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Pot tax proposal heads to ballot

Posted: July 27th, 2018 | News, Top Stories | No Comments

Jeff Clemetson |  Editor

La Mesa voters will again be considering a marijuana ordinance this November, this time regarding how the city should tax the new marijuana businesses that will soon be springing up in the city.

At its July 10 meeting, the La Mesa City Council voted unanimously to put the tax ordinance on the ballot — a move that some residents were unaware was necessary, according Mayor Mark Arapostathis.

“I hear from people, ‘Well, at least the city is getting tax [from marijuana businesses].’ And then I hit them with the fact that no, the city isn’t getting anything and I’m usually met with shock, even from the people that were in favor of Measure U,” he said.

When the citizen initiative Measure U was passed by La Mesa voters in 2016, allowing marijuana businesses to open in the city, there was no tax component in it.

“The only way to add the tax to it is to go back to the voters,” said Councilmember Bill Baber, who added that the city is not taxing customers for purchasing marijuana products.

“What this is, is a business tax on gross receipts. It is not a sales tax,” he continued. “Whether a business passes along the cost of this to the consumers is a choice of the business.”

According to the city staff report, the taxes on marijuana businesses are “structured to provide a range of tax rates that will be high enough to generate revenue to offset the costs of regulating and managing the cannabis businesses and related activities, while simultaneously being low enough to avoid over-taxation and ensure the long-term sustainability of the businesses subject to the tax.”

The proposed tax ranges, and what the initial tax rate — the rates that would take effect immediately if voters pass the measure — are:

  • For commercial marijuana cultivation, growers will be taxed a maximum of $10 per square foot of canopy. The proposal also differentiates between indoor growers and nursery grow operations. The initial tax rate will be $7 per square foot of canopy for indoor grows and $1 per square foot for nursery operations.
  • Retail businesses, both dispensary and delivery, will be taxed a maximum of 6 percent of gross receipts, with an initial tax rate of 4 percent. For sales to people with a valid California Department of Public Health Medical Marijuana Identification Card, there will be zero taxes, including sales tax.
  • Manufacturing businesses, those who make edibles or extraction products, will have a maximum tax rate of 6 percent and an initial rate of 2.5 percent of gross receipts.
  • Testing facilities will have a maximum rate of 6 percent and an initial rate of 1 percent.
  • Distribution businesses will have a maximum rate of 6 percent and an initial rate of 2 percent.

“As you look through the tax rates, they were set in consultation with our consultant as to what the market will bear as a starting point and to give us a range,” Baber said. “Like any tax bill, it’s a series of compromises and no one’s entirely happy but the goal was to come up with a rate that would bring in income for the city and to pay for city operations.”

At the meeting, marijuana business owners and representatives of the industry greeted the tax proposal warmly, with only a few complaints.

“I like what you’re doing. This is a great plan, there is just a little kink in it,” said Shawn McDermott, who will be opening La Mesa’s first dispensary on Center Street. McDermott wants the city to loosen the ID requirement for patients to get tax exemption from the standard of state issued identification card to a physician’s recommendation.

Association of Cannabis Professional vice president Cynara Velazquez said the top tax rate of $10 and initial rate of $7 per square foot of canopy was “quite high” and suggested an initial rate of $4 with a maximum rate of $6.

Carol Green, representing Community Action Service Advocacy (CASA), suggested raising the tax rates.

“As you mentioned, the tax goes to the business owner and not the individuals that are purchasing so it wouldn’t really be a burden on anyone that was using a medical card because that doesn’t have to be passed on to them,” she said. “And a quick assessment will tell you that most of these businesses do quite well financially.”

After public comments, the council decided to maintain the tax rates in the proposed measure, and reminded everyone that the rates are flexible and can be adjusted as needed if they prove to be too low or high.

A discussion on adult use

Following the vote to put the tax measure on the ballot, the council began a discussion on a proposed ordinance to license the sale of adult use, or recreational, marijuana in the city.

“Why are we here [discussing] adult use?” Baber began, before listing his reasons for the city to consider allowing recreational marijuana — that voters view marijuana as a viable business as evidenced by the passage of Prop 64 and Measure U; that there is more tax money in adult use because there are more transactions; and that the wall of just getting a doctor’s note to buy medical marijuana is not much of a hurdle in the first place.

“The fourth reason is the problem with Prop U is it didn’t allow us to fix anything,” he continued. “Instead of waiting for a new citizens initiative on adult use, we decided to obviate the problem, put adult use forward and write the regulations ourselves as best is possible, and it allows us to adjust. The problem with Prop U is, it’s set in stone and absent a vote of the people, we can’t make minor adjustments. This allows that.”

Arapostathis agreed that it would be better for the city to write any future ordinances on marijuana.

“I learned my lesson from Measure U,” he said. “We opposed Measure J in 2014 when it was put on the ballot, and instead of getting ahead of it as a council so we could dictate the terms for the city, we didn’t and [Measure U] went to the voters.”

While still in early draft form, the adult use proposal as is would allow any medical dispensaries that open under Measure U to be able to apply for a joint use license to sell recreational marijuana. Dispensaries that want to open without going through the Measure U rules, and only open as recreational, would be limited to four. Recreational cultivation businesses would be restricted to five.

The most important aspect of the adult use proposal is that it would be a licensing ordinance and not a conditional use permits to operate.

“Measure U was drafted in the form of a conditional use permit,” said City Attorney Glenn Sabine. “When you’re dealing with conditional use permits, there’s certain laws that apply because it’s a land use entitlement. There must be a nexus with a condition you may impose. That’s not true with a licensing ordinance. So, what you see in Measure U is that we could not go back and disqualify applicants for prior bad acts that might be a criminal violation regarding a dispensary use in this city or another city. But that appears here in this licensing ordinance because under the body of law we’re working with, we can do that.”

Under the proposed ordinance, any criminal or civil action against an applicant stemming from an illegal marijuana business would result in the applicant being disqualified. That would also apply to any current dispensary operators who apply for a joint license.

The proposal also includes a few added restrictions on where dispensaries may operate; however, they would only apply to any dispensary that is recreational only — existing Measure U dispensaries would still be able to operate a joint license.

The proposal also sets up a lottery system for applicants, rather than the first-come-first served system that Measure U used in applying for permits, which is still an ongoing point of contention between dispensary applicants and the city. Applicants will be given a lottery number after they pass a qualifications step and their records come up clean.

— Reach Jeff Clemetson at jeff@sdcnn.com.

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