With Measure D Passage Wrangling Begins Over How to Spend Extra Cannabis Revenues, or Rollback the Tax

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Last fall, Measure D, which’ll place an additional tax on cannabis businesses, garnered 65.7 percent of the municipal vote. City Controller Ben Rosenfield estimates that the tax will generate between $7 million and $16 million, with proceeds to be deposited into the general fund. Cannabis businesses and advocacy groups want some of these funds to be spent on educating the public about the effects of cannabis and providing it to individuals who can’t otherwise afford it.

Newly-elected District 10 Supervisor Shamann Walton wants a portion of the funds to be directed to the City’s Cannabis Equity Program, which works to lower barriers to cannabis licensing for those severely affected by the war on drugs and supports efforts to assist youth and individuals who were previously incarcerated for cannabis crimes.

“I believe that we have an opportunity to work with businesses on what we do with the taxes to benefit everyone,” said Walton.

“Since 2017, we have been quietly and diligently working through inspections and permitting for those operators who came out of the shadows through our amnesty program,” said Nicole Elliott, San Francisco Office of Cannabis director. “This program allowed us to put quasi-permitted and unregulated cannabis operators into a permitted and licensed structure. (It also) prioritized compliance, public safety, consumer safety and worker safety over criminalization.”

According to Nicole, a significant portion of the cannabis businesses that came in through the amnesty program are located in San Francisco’s southeast sector.  She asserted that permitting and licensing benefits the industry, consumers and the general public. “Cannabis operators are required to engage in community outreach and have a good neighbor policy as part of the permitting process,” said Elliott.

Permitting relates to securing building space, to utilize as a storefront, for cultivation, or production. Licensing consists of paying required municipal fees to operate.

Cannabis businesses currently pay the same gross receipts tax rate as other enterprises, which ranges from 0.075 percent to 0.65 percent, depending on the business type and level of gross receipts. Measure D, which’ll go into effect in 2021, will add a one to five percent tax on cannabis companies with gross receipts that exceed $500,000.   

According to Michelle Allersma, director of budget and analysis for the City Controller, her office will periodically revise revenue projections. “We will update the numbers…as new information becomes available and include them” in the City’s five-year financial plan and Mayor’s proposed budget, among other reports, said Allersma.

Measure D exempts retail sales of medical cannabis and expands the business tax to enterprises not physically located in the City.

According to David Goldman, president of the Brownie Mary Democratic Club (BMDC), a chapter of the City’s Democratic Party that advocates for medical use of cannabis and an end to the war on drugs, the tax will have pernicious effects. “All the citizens of San Francisco did in voting for Measure D was ensure the health and vitality of the black market. When the County added onerous gross receipts tax rates on cannabis businesses, it force(d) out the small entrepreneurs and pave(d) the way for the big corporations. Cannabis businesses are not rolling in dough. Many dispensaries appeal to tourists, not locals,” said Goldman.

Goldman said BMDC wants to work with newly-elected District 6 Supervisor Matt Haney and District 8 Supervisor Rafael Mandelman to lower the gross receipts tax rates on cannabis businesses to levels that’re similar to comparable non-cannabis businesses. Neither Haney nor Mandelman supported Measure D.

Andy Greenberg, cofounder of Society Jane, a Dogpatch-based, women-owned and women-focused cannabis delivery service, sees the additional tax as unnecessary. “Cannabis businesses are already being taxed at the same rate as other San Francisco businesses,” said Greenberg.  “This new tax is above and beyond what other businesses in other industries will be charged. This industry is so new. The City should have waited to see how the industry grows…before imposing a new tax. I am optimistic…because this cannabis tax can be amended by ordinance by the Board of Supervisors. They have until January of 2021 to revise the rates, based on how the industry changes. The Office of Cannabis has been responsive to the industry as well as the Board. (It) can be instrumental in advising the Board on the specific needs and realities of the local cannabis industry,”

According to Greenberg, Society Jane isn’t yet generating revenue levels that’d require it to pay the additional tax. By 2021, when the new tax takes effect, she expects that’ll have changed. “Society Jane will jump on the opportunity to meet with the Board of Supervisors, as a group and individually, to discuss how the new tax imposed by Measure D will impact us and the City’s other cannabis businesses,” said Greenberg.

Menaka Mahajan, founder of Mahajan Consulting, a San Francisco-based cannabis consulting firm, said Measure D isn’t “small business-friendly. For a small business, which has to buy modest amounts of items, like exit bags or child-free packages, everything in the supply chain is expensive and compliance costs are disproportionately high. To achieve even a small profit margin, your revenue must be higher than your costs. This means your taxable gross receipts would also be higher, unless you’re the very smallest type of business and can qualify for the exemption.”

Mahajan said state taxes and compliance costs cause customers purchasing cannabis in the regulated market to pay higher prices than what’s available on the black market. “Regulated businesses are already struggling to compete with unregulated ones,” said Mahajan. “Yet another tax makes the regulated market that much more unattractive. So, yes, we technically have legalization, but policies such as Measure D undermine the progress of legalization.”

Mahajan, who is on the board of the San Francisco chapter of the California Growers Association, an advocacy group for cannabis growers and business owners, wants Measure D tax funds to be reinvested into the industry. “We’d like to see some of the money generated by the tax go to supporting small businesses,” said Mahajan. “It would be great to see money earmarked for public information campaigns. A significant portion of the City’s population still thinks of cannabis as a gateway drug. We really need to start (educating people) so those who are scared of cannabis can receive current scientific information.”

Ellen Komp, deputy director of the California chapter of the National Organization for the Reform of Marijuana Laws (NORML), said NORML supports earmarking funds to start compassion, equity, and education programs.  “Right now, the money from Measure D could be used for anything. We’re going to have to hold public officials accountable to make sure this happens,” said Komp.

Cannabis operators that are unpermitted at the time the tax takes effect will still have to pay it.  According to Amanda Fried, chief of policy and communications for the San Francisco Office of the Treasurer & Tax Collector, taxation isn’t tied to having a permit to operate. “The two things are distinct on purpose,” said Fried. “If you do something that is taxable, you have to pay the taxes. You can’t get a permit to operate unless you are registered with our office and paying taxes. We will make sure all businesses are compliant with tax laws, even if they are operating illegally.”

Fried said the Tax Collector is well equipped to receive payments. Federal regulations that declare cannabis to be a Schedule 1 drug prevent cannabis operators from depositing profits from cannabis businesses in banks.  “We accept payment in cash in City Hall, and our office and the entire building is secured by Sheriff’s deputies,” said Fried.