HomeMy WebLinkAboutCED Extending Cannabis Business Tax Rate Temporary Reduction____________________________________________________________________________________
FOR CITY CLERK ONLY
Council Meeting: 02/18/2025
Disposition: Adopted Amended Resolution 15372 (amended from 2% to 1%)
Agenda Item No: 6.c
Meeting Date: February 18, 2025
SAN RAFAEL CITY COUNCIL AGENDA REPORT
Department: Community & Economic Development
Prepared by: Greg Minor, Assistant Director
Community & Economic
Development
City Manager Approval: ______________
TOPIC:
SUBJECT:
EXTENDING CANNABIS BUSINESS TAX RATE TEMPORARY REDUCTION
RESOLUTION EXTENDING CANNABIS INDUSTRY TAX RATE OF TWO (2)
PERCENT OF ANNUAL GROSS RECEIPTS FOR CANNABIS DELIVERY
BUSINESSES, FOR THE PERIOD OF JANUARY 1, 2025, THROUGH DECEMBER
31, 2026
RECOMMENDATION:
Staff recommends that the City Council adopt a resolution extending the lower cannabis business tax
rate for cannabis delivery businesses (State License Type 9) for the period of January 1, 2025, through
December 31, 2026.
BACKGROUND:
In June 2018, San Rafael voters approved Measure G, which allowed the City of San Rafael to begin
regulating businesses engaged in commercial cannabis activity in the City. The Cannabis Business Tax
program is codified in San Rafael Municipal Code Chapter 3.40 (Ordinance 1961), which imposes
business taxes of various rates on cannabis businesses. The ordinance authorizes the City Council to
adjust tax rates by resolution provided the City Council sets tax rates for a minimum of a two (2) year
term and the tax rates do not exceed eight (8) percent.
On November 7, 2022, the City Council adopted Resolution 15157, which lowered the tax rate for San
Rafael cannabis non-storefront retailers (delivery businesses) from four (4) percent to two (2) percent of
annual gross receipts for the period of January 1, 2022, through December 31, 2024.
The proposed resolution would extend the current two (2) percent tax rate for delivery businesses for the
time period of January 1, 2025, through December 31, 2026. Beginning January 1, 2027, the tax rate of
four (4) percent established by the City Council in 2018 under Resolution 14477 will go back into effect.
The proposed resolution does not impact the tax rates for the three (3) other types of commercial
cannabis businesses authorized in San Rafael: manufacturing, testing labs, and distribution. Table 1
presents the current and proposed tax rates that would apply starting January 1, 2025, if the City Council
adopts the proposed resolution.
SAN RAFAEL CITY COUNCIL AGENDA REPORT / Page: 2
Table 1: San Rafael Cannabis Businesses’ Historic, Current and Proposed Tax Rates
(Percent of gross receipts)
State License Type
Adopted
in 2018 by
Resolution
14477
Reduced
January 1, 2023
– December 31,
2024
Reduction
Extension
Proposed
January 1, 2025
– December 31,
2026
Delivery, non-storefront retail 4% 2% 2%
Infused Products Manufacturing 3% 3% 3%
Cannabis Testing Labs 1% 1% 1%
Distribution 1% 1% 1%
ANALYSIS:
On November 7, 2022, the City Council adopted Resolution 15157, approving a decrease of the tax rate
for cannabis delivery businesses from four (4) percent to two (2) percent for the period of January 1,
2023, through December 31, 2024. At that time, the related staff report described the financial burden
faced by cannabis businesses in California, including the fifteen (15) percent California cannabis excise
tax (which is set to increase in July 2025) and the 9.25 percent combined sales and use tax, both of
which contribute to low-profit margins. Furthermore, federal prohibition of cannabis adds additional
burdens, including a lack of access to banking and an inability to deduct business expenses. These
challenges remain today and underscore the impact of local business taxes on cannabis businesses.
In addition to the qualitative analysis included above, Tables 2-3 and Figure 1 below offer quantitative
insights into the health of San Rafael’s delivery businesses and how San Rafael’s business tax rate
compares to neighboring jurisdictions. For example, Table 2 shows the total local and state tax rate of
26.25 percent burden for San Rafael cannabis businesses.
Table 2: Total Taxes Imposed on Cannabis Delivery Sales in San Rafael
Tax Type Tax Rates 2024
San Rafael Cannabis Tax – Delivery 2%
Combined Sales and Use Tax 9.25%
State Cannabis Excise Tax 15%
Total Tax Rate as of December 2024 26.25%
Table 3 provides an overview of local cannabis tax rates in the Bay Area and other California
municipalities; San Rafael’s tax rate for delivery businesses falls in the middle of the range for local tax
rates.
Table 3: Comparison of Regional Tax Rates (as of October 2024)
Jurisdiction Cannabis Tax Rate
Sonoma County 3% Retail, 1.5% Manufacturing
City of Sonoma 4% Retail, 2% Testing, 3% Distribution, 4% Manufacturing
City of Santa Cruz 7% Retail, 1% Testing, 2% Distribution, 7% Manufacturing
SAN RAFAEL CITY COUNCIL AGENDA REPORT / Page: 3
City of Palo Alto 4% Retail
City/County of San Francisco 1% - 5% Retail gross receipts; 1% - 1.5% on non-retail sales
City of Sacramento 4% of their gross receipts
City of Davis Flat fee on businesses
City of Santa Rosa 3% Retail, 1% Manufacturing
City of Cotati 3% Retail, 1% Manufacturing
City of Vallejo 7% Retail, 0% Medicinal, 5% Manufacturing, 2% Distribution,
Finally, Figure 1 outlines the combined gross receipts of cannabis delivery businesses in San Rafael for
calendar years 2019-2024, one measure of the health of San Rafael’s cannabis delivery businesses.
Figure 1: Combined Total Gross Receipts - San Rafael Cannabis Delivery Businesses
Figure 1 demonstrates that while the gross receipts of San Rafael’s cannabis delivery businesses have
decreased since 2021, the rate of decline has slowed since San Rafael lowered the local business tax
rate for delivery businesses in 2022. Consequently, staff recommends maintaining the reduced tax rate
of two (2) percent of annual gross receipts for cannabis delivery businesses to allow them to stabilize
and grow their businesses.
COMMUNITY OUTREACH:
The City hosted a Cannabis industry convening in February 2024. At that time, cannabis delivery
operators requested that the City of San Rafael’s tax rate be lowered to either one (1) or zero percent for
a time period longer than two years.
Subsequently, in December 2024, representatives from several San Rafael cannabis businesses
attended the City of San Rafael’s Economic Development Subcommittee meeting where, they shared
some of the challenges they are experiencing related to falling sales in the regulated cannabis market,
competition with the unregulated cannabis market, and a high state tax burden that is scheduled to
2019, $5,647,240.75
2020,
$14,082,820.75
2021,
$14,019,269.75
2022,
$11,403,846.75
2023,
$10,016,368.00
2024, $9,544,328.67
$-
$2,000,000.00
$4,000,000.00
$6,000,000.00
$8,000,000.00
$10,000,000.00
$12,000,000.00
$14,000,000.00
$16,000,000.00
2019 2020 2021 2022 2023 2024
Estimated Combined Total Gross Receipts -San Rafael Cannabis
Delivery Businesses
SAN RAFAEL CITY COUNCIL AGENDA REPORT / Page: 4
increase in the summer of 2025. In January 2025, San Rafael delivery businesses reiterated their request
to eliminate or reduce the local cannabis business tax rate in light of the postponement of a hearing
related to the rescheduling of cannabis from a Schedule One to a Schedule Three substance under the
federal Controlled Substance Act as rescheduling may enable cannabis operators to deduct standard
business expenses.
FISCAL IMPACT:
The Fiscal Year (FY) 2024-2025 budget includes an estimated $225,000 in revenues from the City’s
Cannabis Tax. This revenue estimate was developed based on the existing tax rates and thus assumed
the tax rate reduction approved for delivery businesses would be extended beyond 2024. While extending
the reduced two percent tax rate for cannabis delivery businesses does not impact the FY 2024-2025
budget, if the City Council allowed the tax rate reduction to expire, San Rafael could expect additional
tax revenues in the range of $100,000 - $150,000. The amount of increased cannabis tax revenues San
Rafael would receive by allowing the delivery tax rate to return to four percent of annual gross receipts
depends on how sensitive delivery businesses are to a change in the tax rate, including whether any
delivery businesses may cease to operate in response to increased taxes. Ultimately, maintaining the
lower tax burden on cannabis delivery businesses increases the likelihood that San Rafael’s delivery
businesses will succeed and continue contributing to both San Rafael’s sales tax and cannabis tax
revenue in the long run.
Cannabis Tax Fund (216) expenses include the personnel costs of the Economic Development, Police,
and Finance Departments’ of approximately $160,000 in 2024. In addition, this fund supports costs
associated with the SAFE Team pilot program, which is also funded through opioid settlement funds.
There is sufficient balance in Fund 216 to cover all obligations , which include administration of the
Cannabis program and the SAFE Team through the end of the SAFE pilot.
OPTIONS:
The City Council has the following options to consider on this matter:
1.Approve the attached resolution extending the cannabis tax rate for non-storefront retailers
(Delivery) at two (2) percent of gross receipts for the period from January 1, 2025, through
December 31, 2026, reverting to four (4) percent of gross receipts on January 1, 2027.
2.Adopt a tax rate other than two (2) but no more than eight (8) percent of annual gross receipts for
non-storefront cannabis retailers (Delivery).
3.Continue this item and direct staff to return with more information.
4.Take no action. If no action is taken, the tax rate for cannabis delivery businesses will return to
four (4) percent in January 2025.
RECOMMENDED ACTION:
Staff recommends that the City Council adopt a resolution extending the lower cannabis business tax
rate for cannabis delivery businesses (State License Type 9) for the period of January 1, 2025, through
December 31, 2026.
ATTACHMENT:
1.Resolution
As amended
RESOLUTION NO. 15372
RESOLUTION EXTENDING CANNABIS INDUSTRY TAX RATE OF ONE (1) PERCENT OF
ANNUAL GROSS RECEIPTS FOR CANNABIS DELIVERY BUSINESSES, FOR THE PERIOD
OF JANUARY 1, 2025, THROUGH DECEMBER 31, 2026
WHEREAS, in June 2018, San Rafael voters approved Measure G (Ordinance No.1961,
codified at Chapter 3.40 of the San Rafael Municipal Code), which imposes a special business
tax on businesses engaged in commercial cannabis activity in San Rafael; and
WHEREAS, San Rafael Municipal Code Chapter 3.40 authorizes the City Council to adjust
the tax rates of cannabis businesses by resolution provided the City Council sets tax rates for a
minimum of a two (2) year term and the rate does not exceed eight (8) percent of annual gross
receipts; and
WHEREAS, San Rafael recognizes the volatility of the legal cannabis market and desires
to set tax rates that balance the financial needs of the City with supporting cannabis operators as
they navigate the regulated cannabis marketplace; and
WHEREAS, in recognition of the economic challenges facing San Rafael’s cannabis non-
storefront retail (delivery) businesses, in November 2022 the San Rafael City Council adopted
Resolution No. 15157, which lowered the local business tax rate for San Rafael cannabis non-
storefront retail (delivery) businesses from four (4) percent to two (2) percent of annual gross
receipts for the period of January 1, 2022, through December 31, 2024; and
WHEREAS, San Rafael’s cannabis delivery businesses continue to navigate financial
burdens operating in California’s regulated cannabis marketplace; and
WHEREAS, based on the accompanying staff report, presentation, and discussion, the
City Council finds lowering the gross receipts tax rate to one percent for cannabis non-storefront
retailers (delivery) businesses for an additional two year period as this will reduce a key barrier
facing delivery operators while still generating revenue for the City of San Rafael;
NOW, THEREFORE, BE IT RESOLVED, that, pursuant to San Rafael Municipal Code
section 3.40.050, the City Council hereby sets the tax rate for cannabis businesses in San Rafael
with license type 9, non-storefront retailer (delivery only) at one (1) percent of gross receipts,
effective January 1, 2025, through December 31, 2026, and four (4) percent of gross receipts
beginning January 1, 2027. Tax rates for cannabis businesses with other license types shall be
unmodified by this resolution.
I, LINDSAY LARA, Clerk of the City of San Rafael, hereby certify that the foregoing resolution
was duly and regularly introduced and adopted at a regular meeting of the City Council of the
City of San Rafael, held on the 18th day of February 2025, by the following vote, to wit:
AYES:
NOES:
ABSENT:
Councilmembers: Bushey, Hill, Kertz, Llorens Gulati & Mayor Kate
Councilmembers: None
Councilmembers: None
_____________________
Lindsay Lara, City Clerk
RESOLUTION NO. _______
RESOLUTION EXTENDING CANNABIS INDUSTRY TAX RATE OF TWO (2) PERCENT OF
ANNUAL GROSS RECEIPTS FOR CANNABIS DELIVERY BUSINESSES, FOR THE PERIOD
OF JANUARY 1, 2025, THROUGH DECEMBER 31, 2026
WHEREAS, in June 2018, San Rafael voters approved Measure G (Ordinance No.1961,
codified at Chapter 3.40 of the San Rafael Municipal Code), which imposes a special business
tax on businesses engaged in commercial cannabis activity in San Rafael; and
WHEREAS, San Rafael Municipal Code Chapter 3.40 authorizes the City Council to adjust
the tax rates of cannabis businesses by resolution provided the City Council sets tax rates for a
minimum of a two (2) year term and the rate does not exceed eight (8) percent of annual gross
receipts; and
WHEREAS, San Rafael recognizes the volatility of the legal cannabis market and desires
to set tax rates that balance the financial needs of the City with supporting cannabis operators as
they navigate the regulated cannabis marketplace; and
WHEREAS, in recognition of the economic challenges facing San Rafael’s cannabis non-
storefront retail (delivery) businesses, in November 2022 the San Rafael City Council adopted
Resolution No. 15157, which lowered the local business tax rate for San Rafael cannabis non-
storefront retail (delivery) businesses from four (4) percent to two (2) percent of annual gross
receipts for the period of January 1, 2022, through December 31, 2024; and
WHEREAS, San Rafael’s cannabis delivery businesses continue to navigate financial
burdens operating in California’s regulated cannabis marketplace; and
WHEREAS, based on the accompanying staff report, presentation, and discussion, the
City Council finds extending the two (2) percent of gross receipts tax rate for cannabis non-
storefront retailers (delivery) businesses for an additional two year period as this will reduce a key
barrier facing delivery operators while still generating revenue for the City of San Rafael;
NOW, THEREFORE, BE IT RESOLVED, that, pursuant to San Rafael Municipal Code
section 3.40.050, the City Council hereby sets the tax rate for cannabis businesses in San Rafael
with license type 9, non-storefront retailer (delivery only) at two (2) percent of gross receipts,
effective January 1, 2025, through December 31, 2026, and four (4) percent of gross receipts
beginning January 1, 2027. Tax rates for cannabis businesses with other license types shall be
unmodified by this resolution.
I, LINDSAY LARA, Clerk of the City of San Rafael, hereby certify that the foregoing resolution
was duly and regularly introduced and adopted at a regular meeting of the City Council of the
City of San Rafael, held on the 18th day of February 2025, by the following vote, to wit:
AYES: Councilmembers:
NOES: Councilmembers:
ABSENT: Councilmembers:
_____________________
Lindsay Lara, City Clerk
not adopted
