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City exploring marijuana tax options

Posted: March 23rd, 2018 | News, Top Stories | No Comments

Jeff Clemetson | Editor

When La Mesa voters passed Measure U, paving the way for medical marijuana businesses to open in the city, one of the upsides of the new law was that it could potentially add millions of dollars to the city’s budget.

On Feb. 28, city staff, interested marijuana entrepreneurs and city officials met at the La Mesa Community Center for a discussion on local taxing options for future medical marijuana businesses. The discussion was led by consultant David McPherson, cannabis compliance director for HdL Companies.

Ken Sobel explains why he is opposed to taxing medical marijuana at the forum on city excise taxes for future marijuana businesses on Feb. 28. (Photo by Jeff Clemetson)

McPherson’s presentation laid out different strategies for taxing growers, manufacturers, distributors and retailers, but cautioned on overtaxing the new industry.

“Some cities think, ‘Let’s just tax and get everything we can if we’re going to have them in town,’” he said. “Well, you have to look at it as a goal of sustainability. How do we create a tax point that is going to be successful in getting the proper revenues that we want but at the same time we’re not going to end up with a lot of vacant buildings in 18 months?”

To find that special “pain point” — the tax level where the burden is too hard on legitimate businesses to compete with black market actors — the marijuana industry looked to another industry that also was prohibited and then legalized: alcohol.

“When alcohol first came out, there was a lot of black market bootlegging related to finding that pain point,” he said. “What is that pain point? Well over 40 to 50 years that we have had regulations of alcohol, we found that 30 percent is that threshold where you have all these regulations and taxing mechanisms and touching points involved in the process, that 30 percent [of the total retail cost] seems to be that acceptable range.”

So, what portion of that 30 percent would be the city’s? According to the mockup in the presentation, a little less than 7.5 percent of total retail cost. In McPherson’s mockup, the city would take in approximately $400 for every pound of marijuana sold.

But it is not just the numbers that the city will need to consider. The way businesses are taxed is equally important. For example, taxing growers by the square foot as opposed to taxing receipts makes it easier to prevent fraud in the all cash marijuana business. This can bring in less money over time due to inflation because the tax amount stays constant, even as the money’s purchasing power is diminished. Still, McPherson said, taxing by square foot of grow space is better because it also solves the problem of businesses that are integrated with both retail and grow operations. Taxing gross receipts works for all other types of businesses including retail, manufacturing and delivery.

McPherson also said it is important for cities to use stabilization in setting tax rates, making a set flat rate over a set amount of time with a “not to exceed” component so that businesses can plan for the tax burden and not be caught by surprise with a tax bill no one had planned for.

At the end of the presentation, City of La Mesa Director of Finance Sarah Waller-Bullock addressed the audience before opening the floor for questions.

“We’re not in the business of putting you out of business,” she said. “We’re just trying to get something that is going to work for us and for you.”

A pivot to recreational?

Despite the complexity of the tax issue, there was only one question on the minds of the marijuana business entrepreneurs at the presentation: Will the city ever allow recreational marijuana sales?

“Right now, Measure U only allows for medical marijuana,” Waller-Bullock said, but added that she will bring all the information gathered about taxing recreational and medical to the city council for consideration.

David McPherson (Courtesy HdL Companies)

“It is going to be hard for La Mesa to get support from industry for this tax without opening up recreational,” said Gina Austin, an attorney who works with marijuana businesses.

Waller-Bullock said the city will likely write a tax for medical but leave it open to implement for recreational if it is allowed in future.

La Mesa resident Ken Sobel, who is hoping to open a manufacturing facility for medical marijuana products, said the city should put a tax on adult side only and leave medical untaxed because 90 percent of sales would be recreational.

“I think if we work collaboratively towards this, and we get the city council to give us an [adult use] license, and give us self-distribution rights, then we can build program that provides a lot of money — in the tens of millions of dollars,” he said.

Rocky Goyal, who owns or is part owner of several marijuana businesses already operating in San Diego, said that taxes are going to be hard because the profit margins made by medical marijuana businesses aren’t “that great.”

“They’re certainly not what I thought they were and what people think of when they think of this business,” he said.

McPherson agreed that competing against businesses in municipalities that allow for recreational marijuana sales will someday be a problem, but that the medical marijuana market is still the dominant market.

“We’re seeing a transformation, mostly the big cities, moving to adult use. In the short term, you don’t have the immediate compression problem of just selling medical because 85 percent is medical,” he said, but added that the city will need to be “strategic” about recreational adult use in the future.

— Reach Jeff Clemetson at jeff@sdcnn.com.

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