75A - PH - CANNABIS UPDATE - Laserfiche WebLink

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Ordinance Amendment No. 2019-01 — Commercial Cannabis Ordinance Updates July 16, 2019 Page 4 Financial Amendments (Chapter 21) 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. 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 business -friendly marketplace at the state level, it also results in a single integrated cannabis business being subject to multiple state and local tax assessments. The state assessments - sales tax, excise cannabis tax, and cultivation tax - when added to local taxes, such as Santa Ana's, mean that a single integrated cannabis business could face a combined state and local tax rate exceeding 50 percent of the retail sale value of their cannabis goods. Vertical/horizontal integration of these separately licensed business activities at the local tax level allows a single integrated business to effectively pay their gross receipts tax assessment once, at the final point of retail sale (which is still at the highest rate of 8 percent for adult -use and 6 percent for medicinal cannabis). In this model, interparty sales and transfers of goods between component parts of a vertically/horizontally integrated cannabis business supply chain, sharing 80 percent underlying ownership, without reference to form of business structure, are allowed to be deducted from each individual integrated cannabis business' gross receipts tax assessment at each point in the supply chain. This would leave only their third -party sales and/or their minimum square footage tax, whichever is greater, to be reported and paid. 75A-4