Taxing Marijuana: What Can Cities Do and How Should It Be Done?
With new state regulations on medical marijuana in place, and an initiative legalizing recreational marijuana qualifying for the November ballot, many California cities are reviving the debate surrounding these businesses. Ballot measure deadlines are fast approaching, and therefore cities must decide in coming weeks whether to place a marijuana business tax question on the November ballot. This e-alert addresses the different taxation options available to cities, key considerations for drafting a commercial tax, and other issues relating to the collection of the tax.
Medical Marijuana Regulation and Safety Act
A package of three bills passed by the California Legislature in 2015 is bringing the marijuana industry out of the shadows by creating a comprehensive regulatory structure. The Medical Marijuana Regulation and Safety Act (“MMRSA”) was created by AB 266, AB 243, and SB 643. Until the enactment of MMRSA, most marijuana “businesses,” with the exception of cooperatives and collectives (dispensaries and their associated growers), were illegal. MMRSA changes that by creating licensing categories for every aspect of the industry, including cultivation, testing, distribution, and sales. It assigns various state agencies to oversee each facet of the medical marijuana business. MMRSA also establishes a new regulatory agency, the Bureau of Medical Marijuana Regulation within the Department of Consumer Affairs, to implement the licensing regulations. It is anticipated that the full licensing regulations will be developed by January 1, 2018.
With the promise of more state regulation and oversight, some jurisdictions may be ready to get into – and profit from – the medical marijuana business.
Recreational Marijuana Initiative
The Control, Regulate, and Tax Adult Use of Marijuana (“Initiative”) has qualified for the November 2016 ballot. The potential legalization of recreational marijuana sales and use in California is also influencing policy discussions. From taxes to dispensaries to manufacturing, the marijuana conversation at the local level is picking up momentum. Where some see opportunity for economic growth or restoring recent budget cuts, others see potential negative impacts related to law enforcement and property values. Please click here to read our prior e-alert analyzing the Initiative’s impacts on local land uses and the state taxes it would impose on sales.
Marijuana Taxes in California Cities
Numerous cities in California have enacted marijuana business taxes in recent years. Marijuana tax rates range from four to fifteen percent of gross receipts. The City of Oakland was the first to tax marijuana in 2009. Currently there are at least eighteen cities in the State with marijuana taxes on the books. Not all cities levy the tax. For example, the cities of Albany and La Puente have a general tax for marijuana businesses, but do not allow dispensaries to locate in the cities, and therefore do not collect the tax.
There are many paths a marijuana business tax may take. Voters in the City of Davis recently passed a ballot measure allowing for a ten percent tax on gross receipts of non-medical marijuana businesses; the intent is for the tax to be levied if the Initiative legalizing recreational marijuana sales passes in November. Some cities tax dispensary sales only, while others also tax cultivation operations. Some cultivation taxes are based on square footage of an operation, while others tax a percentage of gross receipts. A tax measure could be designed to cover all “marijuana business operations,” including dispensary sales, cultivation, and even distribution, delivery, and testing businesses.
Procedure to Place a Tax Measure on the Ballot
Some cities may seek a general or special tax on marijuana businesses during the November 2016 election.
A general tax must go before the voters during a regular municipal election (when city council seats are up for election). A general tax may, however, go before the voters in an off-year election if the city council unanimously declares the existence of an emergency. A general tax may be placed on the ballot by a two-thirds vote of the City Council, and it must be approved by a simple majority of voters. General tax revenues are placed in the general fund and may be used for any legitimate government purpose.
A special tax may go on the ballot at any election. A majority vote of the city council is required to place a special tax on the ballot, and it must be approved by two-thirds of the voters. Special tax revenues may only be expended for the purposes stated in the ballot measure.
Components to Consider for a Commercial Marijuana Tax
If a city is interested in placing a tax on the ballot, the following components of the tax should be considered:
- General or special tax?
- Tax rate? Most cities have enacted taxes ranging from 4 to 15% of gross receipts.
- Tax dispensary sales only, or tax cultivation, manufacturing, delivery and/or processing businesses?
- Tax medical marijuana businesses only, or include non-medical (recreational) marijuana businesses in case a statewide initiative passes and the city later allows for such businesses?
- Any regional interest in a tax-sharing agreement with other cities and/or the county?
A tax may be passed by the voters even if marijuana businesses are not yet permitted to operate within a jurisdiction. However, in this case, the city council should consider which types of marijuana businesses to allow (sales/dispensaries, manufacturing/processing, distribution, testing, etc.) and possibly where to allow them.
Additionally, consideration should be given to whether city staff is prepared to collect and administer the business operations tax. Although it is similar to a transient occupancy tax, some cities have found that marijuana businesses are not as advanced in their bookkeeping as hotels, and therefore more staff time is required for audits and collection. One approach is for cities to establish this tax as a business license tax. Such a tax could reduce the administrative burden in cities that have other business license taxes in place. For smaller jurisdictions, a tax-sharing agreement with other cities and/or the county could make the most sense.
The deadline for cities to submit a November 2016 ballot measure to the county elections official is August 12th. A general or special tax measure would generally be exempt from CEQA requirements. For a list of current marijuana business tax rates in California cities, or other questions on this topic, please contact the Meyers Nave attorneys noted below.