San Francisco leaders suspend cannabis tax amid concerns of illegal sales

Bay Area

(Photo by Justin Sullivan/Getty Images)

SAN FRANCISCO, Calif. (KRON) — Earlier this week, San Francisco Supervisors unanimously approved legislation to suspend the City’s Cannabis Business Tax through the end of 2022.

The city says its decision to suspend the cannabis tax is its latest attempt to support legal cannabis retailers and curb illegal marijuana sales.

The legislation, spearheaded by District 8 Supervisor Rafael Mandelman, suspends the cannabis tax through Dec. 31, 2022 as legal cannabis retailers say they are having a hard time competing with illegally sold cannabis.

“Cannabis businesses create good jobs for San Franciscans and provide safe, regulated products to their customers,” said Mandelman.

“Sadly, the illegal market is flourishing by undercutting the prices of legal businesses, which is bad for our economy as illegal businesses pay no taxes while subjecting workers to dangerous conditions and consumers to dangerous products.,” Mandelman added.

“Now is not the time to impose a new tax on small businesses that are just getting established and trying to compete with illicit operators.”

Illegal cannabis market surpassing legal retailer sales

Mandelman’s office attributes a 2019 report from the California Legislative Analyst’s Office to have found an increase in cannabis tax rates directly tied to ongoing illegal cannabis sales — with a possible 10% increase to the State retail tax resulting in a 7-22% decrease in legal cannabis consumption.

In 2016, State voters passed Proposition 64, legalizing adult cannabis use.

Prop 64 established a 15% State excise tax on retail cannabis sales as well as a tax on cannabis cultivation.

Five years since the passage of the proposition, the State estimates that illegal market sales approach $8 billion annually in California — doubling the number of legal sales.

The State is reporting close to 500 raids of illegal operations have been conducted this year.

“The imposition of new local cannabis tax in San Francisco while State taxes remain high runs the risk of further undermining our local legal market and the good union jobs that it creates,” said Jim Araby, Director of Strategic Campaigns for United Food & Commercial Workers Union Local 5 which represents 30,000 workers in the Bay Area, including workers in San Francisco’s cannabis industry.

“This legislation will help provide additional stability for workers in the emerging cannabis industry in San Francisco.”

SF cannabis retailers struggling to keep up

In recent weeks, the Bay Area has been hit by several retail thefts — the city says cannabis businesses are facing increased theft, often from organized and armed groups.

On November 16, BASA Cannabis Dispensary had thousands of dollars of product stolen from their store on Grove Street.

BASA owners say its business has now been robbed five times.

“Cannabis businesses, along with many other retailers in San Francisco, are struggling under the weight of out-of-control retail theft,” said Mandelman.

“San Francisco needs to do more to protect these businesses, their employees, and their customers before we hit them with a new tax.”

The City’s Office of Cannabis oversees a Cannabis Equity Program in an effort to foster equitable participation in the cannabis industry and to create business opportunities for those negatively impacted by illegal drug activity.

The City says many equity businesses opened during the pandemic and many are just now getting their footing after paying significant startup costs including, in some cases, years of commercial rent before ever conducting their first sales.

“The cannabis industry is not mature enough to sustain any additional tax burdens in addition to the incredibly high state taxes,” said Ali Jamalian, President of Sunset Connect, the first social equity manufacturing facility in San Francisco and Chair of the San Francisco Cannabis Oversight Committee. 

“The cannabis industry is capital-intensive for start-ups, leaving little room for newly minted Social Equity Operators and legacy operators to pay a gross receipts tax. This legislation will help us to continue building a solid foundation for a strong, all-inclusive cannabis industry in San Francisco.” 

Future plans

Mandelman’s office says once legislation goes into effect, it will work with the City’s Controller, the Treasurer Tax Collector, the office of cannabis, and the cannabis oversight committee, to analyze data on cannabis business sales in San Francisco.

The group plans to present a set of recommendations on tax rate and provide structure to the Board of Supervisors to implement a new plan for 2023.

“California’s cannabis taxes are smothering the legal market and allowing a dangerous, environmentally-destructive illegal market to flourish,” said Conor Johnston, co-owner of the City’s first social equity dispensary, Berner’s on Haight. 

“Thank you to Supervisor Mandelman and his colleagues for doing what Sacramento has thus far failed to do – give legal cannabis businesses some room to breathe.”

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