California Cannabis: Welcoming a Shift Away from Local Control

16 Nov California Cannabis: Welcoming a Shift Away from Local Control

It’s no secret that, among California’s many cannabis industry issues, local control continues to stymie the success of the Golden State’s industry. In this, California is not alone– most cannabis is all local.

However, after these mid-term elections, there appears to be a bit of a California cannabis local control shift. That’s a good thing. The preservation of local control is not unusual in cannabis-friendly states; cities and counties are free to regulate or ban cannabis businesses within their borders pursuant to police powers.

However, when the majority of cities and counties end up banning cannabis businesses, the illegal market rages on and legal access becomes a problem. With the 2022 midterms behind us, the California cannabis local control shift indicates that some large, key cities and counties are opening up for cannabis businesses.

L.A. County

Back in August, I wrote about the cannabis tax measure in L.A. County. A copy of the ballot measure can be found here.

L.A. County plans to allow the following businesses in in its borders in 2023:

• 25 retail
• 25 delivery
• 10 cultivation (indoor or mixed light only)
• 10 distribution
• 10 testing licenses.

Priority goes to equity applicants. For a County with 9 million people, this is not a lot of cannabis licensing, and the exact licensing/permitting process has yet to be revealed. For now, we can really only tell what the general “framework” for it is. S

We also now know what L.A. County commercial cannabis taxes will be (and they’re pretty competitive). Here are the highlights:

• Retail: 4% of gross receipts
• Manufacturing:  3% of gross receipts
• Distribution: 3% of gross receipts
• Testing: 1% of gross receipts
• Cultivation: $7/sf of canopy (indoor artificial light)
  • $4/sf of canopy (mixed light)
  • $4/sf of canopy (outdoor)
  • $2/sf of canopy space (nursery)
• Any other type of Cannabis Business:  4% of gross receipts

The measure allows the County “to decrease or increase the tax rates up to the following maximum tax rates on cannabis businesses in the unincorporated areas of Los Angeles County after July 1, 2026″:

• Retail: 6% of gross receipts
• Manufacturing:  4% of gross receipts
• Distribution: 3% of gross receipts
• Testing: 2% of gross receipts
• Cultivation: $10/sf of canopy (indoor artificial light)
  • $7/sf of canopy (mixed light)
  • $4/sf of canopy (outdoor)
  • $2/sf of canopy space (nursery)
• Any other type of Cannabis Business:  4% of gross receipts

The County notes that, regarding the max increases, the tax rates for cultivation will be adjusted annually to reflect inflation in 2027.

San Diego County

County voters passed Measure A, which is the County’s cannabis tax measure. Interestingly, San Diego County has a somewhat bizarre cannabis ordinance in that only medical cannabis collectives, commercial cannabis microbusinesses, and commercial cannabis retailers can operate (and no new operating certificates have been allowed to issue after April 14, 2017).

Today, there are only five retailers operating in San Diego County, which is home to 3.3 million people. The passage of this tax measure may indicate that the County is ready to expand its cannabis program. The preamble to the tax ordinance even states that the County Board of Supervisors:

desires to adopt cannabis regulations including a permitting program, and desires to provide appropriate licensing and revenue for the County in a manner consistent with State law.

Once cannabis businesses are actually allowed in the County, they will face the following maximum tax rates on an annual basis (through January 2024):

• Retail/Delivery/Microbusiness: 6% of gross receipts
• Distribution: 3% of gross receipts;
• Testing: 2% of gross receipts;
• Cultivation: either 3% of gross receipts or (depending on grow medium and/or license type) $10/square foot, $7/square foot, $4/square foot, or $2/square foot;
• Other related businesses and Manufacturing: 4%

After January 1, 2024, the foregoing tax rates will be adjusted for inflation in line with the CPI. The County is not allowed to exceed the maximum rate of any tax in the ordinance. And, like L.A. County, the tax applies to both licensed and illegal operators.

Huntington Beach and Laguna Woods

Huntington Beach is yet another local California government that’s passing a cannabis tax measure before it allows for and regulates cannabis businesses. Getting more cities in the OC to regulate and license cannabis businesses would be huge since only six cities allow cannabis businesses right now.

Measure O passed on November 8th, and imposes a tax of 6% on gross receipt for retailers and 1% of gross receipts for everyone else if cannabis businesses are allowed. And will cannabis businesses now be allowed in Huntington Beach? Here’s the City’s own response on that:

No. Approval of Measure O is the first phase of the City’s effort to develop regulations to allow a limited number of cannabis businesses to operate in the City. The second phase of this effort will focus on developing land use regulations that will determine where cannabis businesses would be permitted to operate and establish buffers from sensitive uses such as schools and parks. The final phase will focus on implementation and establish the administrative regulations to select and issue permits to cannabis business applicants, as well as developing the internal City procedures to process and monitor cannabis permitting program.

Voters in Laguna Woods (also in Orange County) also passed a cannabis tax measure, Measure T. Measure T dictates that retailers will pay a tax of between 4%-10% of gross receipts or, from January-December 2023, a maximum of $5/square foot of floor area up to $35/square foot for the same, which can be set according to license type (that’s still up to the City). All other cannabis businesses would be taxed between 1%-10% of gross receipts or, from January-December 2023, pay between $1-$35/square foot of floor area, depending on license type. A full rundown of the measure can be found here.

Laguna Woods, similar to Huntington Beach, will need to pass separate local legislation to allow for licensed/permitted cannabis businesses.

What lies ahead

Other cities in California also adopted cannabis tax measures, which is a good sign. It means that those cities are flirting with regulating and licensing cannabis businesses within their borders. Of course, time will tell if and how these licensing ordinances shake out, but it’s an overall positive indication that the California cannabis local control shift is moving in the right direction.

Of course, not all cannabis measures (tax or otherwise) got approved by the voters (all three beach cities in LA County rejected the concept). Still, what lies ahead for California is hopefully bright as the local control stranglehold loosens a bit.