San Diego County Cannabis Business Tax

Cannabis Business Taxes in San Diego County

Prior to the passage of Proposition 215, cannabis was illegal to sell, possess, grow, or use in any capacity in California. From 1996 to 2016, a variety of legislation was enacted within California to further establish the structure of the medicinal cannabis industry and reduce the criminal liability associated with the possession of cannabis.

In September of 2015, a package of bills called the Medical Marijuana Regulation and Safety Act (MMRSA) was passed, establishing a new regulatory framework for medicinal cannabis that included a licensing and oversight structure. The MMRSA was later renamed to the Medical Cannabis Regulation and Safety Act (MCRSA). The MCRSA entirely changed the manner in which medicinal cannabis was sold, permitting for-profit cannabis businesses to sell their crops after obtaining a license to do so from the state.

On November 8, 2016, the Control, Regulate, and Tax Adult Use of Marijuana Act (AUMA), Proposition 64, was passed by a healthy majority of voters. As a result, California became the sixth state to legalize adult-use (recreational) cannabis. Proposition 64 created a state regulatory, licensing, and taxation structure for adult-use cannabis, and permitted local governments to create their own regulatory, licensing, and taxation structure for cannabis in addition to those imposed by the State. It also permitted local governments to prohibit cannabis commercial activities, but not the growth, use, or transport of cannabis.

In response to the passage of Proposition 64, California legislators passed Senate Bill 94, which integrated MCRSA and AUMA into the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA), and created a single regulatory system to govern both the medicinal and recreational cannabis industry. In January 2018, California began issuing licenses for recreational and medicinal cannabis activities under MAUCRSA.

As of July 2022, the cities of San Diego, Chula Vista, La Mesa, Oceanside, Vista, and Lemon Grove had adopted measures to both legalize cannabis business activities and impose a tax on cannabis businesses. Similar to the other twelve incorporated cities, the County of San Diego has not imposed a cannabis business tax for its unincorporated areas, or for the County at large. The cannabis business tax measures of the six incorporated cities that have passed them all differ in their structure. The following table outlines each City’s cannabis business tax structure:

Municipality	Tax Structure
Chula Vista	A tax of $25 per square foot of canopy on cannabis cultivators and 7% of gross receipts on all other cannabis businesses, Tax rates are identical for medicinal and recreational cannabis.
La Mesa	For both recreational and medicinal cannabis businesses, a tax of 1% of gross receipts for testing laboratories, 2% of gross receipts for distribution businesses, $7 per square foot of canopy on cannabis cultivators, and $1 per square foot of canopy space for nurseries. For medicinal cannabis businesses, no tax on retail sales, but a tax of 2.5% of gross receipts for manufacturing, processing, and microbusinesses. For recreational cannabis businesses, a tax of 4% of gross receipts for retail sales, and 2.5% of gross receipts for manufacturing, processing, and microbusinesses.
Lemon Grove	A tax of 5% of gross receipts for retail sales, 4% of gross receipts for cultivation, 2% of gross receipts for testing laboratories, 3% of gross receipts for distributors, and 4% of gross receipts for manufacturers and processors. Medicinal cannabis is excluded from the tax of gross receipts for retail sales.
Oceanside	A tax of 5% of gross receipts for retail sales, 1.5% of gross receipts for cultivation, 2% of gross receipts for distributors, 2% of gross receipts for nurseries, and 2.5% of gross receipts for manufacturers.
San Diego	A tax of 8% of gross receipts for retail sales, and 2% of gross receipts for cultivation, manufacturing, distribution, and storage businesses. Businesses can exclude gross receipts from medical cannabis sales.
Vista	A tax of 4% of gross receipts for manufacturers, 2% of gross receipts for distributors, 1% of gross receipts for testing laboratories, and 7% of gross receipts for retail. Tax rates are the same for medicinal and recreational cannabis businesses. Cultivation is currently not permitted, but it is legislated to be taxed at $14 per square foot of canopy area.

Encinitas Cannabis Business Tax

Appearing on the November 8, 2022 ballot for Encinitas voters is the City’s proposed “Cannabis Business Tax Measure.” If approved, the Measure will authorize the City to place three separate ranges of tax rates on cannabis businesses. First, a gross receipts tax between 4% to 7% for retail cannabis businesses, such as dispensaries. Second, a gross receipts tax between 1% to 4% on non-retail cannabis businesses, such as testing laboratories and distributors. Third, a commercial cannabis or industrial hemp cultivation tax between $2 to $10 per square footage of canopy area. The proposed Measure is estimated to bring the City between $800,000 and $1.4 million dollars for its General Fund annually.

The proposed measure aligns with other cannabis business taxes imposed throughout San Diego County, and the revenue it would bring into the City would be used to target the potential negative externalities that the presence of cannabis businesses may bring to the City, such as increased law enforcement expenditure and youth exposure to marijuana. However, the City has not provided specific targets for how it aims to target those negative externalities.

Based on this information, the fact that the City of Encinitas has repeatedly demonstrated its managerial acumen, and because cannabis businesses are likely to have impacts on the City that revenue from the Measure will be used to fund, the the San Diego County Taxpayers Association has taken a position of support on the measure. Our analysis can be found here (insert hyperlink once paper published on SDCTA website).

Proponents of the measure include:

• Mayor Catherine S. Blakespear
• Council Member Kellie Hinze
• Council Member Tony Kranz
• Deputy Mayor Joe Mosca
• Council Member Joy Lyndes
• HdL Companies
• Barbara Gordon
• Mark Wilcox
• Trina Priest

Proponent Argument

“On November 3, 2020, the voters of Encinitas passed an initiative known as Measure H, effectively allowing cannabis retail sales, cultivation, manufacturing, distribution, and related cannabis uses in Encinitas. All of these activities were previously prohibited within the City. The City Council subsequently adopted certain regulations and restrictions necessary to implement Measure H and established a permitting process for potential cannabis businesses. Measure H requires that the City license a minimum of four retail businesses, which can be increased at City Council’s discretion. Other cannabis business licenses are not limited in number. The City does not currently have a structure in place to tax cannabis businesses in a manner sufficient to offset their impacts on the quality of life in the City, including impacts on the safety of neighborhoods, law enforcement, fire protection, emergency medical services, traffic, parking, and other vital community services. Voting YES for this Measure will allow the City of Encinitas to impose a business tax on cannabis businesses operating within the City. This Measure creates a tax applicable to potential cannabis businesses and will offset the inevitable costs and other impacts they will have on our City. This Measure is fiscally responsible, timely and prudent. All taxes generated by this Measure will stay here in Encinitas and pay for important City services. This Measure will establish a new source of funding that benefits the entire community. The funds generated by this tax will also assist the City in shutting down cannabis activities operating illegally in Encinitas. Vote YES to help our City thrive by ensuring that the City has the resources to properly regulate the cannabis industry without hurting our investment in core city services, such as neighborhood infrastructure and emergency services.”

opponents

• Rob Berkowitz, J.D.
• David Newman
• Caliva

Opponent Arguments

Cannabis businesses in California are already struggling, and adding additional taxes on businesses will inevitably result in added costs being pushed onto consumers and bolstered demand for the black market products. A tax assessed on the square footage of canopy area does not provide cultivators protection from crop failure, diseases, or poor weather.