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File Number: 17-113 <br />·ensuring that the cumulative federal, state, and local taxes imposed on such <br />businesses would not inadvertently incentivize a black market. <br />Below is a list of the cannabis tax rates currently imposed in neighboring Bay Area <br />communities: <br />·Berkeley: 2.5% of gross receipts <br />·Oakland: 5% of gross receipts <br />·San Jose: 10% of gross receipts <br />·Hayward: Up to 15% of gross receipts <br />Consistent with the City’s adopted medical cannabis dispensary ordinance, in 2015 and 2016 <br />the City Council awarded three medical cannabis dispensary permits. One of those entities <br />(Harborside San Leandro) is expected to begin serving patients in a few months. The other <br />two approved dispensary operators (Davis Street Wellness Center and Blum San Leandro) <br />must still submit their conditional use permit applications. As such, it is important for the City <br />Council to formally establish the rate of local tax that will be imposed on those businesses so <br />that such costs may be incorporated into their business plans and product pricing. <br />Staff recommends that the Council impose a rate of 7% of gross receipts, which would remain <br />in effect until June 30, 2018. Staff also recommends that the rate then increase to 8% of <br />gross receipts on July 1, 2019, and then increase to 9% of gross receipts on July 1, 2021. <br />Staff recommends this graduated implementation to recognize that each of the dispensaries <br />have significant upfront capital and tenant improvement costs before they will be able to <br />commence operations. In addition, each of the three dispensaries are subject to an annual <br />$60,000 permit fee that recovers some of the City’s direct costs to enforce the medical <br />cannabis dispensary permit program. <br />State and Federal Taxes <br />It is important to note that in addition to a local gross receipts tax, San Leandro’s cannabis <br />businesses also face significant state and federal taxes as part of their operations. For <br />example, Proposition 64 (which legalized the non-medical adult use of cannabis statewide as <br />part of the November 2016 election) included a 15% excise tax that will be imposed on the <br />retail sales price of cannabis. In addition, because the federal government still classifies <br />cannabis as a Class I controlled substance, cannabis businesses are subject to higher federal <br />taxes than other businesses. More specifically, Federal law 26 USC §280E (also known as <br />“Rule 280E”) arguably burdens the cannabis industry by disallowing standard business <br />expense deductions. Traditionally, non-cannabis companies may legally deduct from gross <br />sales nearly all of their costs of goods sold and their business expenses. Costs of goods sold <br />are the direct costs attributable to the production of the goods sold. For a cannabis business, <br />this amount includes the costs of the materials used in creating the good, along with the direct <br />labor costs used to produce the good. The expenses would be advertising, professional <br />services, and office supplies, to name a few. However, because of Rule 280E, cannabis <br />businesses are disallowed from taking deductions from gross sales for business expenses, <br />other than cost of goods. Therefore, their federal tax liability will be greater than that of a <br />non-cannabis business of similar size and annual revenues. <br />Nevertheless, most local jurisdictions that allow cannabis businesses to operate have <br />Page 2 City of San Leandro Printed on 3/13/2017 <br />173