Taking Measure

Sonoma County pot tax rattles the emerging legal cannabis industry

Lynda Hopkins has been in office for six weeks and has already endured six floods in her early tenure as Sonoma County supervisor in the 5th District. Now she’s wading into another stormy subject: a scheduled special election next week to enact a county-wide tax on cannabis businesses.

Many of those who will be affected by the tax live in her West County district.

Voters will be asked to head to the polls on March 7 to vote on Measure A. Unlike cannabis taxes that have been set at the state level, the Sonoma County proposal is not a “pay-go” tax; cannabis taxes will not be restricted to cannabis regulation or law enforcement, but will rather go into the county’s general fund where they can be used for those purposes—or not.

The vote comes as the county has set out various zoning schemes that codify who can grow cannabis and where, under the statewide cannabis legalization regime that took place with the passage of Proposition 64. That measure sets out state-specific taxes and also opens the door to localities to set their own.

The proposed county tax would be placed on cannabis businesses, both medical and non-medical, and can be used to pay for code enforcement, public safety, road repair, health and human services or environmental protection and remediation.

According to county fact sheets and documents explaining the tax, the maximum rate that can be charged to growers is 10 percent of gross receipts, under the proposed supply-chain businesses tax. For manufacturers, the starting rate is set at 5 percent. Another cultivation tax is set by square footage. Outdoor cultivators will pay between 50 cents and $10 per square foot, while indoor cultivators will start out at between $1.88 and $18.75 per square foot, with a maximum rate of $38 per square foot.

The county compared its proposed rate with those of 50 other cities and counties around the country, and in an online fact-sheet reported that, “While maximum square footage rates for cultivation are on the higher end, the starting rates, especially for small businesses, are among the lowest.”

The board says it set the rates low to “incentivize compliance and offset startup costs,” and anticipates annual tax revenues of $6.3 million if the measure is adopted. The rate would be set at the discretion of the board of supervisors.

But Measure A opponents say the tax is too high and will be a disincentive to comply with state and county efforts to license and regulate the state’s for-now-legal cannabis industry. And, for pot-growing residents in the county’s “ag residential” and “rural residential” zoned areas, the tax is a double-whammy, since the county has already set out to ban commercial grows in those areas, where thousands of growers now tend to their plants.

Even though Sonoma County code-enforcement efforts operate as a complaint-driven system, resident growers in Hopkins’ district are uncertain about how they’re going to weather the new zoning rules—tax or no tax, Hopkins says.

The pot tax cake was already baked by the time Hopkins took her place on the board in January, as the supervisors voted for the March 7 tax before she was sworn into office.

“I just get to serve the cake,” she says.

Asked if she supports Measure A, Hopkins offers a qualified yes, “We do need the funding in order to begin the permitting process.”

Hopkins is concerned that the tax could serve to drive those in the cannabis industry looking to follow the law back into the shadows, and says Measure A’s flexibility on setting the tax rate—and where the taxes actually go—is a problem for her. Hopkins has been hearing complaints about the tax and the cost of the single-item election, which will reportedly cost $400,000 to administer.

As a general tax, as opposed to a more restrictive special tax, it gives the board of supervisors “tremendous flexibility in how the tax will be assessed,” she says. “Cannabis growers don’t know how much they are going to pay—there’s a range.”

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Hopkins recently met with Forestville grower Oaky Joe Munson, a longtime North Coast grower who has been raising cannabis for HIV-afflicted people in Sonoma County for five years. He was raided in 2015 after a probation check, and hundreds of his plants were destroyed by sheriff’s deputies, who also confiscated cash he only recently got back after the pot-related charges against him were dropped. He’s got a new crop in now, he says—and friendly neighbors, too. Still, he says, “local growers are terrified that they are going to get squeezed out” by the county’s cannabis zoning scheme.

Hopkins says she’s hearing variations on Munson’s concern. “There is a tremendous amount of fear and mistrust,” she says. “People on ag- or rural-residential [land] are now being told that if they continue, that they will be in violation of county code.”

The tax will only apply in unincorporated parts of the county, so that a cannabis business in Santa Rosa won’t be faced with a double-dip from the county and the city.

As the county gets set to vote next week, the city of Santa Rosa is also preparing a pot tax vote of its own in July to set its cannabis business tax, which has been promoted by Santa Rosa through a proposed ordinance. On March 7, the Santa Rosa City Council will meet to discuss the tax rate for the proposed tax and the July election. A series of public meetings will follow throughout the month. According to the proposed ordinance, “the city council is authorized to impose on every person who is engaged in commercial cannabis cultivation in the city, an annual cannabis industry tax at a rate not to exceed either, as council in its discretion may choose, $38 per square foot of cannabis cultivation area or ten percent of annual gross receipts.”

Meanwhile, California has also embarked on a new cannabis taxation regime—and has set out licensing and permitting requirements that localities must abide. All that means more pressure on the county to stand up and and fund its regulation regime and deal with community concerns that come along with cannabis legalization.

Craig Litwin is the owner of Sebastopol’s 421 Group, “a boutique consultancy that offers planning, strategy and development services to help innovative cannabis organizations succeed.” He sees nothing good coming from Measure A, even as he says he appreciates the effort to tackle regulatory problems in Sonoma County. The Sonoma County Growers Alliance is also opposed to the tax, even as some local growers have stepped up in support of it.

“I’m urging people to vote no and go back to the drawing board,” Litwin says. He suggests a lower tax rate going in, repeating an oft-heard tax-the-pot conundrum: “Too many taxes on top of each other will only reinforce the black market.”

Hopkins says that if Measure A passes she’ll work with the Sonoma County Medical Marijuana Ad Hoc Committee to set a target tax rate that’s fair.

Hopkins has established relationships with growers like Oaky Joe and says others have offered to share their books so she can aggregate the data.

“I would come to the board of supervisors and say, ‘If you tax this too high, it will eliminate their profit margin.'”

Of course, all of this talk about taxing commercial cannabis businesses is predicated on the U.S. Department of Justice and its recently appointed pot-hating attorney general Jeff Sessions. And just last week Trump spokesman Sean Spicer hinted at a federal crackdown on recreational cannabis. Closer to home, the Sonoma County sheriff, Steve Freitas, is an opponent of recreational legalization and recently met with Sessions in D.C. “Sheriff Freitas’ opinion has always been that marijuana possession, cultivation, use, transportation and sales should be illegal,” says SCSO spokesman Sgt. Spencer Crum via email.

For its part, the Sonoma County Republican Party opposes Measure A, charging that the board of supervisors is “cramming this item forward with such a hastily called and costly special election.” The local GOP also notes that the “new tax would not decrease the so-called black market sales of cannabis and other drugs, but would instead, in our opinion, increase the black market many fold.”

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