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HomeMy WebLinkAbout22 - NB-6 - Formation of Ad Hoc Committee of - 12/17/20191 LOCK, CONNOR From:Michael Moussalli <michael@se7enleaf.com> Sent:Wednesday, December 4, 2019 7:49 PM To:FOLEY, KATRINA; STEPHENS, JOHN; CHAVEZ, MANUEL; GENIS, SANDRA; MANSOOR, ALLAN; MARR, ANDREA; REYNOLDS, ARLIS; CONSTITUENT SERVICES; CURTIS, BARRY C.; LE, JENNIFER; PREZIOSI, TARQUIN; Kimberly Hall Barlow - City Attorney; FARRELL HARRISON, LORI ANN; TELFORD, KELLY; GREEN, BRENDA Subject:Recent Updates from the Cannabis Industry Attachments:Cannabis Operators Letter to City Council and Staff 11112019.pdf Dear City Council and Staff, Hope you all had a nice holiday. I wanted share a couple of recent updates with you. The first update is that the State of California (specifically the CDTFA) recently decided to raise the already excessive taxes on the struggling cannabis industry, cutting margins even further for current wholesale operators and driving more consumers towards the illicit market. Despite tax revenues falling short of projections and data showing that a tax increase could be detrimental to the stability of the legal marketplace, the CDTFA decided to proceed with the increase, which as been met with total shock and disappointmet by the cannabis industry as a whole in California. The financial burden this tax increase will put on businesses is now another challenge that operators will have to figure out how to endure and overcome. You can read more about the tax increase here: https://www.forbes.com/sites/sarabrittanysomerset/2019/11/22/california-is-raising-its-taxes-on-cannabis- again/#706e073c74eb The second update is that yesterday evening the City of Long Beach voted to reduce their gross receipts tax on all non-retail cannabis businesses from 6% down to 1%, in order to encourage more cannabis businesses to open within the City. You can read more about it here: https://lbpost.com/news/long-beach-to-reduce-some-cannabis-taxes-to-spur-industry-investment As City Council and Staff are currently discussing a reduction in the gross receipts tax for the cannabis businesses here in Costa Mesa, I thought it prudent to share this recent information with you, as Long Beach is a neighboring City with operators that are experiencing the same economic challenges that operators here in Costa Mesa are facing. The tax reduction in Long Beach to 1% across the board for all wholesale businesses is the lifeline that many operators need to survive in this challenging marketplace. Additionally, Los Angeles is at a 2% tax rate on manufacturing businesses and a 1% tax rate on distribution businesses. The concern here is that both LA and now Long Beach are in a strong position to sway new Attachment 2 2 cannabis operators to settle in their cities and the cost of doing business for current operators in those cities is much less than it is for operators in Costa Mesa. Simply put, this means operators in LA and Long Beach are in a position to win deals and earn business that we here in Costa Mesa are not. The cannabis community in Costa Mesa looks forward to continuing an open dialogue with City Council and City Staff in order to work together closley to get the industry in Costa Mesa back on track as soon as possible. Thank you all for your continued help and support. Best, Michael Moussalli Se7enLeaf Co-Founder and Partner Cell: (949) 400-4110 Office: (877) 464-6652 www.se7enleaf.com Begin forwarded message: From: Michael Moussalli <michael@se7enleaf.com> Subject: The Local Cannabis Industry Requests Your Help Date: November 11, 2019 at 3:49:35 PM PST To: katrina.foley@costamesaca.gov, john.stephens@costamesaca.gov, Manuel.Chavez@costamesaca.gov, sandra.genis@costamesaca.gov, allan.mansoor@costamesaca.gov, Andrea.Marr@costamesaca.gov, Arlis.Reynolds@costamesaca.gov, constituentservices@costamesaca.gov, byron.dearakal@costamesaca.gov, barry.curtis@costamesaca.gov, jennifer.le@costamesaca.gov, tarquin.preziosi@costamesaca.gov, khb@jones-mayer.com, LORI ANN FARRELL HARRISON <LoriAnn@costamesaca.gov>, Kelly Telford <kelly.telford@costamesaca.gov>, brenda.green@costamesaca.gov To: Madam Mayor Foley Mayor Pro Tem Stephens City Council Members City Manager City Staff 3 City Attorney City Clerk Chairman of the Planning Commission Hope this email finds you all well. The local Cannabis Industry formally requests a reduction in the tax on our businesses (from 6% to 2% on all current uses), as well as we request that Home Delivery business (with a proposed tax of 5%) be allowed within the City limits. Please find a letter attached to this email from the industry, which outlines the reasoning for these resets and the benefits that can be obtained for both operators and the City by acting swiftly. Members from the Industry will be in attendance tomorrow at the City’s Study Session and several will be elaborating a bit further on our requests during opening comments. We hope to stimulate dialogue with all of you and formulate a plan to take swift action on these requests, as the local Cannabis Industry really needs your help. Please let me know if you have any questions, we look forward to speaking with you in greater details. Thank you Best, Michael Moussalli Se7enLeaf Co-Founder and Partner Cell: (949) 400-4110 Office: (877) 464-6652 www.se7enleaf.com CONFIDENTIALITY NOTICE: The contents of this email message and any attachments are intended solely for the addressee(s) and may contain confidential and/or privileged information and may be legally protected from disclosure. If you are not the intended recipient of this message or their agent, or if this message has been addressed to you in error, please immediately alert the sender by reply email and then delete this message and any attachments. If you are not the intended recipient, you are hereby notified that any use, dissemination, copying, or storage of this message or its attachments is strictly prohibited. Thank you. 1 CITY COUNCIL AGENDA REPORT MEETING DATE: DECEMBER 17, 2019 ITEM NUMBER: NB-6 SUBJECT: FORMATION OF AD HOC COMMITTEE OF THE COUNCIL TO EVALUATE CANNABIS TAX RATES AND REGULATIONS DATE: DECEMBER 11, 2019 FROM: LORI ANN FARRELL HARRISON, CITY MANAGER PRESENTATION BY: CONNOR A. LOCK, CHIEF OF STAFF ALMA REYES, SENIOR MANAGEMENT ANALYST FOR FURTHER INFORMATION CONTACT: CONNOR LOCK (714) 754-5192 ALMA REYES (714) 754-5090 RECOMMENDATION: Mayor Foley requests that the City Council form, by nomination and confirmation, a three- member Cannabis Ad Hoc Committee to consist of the Mayor, the Mayor Pro Tem, and one additional Council Member, to review and discuss the City’s cannabis tax rate and other requests from local operators within the City’s boundaries, and whether any changes may be warranted. BACKGROUND: The City Council has received a letter from several of the City’s cannabis operators, writing as the Cannabis Industry (Attachments 1 and 2). This letter, among other comments, emails, and public testimony at City Council meetings, details changes that operators within the City would like the Council to consider for the regulatory framework for cannabis businesses in Costa Mesa. The requests made in the letter, and the data used to justify them, will be reviewed by City staff to the greatest extent possible to help develop recommendations for the City Council to consider. The formation of an Ad Hoc Committee would assist in the review and analysis of the cannabis industry’s proposals and recommendations to the City Council for final approval and action. ANALYSIS: Individual City Council members and staff have met with cannabis operators currently situated within the City’s “Green Zone” established by Measure X. The proposed Cannabis Ad Hoc Committee could take the lead in reviewing the operators’ requests, 2 reviewing City staff analysis, and drawing up recommendations to the City Council for action at a public meeting. The Ad Hoc Committee would be comprised of three members of the City Council. The Ad Hoc Committee would be solely advisory in nature, of limited duration and would hold informal meetings on an as needed basis. The City’s FY 2018-2019 budget included an expectation for approximately $1.5 million in tax revenues from cannabis business operations. The actual receipts are pacing significantly below expectations, leading staff to discuss with operators the various reasons for lower-than-expected tax receipts and overall lower-than-expected revenue. As described above, operators in the City have several requests that they have asserted could potentially increase business activity and subsequent revenues to the City. The Ad Hoc Committee would be responsible for reporting to the full City Council at public meetings their findings and recommendations, as well as to provide time for questions and answers from the entire City Council and comments from the public. Forming this Ad Hoc committee would enable staff to receive questions for further research and analysis more efficiently during preliminary conversations and meetings with stakeholders. ALTERNATIVES CONSIDERED: The City Council may choose to not create an Ad Hoc Committee. FISCAL REVIEW: No additional resources are anticipated to be required at this time. LEGAL REVIEW: The City Attorney’s Office has reviewed and approved this report as to form. Under the Ralph M. Brown Act, the term "legislative body" excludes less-than-a-quorum advisory committees composed solely of members of the legislative body, provided they are not standing committees that have continuing subject matter jurisdiction or a meeting schedule fixed by charter, ordinance, resolution, or formal action of a legislative body. See Government Code § 54952(b). COUNCIL GOALS AND PRIORITIES: Goal 3 – Keep the City Fiscally Sustainable CONCLUSION: Mayor Foley requests that the City Council form a three-member Cannabis Ad Hoc Committee to consist of the Mayor, the Mayor Pro Tem, and one additional Council Member, to work diligently with staff in reviewing the City’s cannabis regulations and tax rates, and make a recommendation to the City Council as to whether any changes may be warranted. 3 ______________________ _______________________ KELLY A. TELFORD, CPA KIMBERLY HALL BARLOW Finance Director City Attorney _______________________ LORI ANN FARRELL HARRISON City Manager ATTACHMENTS: 1 2 November 11, 2019 Cannabis Industry Letter to the City of Costa Mesa Emails from Michael Moussalli relating to November 11 Letter Cannabis Industry Letter to The City of Costa Mesa November 11, 2019 1 | Page Dear City Council and Staff Members, The Cannabis Industry formally requests that the City of Costa Mesa reduce the gross receipts tax on cannabis manufacturing, distribution and testing businesses to 2% and allow for home delivery cannabis businesses at a gross receipts tax of 5%. The Cannabis Industry also requests that all taxation occur upon exit of product from the City, in order to avoid multi-layered taxation and to encourage/stimulate inter-city business between multiple cannabis operators. As you may recall about a year ago, members of the local cannabis community started making rounds at City Hall and to multiple City Council members to offer an explanation as to why the 6% gross receipts tax was a heavy burden placed on operators and rendered Costa Mesa a non-competitive home for businesses within the cannabis space. In the letter below, we would like to take the opportunity to address some of the challenges we are facing in greater depth with you, as well as provide solutions that will help us overcome these challenging times: TAX ON MANUFACTURING, DISTRIBUTION AND TESTING BUSINESSES: One the first dual-licensed business to become operational in Costa Mesa openly shared the company’s P&L on the Distribution side of the business with City Staff and multiple Council Members in an effort to further illustrate just how detrimental a 6% gross receipts tax really is. This business has now been forced to close their Distribution-to-Retail side because customers were going with Distributors located in other municipalities with much more favorable tax rates, where the cost of business is significantly less. The last tax payment from this operator to the City reflected a significant decrease in revenue and this trend will surely continue unless local cannabis operators are provided with significant tax relief. As the legal cannabis industry continues to evolve, it is important to understand why revenues of new, legal cannabis businesses are generally declining. In short, there are many new challenges that have arisen for current cannabis business operators. Firstly, there are not enough legal retail outlets throughout the state, which is causing a bottle neck of product at the retail front and discouraging consumers from shopping at convenient, legal, safe outlets. This means that consumption of legal cannabis products has gone down, while consumption of illegal cannabis market products has increased. Furthermore, since there is a bottle neck of too much legal product trying to make it onto too few legal retail shelves, the rest of the supply chain (distributors, manufacturers and cultivators) have seen wholesale margins drastically reduce as prices of raw material and final form goods have fallen dramatically over the last few months because of the shaky market conditions and the flourishing black market. Therefore, the Cannabis Industry is finding that a 6% gross receipts tax on manufacturing, distribution and testing businesses is excessive and, in many cases, unsustainable. Cannabis operators in Costa Mesa are losing deals to Cities with lower taxes and with lower costs of doing business. To date, the City has collected only $259,000 in tax revenue- this amount is $1.4 million below budget projections and will not help fix the City's structural budget deficit. We as the local cannabis community want to help you get these numbers up, but we also need your immediate help to make that happen. There are several operators in Costa Mesa with multiple licenses across multiple cities, who are choosing to avoid moving cannabis business through Costa Mesa because of the harrowing gross receipts tax, despite Costa Mesa being an ideal logistical spot to manufacture and distribute cannabis products. This is a shame, as Costa Mesa was on the forefront of creating a cannabis community with Measure X and allowing cannabis businesses to operate within the City well before another other local municipalities. Another key indicator that the gross receipts tax is far too excessive is the availability of properties currently located in the Green Zone. For the first few months after Costa Mesa announced the parameters of the Green Zone, there were many competing offers on properties and it was hard to Attachment 1 Cannabis Industry Letter to The City of Costa Mesa November 11, 2019 2 | Page secure a property- in many cases operators were forced into paying extremely excessive rent, sometimes even having to agree to give up an additional gross receipts percentage to landlords, simply to be able to secure a property to apply and open a cannabis business within the City. Today, the landscape has dramatically changed as there is wide availability of properties with no current offers on them – this is because of the way the cannabis industry has evolved and additionally, the general impression of the cannabis industry outside of the local community is that it is extremely challenging to get a cannabis business up and running in a timely manner in Costa Mesa and even more challenging to sustain a profitable cannabis business within the City. We are formally requesting an immediate reduction in the gross receipts tax to 2% on manufacturing, distribution and testing businesses, in order for these businesses to A) simply survive in many cases, and B) generate increasing, stable revenue over time to help support the budget deficit for the City of Costa Mesa. At a 2% gross receipts tax on these businesses, Costa Mesa will become a competitive, financially sound location to run a cannabis business and fall in line with other cities such where cannabis businesses are successfully thriving. Successfully thriving…. these are important words because while many other cities have similar tax structures to Costa Mesa, they are experiencing the same significant gap in tax projections and operators in those cities are in a similar position to local operators here in Costa Mesa – they are trying to work with their cities to reduce taxes to a sustainable amount in order to kick start the local industry again. It is imperative that a tax reduction to 2% for manufacturing, distribution and testing cannabis businesses is rendered quickly – an escalating tax bracket tier over time simply will not work. To start at a low tax percentage that is associated with limited revenue and then to see that tax percentage increase as revenue increases, still places Costa Mesa in a non-competitive state. Local businesses with licenses and operations in more favorable tax havens elsewhere would be forced to limit their production in Costa Mesa as to fall within the minimum tax bracket and continue increasing their production in the other municipalities where taxes are a sustainable, flat number across the board. Furthermore, an escalating tax bracket will not change the message to the greater cannabis industry that Costa Mesa is a cannabis business friendly city. The City will only see small operations that may or may not survive over time, as larger, multi-city operators will seek to maximize on the lower tax bracket revenue limits and move the balance to other cities with more favorable tax structures. Only a reduction to a 2% gross receipts tax on the above-mentioned business types would prevent this, as even a reduction to only 5%, 4% or 3% would still encourage operators to shift revenue to a city with 1% or 2% taxes because they will still see a significant profit benefit. INTRODUCTION AND TAXATION OF HOME DELIVERY TO COSTA MESA: There is an opportunity for the City to place a higher gross receipts tax on home delivery businesses of 5%, which is a percentage that is also sustainable for operators in Costa Mesa. As mentioned earlier, one of the challenges operators are facing right now is that there are too few, legal retail outlets for products throughout the state. Essentially this means that retail outlets, particularly dispensaries, hold all of the buying and negotiating power within the supply chain – there is way more legal product trying to come to market than the current store shelves can hold, which means wholesale margins have been decimated and many manufacturers and distributors are simply trying to find ways to stay alive at this point. The introduction of home delivery in Costa Mesa solves a few other challenges. The first benefit of having home delivery in Costa Mesa is that manufacturers and distributors will no longer need to go through the “gatekeeper” dispensaries in order to get their products on the shelves for consumers to purchase – they will have the ability to directly sell to the consumer. This means that not only will manufacturer/distributors have the opportunity to be in full control of their own sales channels, it also means that margins will be significantly higher, as product will no longer be sold at wholesale pricing but rather it will be sold direct-to-consumer at retail prices. Another major benefit of home delivery is it will provide direct access to patients who need cannabis to help cope with their medical issues, patients who otherwise in many cases have no way to obtain it. Cannabis Industry Letter to The City of Costa Mesa November 11, 2019 3 | Page There are many residents of Costa Mesa (as well as the rest of Orange County) who would like to obtain legal cannabis to help with various ailments, however they are either A) unable to physically get to a dispensary because of health reasons, or B) may not be comfortable shopping in a dispensary but would still like to partake in the medical benefits of cannabis. Home delivery would provide safe, legal access to patients on a much greater scale than a single retail dispensary ever could. Additionally, it is important to note that since Measure X was written and enacted upon, the State of California has determined that cannabis delivery is fully legal throughout the entire state, meaning that operators running home delivery businesses in Costa Mesa will have the opportunity to deliver to consumers throughout California and Costa Mesa would be able to collect 5% gross receipts tax on all of those sales. Furthermore, if there are any concerns that a reduction in gross receipts tax to 2% on manufacturing, distribution and testing businesses may hinder overall tax revenue for the City, the 5% gross receipts tax on home delivery would more than offset that difference as manufacturers and distributors would have access to the entire consumer base in California. Another point that should be mentioned is that home delivery is already taking place in the City of Costa Mesa. Unfortunately, there are many illegal delivery services (and a couple legal ones) in Orange County that are still supplying residents of Costa Mesa with product and the City is not able to regulate this product or these deliveries, nor is the City able to currently benefit from any taxation on these deliveries. By allowing home delivery businesses in Costa Mesa, the City would be able to lean on cannabis businesses within the city limits to increase the flow of clean, safe regulated product being delivered to local consumers and they would also be able to take advantage of the 5% gross receipts tax on all deliveries made throughout the state. Lastly, it should be noted that the state already has detailed regulations in place to ensure that home delivery businesses are run in a safe, compliant and responsible manner, however Costa Mesa would have the opportunity to work with current operators to impose additional regulations if the City were to deem it necessary. Essentially the home delivery model is VERY similar to the Distribution model, the difference being that product would be delivered direct to consumers rather than retail dispensaries. Deliveries are required by law to be done on a pre-designated route in unmarked, yet secured vehicles, a there are limitations on how much product any driver can carry at any given time. Furthermore, product cannot simply be left at a consumer’s door – the individual ordering the product needs to be present, show full identification and then take direct possession of the product. The Cannabis Community is happy to share with additional regulations with you and how this business model would work safely, discreetly and effectively in Costa Mesa. In summary, we have been asking the City for a year to take action, and now we absolutely need your help as the legal cannabis market has presented operators with many new, unexpected and unforeseen challenges that are threatening the sustainability of our businesses. We want to succeed here in Costa Mesa, and we want the City to benefit from our success, but the only way this can happen is that we have to work together, and we need you to please act and to help us. We ask that you support our requests and swiftly take action. Many local cannabis businesses that are either currently operational or are in mid-process with the City for licensure are currently consulting with their investors, who seek to sell off operations in Costa Mesa or abandon the licensure process and continue licensure/operations in Cities with significantly more favorable taxes. This could result in a mass exodus of cannabis businesses from Costa Mesa which would be detrimental Costa Mesa and to budget projections. Any and all members of the Costa Mesa Cannabis Community are available for discussion and are happy to expound on our requests in greater detail. Thank you for your consideration, we await to hear what actions will be taken. Sincerely, Cannabis Industry Letter to The City of Costa Mesa November 11, 2019 4 | Page The following Costa Mesa Cannabis Industry Executives/Owners: Michael Moussalli Jim Fitzpatrick Se7enLeaf Solutioneers Krystal Kitahara Chris Boudreau Yummi Karma Cannabis Chamber of Commerce Eric Spitz Steve Hellings C4 Distro SW Ventures Blake Terreri Jeff Droege JoshD Sol Distro Chris Sheppard Matt Longo Oil Haus Mellow Extracts William Waldrop Nick Rohan EVIO Labs Expando Products Paul Jacobsen Perry Srey Aureus Leaf Concepts Daniel Abrahami Peter Ishak TEVE Distillate Co Mehran Moghaddam Clay Tanner Nature’s Market California Leaf Company Kandice Hawes Nic Deangelo OC NORML Property Owner 18k sf Wes Eder Shelflife Distributing This initiative and the above requests are also supported by the Cannabis Chamber of Commerce: Cannabis Industry Letter to The City of Costa Mesa November 11, 2019 5 | Page Measure X: November 2016 – People voted 54% “You cannot Manage what you do not Measure” – Peter Drucker TOTAL : $259,046.38 Source: Multiple Public Records Requests