75F - PH CANNABIS BUSINESS INTEGRATION

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Ordinance Amendment No. 2019-01 — Commercial Cannabis Vertical and Horizontal Integration and Ordinance Updates June 4, 2019 Page 3 Proposed Amendments to Chapters 21 Item Proposed Amendment Impact requirements for close-out audits and other guards against loss of taxes due to transfer of ownership or termination of business. Alternate Square Amends Ordinance NS-2962 to allow Allows distribution and manufacturing cannabis Footage Tax certain vertically and/or horizontally businesses that are vertically or horizontally integrated commercial cannabis integrated to report actual allocated square businesses to base their alternate square footage utilized upon verification by the City in footage tax calculations on measured place total square footage of premises. allocated gross square feet rather than total gross square feet. Testing In parallel with an enabling resolution Allows the City to maintain its competitive Laboratories amends Ordinance NS-2962 to reduce the position with regards to cannabis testing which is Reduce Tax Rate gross receipts tax rate on testing the most mobile and easily re -locatable class of From 5% to Two laboratories and testing facilities. commercial cannabis business 2% Vertical and Horizontal Cannabis Business Integration Santa Ana voters approved Measure Y in November 2018, which established various tax rates for legally -operating and permitted commercial cannabis businesses in the City. In tandem with preparation of the measure, City officials met with cannabis industry representatives to discuss vertical and horizontal integration, security deposits and substitution of allocated gross square footage vs. total square footage for certain types of commercial cannabis businesses. Subsequently, City staff met with cannabis industry representatives and reviewed proposed changes to Measure Y in order to address the new tax confronting cannabis businesses and to incentivize legal operators throughout Santa Ana. The City's current regulatory ordinances permit co -location of multiple commercial cannabis business activities on the same site along with medicinal cannabis retail activity; the proposed revisions to Chapter 21 will ensure that these co - located business activities are vertically and/or horizontally integrated under the business license code as well. Additionally, concerns related to reducing the amount of security deposits and accommodating use of allocated gross square footage in the computation of the alternate gross square footage tax payable by commercial cannabis businesses engaged in distribution and manufacturing are likewise addressed below. An understanding was reached with industry representatives that the City would be open, via a subsequent ordinance as provided under the terms of Measure Y, to the adoption of vertical/horizontal integration, and reducing and capping the amount of security deposits and applying in cases of vertically/horizontally integrated cannabis businesses, a single security deposit. With regard to the concept of vertical/horizontal integration which relates to the City's recognition that state law, by requiring separate licensure for certain separate aspects of commercial cannabis business (cultivation, distribution, manufacturing, and retail sales), consciously adopts a horizontally integrated regulatory scheme as opposed to a vertically integrated scheme adopted in other states. Other states that utilize horizontal integration for regulatory purposes and prohibit vertical integration at the regulatory level include Illinois and Washington. While horizontal integration carries with it certain benefits in terms of maintaining a more open, participatory, and 75F-3