Stanislaus County could ask voters to approve a cannabis tax on the November ballot
Stanislaus County may put a tax initiative on the ballot to set new rates for legal cannabis businesses, some of whom are telling the county they can’t afford the current fee structure.
A ballot measure wouldn’t be an attempt to extract more revenue from licensed cannabis businesses. It would simplify the assessment process. Cannabis stores in the county jurisdiction would pay lower fees or assessments than what they’re paying now.
County Chief Executive Officer Jody Hayes said the county has begun to renegotiate fee agreements with retail cannabis stores that are not meeting sales projections that determine how much they owe in county fees.
At the request of license holders, county supervisors voted Tuesday to eliminate a community contribution fee that required cannabis stores to pay annual five-figure amounts to assist community programs with a focus on youth.
The county will amend the community contribution program and may ask voters as early as November to pass a cannabis tax initiative like the one approved for Modesto.
The general message is the fledgling cannabis industry is in distress and won’t generate the revenue for the county that was originally projected.
“We are asking for help,” said Mark Ponticelli of the People’s Remedy dispensary situated in an unincorporated area of Modesto. “We are being overtaxed. It is not sustainable.”
Ponticelli told county officials he’s looking at a $186,000 bill for fees this quarter but collected only $65,000 at the cash register. Unlicensed competitors, who don’t pay county fees, have driven down the price of marijuana products and drawn away customers, he said.
Ponticelli said competitors in the black market promote weekend sales events on social media, serving 1,000 people at secret locations. A Politico analysis suggested illegal dealers sell marijuana products at prices two to three times lower than legal outlets.
To stay competitive, the People’s Remedy has asked to renegotiate the “community benefit rate” in its development agreement to a flat rate that is lower than 8%.
According to the development agreement approved by supervisors in August 2020, the People’s Remedy was obligated to pay the county $600,000 annually, increasing to $700,000 annually over the five-year agreement, or pay 8% of gross sales, whatever is greater.
The business did not take in enough surcharges from customers to cover the “whatever is greater” amount, which was $600,000 owed in 2020 and $635,000 in 2021, according to paperwork submitted to the county. That required the business to pay $3,000 to $17,000 per month in fees from cash on hand, and the store lost money in those two years.
Ponticelli wrote that the business saw a 25% drop in sales when it started collecting the community benefit rate from customers in early 2019. There was a spike in sales the second quarter of 2020 when COVID-19 shutdowns inactivated many workers, but sales came down later in the year.
Ponticelli is asking the county to eliminate the minimum six-figure fee obligations and use a flat rate to assess fees. He wrote that a leading cannabis consulting firm, HDL, has recommended fees or taxes of no more than 4%. According to Ponticelli’s figures, a 4% fee on gross sales would have given the county $219,600 in revenue last year instead of $635,000.
With the board action Tuesday to eliminate the fees dedicated to community programs, the cannabis shop won’t have to pay $61,200 to $71,800 annually. The amended program will allow cannabis merchants to donate directly to charities and community groups through monetary contributions, volunteer hours or in-kind services.
Jason David, who has received national publicity for a cannabis-based medicinal product, told supervisors this week that his business could close in six months without relief from fee policies.
A glut in cannabis market
After commercial cannabis sales became legal in January 2018, more and more shops began opening to cash in on the new industry. Local governments also saw development agreements and cannabis permit approvals as a source of fee revenue for their depleted general funds.
Today, the emerging industry suffers from a finite number of customers and overproduction.
Last month, The Sacramento Bee reported there’s too much legal weed on the market — not counting what’s produced by the vast number of illegal growers. The article, citing Cannabis Benchmark, said legal growers are getting the lowest prices for their harvest since the first year the numbers were tracked in 2015.
California growers were getting an average of just over $800 per pound in April, down from $1,580 in October 2020, but some were settling for less than $300 a pound.
Supervisor Vito Chiesa said Wednesday that Modesto’s Measure T, approved by voters in November 2017, could serve as a model for a county initiative setting parameters for taxing cannabis sales in unincorporated areas. Measure T, which required majority approval, gave authority to the city to tax cannabis receipts up to 10%. Like Modesto, the county could adjust the rate depending on industry conditions.
A reduction of fees won’t give the county the revenue it anticipated as it spends law enforcement resources on raids to shut down illegal grows.
Hayes said many more law enforcement personnel and prosecution staff would be needed to eliminate all the illegal growing. “As long as growing illegally remains a misdemeanor in the state, I don’t think that is going to change,” he said.
Will lower fees attract more cannabis outlets?
Chiesa doubted that setting lower fees to help cannabis businesses will make the county a magnet for additional marijuana enterprises. There are 28 retail cannabis outlets in Stanislaus County, Modesto and other cities. The cities have their own methods of assessing the businesses.
The 2016 statewide initiative that legalized recreational pot was supported in this county by a slim margin and some cannabis business proposals have run into strong opposition from neighboring residents.
Stanislaus County has a limit of seven weed shops in unincorporated areas. A total of 18 cannabis enterprises including retail, indoor cultivation and manufacturing are operating within the county jurisdiction.
“It’s a saturated market,” Chiesa said. “We are not handing out any more permits.”
This story was originally published May 5, 2022 at 1:29 PM.
