Santa Rosa City Council member Eddie Alvarez’s cannabis dispensary faces closure for not having proper permits, unpaid taxes

Santa Rosa City Council member Eddie Alvarez is racking up daily fines of $500 and faces potential legal sanctions for defying a city order issued in mid-March to close his cannabis dispensary.

Code enforcement officers served a cease-and-desist order on his Russell Avenue business, The Hook, March 15 after learning he didn’t have a valid state permit to operate retail businesses.

It’s unclear when the permit was revoked, but the issue appears to stem from at least $380,000 owed in state business taxes.

This is the first time the city has taken steps to close a dispensary, officials said.

To date, Alvarez’s city citations amount to more than $9,000, according to city records.

The California Department of Tax and Fee Administration notified the city in February that it sought to seize Alvarez’s property to recover unpaid taxes.

Alvarez’s tax woes were well known inside City Hall, according to city officials, but the notice kicked off an internal code complaint. An investigation found his business was in violation of several city codes for failing to pay state taxes and not having the proper business permits, according to city employees and copies of the case file and closure order.

Alvarez, who was first elected in 2020, said Tuesday he has been working with state tax authorities to pay down his balance and reinstate his seller’s permit and was surprised by the city’s action. The city didn’t give him a grace period to remedy the issue before ordering him to close, he said.

“I find it very unjust that I’m having positive talks with the state agency and now I’m having my own city saying I can’t operate,” he said. “It’s very frustrating.”

Santa Rosa Cease and Desist.pdf

Alvarez said he can’t afford to shutter the business, so he has remained open despite the accumulating fines.

He said his case shows how the regulatory hurdles and tax liabilities dispensaries face make it hard for smaller operations like his to operate.

The case is emblematic of the financial struggles faced by cannabis operators across California as they grapple with hefty tax burdens, according to industry experts.

The state tax agency, working with California Highway Patrol and local licensing authorities, has conducted more than 1,000 inspections of cannabis retailers, distributors and growing operations since 2020 and seized more than $32 million in cash and products, according to a June story in the trade publication Marijuana Business Daily.

It was not immediately clear how many of those retailers had been forced to close by the state or municipalities.

The city crackdown isn’t the first time Alvarez’s dispensary has faced scrutiny over unpaid taxes.

CHP officers and state tax officials in June 2022 confiscated more than $200,000 in cash from the business to cover unpaid taxes. Alvarez said at the time he hadn’t paid state taxes since opening The Hook in northwest Santa Rosa in 2019.

City Manager Maraskeshia Smith said city staff have treated the latest case as they would any other code complaint so as to not give the appearance of favoritism. Alvarez, who represents Roseland, South Park and other parts of south Santa Rosa in District 1, is one of seven elected members on the council.

“This is a code enforcement issue and we handle it like we do any other case,” Smith said.

State notice spurs city action

The California Department of Tax and Fee Administration notified the city in a Feb. 13 letter that it sought to seize Alvarez’s business and other properties and accounts tied to him to pay off just over $383,000 in unpaid taxes, interest and fees, according to a copy provided by the city.

CDTFA Notice of Levy.pdf

Such seizures, known as levies, are one of several measures the agency takes to collect unpaid taxes.

The letter led to a discussion between the tax agency and city officials about the delinquent taxes. City officials learned during those conversations that The Hook’s seller’s permit had been revoked, Senior Code Enforcement Officer Cassidy Anderson said.

Anderson said city staff members were already aware the business was behind on state taxes and had been reviewing potential enforcement measures before receiving the state notice.

Enforcement officials decided to take immediate action after learning Alvarez’s seller’s permit was inactive, Anderson said.

A seller’s permit is a state license that allows businesses to sell merchandise or property.

The ensuing city investigation found it was in violation of several city codes and state tax laws related to the reporting and remittance of cannabis taxes and for operating without proper permits.

Dispensaries, like other types of retail businesses, are required to obtain a seller’s permit from the tax agency. They also must file annual tax returns and make regular tax payments. Operating a business without the permit or once a permit has been revoked is considered a misdemeanor under state tax code.

That seller’s permit is also required to maintain a city business license, one of several requirements to operate a dispensary in Santa Rosa.

The Hook was ordered to immediately cease operations on March 15 until Alvarez submits proof of an active seller’s permit to the city, according to a copy of the order.

Code enforcement officials are conducting daily inspections and have issued administrative citations worth $500 each day it stays open, Anderson said.

The dispensary was closed April 3 for inventory, according to Alvarez, but has otherwise remained open, racking up 18 citations totaling $9,000.

Anderson said code staff has referred the case to the City Attorney’s Office to draft a complaint that will be filed with Sonoma County Superior Court to force its closure.

Fighting city he represents

Alvarez said he wasn’t at The Hook when the city ordered the business to close but said later efforts to work with code enforcement have been unsuccessful.

Alvarez questioned why the city sought to shut him down if he is working with state authorities to get the business back into compliance.

City officials said they have notified Alvarez of what he must do to remedy the situation and interactions with the council member have been respectful.

It’s not clear how much in delinquent state taxes and fees Alvarez must pay to have his seller’s permit reinstated. The business is current with city cannabis taxes, Anderson said.

When state agents seized cash from the business last June, Alvarez owed nearly $455,000, including $375,000 in unpaid taxes from 2019 through 2021 plus $80,000 in interest, penalties and fees to the state, according to a copy of the warrant shared with the newspaper.

State records show 10 liens have been placed on Alvarez’s business by the state tax agency and the California Employment Development Department between February 2021 and February 2023.

The liens, adding up to nearly $617,450, stem from taxes owed for the period October 2019 through June 2022.

Four liens totaling $180,985 have been terminated since August, including two in March worth $81,638, according to state records.

Alvarez said Tuesday he has been working with state officials to pay the remaining tax liability and had established a payment plan. He estimated he still owed about $40,000 in back taxes plus current taxes due later this month for the first quarter of 2023.

“I’m simply looking to fix this problem and move forward,” he said. “I’m moving in the right direction.”

Alvarez is supposed to make quarterly tax payments to the state. Payments range between $40,000 and $70,000, he said.

About 30% of the business’s gross revenue goes toward local and state sales tax and excise fees, he said.

Tax woes widespread in cannabis industry

While this is the first dispensary Santa Rosa has attempted to close, Alvarez is not alone among cannabis operators in facing tax troubles.

Licensed and unlicensed cannabis companies owed the state nearly $200 million in unpaid taxes as of last June, the Marijuana Business Daily reported.

The state tax agency in recent years has sought to better track cannabis tax reporting, enforce tax collection as well as crack down on illegal marijuana operations and noncompliant businesses.

Efforts include so-called “till taps,” where officers confiscate cash and checks from a business and auction off seized properties to collect unpaid taxes. The ramped-up measures have come as the economy recovers from pandemic impacts, but they have riled people in the industry who say they face a high tax burden.

Nick Caston, a Santa Rosa-based cannabis consultant, said dispensaries face numerous regulatory hurdles and hefty tax liabilities that can make it tough for smaller operations to remain in business.

That sometimes means business owners must make hard choices between paying taxes or other fees and meeting operational demands, he said.

“That creates a situation where if you don’t have a lot of cash or capital, as a business owner, you’re going to be making choices where some things don’t get paid,” he said.

Unlike other cities in Sonoma County that restrict the number of dispensaries or outlaw retail sales, Santa Rosa has been more welcoming. That has created a lot of competition.

There are about two dozen cannabis retailers across the city.

Caston said northwest Santa Rosa, where Alvarez’s shop is located, is particularly saturated, and he has seen many dispensaries go out of business, change hands or ultimately not open after obtaining permits because it’s too costly.

Another challenge is accessing financial services, with many traditional banking and lending options out of reach because cannabis is still illegal at the federal level.

Modernized banking software now allows dispensaries to accept debit payments rather than being so dependent on cash, but those options are expensive, Caston said.

‘Learning curve’ in new business

Opening the dispensary has been a huge learning curve, Alvarez said, and it came as he was also gearing up for his first successful bid for public office.

Previously, the Roseland native managed the Joyeria Maria jewelry store on Sebastopol Road.

“It was definitely a learning curve on both ends and it continues to be a learning experience,” he said.

The pandemic hit just a few months after he opened the shop, and he was forced to temporarily close and later switch to curbside service only, which affected revenue, he said.

Alvarez said the tax burden and hoops dispensaries must jump through are “overwhelming.”

Shutting down businesses is not in the best interest of the community, he said, and he hoped there would be more government support for working with dispensary owners to help them get back into compliance and stay current with various city and state regulations.

“Government should be a partner in business and it’s really frustrating when they become an obstacle,” he said. “No business should have to jump through so many hoops. I’m not a poodle.”

You can reach Staff Writer Paulina Pineda at 707-521-5268 or paulina.pineda@pressdemocrat.com. On Twitter @paulinapineda22.