Medical Cannabis: High Risks and High Rewards for California’s Cities and Counties

Cultivation, manufacturing, wholesale distribution, transportation, delivery, and dispensary sales. These are some of the major issues cities and counties across California are facing as they create and manage local medical cannabis policies. The problem for many is not necessarily where to start, it’s how to mitigate risks while weighing out the pros, cons, costs and benefits.

Last year, California legislators passed the Medical Marijuana Regulation and Safety Act (MMRSA), creating a comprehensive outline for a state licensing system for the commercial cultivation, manufacturing, testing, distribution and sale of medical cannabis. A law that could provide a significant increase in state tax revenues and allow cities and counties to impose new local taxes.

“For many of our clients, the tax benefits are there. But it’s not just about tax revenue. It’s working within a changing regulatory environment that can present a lot of risks for local leaders,” said Larry Bergkamp, a special cannabis adviser for MuniServices, the state’s leading consultant on local medical cannabis measures and ordinances.

While the MMRSA created the Bureau of Medical Cannabis Regulation to help regulate the industry, local leaders were left to determine the size and scope of the industry within their jurisdictions. This is where confusion and inconsistencies come into play.  MuniServices is working with the Bureau to ensure their clients’ issues are considered as state regulations are being developed.  However, municipalities should not wait for the state regulations and policies to come out to develop and implement local ordinances.

“A lot of municipalities are looking for standardized language and policies for local ordinances. The problem we’re seeing is that they aren’t out there right now.  Cities and counties have different priorities and policies, and have developed ordinances and codes to address their specific issues and concerns. Our research has found that local leaders may use ordinances and codes from other jurisdictions, but modify them to meet their needs.  Some local leaders have not taken any action, creating a passive ban.  However, these passive bans may not hold up in the future. It’s currently a very piecemeal approach,” said Bergkamp.

Across the state, business taxes on dispensaries vary greatly, but provide significant increases in tax revenue to local jurisdictions that have taken action. In the City of Sacramento, it’s 4%. In Palm Springs and San Jose it’s 10%. Depending on the number of dispensary permits issued and medicinal marijuana card holders in the area, a municipality can add hundreds of thousands to millions of dollars a year to its general fund.

“It really is the time for local leaders to have the policy discussions about allowing cannabis in their communities,” said Jeff Kolin, another special cannabis adviser to MuniServices. “Do they want the cannabis industry in their community? How many producers, distributors and dispensaries do they allow? What are appropriate land uses and zones for each segment of the industry? Locals need to answer these, and many similar questions, to determine what is the best fit for them.”

Larry and Jeff know what they are talking about. Before coming to MuniServices, Larry spend the past 13 years working as the lead specialist on medicinal marijuana for the California Board of Equalization, the state agency that oversaw the industry before the creation of the Bureau. Jeff is a former city manager, and comes from a city that approved dispensaries after working with regulators across the state.

“A lot of what we hear from local leaders is that cannabis policy questions are coming up in the community, at council meetings, and from the cannabis industry. They want to know the process and what the future looks like,” said Kolin. “Initially, we tell them to really think about the costs and risks, both good and bad. Taxation and fees always come into play.  The future is not completely unknown, but they have to work with regulators and others who know what they are doing.”

This is where MuniServices has really shined, having worked with the Board of Equalization for more than a decade on this issue. In the past six years, their medical cannabis services have been a priority to many cities and counties wanting to develop appropriate ordinances and tax measures.

In addition, MuniServices Deficiency Audit Services identify entities that are not properly reporting the taxes they are subject to through local ordinances. Not properly reporting is the key here. Currently, the medical cannabis industry is being underserved by banks and credit unions afraid to do business with them. This means a lot of their transactions are made using cash, and recorded on basic spreadsheet software. In some cases, by pencil in composition notebooks.

“From a normal business perspective we would be able to verify suppliers, sales inventory, receipts, and any other transactions,” said Bergkamp. “For medicinal marijuana, there are very few verification procedures to audit growers, distributors and sellers. That means we have to develop and utilize alternative audit methods, such as an observation test to verify sales. We compare them to other metrics and databases like business licensing and medicinal marijuana card holders. It’s a real gray area because documentation is very loose or nonexistent right now.”

While the medical cannabis industry poses significant challenges to California’s cities and counties, it also brings many opportunities to define how it operates in the local economy. For many municipalities that have taken action, taxes on medicinal cannabis have helped generate much needed revenue and given them the authority they need to regulate the industry in their communities. For those who haven’t, the loss in revenue and risks continue to add up as the months go on.

MuniServices created a helpful policy report on medicinal marijuana in California to help local officials better understand some of the complexities surrounding this issue.