Cathedral City approves small tax breaks for cannabis growers

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Cannabis businesses in Cathedral City have pleaded with the city to cut taxes, arguing that high costs make it difficult to tap into a struggling market.

This week, the city council approved two cannabis tax exemptions, but some industry players aren’t convinced they’re big enough to make a difference.

Cannabis makes up a good chunk of Cathedral City’s revenue: Cannabis companies paid the city about $4.97 million in taxes last year. These taxes include a 10% retail sales tax on the gross product, a cultivation tax of $15 per square foot of installation, and a manufacturing tax of $0.05, $0.10, or $0.40 per gram depending on the type of product.

But the tax exemptions approved on Wednesday will only affect cannabis growers.

In a 5-0 vote, the board approved exempting rooms that do not regularly contain cannabis, such as bathrooms or employee lounges, from being counted in the square footage on which cultivation tax is based. This will come into effect upon renewal of a business’s license, when it submits updated floor plans, City Manager Charlie McClendon said.

Council members also approved the tax exemption of cannabis cultivation businesses if they have not opened or are temporarily closed.

Businesses that have not opened will not be charged taxes for 90 days after receiving their certificate of occupancy. They had already been charged after receiving it, McClendon said.

Business owners have noted that it takes some time after obtaining a certificate of occupancy to generate revenue, he added.

Cannabis businesses that are temporarily closed will not be charged until 90 days after notifying the city that they are suspending operations for at least 90 days. This exemption is only allowed once per license.

“I think this is a positive step for the growers of Cathedral City,” said council member Mark Carnevale.

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The state also made recent changes to its cultivation tax.

California will eliminate its weight-based grow tax on harvested cannabis beginning in 2023, McClendon said. The 15% state retail sales tax will remain in place for three years, but may be increased thereafter.

“It can float every two years and the idea is to recoup what they gave up by eliminating the cultivation tax through the retail sales tax,” McClendon said. “But this cannot happen for the first time before July 2025.”

Companies plead for a global tax cut

Despite Wednesday’s changes, cannabis companies have mostly focused on reducing the city’s 10% cannabis retail sales tax. Palm Springs, Palm Desert, and Desert Hot Springs also have a cannabis retail sales tax of 10%, while Coachella’s retail sales tax is 6%.

But the majority of the council did not back the retail sales tax cut due to concerns about lost revenue. Cathedral City could lose about $150,000 in tax revenue for every 1 percentage point reduction in retail sales tax, according to a city staff report.

Rich Eaton, owner of Vault Dispensary, said he offered a six-month trial with no or reduced retail sales tax to the city at least three times. The council did not support this proposal.

He claimed that there were several stores in Cathedral City about to close. Eaton said that with city levies, he pays more in taxes than he retains as profit.

“What they did on Wednesday isn’t even a finger in the dam,” Eaton said.

Removing some parts of the city’s cultivation tax will also cost city revenue. McClendon said it would cost around $79,000 a year.

Kenneth Churchill, CEO of the West Coast Cannabis Club, has a dispensary in Cathedral City and a grow facility in Palm Desert. He said the way Cathedral City defines its canopy space, where cannabis is grown, is outrageous.

Cathedral City previously included the entire facility in the square footage of its cultivation tax. But even with Wednesday’s vote, Churchill said the city is still taxing rooms it shouldn’t, like packing rooms.

“It’s not normal,” he said. “In Palm Desert, for example, I have a 40,000 square foot building and I only pay canopy tax on the 2,500 feet I actually grow the plant on.”

Jocelyn Kane, vice president of the Coachella Valley Cannabis Alliance Network, said the industry needs a reduction in taxes in general. But she said the new exemptions are a positive change.

Cannabis companies shouldn’t be taxed on office space where nothing is grown to be sold, she said.

“So now we’re moving towards a way of taxing that’s better than it was before,” Kane said.

John Chaisson, owner of Atomic Budz, said cannabis businesses in the Coachella Valley have suffered financially during the pandemic.

He called the new exemptions common sense.

“If you know the cannabis business, the first four months you don’t produce any income when you plant and you’re taxed on space that you don’t use to generate income. … I think both (exemptions) have great meaning.”

Ani Gasparyan covers the western Coachella Valley towns of Desert Hot Springs and Cathedral City. Contact her at [email protected]

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