Banking, taxes and marijuana were the topics of discussion as municipal and industry leaders gathered September 15 to talk about local impacts of the cannabis industry during the League of California Cities’ Annual Conference in Sacramento.
Fran Mancia, MuniServices’ vice president of government relations, along with California Board of Equalization Member Fiona Ma, CPA, and Hezekiah Allen, executive director of the California Growers Association, spoke to more than 120 people on how the State is working with the cannabis and financial services industries to bring conformity and consistency into the complex, and now legal, cannabis industry in California.
During the discussion, Board Member Ma detailed the difficulty cities have in auditing dispensaries, noting banks, credit unions and accountants will not work with the cannabis industry because of the drug’s status as a Schedule 1 narcotic. “They do not want to inadvertently find themselves being investigated by the U.S. Justice Department,” she said.
“The handling of cash seems to be one of the biggest concerns we see,” said Mancia, whose firm works with cities and counties to develop and implement cannabis ordinances. “The lack of banking and professional accounting has caused a lot of issues for the cannabis industry. Some dispensaries are still using pencil and paper to do their bookkeeping, and often keep tens of thousands of dollars in cash on hand because they have no business bank account.”
In addition to banking, the panel also raised the issues cities are having in determining what to allow and how much to tax and charge industry businesses.
“Cities need to develop ordinances and policies that are good for them,” said Mancia. “There is no one-size-fits-all. Every jurisdiction has to tailor their ordinances and determine how they want to tax and charge the industry.”
While fees and taxes are critically important in paying for industry enforcement and generating needed revenue for local municipalities, panelists reminded attendees not to overtax or over-burden the industry.
“Business license taxes have worked well. Gross receipts are another good way, but they do fluctuate,” said Mancia. “On the growth and manufacturing side, you could charge a tax for square feet of space, but be careful how much you tax. It’s very easy to tax businesses into the underground economy.”
“A 25-30 percent effective tax rate is the rate at which we see the industry start to be pushed back into the underground,” said Allen, whose association represents growers and independent businesses within California’s cannabis industry. “The State starts at a 22 percent rate, so cities do not have much wiggle room for what they can do before pushing the market back underground. We like the square-foot license and tax model, but cities could also look at the expected production of the business and tax them based on output.”
As Proposition 64’s January 1, 2018, deadline fast approaches, many cities are still struggling to develop enforceable ordinances to regulate the recreational cannabis industry. Since November 2016, some cities have proactively worked with their cannabis industry to curtail foreseeable issues. MuniServices has worked extensively with Cathedral City to help cannabis manufacturers, transporters and retailers comply with tax levies and municipal codes by helping them prepare for audits.
“In Cathedral City, we are showing dispensaries what we look for when we audit them and how to properly record and manage their inventory and sales so they do not run into issues,” said Mancia. “The goal is to make enforcement of the industry as easy and streamlined as possible so that our clients can dedicate their resources to enforcing bigger issues.”
“The starting point for regulation is getting to know each other. Build bridges and find common ground to create real policies to move forward,” said Allen.
MuniServices is a leading provider of revenue enhancement and recovery for local municipalities. With over 900 cities, counties, special districts, and states as clients, MuniServices is the only firm in California and throughout the United States to offer proprietary revenue recovery, audit and administration services encompassing all general sources of municipal tax revenue. Learn more at muniservices.com.