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Home My WebLink About24 Cannabis Tax RebateMEETING DATE: PREPARED BY : REQUEST: Recommendation CITY COUN CIL ACTION APPROVED '~ DENTED----- RECEIVED _____ OTHER----- ST AFF REPcSJt;,~~6: a&%&uQq , ¥Kf/4, CITY OF PALM DiSfii.SI ~ · ~ ECONOMIC DEVELOPMEN ~=::J.J~.c.~::~i.i.-J:ta.:::~.,...~-~2-~:.._-_-_-_-_-_-_-_-_-_-_-_ -_ VERIFIED BY:--1.m.J._A;;;t;.~----------- June 24 , 2021 Original on File wit h City Clerk's Office Martin Alvarez , Director of Economic Development Consideration to rebate a portion of the City 's Cannabis Tax to existing licensed cannabis businesses . By Minute Motion : 1. That the City Council approve a program to rebate a portion of the City of Palm Desert Retail Cannabis Tax revenue collected from the cannabis businesses that exceeds $3M for Fiscal Year (FY) 2020/2021 , up to a total aggregate rebate at $250K. 2 . Authorize the City Manager, Finance Director, and City Attorney to finalize individual tax rebate agreements with each of the City's existing licensed cannabis businesses. Rebates would be calculated and based on the proportion of cannabis tax submitted by each business for FY 2020/2021. Strategic Plan Objective The approval of the proposed program aligns with the City 's Envision Palm Desert Strategic Plan and Economic Development Strategic Plan in the following areas : • Economic Development Priority 1: Expand job and business creation opportunities Background In April 2021 , the City received a request from Mr. Rob Bernheimer , a representiative of several Palm Desert cannabis businesses , asking that the City consider temporarily suspending the City 's 10% retail tax on cannabis (see attached correspondence). In the correspondence , Mr . Bernheimer indicates that the State/local tax burdens along with the existing black market surges have significantly impacted the State cannabis industry's ability to be profitable and in some cases viable . The City 's 10% tax is one of several taxes imposed on the customers of Palm Desert cannabis businesses . Below is a summary of the types of taxes imposed on the State and Palm Desert cannabis industry : • State Cultivation -$9 .25/ounce (paid prior to retailer receiving product) • State Cannabis Excise Tax -15% \\srv-everyone\everyo ne\Staff Report s -Shared 2\St aff Reports 06-24-202 1\4 -City Clerk -06-24-2021124 Cannabis Ta x Rebate \02 CannabisTaxSR 6-24-21 SR.docx June 24, 2021 – Staff Report Cannabis Page 2 of 3 \\srv-everyone\everyone\Staff Reports - Shared 2\Staff Reports 06-24-2021\4 -City Clerk - 06-24-2021\24 Cannabis Tax Rebate\02 CannabisTaxSR 6-24-21SR.docx • Palm Desert Cannabis Cultivation Tax - $13.00/square foot (paid only for Palm Desert cultivators) • Palm Desert Cannabis Manufacturing Tax – 2% • Palm Desert Cannabis Retail Tax – 10% (see attached Cannabis Tax Rates for Coachella Valley cities) • State Sales Tax – 7.75% (City retains 1% of the 7.75% sales tax) For Palm Desert cannabis businesses, the minimum tax rate collected from customers on all retail cannabis sales is 32.75% (i.e. State Excise Tax -15%, Palm Desert Retail Tax- 10%, State Retail Sales Tax – 7.75%). Palm Desert Retail Cannabis Tax Collections: After the approval of Proposition 64 by the State in 2016 (adult-use regulation/sales of Cannabis), the City of Palm Desert initiated collection of its 10% retail sales tax in March 2019. At that time only five (5) of the six (6) retail cannabis retailers were in operation. The table below identifies the Palm Desert Cannabis Tax collections per year. FY 2018/2019 (5 of 6 retail bus. operating) March - June FY 2019/2020 FY 2020/2021 Projected $789,950 $2,526,944 $3.5M Discussion In order to review and address the request to suspend the City’s Cannabis Retail Tax (10%), staff has met with the Economic Development Subcommittee (EDSC) on three (3) occasions. The first two meetings were held on May 6 and May 18, 2021, and were also attended by Mr. Bernheimer and cannabis business owners. The cannabis representative expressed the industry concerns with the Subcommittee. In addition, the industry representative had the opportunity to share one of the local businesses’ confidential financial information describing the tax burdens on the cannabis businesses and consumers. At its June 6, 2021 meeting, staff and the EDSC Subcommitee discussed options to address the concerns raised by the local cannabis industry. Those options included the following: 1. Rebating a portion of the sales tax (1% of the 7.75%) for a period of time 2. Suspending the City’s 10% tax for a period of time 3. Reducing City’s 10% (i.e. 9% or 8% temporarily or permanently) 4. Rebating a portion of 10% tax 5. Rebate a portion of the tax collected per fiscal year that exceeded a baseline amount Each one of the above options was vetted by staff and the EDSC. Each option has pros and June 24, 2021 – Staff Report Cannabis Page 3 of 3 \\srv-everyone\everyone\Staff Reports - Shared 2\Staff Reports 06-24-2021\4 -City Clerk - 06-24-2021\24 Cannabis Tax Rebate\02 CannabisTaxSR 6-24-21SR.docx cons and would impact revenues that the City utilizes to provide services to the Community. Economic Development Subcommittee Recommendation: The EDSC recommended that the City participate in assisting its local cannabis businesses. The committee and staff recommended that the City rebate the portion of the Palm Desert Retail Cannabis Tax (10%) revenue collected that exceeds $3M (annual baseline), with an aggregate cap of $250K (all rebates for all businesses would not exceed $250K). See example of proporational rebate per business based on $3.5M Cannabis Tax collected FY 20/21): (Total aggregate rebate - $250K) Cannabis Business Tax Collected (FY 20/21) % of Total Tax Rebate Amount A $700K 20% $50,000 B $525K 15% $37,500 C $300K 8% $21,428 If this option is approved by the City Council, the subcommittee recommended that this program be re-evaluated at the end of FY 2021/2022. The EDSC acknowledged that the City assisted hundreds of businesses during the COVID- 19 pandemic with the use of Unite Palm Desert Economic Relief loans and grants. The Unite Palm Desert relief programs did not include the cannabis industry, as they were deemed essential businesses under the COVID-19 Guidelines and were allowed to remain in operation. Fiscal Analysis If the City Council approves the EDSC and staffs’ recommendation, the revenue collections for cannabis tax could be reduced up to $250K if the total amount of cannabis tax collected for the FY 2020/2021 meets or exceeds $3.25M. Currently the City’s Cannabis tax is utilized to offset public safety costs that would otherwise be paid by the General Fund. LEGAL REVIEW DEPT. REVIEW FINANCIAL REVIEW ASSISTANT CITY MANAGER N/A Robert W. Hargreaves City Attorney Martin Alvarez Martin Alvarez Director of Economic Development Janet M. Moore Janet M. Moore Director of Finance Andy Firestine Andy Firestine Assistant City Manager L. Todd Hileman, City Manager: L. Todd Hileman Attachments: Correspondence from Mr. Rob Bernheimer Cannabis Tax Rates for Coachella Valley cities [This page has intentionally been left blank.] Anythoughts? SabbyJonathan,CPA Councilmember- City of Palm Desert From: Rob Bernheimer <rob@robbernheimer.com> Sent: Friday, April 2, 20211:39 PM To:lonathan,Sabby Subject: Cannabis Retail Tax Council Member Jonathan: The cannabis retail license holders in Palm Desert would like the opportunity to meet with you to discuss the current retail cannabis tax rete in the City. The tax burden on the cannabis industry in California and Palm Desert is oppressive. With Palm Desert's 10% retail tax on cannabis, the overall taxes are at nearly 40% of the retail sale price. This has allowed the black market to thrive while preventing legitimate, licensed cannabis retailers from making any profit. Most, if not all, retailers in Palm Desert are losing money after taxes. This cannot continue long-term. During COVID the cannabis black market has continued to thrive as those prices are far less for seemingly similar products, although black market cannabis is not rigorously tested and safe from chemicals/pesticides like produds flowing through licensed operators. We would like to have a couple of representaHves from licensed cannabis retailers in Palm Desert meet with you to discuss temporarily suspending the retail cannabis tax in Palm Desert. eelow please find information relevant to this request and any meetlng we may have. Summary of Can�abis Taxes: The following summarizes the tax rete on cannabis in Palm Desert: - State Cultivation tax— paid prior to a retailer receiving product -$9.25 per ounce - State Cannabis Excise Tax-15%* Sa les Tax — 7.75 % - PalmDesertCannabisCultivationTax—$13persq.ft. - PalmDesertCannabisManufacturersTax-2% - Palm Desert Cannabis Retail Tax-10% * The Excise Tax is based on a formula for what the State says the sale price should be. Therefore, if a cannabis store discounts the price, it must pay the excise tax on the full anticipated retail price, not the actual sale price, making this tax potentially higher than 15%. Example of Cannabis Taxes: A cannabis vape pen with an average sale price of $50 has $18.38 in taxes, broken down as follows: - $1.00 State Cultivation Tax (estimate) - $7.SO State Excise Tax (possibly more) - $3.88 Sales Tax - Nominal Palm Desert Cannabis Cultivation Tax " - $1.00 Palm Desert Cannabis Manufacturing Tax *• - $5.00 Palm Desert Cannabis Retail Tax ** Rate if culHvated or manufactured in Palm Desert but may be higher or lower if cultivated or manufactured in anotherjurisdictlon with a different local tax rete. IMPORTANT TO UNDERSTAND IRS Tax Code 280e: The crippling effect of IRS Tax Code 2SOe cannot be ignored. While 280e is complicated, Cannabis businesses are required by law to pay taxes on their gross profit rather than net income. 7he only deduction allowed is the cost of goods. Unlike all other businesses that deduct payroll, rent, utilities, marketing, etc., cannabis businesses must pay federel income tax without deducfing these expenses. Cannabis business owners end up paying tax rates that are 70% or higher. That's almost triple, if not more, than the tax retes paid by non-cannabis business owners. This is because any business selling Schedule I controlled substances (cannabis) is denied the right to deduct any business expenses related to their businesses under federal law because the business is deemed illegal (regardless of the legality recognized by the state). Piling local taxes onto this already oppressive tax structure prevents local retail cannabis businesses from realizing any profit. Other Jurisdictional Tax Rates: While there are some outliers, local retail tax rates generally range from 0-10% in California, putting Palm Desert at the highest end of the spectrum. Examples of cities with lower retail taxes include Malibu at 2.5%; San Francisco at 2.5-5%; Sacramento and Pasadena at 4%; and San Diego at 5%. Thank you. Rob Bemheimer � Ro b@Rob B ern hei mer.com 45025 Manitou, Drive, Suite 3 Indian Wells, CA 92210 (760) 360-7666 office (760) 831-5455 mobile i Cannabis Tax Type Retail Delivery Cultivation Cultivation Additional Manfucaturing Rate Manufacturer Distribution Testing Cannibis Tax Rates I � Palm Desert I � Coachella I I Cathedral City I � Palm Springs I � Desert Hot Springs I � 10%(35% max) I 6% I 10% I � 10% � � 10% � � 10%(15%max) � 6% I 10% I 0% 0% $13.00 ($20 max) � 5 is.00 � 5 io.00 5 io.00 $ io.zo �% I 4� I �� % $ - � $ 15.00 � $ - $ - $ - 2%(3%max) 2% I 5% I 0% 0% 0% � 2% � 0% 0% 0% 0% � lY � 0% 0% 0%