement reasons. The license would also require proof of payment of all taxes. The program would also include fines for non -compliance with the requirements of the program. For example, the City of Santa Clara passed a commercial cannabis business tax in 2018 while the City Council banned commercial cannabis earlier this year. The tax ordinance explicitly states that “the payment of any commercial cannabis business tax…shall not be construed as authorizing the conduct or continuance of any illegal business or of a legal business in an illegal manner.” Under this structure, if the City of Santa Clara identifies illegal cannabis business activity, that business would be responsible for remitting the tax to the City, in addition to any other related fines. Enforcement of the program would be mostly complaint driven. Cannabis companies themselves often file complaints against their competitors, knowing that a documented violation could be grounds for the BCC or a local agency to revoke their license to operate, and therefore eliminate competition. Yet, the expenditure of staff time and resources to pursue a more robust regulatory and enforcement program would surpass the minimal tax revenue generated by one facet of the commercial cannabis supply chain. Next Steps This item is an informational item, prepared at the request of the City Council. At this time, Staff has no recommendations on next steps, and looks to the City Council for any additional direction. STRATEGIC PLAN INITIATIVE: None. NOTICING REQUIREMENTS/PUBLIC OUTREACH: None. ATTACHMENTS: None.