California Cannabis: Welcoming a Departure from Local Control

It’s no secret that among the many problems facing California’s cannabis industry, local control continues to impede the success of the Golden State’s industry. California isn’t alone in this – most cannabis is strictly local.

However, following these midterm elections, there appears to be some shifting in local control over cannabis in California. It’s good. Maintaining local control is not uncommon in cannabis-friendly states; Cities and counties are free to regulate or ban cannabis businesses within their borders according to police powers.

However, when majority of cities and counties ban cannabis companies, the illegal market rages on and legal access becomes an issue. With the 2022 interim periods behind us, the shift in local cannabis control in California suggests that some large, key cities and counties are opening up to cannabis companies.

LA County

Back in August, I wrote about the LA County cannabis tax measure. A copy of the ballot can be found here.

LA County plans to allow the following businesses within its borders in 2023:

  • 25 Retail
  • 25 delivery
  • 10 cultivation (only indoor or mixed light)
  • 10 distribution
  • 10 trial licenses.

Equity applicants have priority. For a county of 9 million people, that’s not a lot of cannabis licensing, and the exact licensing/permitting process has yet to be announced. At the moment we can really only say what the general “framework” for this is. S

We also now know what LA County’s commercial cannabis taxes will be (and they’re pretty competitive). Here are the highlights:

  • retail trade: 4% of gross receipts
  • manufacturing: 3% of gross receipts
  • distribution: 3% of gross receipts
  • Testing: 1% of gross receipts
  • cultivation: $7/sf canopy (artificial indoor light)
    • $4/sf canopy (mixed light)
    • $4/sf canopy (outdoor)
    • $2/sf canopy (nursery)
  • Any other type of cannabis business: 4% of gross receipts

The measure allows the county to “decrease or increase tax rates up to the following maximum tax rates for cannabis businesses in the unincorporated areas of Los Angeles County after July 1, 2026”:

  • retail trade: 6% of gross receipts
  • manufacturing: 4% of gross receipts
  • distribution: 3% of gross receipts
  • Testing: 2% of gross receipts
  • cultivation: $10/sf canopy (artificial indoor light)
    • $7/sf canopy (mixed light)
    • $4/sf canopy (outdoor)
    • $2/sf canopy (nursery)
  • Any other type of cannabis business: 4% of gross receipts

The county notes that cultivation tax rates for the maximum increases will be adjusted annually to reflect inflation in 2027.

County of San Diego

County voters passed Measure A, the county’s cannabis tax measure. Interestingly, San Diego County has a somewhat bizarre cannabis ordinance in that only medical cannabis collectives, commercial cannabis micro-enterprises, and commercial cannabis retailers are allowed to operate (and no new operating certificates were allowed to be issued after April 14, 2017).

Today there are only five retailers in San Diego County, home to 3.3 million people. The adoption of this tax measure can indicate that the county is poised to expand its cannabis program. In fact, the preamble to the tax ordinance states that the County Board of Supervisors:

desires the passage of cannabis regulations, including a permitting program, and seeks to provide the county with appropriate licenses and revenues in accordance with state law.

Once cannabis businesses are actually licensed in the county, they will face the following maximum tax rates on an annual basis (until January 2024):

  • Retail/Delivery/Micro Business: 6% of gross receipts
  • distribution: 3% of gross receipts;
  • Testing: 2% of gross receipts;
  • cultivation: either 3% of gross receipts or (depending on growing medium and/or license type) $10/sqf, $7/sqf, $4/sqf, or $2/sqf;
  • Other related businesses and manufacturing: 4%

After January 1, 2024, the above tax rates will be adjusted for inflation in line with the CPI. The county may not exceed the maximum rate of any tax in the ordinance. And like LA County, the tax applies to both licensed and illegal operators.

Huntington Beach and Laguna Woods

Huntington Beach is another local California government passing a cannabis tax measure before allowing and regulating cannabis businesses. Getting more cities in the OC to regulate and license cannabis companies would be tremendous since only six cities currently allow cannabis companies.

Measure O was passed on November 8th and imposes a tax of 6% on gross receipts for retailers and 1% on gross receipts for all others if Cannabis shops are allowed. And will cannabis businesses now be allowed in Huntington Beach? Here is the city’s response:

no The approval of Measure O is the first phase of the city’s effort to develop regulations that would allow a limited number of cannabis companies to operate in the city. The second phase of this effort will focus on developing land use regulations that will determine where cannabis companies can operate and establish buffers on sensitive uses such as schools and parks. The final phase will focus on implementation and will establish the administrative rules for the selection and issuance of permits for cannabis business applicants, as well as the development of the city’s internal procedures for processing and overseeing the cannabis permit program.

Voters in Laguna Woods (also in Orange County) also passed a cannabis tax measure, Measure T. Measure T requires retailers to pay a tax between 4% and 10% of gross receipts, or a maximum of $5/sq.ft. of floor space from January through December 2023 at $35/sqft for the same, which can be determined by license type (that’s still up to the city). All other cannabis businesses would be taxed between 1% and 10% of gross receipts, or between $1 and $35 per square foot of floor space from January through December 2023, depending on the license type. A full summary of the measure can be found here.

Similar to Huntington Beach, Laguna Woods must pass separate local laws to allow for licensed/permitted cannabis operations.

what lies ahead

Other cities in California have also introduced cannabis tax measures, which is a good sign. This means these cities are flirting with regulating and licensing cannabis companies within their borders. Of course, time will tell if and how these licensing regulations catch on, but it’s an overall positive indication that California’s local cannabis control shift is moving in the right direction.

Of course, not all cannabis measures (taxes or otherwise) were approved by voters (all three LA County beach towns opposed the concept). Hopefully, what’s ahead for California is bright as the stranglehold of local control loosens somewhat.

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