Cannabis Tax and E-Commerce Tax
Additional Tax on Cannabis Businesses; Expanding Business Tax Criteria
Levies an additional tax on the gross receipts of cannabis-related businesses in San Francisco and extends local business taxes to companies based elsewhere but doing business in San Francisco.
What the Measure Would Do
Prop. D would do two things: It would impose an additional tax on cannabis-related businesses, and it would allow the city to levy a tax on companies that do business in San Francisco but aren’t located there.
The first part of the measure would levy a tax on the gross receipts (or total income) of companies engaging in cannabis business activities in San Francisco. These activities include but are not limited to the cultivation, possession, manufacture, processing, storing, labeling, distribution or sale of cannabis or cannabis products.1
For cannabis retail sales, the rate would be 2.5 percent of gross receipts up to $1 million and 5 percent of gross receipts above $1 million. For business activities other than retail sales, the rate would be 1 percent of gross receipts up to $1 million and 1.5 percent of gross receipts above $1 million. The new rates would go into effect on January 1, 2021. These tax rates would be in addition to the current gross receipts tax rate that San Francisco businesses pay. Those rates vary from 0.075 percent to 0.65 percent, based on the kind of business and the amount of the business’s gross receipts. The controller’s office estimates that this additional tax would increase city tax revenue by $5 million to $12 million annually beginning in 2021.
The first $500,000 in gross receipts from cannabis business activities would be exempt from the tax, as would the retail sale of medical cannabis. Businesses that are exempt from San Francisco’s current gross receipts tax (including certain nonprofits, banks and insurance companies) would also be exempt.
The Board of Supervisors could, by a two-thirds majority, vote to increase any of the tax rates at any time, though the total rate could not exceed 7 percent and the increase could not exceed 1 percent in any given year. The Board of Supervisors could also decrease any of the tax rates by majority vote.
This measure is a general tax, and proceeds would be deposited in the city’s General Fund.
The second part of the measure, separate from the cannabis tax, proposes to amend the Business and Tax Regulations Code to expand which businesses pay a gross receipts tax. In addition to current requirements that subject a business to the gross receipts tax for “engaging in business within the city,” the measure would also include businesses located elsewhere, as long as they have gross receipts in the city over $500,000. Beginning in 2019, this amendment would permit San Francisco to tax businesses that operate over the internet and don’t have a physical presence in the city, such as Etsy, Wayfair and Overstock. The controller’s office estimates that this part of the measure would raise $2 million to $4 million annually in the short term, with the potential for significant additional tax revenue in the future.
In November 2016, California voters passed Prop. 64, which legalized the recreational use of marijuana.2 In the last year, San Francisco has been working to establish a regulatory system for the cannabis industry, encouraging legal and illegal cannabis businesses to register and apply for permits to operate. The measure’s proponents argue that now is the time to create a system for taxation and that the industry’s growth thus far indicates that businesses can shoulder the additional tax, particularly with enough lead time to prepare.3 Many neighboring jurisdictions already tax cannabis businesses: Oakland has a 10 percent tax on recreational cannabis, Berkeley has a 5 percent tax on recreational cannabis and Sonoma County has a 3 percent tax on cannabis manufacturing and a 2 percent tax on dispensaries.
The measure has gone through several rounds of negotiations, which pushed out the start date, decreased the tax rates and narrowed the scope of applicable business activities. Despite these changes, members of the cannabis industry remain opposed to the tax.
While this measure is a general tax and revenues would be deposited into the General Fund, its author intends it to fund support for the cannabis industry, including the city’s Cannabis Equity Program, workforce development support, public education campaigns, enforcement and more. The author plans to develop a Board of Supervisors resolution stating the above intention, similar to what was done with the sugary beverage tax passed in 2016.
Regarding the second part of this measure, in June 2018 the U.S. Supreme Court ruled in South Dakota v. Wayfair that a business’s physical presence is no longer a requirement in collecting state sales taxes. Those in support of the ruling say it paves the way for changes to state and municipal taxation that better reflect the modern economy and level the playing field between e-commerce and local businesses. It remains to be seen how states and cities like San Francisco interpret this new decision for the purposes of collecting business taxes — and how the taxes hold up in court.
This measure was placed on the ballot by a vote of 8 to 3 at the Board of Supervisors. As a general tax, it requires a simple majority (50 percent plus one vote) to pass.
• If enacted as intended, Prop. D would dedicate tax revenue toward programs that support the growth and normalization of the cannabis industry, including workforce development and the city’s Cannabis Equity Program, created to ensure that cannabis legalization and cannabis business activities benefit those who were most impacted by the War on Drugs.
• In distinguishing between retail and nonretail activities, this measure seeks to protect jobs in cultivation and manufacturing (many of them middle-wage) and maintain a healthy local cannabis industry.
• The cannabis tax could be amended by ordinance at the Board of Supervisors, providing legislative flexibility to revise the rates up or down as the industry grows and changes.
• The tax is structured to take effect in 2021 — after the city is expected to revise its gross receipts tax rates across industries.
• The taxation of e-commerce companies without a physical presence in San Francisco would level the playing field for local brick-and-mortar businesses.
• This measure is one of several piecemeal efforts to increase tax revenue for specific issues or to tax specific business sectors. San Francisco instead needs a more comprehensive effort to update and reform the gross receipts tax, one that adjusts rates across industries to complete the phasing out of the payroll tax and, ideally, one that takes all of the city’s funding needs into account comprehensively.
• This measure would both lower the threshold at which retail cannabis businesses would be subject to taxation and significantly increase their gross receipts tax rate — which could push them back into the black market.
As a new industry and a long-stigmatized substance, cannabis is in need of support and normalization in San Francisco. The first part of this measure intends to put revenues toward worthy programs to grow cannabis businesses, and the second part could help local businesses of all kinds better compete. There is merit to establishing a tax regime for cannabis early but structuring it with flexibility to allow businesses to adjust over time; the tax has been constructed thoughtfully and is being shared as a model with other jurisdictions in California.
On the other hand, taxing a fledgling industry at too high a rate and too soon could send businesses back to the black market. Cannabis retailers in particular face a high cost of doing business in San Francisco, which already includes an 8.5 percent local sales tax and a 15 percent state excise tax. The city could wait and gather data on the industry as it grows before imposing additional taxes. Moreover, San Francisco needs to adjust its gross receipts rates comprehensively across industries and fully phase out the payroll tax. SPUR’s board was divided on these points and was not able to reach enough votes to recommend either a “yes” vote or a “no” vote on this measure.
1 For the purposes of this measure, “cannabis” does not include industrial hemp products such as cannabidiol (CBD) products.
2 Marijuana remains banned at the federal level.
3 A July 11, 2018, memo from the controller’s office to Supervisor Malia Cohen reported a 25 percent growth in revenue for retail sales of cannabis in the last year.