Laserfiche WebLink
Ordinance Amendment No. 2019-01 — Commercial Cannabis Ordinance Updates <br />August 20, 2019 <br />Page 4 <br />Financial Amendments (Chapter 21) <br />Vertical and Horizontal Cannabis Business Integration <br />Santa Ana voters approved Measure Y in November 2018, which established various tax rates <br />for legally -operating and permitted commercial cannabis businesses in the City. In tandem with <br />preparation of the measure, City officials met with cannabis industry representatives to discuss <br />vertical and horizontal integration, security deposits and substitution of allocated gross square <br />footage vs. total square footage for certain types of commercial cannabis businesses. <br />Subsequently, City staff met with cannabis industry representatives and reviewed proposed <br />changes to Measure Y in order to address the new tax confronting cannabis businesses and to <br />incentivize legal operators throughout Santa Ana. The City's current regulatory ordinances <br />permit co -location of multiple commercial cannabis business activities on the same site along <br />with medicinal cannabis retail activity; the proposed revisions to Chapter 21 will ensure that these <br />co -located business activities are vertically and/or horizontally integrated under the business <br />license code as well. Additionally, concerns related to reducing the amount of security deposits <br />and accommodating use of allocated gross square footage in the computation of the alternate <br />gross square footage tax payable by commercial cannabis businesses engaged in distribution <br />and manufacturing are likewise addressed below. <br />An understanding was reached with industry representatives that the City would be open, via a <br />subsequent ordinance as provided under the terms of Measure Y, to the adoption of <br />vertical/horizontal integration, and reducing and capping the amount of security deposits and <br />applying in cases of vertically/horizontally integrated cannabis businesses, a single security <br />deposit. <br />With regard to the concept of vertical/horizontal integration which relates to the City's recognition <br />that state law, by requiring separate licensure for certain separate aspects of commercial <br />cannabis business (cultivation, distribution, manufacturing, and retail sales), consciously adopts a <br />horizontally integrated regulatory scheme as opposed to a vertically integrated scheme adopted <br />in other states. Other states that utilize horizontal integration for regulatory purposes and prohibit <br />vertical integration at the regulatory level include Illinois and Washington. While horizontal <br />integration carries with it certain benefits in terms of maintaining a more open, participatory, and <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 - <br />sales tax, excise cannabis tax, and cultivation tax - when added to local taxes, such as Santa <br />Ana's, mean that a single integrated cannabis business could face a combined state and local tax <br />rate 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 <br />percent for medicinal cannabis). In this model, interparty sales and transfers of goods between <br />component parts of a vertically/horizontally integrated cannabis business supply chain, sharing <br />80 percent underlying ownership, without reference to form of business structure, are allowed to <br />be deducted from each individual integrated cannabis business' gross receipts tax assessment at <br />75A-4 <br />