Truly a Cash Crop
Mono County seeks to find the right balance in regulation of cannabis
At the August 1 meeting of the Mono County Board of Supervisors, consultant David McPherson of HdL Companies presented a series of options to the County regarding taxation of marijuana businesses.
McPherson told Supervisors that Mono County will have to consider the taxes imposed on legal marijuana sales by the State when setting its own local tax rates and fees. If local tax rates are set too high, the County could dissuade marijuana businesses from coming to the area. If they are set too low, the regulatory costs of enforcing local ordinances could cause the County to operate at a loss.
The Adult Use of Marijuana Act, also known as Proposition 64, which was enacted in November 2016, imposed a 15 percent statewide tax on recreational marijuana sales. Unlike a sales tax, an excise tax is levied by the Internal Revenue Service on the producer or merchant, not the customer. However, the tax is often effectively passed onto the customer when merchants build it into the cost of the product.
McPherson, formerly the Deputy Sheriff of Orange County and a retired Tax Administrator-turned-consultant, warned that if the cumulative taxation of marijuana sales is too high, consumers will turn to the unregulated market. McPherson said that, after excise tax and other state taxes, the State of California imposes a nearly 25 percent tax on all marijuana sales, with some exemptions for medical pot.
According to McPherson, the established industry threshold for taxing alcoholic beverages is 30 percent. He said 25 to 30 percent is a reasonable threshold for marijuana, and that most counties in California are choosing to impose local taxes on marijuana-related business revenue of 4-6 percent.
McPherson noted that there will be huge administrative costs incurred by the County as a result of the passage of Prop 64.
Mono County Finance Director Janet Dutcher told Supervisors that the managers of Oak Valley and Union Banks, the only two banks in Mono County (which employ humans), told County staff they would not open business accounts for marijuana-related businesses. They will, however, accept money from the County earned through the taxation of marijuana businesses. Dutcher encouraged Supervisors to consider the administrative expenses incurred by the County as a result of the additional staff time needed to enforce and regulate Transient Occupancy Tax as a means of comparison.
At the same meeting, Paul Smith and Arthur Wylene of the Rural County Representatives of California, an advocacy group comprised of County Supervisors from the smallest counties in the State, gave a presentation regarding the legal ambiguities surrounding taxation of marijuana. They warned that the American Civil Liberties Union had pursued a lawsuit against the city of Fontana for imposing exorbitant taxes on marijuana sales with the intent of discouraging business.
Medical and recreational use of marijuana were signed into law in two separate bills in California. On June 27, Governor Brown signed the 2017 Cannabis Budget Trailer Bill, which creates a single regulatory structure for both industries. Under the new Trailer Bill, the State of California has said it will not issue a cannabis-related business license (required for commercial cannabis activities under Proposition 64) unless the proposed business is in compliance with the ordinances adopted by the jurisdiction in which it plans to operate. To enforce this, the State has asked counties and cities to submit a copy of their commercial cannabis ordinances, if they have them, as soon as possible. When an application for a state license is processed, the State will notify the local jurisdiction that the application was submitted, and ask them to demonstrate that it is either in compliance with the local commercial cannabis ordinance or non-compliant.
Smith and Wylene said that the State can start issuing commercial cannabis licenses on January 1, 2018, but that there is no deadline that says local jurisdictions must have a permitting program in place at that time. It’s just that if they don’t, the state could issue a license without local say in the matter.
Furthermore, Mono County will be responsible for developing its own strategy for enforcing compliance with whatever commercial marijuana ordinance it chooses to pass. According to Smith and Wylene, oversight of the crop could legally be understood to fall under the jurisdiction of the Agricultural Commissioner. They said other counties have assigned that duty to the Sheriff’s Department, since the Agricultural Commissioner is not a law enforcement officer. “This is a cash industry, so anticipate that these business owners may showing up at your office with a year’s worth of taxes. There are security considerations there,” said McPherson.
Additionally, cannabis-related money cannot cross state boundaries. A prospective grower in Antelope Valley could not open a business account with a bank in Nevada. The only regional option, as long as Oak Valley Community Bank and Union Bank maintain their stance against cannabis-money, is to deal in cash.
