Cathedral City offers some tax breaks for cannabis cultivators. Some say it's not enough

·4 min read

Cannabis businesses in Cathedral City have been pleading with the city to lower their taxes, arguing that the high costs make it difficult to operate in a struggling market.

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

Cannabis makes up a decent chunk of Cathedral City's revenue: Cannabis businesses paid the city around $4.97 million in taxes last year. These taxes include a 10% retail tax on gross proceeds, a cultivation tax of $15 per square foot of a facility 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 Wednesday will only affect cannabis cultivators.

In a 5-0 vote, the council approved exempting rooms that don’t regularly have cannabis in them, like bathrooms or employee lounges, from being counted in the square footage on which the cultivation tax is based. This will be effective upon a business' license renewal, when they submit updated floor plans, City Manager Charlie McClendon said.

Councilmembers also approved exempting cannabis cultivation businesses from taxes if they haven’t opened or are temporarily closed.

Businesses that haven’t opened won’t be charged taxes for 90 days after they receive their certificate of occupancy. They were previously charged upon receiving it, McClendon said.

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

Temporarily closed cannabis businesses won’t be charged taxes for up to 90 days after notifying the city that they are suspending operations for a minimum of 90 days. This exemption is only allowed once per license.

“I think this is a positive and forward move for the cultivators in Cathedral City,” Councilmember Mark Carnevale said.

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The state also made recent changes to its cultivation tax.

California will eliminate its weight-based cultivation tax on harvested cannabis starting in 2023, McClendon said. The state's retail tax of 15% will remain in place for three years, but can be raised afterward.

"It can float up every two years and the idea is to recover what they gave up by eliminating the cultivation tax through the retail tax," McClendon said. "But that can't happen for the first time until July of 2025."

Businesses advocate for lower overall taxes

Despite Wednesday's changes, cannabis businesses have primarily focused on lowering the city's 10% cannabis retail tax. Palm Springs, Palm Desert and Desert Hot Springs also have a 10% cannabis retail tax, while Coachella's retail tax is 6%.

But the council majority has not been supportive of lowering the retail tax due to concerns over losing revenue. Cathedral City could lose around $150,000 in tax revenue per every 1 percentage point reduction of the retail tax, according to a city staff report.

Rich Eaton, owner of Vault Dispensary, said he has proposed a six-month trial of either no or reduced retail tax to the city at least three times. The council has not supported this proposal.

He claimed that there are several stores in Cathedral City on the brink of closing down. Eaton said with the city's levies, he pays more in taxes than he retains as profit.

"This thing they did Wednesday is not even a finger in the dam," Eaton said.

Removing certain rooms from being counted in the city's cultivation tax will also cost the city revenue. McClendon said it will cost around $79,000 annually.

Kenneth Churchill, CEO of West Coast Cannabis Club, has a dispensary in Cathedral City and a cultivation facility in Palm Desert. He said how Cathedral City defines its canopy space, which is 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, such as packaging rooms.

"That's not normal," he said. "In Palm Desert, for instance, I have a 40,000 square foot building and I only pay canopy tax on the 2,500 feet that I'm actually growing the plant."

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

Cannabis businesses shouldn't be taxed on office space where nothing is grown to sell, she said.

"So now we're going to 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 suffered financially during the pandemic.

He described the new exemptions as common sense.

"If you know the cannabis business, the first four months you produce no income when you plant and being taxed on a space that you're not utilizing to produce income. ... I think both of the (exemptions make) great sense."

Ani Gasparyan covers the western Coachella Valley cities of Desert Hot Springs and Cathedral City. Reach her at ani.gasparyan@desertsun.com.

This article originally appeared on Palm Springs Desert Sun: Cathedral City approves small tax breaks for cannabis cultivators