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Meeting Date: 08/03/2020  
Submitted By: Andrew Ho, Director of Community & Economic Development

Staff requests City Council provide direction on whether to place a ballot measure on the November 3, 2020, General Municipal Election authorizing a cannabis business tax on all types of commercial cannabis businesses that now or in the future may operate in the City, and authorizing the City Council to adopt an ordinance authorizing up to four licenses for non-storefront (delivery only) retail cannabis business:

Mayor Beamish, with the concurrence of Mayor Pro Tem Espinoza, requested staff bring forth for City Council consideration a potential ballot measure to be included on the November 3, 2020 General Municipal Election that would impose a gross receipts business tax on commercial cannabis business types currently or subsequently authorized by the City Council to operate in the City, as well as to authorize up to four licenses for non-storefront (delivery only) retail cannabis businesses to be allowed to operate in the City. The deadline for placing measures on the ballot for the upcoming election is August 7, 2020.

In November 2016 California voters approved Proposition 64, legalizing recreational marijuana and authorizing the State to establish a licensing process for recreational marijuana businesses and activities.  At the State level, voters approved this measure by a vote of 57 percent in favor with 43 percent opposed.  In Orange County 52 percent of voters approved the measure versus 48 percent who opposed it.  In La Habra, the votes were almost an even 50/50 split, with the measure passing by 43 votes.  In June 2017, the State of California adopted SB 94 creating the Medicinal Adult-Use Cannabis Regulation and Safety Act (MAUCRSA) which integrated the rules and regulations for both medical and adult use of marijuana.  SB 94 allows for 20 license types that can be classified into six categories consisting of:
  1. Cultivation licenses(14 types),
  2. Manufacturing licenses (2 types),
  3. Testing licenses (1 type)
  4. Retailer license (1 type),
  5. Distributor license (1 type).
In La Habra the City Council has approved up to four distribution and four testing licenses to be issued.  In addition, City Council has approved a series of actions to ensure that the City is in compliance with new laws allowing the use of legal cannabis products, and has previously directed staff to evaluate and report on the types of cannabis businesses that are permitted to operate in State.  A brief timeline of prior City Council action include:
  • October 2017:  Directed staff to research cannabis distribution, testing, and retail home-delivery business types.
  • April 2018:  Approved the establishment and licensing of cannabis distribution (warehouse) facilities.
  • September 2018:  Approved the establishment and licensing of cannabis testing laboratory faciilties.
  • March 2020:  Denied the establishment and licensing of non-storefront home delivery only facilities.
  • June 2020:  Denied the proposal to reduce the number of cannabis distribution licenses from 4 to 3 and the proposal to eliminate all licenses for cannabis testing laboratory facilities 
As requested, staff has prepared a draft ordinance for voter approval that would authorize the City Council to impose a gross receipts business tax of up to six percent on all commercial cannabis business types currently or subsequently approved to be licensed within the City, as well as to authorize up to four licenses for non-storefront (delivery only) retail cannabis businesses.  If this proposed ballot measure is approved to be placed on the ballot by a 2/3 City Council vote, and is then subsequently approved by the voters by a majority vote, staff will return to City Council with ordinance(s) proposing initial rates for each type of commercial cannabis business and amending Chapter 18 (Commercial Cannabis Activity) of Article 1 of the Zoning Code to allow for up to four licenses for non-storefront (delivery only) retail cannabis businesses.  A cannabis business license tax would not be a direct tax on residents of La Habra or their property, but would be paid by cannabis businesses that already operate or may operate in the future within the City, and obligate those cannabis businesses to pay for their fair share of City services.

In consultation with the City's tax consultants HdL, staff recommends establishing a cap on the proposed cannabis business gross receipts tax of no more than six percent.  Staff at HdL have indicated that, based on their experience in the area, any higher tax rate would not be financially feasible for many cannabis businesses and would prevent them from considering La Habra as a location to establish a business.  In general, retail cannabis businesses can absorb approximately 30 percent in total taxes.  Currently, the State charges 15 percent in state cannabis taxes and the sales tax rate in La Habra is currently in at 8.25 percent, which leaves approximately 6.75 percent in taxing capacity in order to keep the total combined tax rate under 30 percent.  In an effort to stay competitive with other cities in the region who either currently license or are considering allowing the licensing of retail cannabis businesses, staff recommends limiting the City's proposed cannabis business tax rate to no more than six percent.

It is important to note that the proposed ballot measure will provide the City Council with the authority to set cannabis tax rates at any rate up to, but not in excess of, six percent on any permitted commercial cannabis activity and will also allow the City Council to have the authority to adjust the cannabis tax rate by business type as necessary without having to secure additional voter approval, as long as the rate does not exceed six percent.  The reason for this is that different cannabis business types will have differing levels of financial capacity for taxation.  For example, a home delivery retail dispensary may be able to accommodate a higher gross receipts tax than a testing lab could.  Due to the current COVID-19 pandemic's effect on the economy, some cites who have already licensed cannabis businesses in Los Angeles and Orange County have even temporarily lowered their tax rates to as low as one percent to help those businesses survive the current economic recession.  The proposed ballot measure would give the City Council the ability to remain flexible to changing economic or market conditions in the future.  It should also be noted that any existing cannabis business operating in the City under the terms of a development agreement will not be required to continue to make any contractual payments to the City once the City Council adopts an ordinance setting and imposing a tax.

If this ballot measure is approved to be placed on the ballot by the City Council (by at least a 2/3 City Council vote), and is then subsequently approved by the voters by at least a simple majority of 50 percent +1 vote, staff will return to City Council with proposed tax rate for each category of commercial cannabis businesses approved by Council for licensing, as well as with amendments to Chapter 18 (Commercial Cannabis Activity) of Article 1 of the Zoning Code that would allow for up to four licenses for non-storefront (delivery only) retail cannabis businesses.  

Staff estimates that the proposed tax of up to six percent, if approved by the voters, could generate approximately $1 million to $2 million annually in additional General Fund revenue based on projections for estimated tax rates on four distribution licenses, four testing licenses, and four non-storefront retail (delivery) licenses.  Currently, of the four distribution licenses and four testing licenses that have already been approved by Council, the City has only issued two licenses (one to a distribution licensee who is currently operating and one to a distribution licensee who is currently under construction), one additional distribution license application is pending Planning Commission review, and one distribution license remains available.  To date, no applications have been received for any of the four available testing licenses. 

In 2019, the City Council formed the Ad Hoc Fiscal Review Committee to evaluate and provide recommendations to the City Council regarding the City's fiscal condition. The Committee reviewed the actions that the City Council had previously taken regarding cannabis businesses and recommended that the Council continue to look at expanding licensing for cannabis business types that had a low land use impact to the community as an additional source of revenue.  Since home delivery only retail cannabis businesses would be prohibited from conducting any walkup or storefront sales, and would be required to operate in a similar fashion to distribution facilities, they would also be considered to have a low land use impact on the community, while having the potential to generate significant revenue for the City.

Included with this report for the City Council's consideration and action is the necessary resolution to place this measure on the ballot for the November 3, 2020, General Municipal Election.  The ordinance to be considered by the voters is an attachment to the resolution.  Because the voters, if they approve the ballot measure in November, will be themselves adopting the ordinance, there is no need for the City Council to itself adopt the ordinance.

Pursuant to the provisions of the California Environmental Quality Act (“CEQA”) (California Public Resources Code Sections 21000 et seq.) and State CEQA guidelines (Sections 15000 et seq.) the Measure and adoption of the Resolutions to place the Measure on the ballot at the General Election are exempt from CEQA pursuant to CEQA Guidelines Section 15061(b)(3), because it can be seen with certainty that there is no possibility that these actions may have a significant effect on the environment.
On April 2, 2018, the City Council established fees for the processing of Commercial Cannabis activities that recover the full cost of processing such applications through the screening, Development Agreement, and Conditional Use Permit process.  Currently, the one existing and operational cannabis distribution facility is generating approximately $500,000 in revenue to the City per year.  The proposed ballot initiative, if placed on the ballot by the City Council and subsequently approved by the voters, could conservatively generate approximately $1 million to $2 million in additional General Fund revenue annually to the City, assuming that approved cannabis facility operators apply for and are issued all available licenses.
The ballot initiative implements the following General Plan Policies:

LU 4.1 Development Compatibility
LU 6.3 High-Impact Uses
LU 16.1 Diversity of Uses
ED 2.1 Business Attractions
Resolution Submitting to Voters Cannabis Measure with Cannabis Ordinance


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