Costa Mesa City Council will consider lowering tax for marijuana companies

Se7enLeaf, a cannabis manufacturer, was the seventh business approved by the Costa Mesa Planning Commission in spring 2018 under Measure X.
Se7enLeaf, a cannabis manufacturer, was the seventh business approved by the Costa Mesa Planning Commission in spring 2018 under Measure X.
(Courtesy of Se7enLeaf)

Costa Mesa will consider lowering a business tax rate for local marijuana companies in response to claims from people in the industry that the 6% rate is too high.

The city initiated the 6% marijuana business tax on gross receipts in 2016 when voters approved Measure X, which allowed for the permitted researching, testing, processing and manufacturing of medical marijuana products in a “green zone” north of South Coast Drive and west of Harbor Boulevard. The city began collecting the tax in 2018.

The City Council will vote on whether to cut the tax to 2%, a proposal that cannabis industry leaders asked for in a November letter to the city.

But now that number isn’t low enough, said Michael Moussalli, co-founder of the marijuana manufacturing and distributing company Se7enLeaf in Costa Mesa. He signed the Nov. 11 letter to the City Council.

Ever since Long Beach cut a tax on its distributors, cultivators, manufacturers and testing facilities from 6% to 1% in December, Costa Mesa is struggling to compete, he said.

“With 2%, we’re still not competitive with a neighboring city that’s 30 minutes away, it’s a coastal city, closer to Los Angeles. They allow retail where Costa Mesa doesn’t,” Moussalli said, listing the ways Long Beach beats Costa Mesa’s market. “There’s similar factors that make it more attractive.”

Moussalli said he would be joining other industry leaders Tuesday to ask the City Council to reduce the tax to 1%. The reduction still would not put Costa Mesa on a level playing field with Long Beach, he said, since rents are more expensive and retail dispensaries are not allowed in town. Still, he said, it would help existing companies “get over that last little hump.”

After receiving the cannabis industry’s letter, the city formed an ad hoc committee to investigate the industry’s concerns and brainstorm how to bolster an industry that was supposed to fatten the city’s coffers but has so far fallen short.

In its current budget, which covers the period from July 1 to June 30, the city projected $1.143 million in marijuana tax revenue. But as of December, it had banked $217,511.

Part of the reason it failed to bring in as much revenue as hoped is a grueling city permitting and approval process, marijuana manufacturing and distribution company leaders told the Daily Pilot.

Once a business is permitted, it is subjected to a litany of taxes. In addition to the gross receipts tax, marijuana companies must pay state excise and sales taxes, a cultivation tax and state and federal income taxes — a combined 35%, a city staff report estimated.

“There’s a lot,” Moussalli said with a laugh. “It’s a compounding tax problem. And at the end of the day, it just makes it more expensive for the consumer.”

City staff estimated that 20 businesses have received permits but have not yet opened, potentially “due to the financial challenges, including the local, state and federal taxes facing the industry.”

Lowering the tax would encourage competition, the staff report said. However, staff did not go so far as to recommend reducing it to 1% because, the report said, Costa Mesa still maintains “geographical advantages to places with lower tax rates such as Long Beach.”

Tuesday’s council meeting will begin at 6 p.m. at City Hall, 77 Fair Drive.

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