Tax suspension could alleviate burden on cannabis growers while supes consider tax reform

By Brandon McCapes, Staff Writer , SoCoNews, January 19, 2022

At their Jan. 4 meeting, the Sonoma County Board of Supervisors deliberated on how to help alleviate the burden caused by industry-reported market conditions and increased state taxes by delaying or suspending county cannabis taxes.

At their Jan. 4 meeting, the Sonoma County Board of Supervisors deliberated on how to help alleviate the burden caused by industry-reported market conditions and increased state taxes by delaying or suspending county cannabis taxes. Supervisors took no action at the Jan. 4 meeting, but, based on the consensus, are likely to provide some sort of temporary tax relief to help cultivators at their Jan. 25 meeting.

Cultivators owe their first tax payment of the calendar year at the end of the county’s third fiscal quarter, Jan. 31. Supervisors directed staff to return with more information regarding the collection and expenditure of the county’s cannabis tax, which could be put under the microscope this spring with a potential delay or suspension.

A delay, according to county staff, would mean growers would still be responsible for the payment of accrued taxes, but the deadline would be extended. A suspension would mean the county could retroactively reduce the cannabis tax rate to zero for a given amount of time so that no taxes would be owed by growers.Assistant County Administrator Christina Rivera said that although the board is signaling it will provide tax relief, “The liability of the grower to pay will remain until such time as (the board) makes a different decision.”

The industry’s request for a tax suspension, like one that was done in the City and County of San Francisco, was spurred by a recent drop in the market price for cannabis per ounce from $900 to $300 and concurrent increases in state cannabis taxes, which account for about 80% of the total taxes to cultivators. Rivera said, however, that staff should independently verify the reported drop, and determine whether it’s due in part to overproduction.

The state, which taxes cultivated cannabis based on ounce, not square foot, as Sonoma County does, has raised the taxes imposed on flowers, leaves and fresh cannabis plants by $0.43, $0.13 and $0.06 respectively per dry-weight ounce.

Sonoma County’s square-footage-based tax taxes between $1.12 and $12.65 per square foot, depending on zone, with indoor cultivation taxed the highest, and outdoor cultivation the lowest. According to county staff, when looking at a specialty outdoor grow in Sonoma County, cultivators are looking at $161.28 in state taxes and $42.25 in county taxes, with an effective annual total of $205.53 per cannabis plant. Extrapolated to a hypothetical 200 plants on a 5,000 square-foot cultivation site, the cost per year would be $40,706.

According to Auditor-Controller-Treasurer-Tax Collector Erick Roeser, the county currently collects taxes from 170 cannabis cultivators, in addition to five dispensaries and five manufacturers. The tax holiday as discussed would only apply to the cultivators.

“The tax deadline is coming due at the end of January, and the folks in the industry are very nervous about that tax deadline,” First District Supervisor Susan Gorin said. “We have to acknowledge that people are hurting, and we’ve taken other steps such as during wildfires to alleviate their industries, so I think we need to do something here.”

Discussion among staff and supervisors was stilted due to the need for analyses of current tax laws and expenditures, and how county cannabis tax collection could be changed. The county could, for instance, switch from a square-footage-based tax system, which considers only grow size and no market forces, or one based on gross revenue, so that cannabis cultivators are not faced with an unfair tax burden while facing price-per-pound drops, as currently reported.

Samantha Lowe, a Sebastopol cannabis farmer, urged supervisors to suspend taxes through the end of the year, and to convert to a tax based on gross receipts. She said that growers are seeing only the highest quality flowers sold, and product is sitting on shelves while some farmers are destroying their crop because they won’t make money.

“It just costs too much. There’s no money for this season. The existing tax will either be putting people out of business or driving people further underground. With people with big farms going underground, the underground market is going to be bigger than it ever was. I hope it doesn’t come to that,” Lowe said.

The risk with a gross receipts approach, however, is that some cannabis cultivators could “game the system” and sell a portion of their product on the black market while otherwise benefiting from operating a legal grow but selling illegally to avoid taxes. This risk is exacerbated by cannabis being a cash-based industry.

“I don’t think that it makes sense to have a square-footage-based tax that has no linkage to gross receipts. At the same time, I recall staff being concerned that if it’s all based on gross receipts they could report only a little bit and sell the rest on the black market. I do feel that there is some path forward where we take both into consideration — where we look at something that is based on square footage but has something like a cost-of-living adjustment tied to the actual, marketable rate,” Fifth District Supervisor Lynda Hopkins said.

Supervisors were also concerned about the loss of revenue for the county, which spends 22% of cannabis revenue on administrative fees, according to Second District Supervisor David Rabbit.

“I’m just worried about how we pay the bills going forward,” Rabbit said, referring to a potentially permanent change to the cannabis tax.

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