Sonoma Community Workshop #2: Commercial Cannabis Industry Overview

1. Sonoma Community Workshop #2: Commercial Cannabis Industry Overview April 11 6:30-9:00 PM Sonoma Community Center, Andrews Hall Consultants Jeff Kolin, Senior Advisor Robert Hamud, Client Service Manager

2. Sonoma Agenda: Program and goals for the workshop • Develop an understanding of: • Revenue sources, opportunities, fee structures • Administrative / implementation issues • Challenges for public safety and law enforcement • Finance / audits / Cash • City oversight / staffing / administration • Risk factors to revenue and successful implementation • Land use regulations • Hear from Panelists

3. Sonoma Speaker Panel Tim Ricard, Cannabis Program Manager Sonoma County Economic Development Board Countywide Cannabis Economics and current permit applications in Sonoma Valley Amy Jenkins, Advisor, Platinum Advisors, Sacramento – Statewide Industry Trends, Sacramento legislation and regulations impacting the industry, what’s happening in other jurisdictions of interest Sergeant Jeff Toney, City of Sonoma, Sonoma County Sheriff Public Safety and Law Enforcement Concerns – Cannabis Related Crime

4. Sonoma State and Local Taxes and Fees City Excise Taxes (Can apply to medicinal and/or adult use) State Cannabis Excise Taxes (Applies to medicinal and adult use) Retail Tax Cultivation Tax Cultivation/Retail/ Manufacturing/ Broker, Testing 15% Gross Receipts of Retail Sales XX% of Gross Receipts $XX per Square Footage $XX per Quantity City Administrative Fees (Can apply to medicinal and adult use) $9.25/oz. Flowers $2.75/oz. Leaves $1.29/oz. Fresh $XX Application Fee $XX License Fee $XX Renewal Fee $XX Administration Fee (Cost Recovery)

5. Sonoma Common Tax Structures Gross Receipts Percentage of Gross Receipts Audits are needed to verify cash sales Impacted by price fluctuations Can be applied to all commercial cannabis businesses Common for retailers and wholesalers Provides information on business activities Square Footage Can be applied to all commercial cannabis businesses Not impacted by price fluctuations Less complex Will not represent volume of business activities Common for cultivation and manufactures Easy to estimate future revenues

6. Sonoma Tax Revenue Considerations Impact on tax revenue Number of consumers and consumption patterns Number, type and size of authorized commercial cannabis businesses Attractiveness of retailer to both resident and non-resident customers Non-retail ability to serve businesses located outside city Competition from licensed and black market Price of flower Development agreement Negotiated based on size of facility proposed, projected revenues and tax rates anticipated. Contract between local jurisdiction and property owner Provides certainty to developer that project isolated from changes in zoning Developer in turn agrees to provide benefits to municipality In lieu of tax measure

7. Sonoma Area Tax Rates

8. Sonoma Area Retail License Authorization and Issuance

9. Sonoma Trends • Some dispensaries that were medicinal only pre-MAUCRSA are making the transition to dual (Med and Adult Use) or Adult Use only. • Many former customers who accessed the market through the medicinal program in CA in fact more closely resembled Adult Use customers. Many will move from Medicinal for convenience (no card needed) and other reasons. • Businesses are concerned that CA taxes, • the highest in the nation, will be too • onerous especially for small businesses • to survive. High cumulative state and • local taxes may invite more black market • competition than constituents and • permit paying entrepreneurs will tolerate. • Other states and localities have trimmed, or ”right-sized”, tax burdens to reflect this anti-non-licensed operations priority.

10. Sonoma Industry Sales Information MPG provides that a cultivation and manufacturing businesses would expect to have annual revenues of between $2-15 million.  Berkeley estimates annual revenue of $5 million per licensee. 2018 Statewide Sales estimates

11. Sonoma Sales and tax revenue estimates AVERAGE annual revenues for cultivation and manufacturing From three years of Washington state WSLCB store level sales data (MuniServices) Retailer ~$1.8 million per license per year 5% tax rate would generate $90,000 per year per retailer 10% tax rate would generate $180,000 per year per retailer Manufacturer (Processor) ~$790,000 per license per year 5% tax rate would generate $40,000 per year per manufacturer 10% tax rate would generate $80,000 per year per manufacturer Cost of living (COL) adjustment – Large city COL Seattle, WA/Los Angeles, CA and Mid-size Takoma, WA/Bakersfield, CA have very similar COL. Though higher population density in California may make average dispensary gross sales higher.

12. Sonoma California Sales and Use Tax Defined Base rate for sales and use tax = 7.25% Includes Bradley Burns Local Tax of 1.25% (1.00% to City or County Operations, 0.25% to County Transportation Funds). Total tax rates may be higher than 7.25% depending on District Taxes and not all impose District Taxes. General Application State and Local Sales and Use tax applies to retail sales of recreational cannabis. Currently, retail sales of medical cannabis exempt from State and Local Sales and Use Tax if medical identification card presented - otherwise subject to the State and Local Sales and Use Tax. Business to businesses sale of cannabis product are exempt from the State and Local Sales and Use Tax as a sale for resale. Place of Sale Bradley Burns Local Tax (1% to Sonoma) Generally place of sale is primary business location. For cannabis retail, tax would be allocated to local jurisdiction of storefront or location from which sale initiated. Would also be case for delivery sales, even though product is delivered to location outside local jurisdiction. Transaction (District) Tax (0.5% to Sonoma) Generally place of sales is primary business location where cannabis product is transferred to customer. For cannabis retail, with storefront sales, tax would be allocated to local jurisdiction, of storefront, if it imposes a District Tax. For delivery, operator considered to be engaged in business in the jurisdiction in which it makes the delivery. District Tax would apply to local jurisdiction.

13. Sonoma Business Regulatory Fee Structure Must be used to recover the reasonable costs for issuing licenses and permits, performing investigation, inspections, audits to enforce the regulations. Application fees can be tiered or phased to allow participation by different levels of operators. Annual fees can tailored to each type of business operation.

14. Sonoma Industry Sales Information Marijuana Policy Group (MPG) provides that annual average sales per square foot for a cannabis dispensary/retail business range from $800.00 to $1,000.00 per sq. ft. (Average = $900.00/sq. ft.) Annual tax revenue scenarios

15. Sonoma Administrative Components

16. Sonoma Banking • Banking currently characterized by stopgap measures until Federal government reclassifies cannabis and opens access to federal system • Solutions: • Bank or credit union - “don’t ask don’t tell”, compliance often expensive. • Armored car - safe, reduces counting, but expensive • Smart safes / kiosk – on premise, requires co-mingling • Money service business – money order, low ceiling on transaction • Third party payment system – similar to PayPal, closed system • Considerations: • Protect the safety of cannabis business and government employees • Easily accessible? • Handle large dollar volumes and multiple accounts easily • Minimize risk of loss of revenue-receiving agencies • Permit agencies to deposit funds in financial institutions

17. Sonoma Planning for Large Cash Payments to Local Government Security Appropriate staff coverage Limited access to cash and facilities Video and camera placement Facility evaluation Documentation and verification Separation of Duties Staff health and safety concerns Specific safety supplies Adequate ventilation Limited exposure to cash Cleaning supplies

18. Sonoma Detection • THC stores in fatty cells – detectable for 30 days in frequent user • Makes DUI, stoned driving, for cannabis difficult • No “per se” limit like BAC • Vaping is nearly odorless and difficult to detect in public setting. • School bathroom • Public walkways • Edibles longer more consistent effects but users cautioned to wait for effects to set in: “Start low and go slow” • Smoking faster THC/CBD uptake but diminishes more quickly • Health damage from particulate matter in smoke

19. Sonoma Cannabis Impaired “Stoned” Driving • Stoned driving: Similar to 0.02% BAC. Double risk driving sober, or darkness vs daylight • Drunk driving: BAC 0.08% – 0.10%): 6 to 11 or more times risk driving sober • 2017 all of the drivers who survived and tested positive for marijuana use had the drug at levels that indicated use within a few hours of being tested (Colorado DOT/ NHTSA) • Citations for THC DUI dropped by 33% from 2016 to 2017 in CO. • There is no reliable “per se” measurement (i.e. BAC) for cannabis. Lingering TCH in body and differing tolerance make impairment call difficult. • Other drug and alcohol outcomes: • Medicinal cannabis laws associated with significantly lower opioid overdose mortality. Patients seem to be using these as substitutes. • Anderson, 2013 ->Legal recreational marijuana associated with a reduction in alcohol-related traffic deaths.

20. Sonoma City resources needed for City Administration and Oversight Planning and Permitting Inspections Building and safety Fire and hazmat Public health Tax and Compliance Audits Prevention Programs Education Programs Public Relations/Media Data Collection and Interpretation Evaluate the existing workload for City Staff Know what resources will be required to develop and administer and enforce a cannabis program. Low cost self-reporting can be used • Pros • Less use of admin services • Less business coordination and oversight • Less dispensary decoy operations • Less cost and effort training inspectors • Cons • Greater tax avoidance/evasion • More youth sales, shoulder tap purchases • More health, safety, environmental and labor violations

21. Sonoma Do you have the team you will need? Sonoma • Planning • Code enforcement • Finance • Police • Fire • Economic Development • City Attorney • Public Health • Public Utilities • With this team in place, the city gets most upstanding and best business partnerships possible. • Minimize criminal element NOTE: A reliable operator, could transition to self reporting model with reduced requirements for city staff or consultant resources

22. Sonoma Buffer Zone Requirements and Local Options Minimum State Buffer Zone Requirement Requirement: Minimum 600-foot radius between the facility and a school with a kindergarten or any of grades 1-12. Applies To: Medicinal cannabis cooperative, collective, dispensary, operator, establishment, or provider having a storefront or mobile retail outlet. Local Buffer Zone/Separation Options • Dare Care Providers. • Youth Serving Facilities—Library? • Residential Zoning Districts. • Minimum Separation from a Residence. • Minimum Separation from Other Dispensaries or Smoke Shops. • Other Uses Deemed Sensitive by the Local Jurisdiction (e.g., rehab facilities).

23. Sonoma Youth Serving Facility Definition • Siting location – zoning / distance requirements • State Law -- 600 feet from school (K-12), day care center or youth center. • Youth center – public or private facility primarily used to host recreational or social activities for minors, including, private youth membership organizations or clubs, social service teenage club facilities, video arcades, or similar amusement park facilities • City Council determines what a “youth center” is. • Can do lesser or greater distance and define “day care center or youth center”

24. Sonoma Other Local Land Use Options Zoning • Allow in Commercial and Mixed Use Zones; or, • Allow in Commercial Zones Only. • Allow or Prohibit in Plaza? Permit Types and Limitations • Use Permit or Dispensary License? • Numerical Limit on Dispensaries? If so, what is selection process? • Limits on Hours of Operation and Other Operating Restrictions.

25. Sonoma Dispensary Distance Requirements in Other North Bay Communities Cotati Buffer zone 500 feet Notes: Only located in commercial zoning districts. Cannot be in the downtown commercial CD zoning district. 500 feet (straight line from boundary) from youth oriented facility, school, or smoke shop - cannot be in a residential area. Highly visible entrance from East Cotati Ave, Gravenstein Hwy, or Redwood Dr. Napa Buffer zone 1,000 feet Notes: 1,000 feet of any youth-oriented property. City Council has requested Napa ease this buffer, or adjusting measure not as ”the crow flies” but shortest possible path over streets. May not be abutting or across the street from, a residential zoning district; with exception of medicinal cannabis retailer on property directly abutting back yard of residential zoning district. Santa Rosa Buffer zone 600 feet Notes: 600 feet of any other Cannabis Retail use or from any K-12 “school” Sebastopol Buffer zone 500 feet Notes: In commercial or industrial area - not in residential or mobile home land use – unless intervening nonresidential use appropriately separated from residence. Visible location with good views of dispensary entrance. Not within 500 feet of a youth oriented facility, a school, a park (except for Laguna Wetlands Preserve) and the town plaza.

26. Sonoma State-Mandated School Buffer Zone

27. Sonoma Local Buffer Zone Options

28. Sonoma Sonoma Valley Site Freemont Drive

29. Sonoma Panelists Tim Ricard, Cannabis Program Manager Sonoma County Economic Development Board Countywide Cannabis Economics and current permit applications in Sonoma Valley Amy Jenkins, Advisor, Platinum Advisors, Sacramento – Statewide Industry Trends, Sacramento legislation and regulations impacting the industry, what’s happening in other jurisdictions of interest Sergeant Jeff Toney, City of Sonoma, Sonoma County Sheriff Public Safety and Law Enforcement Concerns – Cannabis Related Crime

30. Sonoma Next Steps in Town Hall Questions Map Exercise Public Comment Closing Solicit Feedback – avoid policy and regulatory decisions without constituent and business community input Plan to make changes in your ordinances and regulations based on your experiences City Council discussion in May

31. Sonoma Thank You