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Ordinance Amendment No. 2019-01 — Commercial Cannabis Vertical and Horizontal Integration <br />and Ordinance Updates <br />June 4, 2019 <br />Page 4 <br />business -friendly marketplace at the state level, it also results in a single integrated cannabis <br />business being subject to multiple state and local tax assessments. The state assessments - sales <br />tax, excise cannabis tax, and cultivation tax - when added to local taxes, such as Santa Ana's, <br />mean that a single integrated cannabis business could face a combined state and local tax rate <br />exceeding 50 percent of the retail sale value of their cannabis goods. <br />Vertical/horizontal integration of these separately licensed business activities at the local tax level <br />allows a single integrated business to effectively pay their gross receipts tax assessment once, at <br />the final point of retail sale (which is still at the highest rate of 8 percent for adult -use and 6 percent <br />for medicinal cannabis). In this model, interparty sales and transfers of goods between component <br />parts of a vertically/horizontally integrated cannabis business supply chain, sharing 80% underlying <br />ownership, without reference to form of business structure, are allowed to be deducted from each <br />individual integrated cannabis business' gross receipts tax assessment at each point in the supply <br />chain. This would leave only their third -party sales and/or their minimum square footage tax, <br />whichever is greater, to be reported and paid. <br />Security Deposits <br />Concerning security deposits, it was determined that nominal security deposit language setting a <br />minimum security deposit amount of $10,000 or the average of one month's remittable commercial <br />cannabis tax, whichever was greater, would be included in the final text of Measure Y. This was <br />done with an understanding that the City would be open via a subsequent ordinance, as provided <br />under the terms of Measure Y to reducing and capping the amount of security deposits for <br />commercial cannabis businesses to $10,000 or one month's average remittable commercial <br />cannabis tax whichever is least. Also, it would permit two or more vertically/horizontally integrated <br />cannabis businesses to be covered by a single deposit, provided that: clear detailed procedural <br />language be added surrounding security deposits, their maintenance, application, replenishment <br />and refunding and that similarly detailed language be added concerning sales, assignments, <br />transfers and terminations of cannabis businesses to ensure the City is secure in its continued <br />receipt of cannabis business license tax revenues. <br />Allocated Gross Souare Footage <br />In the case of integrated distribution and/or manufacturing cannabis businesses, the minimum <br />gross square footage tax reported would reflect the allocated square footage actually utilized by <br />the business as verified by the City, rather than the maximum square footage of the premises. The <br />gross square footage tax on cultivation would continue to be based on canopy size as reported to <br />the state and as verified by the City. The gross square footage tax for adult -use retail businesses <br />would continue to be based on the maximum size of the premises. <br />75F-4 <br />