----
Report Prepared by: Michael Hren, Principal Planner, Development Services Department
Title
SUBJECT: Direction on Possible Changes to the Commercial Cannabis Business Permits Ordinance Including, but not limited to, the Merit Based Selection Process, the Current Tax Rates, Inspection Procedures, Labor Peace Agreements, Safety Standards, Allowable Zones and Regulatory Fees
REPORT IN BRIEF
City staff will provide an update on the history and current status of commercial cannabis businesses in Merced. Among other considerations, seeking Council direction on the number of retail permits, local preference, taxes and fees, inspections, possible expansion to other zoning districts, and other items relating to the Ordinance.
RECOMMENDATION
Provide staff with direction on items relating to the cannabis Ordinance and related matters.
Body
AUTHORITY
Section 20.44.170 of the City of Merced Municipal Code addresses Commercial Cannabis Business Permits.
CITY COUNCIL PRIORITIES
FY 2020-21 Council Priority #1 includes Public Safety and Parks, which taxes from the passage of Measure Y can supplement. Council Priority #5 includes Infill Development and Priority #6 includes Industrial Development, both of which cannabis business can significantly impact.
DISCUSSION
The City’s Commercial Cannabis Business Ordinance, Merced Municipal Code 20.44.170 (Attachment 1), was first adopted in December 2017, with the passage of Ordinance #2480 and substantially amended in March 2019, with the passage of Ordinance #2498. Since adoption of the Ordinance, 15 total permits have been approved.
Current Status of Permitted Cannabis Businesses
• 3 retailers in operation, 1 completing tenant improvements, 1 expired
• 8 other permits (4 entities) approved but not operational
o 3 Manufacturing
o 3 Distribution
o 2 Cultivation
• 1 Cultivation permit, 1 Distribution permit, 1 Retail permit not renewed
• 1 application for Cultivation pending Phase 2 fee and review
• Under the current code, the available retail permit would be filled by the City opening a new application period. The Qualified Commercial Cannabis Business Application List expired on September 20, 2019 per 20.44.170 (L)(1)(g)(iv)(a).
o Does the City Council want the total number of permits to remain at five?
o The current process for selection of a dispensary permittee is stated in 20.44.170(L)(1)(g)(iv). It states the following:
§ “The Director of Development Services or designee, after reviewing the application approve in Phase 1 and the aforementioned information, will convene a Selection Panel composed of the City Manager, Chief of Police, and the Director of Development Services, or their designees. The Selection Panel will review all application documents required in the City’s Phase 1 application package plus an additional background check of all owners conducted to the satisfaction of the Chief of Police, and individually score each application in accordance with the merit based scoring system established by Resolution of the City Council. A complete description of the merit based system and all merit based considerations shall be included with the application forms. An average score for each applicant based upon the merit based scoring of the Selection Panel shall be calculated and the applications shall be ranked from highest to lowest in accordance with the average score. The applications, in order of ranking, shall then be placed on the Qualified Commercial Cannabis Business Application List-Dispensaries/Retail Sales in the order of ranking. The Selection Panel will recommend the highest ranked applicant(s) on the Qualified Commercial Cannabis Business Application List-Dispensaries/Retail to the Planning Commission for the issuance of a Commercial Cannabis Business Permit - Dispensaries/Retail Sales. The number of applicants recommended to the Planning Commission by the Selection Panel shall be the same number of Commercial Cannabis Business Permits - Dispensaries/Retail Sales then available.”
o Does the Council have any direction regarding the above process moving forward?
o Should there be a distance requirement for dispensaries from existing dispensaries?
Changes to Merit Process
The current merit-based selection criteria for cannabis dispensaries are provided as Attachment 3.
• The current procedure awards points for local ownership. One point is awarded for ownership with residency in the County of Merced and an additional two points for ownership with residency within the City limits. An additional point can be earned for designating an employee who is a resident of the City of Merced as a designated liaison with the neighborhood. Should points for local business ties or residency be increased?
• Are there other changes to the Merit-Based system the Council would like to see implemented?
Possible Changes to Taxes
Per Merced Municipal Code Section 3.52.600, “The voters expressly authorize the city council to amend, modify, change, revise, or appeal any provision in this Chapter as the city council deems in the best interest of the city without a vote of the people to the extent allowed by law. However, as required by Article XIII C of the California Constitution, voter approval is required for any amendment to Section 3.52.100 that would increase the rate of any tax levied pursuant to this Chapter above the maximum rates established by this Chapter or to change the services funded by the tax. The city council may impose any tax authorized by this Chapter at a lower rate and may establish exemptions, or other reductions as otherwise permitted under state and federal law. No action by the council under this Section shall prevent it from later increasing the tax or removing any exemption, incentive, or reduction, and restoring the maximum tax rates specified in this Chapter.”
Thus, the City Council has the authority, by passing a Resolution, to modify the taxes on each of the types of cannabis business (cultivation, distribution, manufacturing, nurseries, retail dispensaries, and testing). Each business type has a maximum rate that the Council can raise the tax to in this fashion, but there is no minimum (i.e. the Council can reduce these rates to zero if it chooses to). Staff has provided recommendations on each of the tax rates below and has provided a table at Attachment 2 detailing a comparative analysis of Merced’s taxes to other municipalities’ taxes.
• Retail Dispensaries
o Adult Use: No Change (7% of gross receipts)
§ Since three retail businesses are already operational, and with the limit of five total businesses, reduction in this tax rate would not incentivize any more growth in this part of the industry. Furthermore, retail business is still performing well during the pandemic.
o Medicinal Use: Reduce from 4% to 2% of gross receipts.
§ Medicinal use has generally been low, and further reducing the tax rate both incentivizes people to take advantage of the medicinal program at the state level and also demonstrates compassion for those requiring cannabis as medicine by reducing their costs, per the original intent of the City’s cannabis policy.
• Cultivation: Reduce from the greater of $7/sq. ft. or 4% of gross receipts, to the greater of $4/sq. ft. or 4% gross receipts.
o Cultivation is the area that the City has heard the most that its taxes are too high compared to other municipalities. The fact that one cultivation license was allowed to lapse plus the lack of forward momentum on getting any licensees in operation suggests that this could be a viable area to incentivize new applications and lighten the burden of getting operational. Merced’s gross receipts number is competitive, matching that of Sacramento, but reduction of the square footage rate is particularly helpful for the businesses as they get started, in years where gross receipts will be low.
• Nursery: No change ($0.50/sq. ft.)
o Nursery rates were started at a significantly lower rate than other cultivation to begin with, and thus do not need a reduction.
• Distribution: No change (the greater of $1/sq. ft. or 2% of gross receipts)
o Distribution rates are competitive, there is no present need to lower them.
• Manufacturing: Reduce from $7/sq. ft. to $4/sq. ft.
o This change is proposed both to remain consistent with the cultivation tax and reflective of the fact that manufacturers have struggled to open their doors. Reducing this tax may assist current permittees in opening their doors as well as incentivize new operators to consider Merced.
• Testing: Reduce from $0.25/sq. ft. to $0/sq. ft.
o There have been zero applications for a Testing facility, and the presence of one or more would dramatically improve the cannabis industry’s health in the City and the region. Testing is not a high-profit sector as far as the City’s revenue is concerned and reducing this tax to zero shows Merced’s commitment to bringing these facilities to the City, removing even token barriers to entry. Having a local licensed Testing business can be key to other business types, cutting hours and days off turnaround times, and reducing travel expenses.
Possible Changes to Inspection Policy
During the creation of the procedure to inspect cannabis businesses, the City chose to take an aggressive approach to inspections according to the following schedule, set by Exhibit A of Resolution 2017-67 and updated according to the Consumer Price Index as follows:
|
Business Type |
# of Inspections/Year |
Annual Regulatory Fee |
Approx. Fee* @2 Insp./Year |
|
Cultivation |
4 |
$19,777 |
$9,889 |
|
Nursery |
4 |
$16,605 |
$8,303 |
|
Distribution |
4 |
$13,649 |
$6,825 |
|
Manufacturing |
4 |
$35,432 |
$17,716 |
|
Retail Sales |
6 |
$22,741 |
$7,581 |
|
Testing |
2 |
$6,804 |
$6,804 |
*Approximations based on current fees. Staff is also working with its consultants at SCI to refine inspection costs based on completed inspections.
Having performed inspections on the retail sales dispensaries, staff believes that the schedule could be reduced without an adverse impact on the level of compliance or compromising the quality of the businesses. Additionally, reduction in inspections would reduce annual regulatory fees, lowering the burden of maintaining an active cannabis business on operators. If for all business types, the inspections are reduced to two inspections per year, this would commensurately reduce the regulatory fees and annual City revenues.
Additionally, the annual review of cannabis permits does not currently review the community benefits elements that were proposed by licensees during the application process. Does the City Council wish staff to incorporate some level of accountability for the elements that earned retail businesses merit points into the annual review process? If so, how would City Council prefer that staff enforce accountability in the event that the proposed elements have not been implemented?
Ordinance Updates
• An update of appeals language to clarify when an item must be scheduled versus when it must be heard should be made. This is part of a change that will be made to multiple sections of the Zoning Code for consistency and will be the first update brought back to the City Council as a separate Zoning Ordinance Amendment in May 2021.
• At the February 1, 2021 meeting of the City Council, Mayor Serrato requested information regarding labor peace agreements and OSHA Standards. The City’s cannabis Ordinance does not directly address either of these issues, though all customary regulations would still apply to cannabis businesses, as the Ordinance specifies that licensees, “…shall comply with any applicable State licensing requirements.” What is the Council direction on this issue?
o Applicants for a license with more than 20 employees must either attest that they have entered into a labor peace agreement and that they will abide by the terms of the agreement, and provide a copy of the agreement to the Bureau of Cannabis Control, or provide a notarized statement indicating the applicant will enter into and abide by the terms of the labor peace agreement.
o Several Cal/OSHA regulations apply to workplaces in the cannabis industry. A link to the State of California Department of Industrial Relations website at <https://www.dir.ca.gov/dosh/cannabis-industry-health-and-safety.html> provides more information and resources regarding these regulations.
• Application fees are presently one size fits all. Each background check carries a cost in time for Police Department personnel to conduct. Staff recommends modifying the Phase 2 application fee to increase based on the number of owners needing background checks (any with 5% or more ownership, including entities).
o Additionally, staff recommends adding language to the Minor Modification section that future changes of ownership carry a fee for background checks to be determined by the Chief of Police and Finance Officer.
• Does the City Council support the below proposed changes to the allowable zones for cannabis activity?
o Staff believes that the Business Park (B-P) zone, defined in the Zoning Ordinance that it, “provides a location for employment-intensive uses within an attractive campus-like setting… but also limited commercial retail uses…” may be an appropriate location for commercial cannabis businesses. Though proposed businesses would still need to be appropriately distanced from sensitive uses, staff is asking if the Council would like to add Business Park (B-P) to the allowable zones for all cannabis uses. This would impact Planned Developments with underlying General Plan designations of Business Park, as well as a large Business Park in the southeast of the City.
o Staff believes that the Thoroughfare Commercial (C-T) zone, defined in the Zoning Ordinance that it, “…accommodates… heavy commercial uses that benefit from proximity to the highway,” may be an appropriate location for Retail Dispensaries of cannabis. A business in this industry could significantly benefit the City by attracting customers travelling on the highway who otherwise may not have stopped in Merced. These customers may then patronize other local businesses and return to Merced for repeat visits.
Next Steps
Based on City Council direction on the above items, City staff will prepare amendments to the Ordinance, and fee and taxation resolutions for future City Council consideration.
IMPACT ON CITY RESOURCES
Issuance of the now-vacant retail commercial cannabis business license could have a significant impact on available funding by collecting Measure Y-approved taxes from the business. Changes in the taxation policy could reduce the potential funds from businesses but could provide incentive for new businesses to locate in Merced or assist businesses struggling with finances to open their doors more quickly after receiving a permit. Changes in the inspection schedule would reduce the fees being provided to the City but would also reduce the costs associated with those fees commensurately.
ATTACHMENTS
1. Merced Municipal Code 20.44.170
2. Comparison of Merced Cannabis Taxes to Other Municipalities’
3. Merit-Based Criteria
4. Presentation