Regulating Cannabis After Senate Bill 94 City of

Overview • Brief discussion of the federal prohibition and federal jurisdiction • Stories of legalization from Colorado • Brief review of current law in Avalon • How can the City regulate commercial cannabis uses under Senate Bill 94? § Permitting and/or Land Use Ordinance • Cannabis delivery services • Cannabis Cultivation § Taxation and Revenue • Next steps 3

FEDERAL LAW CONCERNS

FEDERAL PROHIBITION • Under federal law, cannabis is categorized as a controlled substance under Schedule 1 of the Controlled Substance Act. • Therefore, the cultivation, manufacture, possession, and transport of cannabis remains illegal under federal law.

FEDERAL JURISDICTION • For many other cities in California, they are able to avoid conflicts with federal jurisdiction by staying entirely within State boundaries. • The City of Avalon faces an interesting conflict because it is located on an island surrounded by federal waters.

FEDERAL AND STATE BOUNDARIES • Federal law – California’s territorial boundaries extend 3 nautical miles from the coast, and includes a 3 -mile wide band around any islands laying off the coast, but excludes waters between the islands and the coast. • State law – California’s territorial boundaries extend 3 nautical miles beyond the outmost islands, and includes all waters between the islands and the coast.

FEDERAL AND STATE BOUNDARIES • The distance between Catalina Island the mainland coast is approximately 30 miles. Under the federal definition, there would be a band of water approximately 24 miles wide (with a 3 mile buffer from the coast and a 3 mile buffer from the island) that would not be included in California’s territorial boundary.

Pacific Ocean Long Beach Avalon

COMPARISON CASE LEGALIZATION OF RECREATIONAL CANNABIS IN COLORADO

COLORADO - Overview • Colorado legalized recreational use of cannabis in January 2014. • Colorado is often held out as a state that is ahead of the curve and used to forecast trends elsewhere because it legalized recreational use before many other states were able to. • Since legalization, there have been mixed reviews about the results.

COLORADO – Drugged Driving • Increase in users driving under the influence § In 2016, more than 17% of all DUI arrests involved cannabis. § According to a 2016 survey conducted by the Colorado Dept. of Transportation, 55% of cannabis users said they believed it was safe to drive under the influence of cannabis. • Increase in costs of enforcement

COLORADO – Drugged Driving

COLORADO – REVENUE • In a report dated July 19, 2017 citing Colorado’s Department of Revenue statistics, Colorado has exceeded $500 million in cannabis revenue since legalization.

COLORADO – REVENUE

CURRENT LAW IN AVALON

Current Law in Avalon • Medical cannabis dispensaries are prohibited. Avalon Municipal Code, § 5 -20. 02. • Mobile medical cannabis dispensaries are prohibited. Avalon Municipal Code, § 5 -20. 03. • Medical cannabis delivery services are prohibited. Avalon Municipal Code, § 5 -20. 04. • Cannabis cultivation is prohibited. Avalon Municipal Code, § 5 -20. 07. 19

OPTIONS FOR REGULATION

SENATE BILL 94 • Prior to SB 94, there were two separate regulatory schemes: the Medical Cannabis Regulation and Safety Act (MCRSA) and the Adult Use of Marijuana Act (AUMA). • In June 2017, Gov. Jerry Brown signed SB 94 into law, creating a single regulatory scheme that addresses both medical cannabis and recreational cannabis known as the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA).

Regulation of Commercial Cannabis Uses • Cities can: § Ban all commercial cannabis activity, including commercial delivery, commercial cultivation, commercial manufacturing, commercial testing, and commercial dispensaries or recreational retailers § Allow commercial cultivation with a local tax imposed on growth § Allow retailers with zoning limitations on location or number, or a local tax on retail sales

Community Research and Outreach • Determine • Local Health and Safety Priorities • Taxation Rate • Engage stakeholders • Law Enforcement, Finance, Planning, school leaders, church leaders, community leaders, advocates, business leaders, etc. • Community-wide Survey • Mail Survey • Phone Survey

Health and Safety Regulations • Ordinance Structure: • Purpose and Intent • Definitions • Permits • Operating Requirements • Penalties • Severability

SELECTION PROCESS • The City has some discretion in the selection process, but it cannot have an arbitrary selection process. • Priority Status § Oakland prioritizes residents, requiring that applicants have residency in the city for no less than two years and maintain no less than a 50% interest in the business. Oakland Municipal Code, § 5. 80. 045. • Point System § Berkeley, Long Beach, Richmond, and some other cities use a point system to prioritize some applicants over others. For example, points may be provided for site suitability, sustainability of operations, experience, or any other factors.

ORDINANCE PERMITTING CANNABIS DELIVERY SERVICES

DELIVERY SERVICES • As discussed earlier, there are restrictions on the transportation of cannabis from the mainland to the island. • Therefore, any cannabis-related businesses must be contained on the island itself. • With that said, if the cultivation and manufacture of cannabis is contained on the island itself, the City could also permit the operation of delivery services.

ORDINANCE PERMITTING CANNABIS CULTIVATION

4 Aspects of Implementing Commercial Cannabis Regulations 1. 2. 3. 4. Community Research and Outreach, and Planning Health and Safety - Ordinance Taxation and Revenue – Ballot Measure Monitoring and Compliance – defined by Ordinance

Permitting Commercial Cultivation • One option for regulating commercial cultivation would be to create a permitting scheme. • This option does not authorize cultivation in any particular zone; rather, regulatory permits must be issued in conjunction with a land use permit. 30

Permitting Commercial Cultivation • Ministerial § Staff-level approval § Check the boxes, get a permit § No CEQA review § Not subject to appeal • Discretionary § Planning Commission approval § Conditions can be imposed case-by-case § CEQA Review § Appeal to City Council 31

Permitting Commercial Cultivation • The City could require applicants to: § Submit to a background check § Submit a comprehensive security plan § Hold all necessary state licenses § Agree to defend and indemnify the City § Maintain a “point of sale” system tracking cannabis § Maintain a community relations contact 32

Permitting Commercial Cultivation • In order to address security concerns, the City may require applicants to submit a security plan. • Security plan, in turn, should include: § Restricted entrances to any areas containing cannabis (locked doors or security personnel) § Security cameras recording all entrances, secured areas, and parking areas § Security alarms § Licensed security guard during operating hours § Plan for performing background checks § Description of all delivery routes 33

Permitting Commercial Cultivation • Regulatory permits are not transferable • A land use regulation, on the other hand, runs with the land • A separate regulatory component enables the City to regulate any new operators • City Council can set limitations on the number of permits 34

LAND USE ORDINANCE

Land Use Ordinance • Serves three purposes: 1. Establishes location for a cultivation business 2. Contains standards for site development 3. Creates a process for project approval 36

Land Use Ordinance • Where may cultivation facilities be located? • Many cities require that cultivation facilities be within industrial zones. 37

Land Use Ordinance • Before passage of Ordinance: § A noticed public hearing before PC; and § A noticed public hearing before City Council. § Any final ordinance must be consistent with Zoning and the General Plan and must comply with CEQA. 38

Land Use Ordinance Water Availability § Cultivators must show they have obtained sufficient water. • The City could draft an ordinance that requires an applicant to submit a plan for utility services • At the outset, the City should determine whether City water will be available for irrigation purposes § Evidence should include: • Will-serve letter from Edison • Agricultural well with adequate capacity • Other water source § Note: the City retains the right to make a separate determination regarding the availability of water under its police power and authority to regulate water conservation. 39

Land Use Ordinance • Like the concerns with water availability, the City should consider the impacts on electricity demands of cultivation facilities.

TAXATION AND REVENUE

Taxation and Revenue • Revenue § Conditional use permit conditions § Business license fee § Permitting fee (must be tied to the cost of issuing the permit) • If a commercial use is allowed, it can be taxed: § Sales tax § Cultivation tax • Taxation of these uses comes with increased costs associated with: § Licensing of businesses § Regulation of various uses § Enforcement of regulations § Tax collection § Auditing

Excise Taxes, Sales & Use Taxes • All taxes are either property taxes or excise taxes § Property tax = tax on ownership of (real or personal) property which is triggered by the mere ownership of property. § Excise tax = tax on the privilege of using, doing something with property. E. g. , business license tax, transient occupancy tax, parcel tax, etc. • State and Local Sales and Use Tax § The sale tax is a tax on the “privilege of selling tangible personal property at retail” (Cal. Rev. & Tax Code, § 6051). § The use tax is imposed on the storage, use or other consumption of tangible personal property purchased from a retailer (Cal. Rev. & Tax Code, § 6201).

SB 94 and Taxation of Cannabis • Adds excise tax of 15% on the privilege of purchasing cannabis at retail. Effective January 1, 2018. • Adds excise tax of $9. 25/dry-weight ounce (flowers) and $2. 75/dry-weight ounce (leaves) on the privilege of cultivating cannabis. Effective January 1, 2018. • SB 94 does not affect local governments’ authority to impose taxes on medical or non-medical cannabis. • Exemptions: § Cannabis cultivated for personal use is exempt from cultivation tax. § Medical cannabis is exempt from State/local sales tax, but NOT other State or local taxes.

Taxes and Fees on Cannabis Under SB 94

Allocation* of State Excise Taxes on Cannabis Under SB 94 *may be altered by majority vote of the Legislature after 2027 A city (or county) that bans cultivation, including outside personal cultivation, or the retail sale of cannabis, is not eligible for some grants.

Local Taxes and Fees on Cannabis • SB 94: the new State excise taxes are “in addition to any other tax imposed by a city, county or city and county” (Cal. Rev. & Tax Code, § 34021). • New, increased, or extended local taxes require voter approval (2/3 vote for special tax; majority vote for general tax). • The most common local excise tax is a business license tax: dispensing, manufacturing, cultivation, and transportation. • Local governments’ sales tax may not differ from Bradley-Burns Uniform Sales and Use Tax Law in either what is taxed or the rate of the tax.

Local Taxes and Fees on Cannabis Taxes vs. Fees • Business License Taxes § Allow revenue to be appropriated for any municipal purpose unless the tax has been approved as a “special tax” for a specific purpose • Business Regulatory Fees § May recover for the reasonable regulatory costs for (1) issuing licenses and permits, (2) performing investigations, inspections, and audits, and (3) enforcing these regulations § Should be scaled appropriately

Local Taxation • The City may impose its own taxes for cultivating, manufacturing, producing, processing, preparing, storing, providing, donating, selling, or distributing cannabis.

Local Taxation • Any tax imposed must be passed by the voters, per Prop. 218 § A special tax must be passed by a 66% vote § A general tax must be passed by a 50% vote § The earliest opportunity to place a measure on the ballot to tax cannabis is November 2018

How Much Taxation? • City of Avalon sales tax 8. 75% + • MAUCRSA 15% gross receipts + • Local gross receipts tax (. 003% and above, depending on tax bracket) + • $9. 25 on flower/$2. 75 on non-flower plant leaf =

Local Taxation • Option 1: § One square footage tax for all cannabis activities related to cultivation, processing, manufacturing, testing, and distribution § One gross receipts tax for any sale of cannabis • Option 2: § Gross receipts tax for any sale of cannabis § Tiered square footage tax with separates for different uses. EXAMPLE: • $__ per square foot of space utilized for outdoor cultivation • $__ per square foot of space utilized for indoor cultivation • $__ per square foot of space utilized in connection with the manufacturing, processing, distribution, and testing of cannabis products 52

NEXT STEPS

Implementation Path 1. Provide direction regarding how to proceed. 2. Draft a health and safety ordinance and get it approved by City Council. 3. If allowed, propose a tax measure, and get it approved by voters. 4. Rigorous monitoring and compliance.

Questions? Marc Tran Marc. Tran@bbklaw. com Best & Krieger 2855 E. Guasti Road Suite 400 Ontario, CA 91761 Tel: (909) 483 -6658 Website: www. bbklaw. com