Marijuana customers who buy cannabis from proposed Modesto retail shops can expect to pay more taxes than they have been at other dispensaries in Stanislaus County.
The Modesto City Council has approved an 8 percent tax for cannabis retail businesses. The council at its Dec. 4 meeting also approved tax rates for other types of cannabis businesses in Modesto, including distribution, microbusiness, manufacturing, indoor cultivation and testing labs.
Modesto’s retail tax will be in addition to state taxes and regular sales taxes on cannabis products in California. That means cannabis customers in Modesto retail stores will likely be paying slightly more than 30 percent in taxes, which will be reflected in their sales receipt.
“This makes it one of the highest taxed products on the market right now. But I think the market can still support that tax,” said Doug Mutoza, general manager for Empire Health & Wellness, which is in the application process to open another shop in Modesto.
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In Stanislaus County, which has about a dozen legally operating dispensaries, four cities passed marijuana business tax measures in November, allowing their local governments to approve similar additional taxes on marijuana sales. Voters in Ceres, Oakdale and Patterson gave their city councils the power to levy up to a 15 percent tax. Riverbank voters permitted up to a 10 percent tax.
In November 2017, Modesto voters approved a measure that allowed the city to levy up to a 10 percent tax. The City Council decided last week to approve a tax rate for all cannabis businesses in Modesto that ranges from 8 to 2.5 percent. Modesto expects to receive about $3.2 million in annual revenue from the cannabis taxes.
These municipal taxes will then be added to about 23 percent in taxes currently collected on cannabis retail sales. That includes a 15 percent excise tax imposed by the state and the existing 7.875 to 8.375 local sales tax rate in Stanislaus County.
In Modesto, the final combined tax rate for cannabis products will be 30.875 percent. For example, if a customer buys $50 worth of marijuana from a business authorized by Modesto, the customer will be charged $15.44 in taxes. The total amount on the marijuana customer’s receipt would then be $65.44.
Cannabis Tax in Modesto
|Business Type||Percentage of Gross Receipts|
At last week’s meeting, Modesto City Manager Joe Lopez said the city can only estimate how much money the cannabis tax will generate. He said officials will have a better understanding of how much tax money the city will receive once the cannabis businesses are up and running.
“This is going to be a constant evaluation over the next year as we get more and more data about the impact this is having on our community,” Lopez said.
The City Council voted unanimously to approve the cannabis tax rate, along with resolutions to establish a permit fee and amend a contract with a firm that will monitor authorized marijuana businesses in Modesto.
Navigating the complex tax structure for marijuana sales has been a challenge both for sellers and consumers. Since Proposition 64 legalized the sale of recreational marijuana across the state starting this year, dispensaries have been adding the state excise and local taxes to customers bills.
Mutoza said that for a while, his dispensary in Empire had a note on a whiteboard explaining the tax breakdown.
“This wasn’t brought on by us, but it’s something we have to abide. Most of (the customers) understand. But once we have to start adding the new local tax on, too, I’m sure we will get some (complaints) from customers,” Mutoza said.
Modesto spokesman Thomas Reeves said 20 retail businesses have applied for a permit, and city staff is within weeks of submitting applicant recommendations for approval.
All Modesto cannabis business permits — retail and otherwise — require a vote for approval by the City Council. None have been submitted for approval, which means no businesses are operating within Modesto’s jurisdiction.
The screening process for retail permits has been completed, Reeves said Friday, and city staff was in the process of finalizing its recommendations to the Modesto City Council.
The council has decided that only 10 retail businesses will be granted permits to operate in Modesto; they cannot be located downtown. It’s unclear how many of the 20 retail businesses that have applied are still in the running.
Reeves said the 8 percent retail tax will be based on the business’s gross receipts; it is not a sales tax. He said it will be up to the retailers to decide whether to pass on the additional cost to customers in the form of higher prices for their products.
Cannabis retailers typically pass on all the state, sales and municipal taxes to marijuana customers.
“All those taxes come back down onto the consumer,” said Mark Ponticelli, co-owner of The People’s Remedy, which operates dispensaries in unincorporated areas of Modesto, Oakdale and Patterson. “You get a couple comments here and there, but everyone understands and they know. We’re just really overregulated. But it hasn’t made a difference in (sales).”
As of Friday, Modesto has received six applications for nonretail businesses. Reeves said there is one applicant for a distribution business, which would supply retailers with cannabis products to sell. Modesto’s cannabis ordinance does not allow for deliveries to customers.
Reeves said there are five cannabis microbusinesses that have applied for a Modesto permit. A permit for a microbusiness allows multiple types of operations, such as cultivation, manufacturing, distribution, retail or a combination of those under one roof.
But Reeves said a microbusiness cannot exceed 10,000 square feet. If it does, the business owner would need to apply for a permit for each type of cannabis operation.
On Friday, the permit applications for distribution and microbusinesses were being reviewed for conformance with the city’s regulations, Reeves said.
The city council Tuesday approved a $21,740 annual commercial cannabis permit fee for each business operating in Modesto. The cost of the fee would fund ongoing administration of authorized cannabis businesses.
HdL, a consulting firm that has evaluated more than 1,400 cannabis business applications for local governments throughout California, worked with Modesto on determining the annual permit fee that funds administrative costs and compliance checks.
The city council last week approved a $1,164,250 contract over five years for HdL to monitor permitted cannabis businesses. The consulting firm also has helped Modesto review the permit applications and will continue to do so as needed.
Each year, HdL will perform three random compliance inspections at each cannabis business, along with an annual financial audit of each business, according to Steve Mitchell, Modesto’s acting planning manager.
HdL also will conduct additional background checks of cannabis business employees and assist Modesto with issuing identification badges for cannabis employees.
Along with funding the city’s administrative costs, the revenue from the annual permit fee will fund the cost of HdL’s contract. The city’s estimated costs for compliance checks were based on Modesto permitting 14 cannabis businesses: 10 marijuana retailers and four nonretail businesses.
As Modesto gains more experience administering the cannabis industry, the number of businesses could increase or decrease. The price of the annual permit fee also could be adjusted.
Illegal marijuana businesses
But the permit fee revenue will not fund police enforcement of unauthorized cannabis businesses in Modesto; that will be funded by the municipal tax for cannabis businesses.
The cannabis tax revenue will go into Modesto’s general fund and be used for any legitimate government purpose, including neighborhood safety, maintaining parks and recreation and creating jobs.
Modesto City Attorney Adam Lindgren said the city is continuing to apply pressure on illegal marijuana businesses in Modesto, and new funding from the cannabis business tax will make these efforts even more successful.
Mitchell said the city tax rates couldn’t be set too high, which could create a risk of pushing cannabis businesses into operating illegally. Modesto wants to ensure these businesses thrive while the city recovers the cost of thwarting illegal marijuana businesses.
“It’s a balancing act,” Mitchell told the City Council last week. “You want the revenue, of course, you want to maximize your revenue possibilities. But at the same time, you also don’t want to burden the legal businesses so much that it creates, it basically encourages, the black market.”
Modesto City Councilman Doug Ridenour said the black market for cannabis will not go away, even with the legalization of recreational marijuana use. He made it clear that he has been convinced there some medical benefits from cannabis, but he is not in favor of recreational marijuana use.
Ridenour, however, voted last week to approve the cannabis business tax rate, adopting the permit fee and amending the contract for compliance services from HdL.
The councilman said he wishes the city could slow down and do more research before implementing this local system for cannabis business revenue. Ridenour said he’s worried about unintended consequences, such as increased drugged driving, failed drug tests, marijuana-related emergency room visits, along with lower school attendance and kids consuming candy-flavored cannabis products.
“I fear that may happen,” Ridenour said at last week’s council meeting. “And I don’t think recreational (use) is going to help at all.”