Costa Mesa has approved an ordinance that will reduce a business tax on all legal marijuana operations established in a city measure approved by voters in 2016.

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The City Council voted 4-2 in mid-March to give final approval to the law that will reduce a 6% gross receipt tax to 1% on all distribution, manufacturing, research and development of legal marijuana, and will eliminate the tax for testing. The law goes into effect April 16.

California’s Proposition 64 (also known as The Control, Regulate and Tax Adult Use of Marijuana Act) was approved in 2016 and legalized the adult use of marijuana statewide and created two state excise taxes: a 15% wholesale tax and a $9.25 per ounce cultivation tax (recently increased to $9.65).

Along with an inability to reduce taxable income, these combined tax rates have resulted in a lack of business, causing severe economic challenges for legal marijuana businesses and have contributed to lower city revenue than anticipated, according to a city staff report.

While over 20 businesses have received permits to operate, only eight manufacturers and distributors are active in the city. It is anticipated that more may not open due to financial burdens posed by local, state and federal taxes, the staff report says.

City voters also approved Measure X in 2016, which legalized and provided regulations for the distribution, manufacturing, testing, transporting, research and development of medical marijuana. One regulation imposed was a 6% business tax on all aforementioned activities, as well as on any other marijuana-related business/operation.

In 2019, the city received a letter drafted by a collective of cannabis industry executives and business owners with requests to reduce the gross receipt tax from 6% to 2%, calling the current rate a “heavy burden placed on operators.”

The City Council subsequently established an ad hoc committee to evaluate marijuana tax rates and regulations.

According to projections from Costa Mesa’s fiscal year 2019-20 plan, the 1% gross receipt tax is expected to cut city revenue from marijuana businesses down by about $539,000, with the original revenue being about $647,000 under the 6% tax. A 2% tax, that was originally proposed, would reduce city revenue by about $431,000.

Of the 21 public comments during an early March meeting — when the council gave preliminary approval to the new ordinance — most were from operators or those employed by the cannabis industry who supported the law. One operator shared concerns that the industry in Costa Mesa would go extinct if a 6% tax remained intact, and others argued for a 1% tax (and 0% tax on testing) instead of the 2% originally proposed.

During first reading of the ordinance at that March 3 meeting, Councilmember Allan Mansoor made the motion to approve, which carried with a 5-1 vote.

Mansoor called a potential $100,000 reduction between 1% and 2% in city revenue negligible for the short term, supporting a move to lower the gross receipt tax to 1%.

Councilmember Manuel Chavez also supported the ordinance and revision to reduce gross receipt tax to 1% to compete with cities like Long Beach.

“We have to let the market decide,” Chavez said.

Mayor Pro Tempore John Stephens called for a reduction of the gross receipt tax to 0% on testing as there are no testing facilities in the city.

However, some public commenters during the March 3 meeting were concerned with the reduction.

One speaker noted the city does not need a bigger cannabis industry presence, and that there is the option to travel to neighboring Santa Ana dispensaries. The speaker also argued that the people voted on Measure X, which outlined a 6% tax, and that should not be changed without voter approval.

Councilmember Sandra Genis, who cast the sole dissenting vote after the first reading, agreed with the speaker, stating she has to support the voters’ decision.

Although the original proposal outlined a temporary reduction of the tax, it was revised to be permanent during the March 3 meeting. Amidst the COVID-19 pandemic and subsequent economic concern prevalent on March 17 — when the final vote was taken — Stephens proposed reverting that change back to temporary.

A substitute motion was made to vote on the ordinance as revised, and Stephens voted no based on the permanence of a tax decrease, joining Genis in the dissent. The tax rate can be increased up to 6% only with voter approval.

Mayor Katrina Foley was excused from the March 3 meeting due to her state Senate campaign and was unable to vote on the first reading of the law. She was then recused from voting during the second reading on March 17 due to a conflict of interest regarding a donation made to her campaign less than a year ago.

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