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File Number: 19-331 <br />City’s General Fund as part of their business plan proposals when they first applied for <br />dispensary permits several years ago. For example, the Davis Street Wellness Center voluntarily <br />committed in writing to contribute 9% of its gross receipts to the City of San Leandro. In addition, <br />Blum San Leandro offered to contribute 5% of its gross receipts to the City, and Harborside San <br />Leandro committed to donating 4% of its gross receipts to a community benefits program fund, in <br />addition to a 1% gross receipts and 10% net revenue contribution to the City. All of the <br />above-referenced voluntary contributions were ultimately nullified when San Leandro voters <br />adopted Measure NN. <br />Nevertheless, as of the date of writing of this staff report, only one cannabis dispensary business <br />is legally in operation in San Leandro. However, the remaining two permitted dispensaries are in <br />the process of completing their tenant improvements and are expected to open for business later <br />this year, in advance of the December 31, 2019 deadline that the City Council imposed when it <br />authorized adult use sales earlier this year. In addition, there is currently one stand-alone <br />cannabis manufacturing business and one cannabis testing laboratory that have received <br />conditional use permits, although neither of these businesses have yet commenced operations. <br />State and Federal Taxes <br />It is important to note that in addition to local gross receipts taxes, cannabis businesses <br />throughout the State and region also face significant state and federal taxes as part of their <br />operations. For example, Proposition 64 (which legalized the non-medical, adult use of cannabis <br />statewide as part of the November 2016 election) established a 15% excise tax that is <br />embedded into the retail sales price of cannabis. In addition, because the federal government still <br />classifies cannabis as a Schedule I controlled substance, cannabis businesses are subject to <br />higher federal taxes than other businesses. More specifically, Federal law 26 USC §280E (also <br />known as “Rule 280E”) arguably burdens the retail cannabis industry by disallowing certain <br />standard business expense deductions. Therefore, their federal tax liability will be greater than <br />that of a non-cannabis business of similar size and annual revenues. <br />Conclusion <br />Based on the factors stated, a reasonable argument could be made for delaying implementation <br />by one year of the previously scheduled gross receipts tax increase. Such a delay would allow <br />each of the teams additional time to complete any outstanding capital improvements, while also <br />allowing additional time for the rapidly evolving regulatory environment and cannabis market to <br />further mature. Based on the request of the City Council, city staff have prepared the attached <br />draft resolution for the Council’s consideration, which would maintain the existing gross receipts <br />tax at the current 6% rate for an additional one year. Absent subsequent direction from the City <br />Council, the previously established increase to 7% would take effect on July 1, 2020, and then <br />increase again to 8% two years thereafter. <br />Fiscal Impacts <br />Because only one cannabis business is presently in operation in San Leandro and the entirety of <br />their first quarter earnings were generated without adult use sales being in effect, it is challenging <br />to generate reliable General Fund revenue projections for the upcoming fiscal year. Assuming a <br />15% reduction in whatever revenue would have otherwise been generated (i.e. the marginal <br />difference in revenue generated between a 6% tax rate vs. a 7% tax rate), it is conceivable the <br />Page 3 City of San Leandro Printed on 6/12/2019 <br />248