Potential Dispensary tax flows attractive to cities

February 16, 2013

Xochitl Peña, The Desert Sun

Medical Marijuana dispensaries - originally allowed so sick patients could have safe access to the drug - have become cash cows for cities that see the opportunity for an alternative source of income.

"There's no question there's a big pot of tax money sitting there to be collected," said Palm Springs lawyer Joseph Rhea, who represents dispensaries.

Some cities have generated millions in extra revenue by placing additional taxes on the businesses - Oakland brought in $1.4 million in 2011 and San Jose $3.6 million during fiscal year 2011-12.

Palm Springs - the only Coachella Valley City to permit dispensaries - collected $22,224 in sales tax over the course of a year, but does not levy an extra tax.
It may be just a matter of time, though.

Mayor Steve Pougnet said the city is "taking a look at the possibility."
"It's something that we've definitely discussed," he said.

Pougnet and Councilwoman Ginny Foat are researching what other cities such as San Jose have implemented for possible discussion with the entire City Council at a later date.

"Once we have that research, we will talk to our dispensaries here, our stakeholders," he said.

An extra tax would have to be approved by voters.

Like any other business that has an exchange of goods, a sales tax is collectable from marijuana sold at dispensaries and delivery services, regardless of whether they are considered legal or not.

The California Board of Equalization collects between $58 million to $105 million in sales taxes from dispensaries annually, based on estimates of between $700 million and $1.3 billion in total sales.

The board does not have actual numbers for sales of medical marijuana because dispensaries are not required to identify their business type when registering for a permit and can report total taxable sales without categorizing the specific product sold.

Of the sales tax collected, 1 percent is returned to cities.

In Palm Springs, the city collects an additional 1 percent for Measure J on top of that - to help pay for redevelopment.

Palm Springs has seen a steady increase in sales tax revenue over the years, but Palm Springs City Attorney Doug Holland said he can't attribute it to dispensaries, which at one point topped at about a dozen.

"I think the amount they would be generating would be so small it's not a significant amount at this juncture."

Local dispensaries battling to stay open said they would welcome an extra tax, if it meant no hassle from the city.

"We'd be OK with whatever payment plan, permit fee, in order to stay open and serve our patients," said Charles Pace, director of operations at PS Organica on East Sunny Dunes Road.

Many of the non-permitted dispensaries have been embroiled in legal issues as they fight to stay open amid pressure from the city to close.

Since early December, when the city issued abatement notices with steep fines to all the illegal marijuana dispensaries operating in the city, at least four of the nine have closed, Holland said.

With the potential for extra revenue at a time when many cities are struggling financially, marijuana advocates wonder why more cities aren't allowing the dispensaries.

"They're denying a huge income into a city," Pace said.

Despite a ban on dispensaries in most cities, there are still dozens of them operating across the valley, and they are still required to collect taxes.

Kris Hermes, spokesman for Americans for Safe Access, whose organization's goal is to advance medical marijuana policy at all levels of government, said it's the city's right to levy extra taxes on dispensaries, but doesn't condone it. "We think it puts an undue burden on the patients," he said.

In addition to the state sales tax, San Jose levies a 7 percent tax and Oakland tacks on a 5 percent tax. Instead of an extra sales tax, San Francisco receives additional revenue from dispensaries through the licensing or permitting process.

"You'll find in many cities, they tax medical marijuana far in excess of other businesses. They feel that's acceptable. Whether it is or not, it does represent or indicate an alternative source of revenue," Hermes said.

With only three permitted dispensaries in the Coachella Valley, Rhea is guessing those operations do well with sales.

"If they're not bringing in a lot, something is wrong. They have three collectives that are wide open, fully permitted in a tourist town. There is going to be a substantial amount. If not, then something is weird," Rhea said.

Cities could further add to their pocketbooks, advocates say, if marijuana was legal like alcohol as it is now in Colorado and Washington.

Even those cities that ban dispensaries could see a benefit if they allowed the collectives to operate legally, said Ellen Komp, deputy director of NORML of California.

"First of all you have a legal income stream, so that means you're paying employees that are paying income tax, and there's payroll tax," she said.

She also points to the savings in law enforcement costs from not having to chase after non-permitted operations and illegal purchasers. "There have been studies that show when they close down dispensaries, crime increases on the street because it goes back on the street. It increases crime and it decreases the economic benefits to the community," she said.

According to a Colorado Center on Law and Policy Center study on the legalization of marijuana, it is estimated that $32 million in new revenue for the state and more than $14 million in new revenue for local governments could be generated while saving more than $12 million in state and local law enforcement spending.

In California, a report conducted by NORML updated in 2009 estimates total legalization of marijuana could yield at least $1.2 billion in tax revenue as it lowers enforcement costs.


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