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San Rafael has cut its tax on cannabis delivery operators to 1% as a looming state tax hike threatens to upend the industry.
The cut aims to modestly offset Assembly Bill 195, which eliminated the state’s cultivation tax but could allow for an excise tax increase from 15% to as much as 19% beginning in July. The bill became law in 2022.
That same year, San Rafael slashed its tax on cannabis delivery services from 4% to 2% for two years. The move sought to provide some relief to businesses struggling with pandemic stress, weighty regulations and the impending blow of AB 195. That 2% rate collects about $200,000 in annual revenue for the city.
Last month, city staff recommended continuing the 2% rate for another two years, but the City Council said it needed to do more.
Councilmember Rachel Kertz said the city’s all-funds projected revenue is $196 million for fiscal year 2024-25. The cannabis tax provides only a sliver of that, and Kertz said she’s not sure taxing these businesses that are “trying to stay alive” is really helping the city.
“These businesses are trying to operate in a white market that is fully driven by a black market,” Kertz said, advocating for the 1% rate, and an elimination of the tax if possible.
Greg Minor, the city’s assistant director of community and economic development, said Measure G, approved by voters in 2018, gives the council authority to adjust the tax rate every two years, but it is capped at 8%.
“Measure G stated that the special cannabis tax revenues would go towards maintaining and enhancing the city of San Rafael’s services,” Minor said.
Since 2018, the city has allowed cannabis testing labs, manufacturing, non-storefront delivery and distribution businesses to operate in the city with municipal and state licenses.
In San Rafael, cannabis manufacturers are charged the special business tax at a rate of 3% of gross receipts. Testing labs and distribution operators are charged at 1%.
The city’s cannabis program allows for up to eight delivery businesses. There are four delivery operators with active licenses, according to the city. Delivery services were initially taxed at the 4% rate.
For comparison, city staff said Sonoma County imposes a 3% tax on retail businesses, which includes storefronts and delivery services. The city of Sonoma charges a 4% tax, Santa Rosa and Cotati have a 3% tax and cities such as Santa Cruz and Vallejo have a 7% tax.
San Rafael cannabis industry leaders said that because cannabis is a schedule 1 drug at the federal level, businesses pay federal taxes but get zero deductions. Also, cannabis businesses did not qualify for pandemic relief loans or grants like other businesses.
Cannabis businesses do not have access to traditional banking systems, and people in the industry are paying premiums for rent, insurance and bank accounts.
A city staff report showed that the total gross receipts for the businesses in San Rafael went from about $14 million in 2020 and 2021 to $11.4 million in 2022. That dropped to $10 million in 2023 and $9.5 million for 2024, according to the city’s report.
Minor said that without intervention a higher state tax could devastate the struggling industry. Policymakers and industry leaders are resisting the increase, Minor said.
Assemblymember Matt Haney, a Democrat in San Francisco, is leading the charge with Assembly Bill 564. The bill, introduced on Feb. 12, would repeal a requirement for the California Department of Tax and Fee Administration to adjust the excise tax rate as outlined in the 2022 law.
Even so, San Rafael business owners pleaded with the city to reduce the local tax.
Monica Gray, chief operating officer of Nice Guys Delivery, one of the licensed cannabis services, asked the city to reduce the tax to zero. Gray said other businesses have closed their doors under financial pressure.
“This is not an ask that I make lightly, nor is it one born out of convenience or comfort,” Gray said. “It is born out of necessity and a plea for survival.”
City Council members said at their meeting on Feb. 18 that they would do what they can to press the state legislators to take a more reasonable approach to taxation on the industry. In the meantime, the council agreed on the lower 1% rate.
“I think this is the right move to send the right message,” Councilmember Eli Hill said. “I think this is a very narrow intervention for a very specific reason that the state and federal policy is not consistent with where things should be for the legal industry of cannabis retail here in San Rafael.”
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