Sonoma County’s proposed cannabis business tax heads to voters

Legalizing marijuana in California was the easy part, given the cultural swing toward acceptance of the long-outlawed drug. Figuring out how to pay for regulation of the booming cannabis industry, however, could prove more problematic in Sonoma County and statewide.

A cannabis business tax, proposed by the Board of Supervisors to cover the cost of implementing regulations for the newly recognized crop, will go before voters countywide in three weeks in a special election that is causing angst among the people who depend on marijuana for their livelihood.

Measure A is the only countywide issue in the March 7 election, and mail-in votes are already being cast.

An approved tax, at the proposed initial rates would generate $6.3 million a year from cannabis businesses outside city limits. County officials say the funding is critical to usher the pot industry out of the legal shadows.

“Let's legalize, let's regulate and let's tax,” said Shirlee Zane, the Board of Supervisors chairwoman. “They all come together, like it or not.”

If the tax fails to win majority support, however, county officials say they will have to abandon a July 1 startup date for accepting cannabis business permit applications, a step that could cost pot operators the chance to get in line for state permits at the start of 2018 and possibly expose them to criminal prosecution.

What's unusual about the election is that about 100,000 voters - based on an anticipated 35 percent turnout - will be weighing a tax that few of them will pay. A chorus of marijuana growers and advocates, including a state trade association and a labor union, meanwhile, is decrying the tax as excessive and ill-conceived.

“Once again our industry has to make the choice between progress and what feels like financial extortion,” said Tawnie Logan, executive director of the Sonoma County Growers Alliance.

By progress, she means the historic approval in November of Proposition 64 by 57 percent of state voters, setting in motion a series of steps that will legalize the recreational cannabis trade in California.

Logan's 260-member alliance opposed the initiative, in part because it set a state marijuana sales tax of 15 percent and authorized local taxes, as well.

Logan said her group agonized over Measure A, finally announcing Friday it would remain neutral “with hardline concerns” over the tax capped at 10 percent of gross receipts of pot businesses in the unincorporated area outside the county's nine cities.

The initial tax rates will be lower - ranging from 0.5 percent to 5 percent of receipts - but critics say there is no certainty when or whether the supervisors might bump up the rates to levels that some contend could smother small operators.

At the proposed initial rates, the tax would generate $6.3 million a year, and at 10 percent across the board for cultivators, manufacturers and other businesses it would collect $15.6 million a year.

There are about 9,000 cannabis industry members in Sonoma County, including 5,000 growers, Logan said.

The outcome of the Measure A election will have no bearing on Proposition 64's guarantee that California adults can legally grow and possess modest amounts of marijuana.

But the stakes are high for regulation and taxation of a $7 billion industry. Statewide, more than two dozen local governments, including Cloverdale and Point Arena, and seven counties, Lake and Mendocino among them, secured voter approval of marijuana tax measures in November, according to research by Santa Rosa officials, who are drafting a pot tax proposal for the June ballot.

Santa Rosa's study found 10 cities and counties with cannabis taxes capped at 10 percent of gross receipts, 10 others at 15 percent or more, and six ranging from 3 percent to 8 percent.

Asked about industry concerns over the county's proposed 10 percent cap, Zane said: “Any percent is going to seem high if you've been paying nothing.”

That rate is “pretty common ground” in California, she said.

Santa Rosa's draft tax ordinance started at 10 percent, but an 8 percent proposal will be considered by the City Council in March, said David Guhin, director of Planning and Economic Development.

Initial tax rates will range from 1 percent to 3 percent for cultivators and manufacturers, locked in for at least two years, he said, adding that pot industry members are pushing for a 5 percent cap.

Logan would like the supervisors to adopt a resolution holding the initial tax rates for two years, a provision that could, however, be rescinded by a future action. “There's nothing to insure they don't inflate it to 10 percent in the first year,” she said.

The 15 percent state tax, plus a 10 percent county cannabis cultivation and 5 percent manufacturing tax, piled onto an existing 8 percent sales tax rate, would total 38 percent, said Craig Litwin, a Sebastopol consultant to cannabis organizations.

“That tax is way too high,” he said, calling it a “cash overreach.”

Litwin, who said he is advising people to vote against the tax, said the pot industry is “ready to pay its fair share. Unfortunately, every branch of government has its hand out.”

Mara Gordon, the founder of Aunt Zelda's, a medical cannabis product manufacturer in Bodega Bay, said she had no qualms about the manufacturing tax.

“I think it's fair,” said Gordon, who went into the industry after marijuana helped her recover from bacterial spinal meningitis. But, she said, the potential 10 percent cultivation tax is “outrageous” because it will be passed on to consumers and may inflate the price of their medicine beyond their means.

Gordon envisions Sonoma County as a hub for the cannabis trade, located between the marijuana-rich Emerald Triangle and the populous Bay Area. Business owners and investors base their plans on the maximum tax allowed by law, she said, adding that cultivators might opt for counties with lower rates.

Measure A includes a maximum tax of 10 percent on dispensaries and other businesses, including pot transporters, distributors, nurseries and testing laboratories. The main state tax would apply to retail sales.

The California Cannabis Industry Association, which represents more than 250 businesses statewide, considers the county's proposal “an overly burdensome tax scheme,” said Josh Drayton, the trade group's deputy director.

Excessive taxation “only furthers the illicit market,” he said.

CannaCraft, a Santa Rosa-based medical cannabis products manufacturer, is a member of the trade group and supports its position, said Nick Caston, a company spokesman.

Santa Rosa officials engaged in a “robust conversation” with marijuana stakeholders, leading to what Caston said is a “much more feasible proposal” than the county tax plan.

The United Food and Commercial Workers Union, with a membership that includes about 2,000 cannabis industry workers, is sponsoring a 30-second television commercial opposing Measure A that will air on cable news networks, said James Araby, executive director of the union's western states council.

“Measure A was written by politicians to prevent patients and the public from having any say about cannabis taxes in the future,” the ad says.

Sonoma County's proposed tax is the first local measure targeted by the union, which endorsed Proposition 64, Araby said.

By designating the tax proceeds for a variety of county services, including public safety, health, housing and roads, Measure A qualified as a general tax, requiring majority voter approval. A special tax, earmarked for a specific purpose, requires a two-thirds vote.

The March election is set to cost the county about $400,000.

The Sonoma County Taxpayers Association has no objection to Measure A, because marijuana regulation will put “substantial burdens” on the county that ought to be paid by the industry, said Dan Drummond, the group's executive director.

If the tax measure fails, the county will have to pay for pot-related criminal prosecution and environmental cleanup, Zane said. Those expenses should be paid by taxes on the marijuana industry rather than the general public, she said.

Critics fault the county for asserting from the start that cannabis business permits will not be issued until the tax passes or other funding is secured to cover the costs of regulating legal pot.

The county needs to begin accepting permit applications by June in order to grant them by year's end, enabling cannabis entrepreneurs to get in line for state permits on the Jan. 1, 2018, deadline established by Proposition 64, Logan said.

The county's approach is “manipulative,” she said, placing the local industry in “a tenuous position.”

Rebecca Wachsberg, a deputy county administrator, said she could not pinpoint a date when the permitting process would start if the tax vote fails.

The county could begin taking permit applications ahead of the tax vote, as Santa Rosa has already done, Litwin said.

Santa Rosa has accepted 23 cannabis business permit applications and approved six, Guhin said.

Another hazard for county pot operators is the sunset date on the Board of Supervisors' resolution allowing medical cannabis patients or caregivers to cultivate up to 30 plants per patient. It expires on Jan. 1, 2018. After that, growers who lack a state permit will “have no defense against prosecution,” Logan said.

You can reach Staff Writer Guy Kovner at 707-521-5457 or guy.kovner@pressdemocrat.com. On Twitter @guykovner.

Editor's note: This story has been revised to accurately reflect the range of businesses subject to the proposed tax, including dispensaries, pot transporters, distributors, nurseries and testing laboratories.