New Local Cannabis Laws Proposed for San Francisco Raise Some Concerns

Co-Authored By: Charlie Lucero

By now it’s well known that the City of San Francisco is considering two new cannabis laws: the first would be a local cannabis industry tax and the second would establish a new 9-member Cannabis Commission to oversee the industry within city limits.

Last week, our attorneys attended a meeting sponsored by the San Francisco California Growers Association during which Supervisor Malia Cohen (the sponsor of the tax proposal) and Supervisor Sandra Lee Fewer (the sponsor of the Commission proposal) presented their rationales for the two proposed laws and engaged in a spirited Q&A in front of a warehouse-sized room full of cannabis entrepreneurs. Here we provide some high-level thoughts about the two proposed laws and the rationale advanced by these two influential members on the City’s Board of Supervisors. We also provide some recommendations for cannabis operators wishing to help shape these proposed laws before their most-likely adoption later this year

The Proposed Cannabis Tax

If adopted, the new law would amend the City’s Business and Tax Regulations Code in order to tax most cannabis businesses, starting on January 1, 2020, at a rate equal to 2% to 5% of gross receipts, but potentially up to 10%. There would be two important carveouts: first, medicinal dispensaries would not be taxed; and second, the first $500,000 of gross receipts would not be taxed. Other M-class operators, like medicinal cultivators and medicinal manufacturers, would be taxed.

As drafted, the tax law would have a few interesting features to note. For starters, the tax rates for retail sales would be higher than the tax rates for other operators. There would also be a higher rate on gross receipts over $1 million. There would be an initial cap on the tax of 2% for all taxed operators until 2021 and then a cap of up to 5% thereafter, but this could be either increased or decreased by a super majority (2/3 vote) of the Board of Supervisors, but not above a tax rate of 10%. The proposed initiative ordinance is complex and we encourage readers to read the proposal for themselves because this posting is just a top-line summary. The current language of the proposed initiative ordinance, as of the date of this writing, can be accessed here.

At last week’s SFCGA meeting, Supervisor Cohen defended the proposed cannabis tax along these lines: first, local taxes are inevitable (see Berkeley, Oakland, etc.), so it is better to put a pro-cannabis tax in place while the Board of Supervisors remains supportive of the industry; second, the tax delay until 2020 is a good thing because it should give the industry time to take root and mature before the local taxes hit; and third, there is very little chance the tax will ever go up to 10%. She herself wouldn’t support that, stating that a tax around 2-5% would be appropriate.

During the presentation and the Q&A that followed, there were several concerns raised by the audience against the proposed local cannabis tax. First, people noted that the tax would apply to gross receipts (not profits) at every link in the commercial chain. This would mean a SF consumer buying a cannabis product grown by a SF cultivator, transported within the City by a SF distributor, manufactured in the City by a SF manufacturer, and sold by a SF distributor would be purchasing a product taxed fourfold by the City. Second, while appreciating the delay in the effective date for the tax, people generally noted, and Supervisor Cohen didn’t dispute, the fact that the industry is new, untested, and that the tax was authored without much hard data to support it.  It seems as if there has been no effort to assess how this specific tax proposal might affect the cannabis industry within San Francisco. Third, several in the audience raised concerns that the proposed tax would force many (most?) of the cannabis operators into the black market. One participant noted correctly that Berkeley has recently rolled back its local tax (10% to 5%) because the rate was proving to have too great a chilling effect on local businesses. A cultivator friend of the firm’s has shown us that even a 1% local tax on cultivation could put his business in the red. Anyone interested in taking a look at this cultivator’s pro forma financial statement against a “black market” comparable can see it here.

Based on what we know now, we encourage anyone concerned about the tax to: (i) push for the matter to be tabled long enough for the City to prepare a data-driven impact report; (ii) push for a longer delay of the effective date (2-years or longer) to give the industry breathing room; and (iii) push to lower the absolute cap from 10% to 5% or lower.

The Proposed Cannabis Commission

Supervisor Fewer has introduced a proposal to amend San Francisco’s charter to create a nine-member Cannabis Commission that would oversee commercial cannabis activities within the City.  We expect that this proposed charter amendment will be put before voters this fall on the November 6 ballot. Under Supervisor Fewer’s proposal, the Office of Cannabis would cease to exist and would be replaced by a newly created Department of Cannabis.  Currently, the City Administrator is charged with appointing the Office of Cannabis’ director. Nicole Elliott is the acting Director of San Francisco’s Office of Cannabis and she and her staff have received high praise from industry professionals. Supervisor Fewer’s charter amendment would transfer this appointment power to the nine-member Cannabis Commission.  A majority of the Cannabis Commission’s seats would be appointed by the SF Board of Supervisors and the remaining seats would be appointed by the Mayor. The criteria for holding a seat reflects Supervisor Fewer’s desire to see “key communities and stakeholders be represented on an oversight body.”  For example, several of the Commission’s seats would be reserved for representatives from an impoverished community or for Cannabis business owners permitted through the City’s Equity Program.  If passed and approved by voters in November, the Board of Supervisors and Mayor would start making appointments to the Commission by February 1, 2019 and the Department of Cannabis would be operational on May 15, 2019.

At last week’s SFCGA meeting, the main concerns about the proposed Commission appeared to be around the transfer of day-to-day operational responsibilities from the Office of Cannabis to the Department of Cannabis. Given the many new and oftentimes shifting rules and requirements SF cannabis operators work under, it is not surprising that the sentiment in the room was firmly in support of keeping the Office of Cannabis stable and in place as long as possible. Other interesting feedback included a proposal to include a “patient advocate” representative and a “veterans advocate” on the Commission. While Supervisor Fewer seemed willing to entertain adjustments to the Commission’s composition, she apparently does not support any delay in putting the matter up to vote. Last week she seemed intent on moving cannabis oversight away from Mayoral control before the end of her term in office.

Timing Considerations and Next Steps

Readers should note that, as of the time of this writing, there are still opportunities to provide public comment on these two proposed laws. Emails can be sent to Supervisor Malia Cohen’s office (Malia.Cohen@sfgov.org) for the proposed tax law and to Supervisor Sandra Lee Fewer’s office (Sandra.Fewer@sfgov.org) for the proposed Commission and Department of Cannabis. There should be at least one more public hearing on these matters before the Small Business Commission; interested persons can subscribe for a calendar of events.

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