Santa Rosa seeks court order against Alvarez to force business closure

Santa Rosa Council member Eddie Alvarez led a defiant and celebratory last day of business at his cannabis shop Thursday in the face of escalating city legal action to shut the store.

Alvarez welcomed customers to his Russell Avenue business, The Hook, which he plans to close starting Friday to comply with a city order stemming from a long-revoked state permit and tens of thousands of dollars in unpaid state taxes.

“Today is my last day. I won’t be open tomorrow," he said, adding that he chose to close rather than have a court order force him to do so.

"At no point would I want this to go where I force the city’s hand," he said. "The state (process) is taking longer than expected.”

The dispute, however, entered a new stage Wednesday as City Hall attorneys sought a judge’s order that would allow the city to forcibly close Alvarez’s dispensary.

The action, leveled against the business of one of the Santa Rosa’s seven elected council members, represents the first attempt to close a dispensary in the post-2016 era after adult recreational use was legalized, officials said.

“We have an obligation to the city to provide ethical code enforcement and we want our city to trust us that no one is above the rules,” City Manager Maraskeshia Smith said. “I have a moral, ethical and fiduciary duty to uphold the laws and codes of the city.”

The city also sought additional fines and fees in its request for an injunction filed in Sonoma County Superior Court on Wednesday.

He has remained open in defiance of a March 15 cease-and-desist order, accruing $500 daily fines that amounted to $13,000 by Friday last week and as much as $16,000 by Thursday.

Just after 1 p.m., Alvarez stood at the door greeting a growing line of visitors on 4/20 ― one of the busiest days for the industry. He spun a rainbow-colored wheel and handed prizes to those coming in, while customers browsed through the merchandise inside or ate tacos in the parking lot.

He did not know when he’d be able to legally reopen, and he shared that state officials were also now going through his business accounts, yet another layer of scrutiny for the troubled dispensary.

City of Santa Rosa filing.pdf

The city’s court filing, meanwhile revealed new key details about the scope and length of the dispute with authorities.

Alvarez was notified his business was operating without a retail permit as early as a year ago, according to court documents. That is when, in April 2022, state authorities first notified him his seller’s license had been revoked over failure to file a tax return and pay taxes the last six months of 2021, according to court documents.

Alvarez said he has been working with state officials since to pay down his liability, which last summer topped about $455,000 and resolve his licensing issue. He had hoped to resolve the problems before the city filed the injunction, he said.

California Highway Patrol officers and state tax authorities in June 2022 confiscated more than $200,000 in cash from the business’s safe and cash registers. He estimated his outstanding debt is about $40,000 after recent payments plus taxes for the first quarter of 2023 due at the end of April.

Beyond the unpaid taxes, Alvarez said he is facing scrutiny from state authorities over the pricing of his products and profit model, which has delayed the process.

Alvarez said he notified state authorities of his plans to close to comply with the city’s latest action.

City: Alvarez ‘knowingly’ operated outside law

City attorneys alleged in the court filing that Alvarez’s dispensary, open since 2019, was engaging in unlicensed commercial cannabis operations in violation of city and state codes.

The Hook also is violating the California Unfair Competition Law for operating unlawfully without the necessary permits, unlike competitors in the area meeting all business requirements, detracting from quality of life and becoming “unjustly enriched,” according to the filing.

The city is seeking a judge’s permission to enforce a the March 15 cease-and-desist order that sought the business’s closure while Alvarez works to reinstate his state seller’s permit. That license is required to operate a retail business in California.

The city has asked the court to assess a civil penalty of up to $2,500 for violating the state competition law. The city motion also seeks to force Alvarez to pay the $500 daily citations he’s amassed for continuing to operate in defiance of the city closure order as well as attorney fees.

Alvarez, a longtime Roseland businessman elected to the council in 2020, is not explicitly named in the city’s legal filing.

The city will now wait for the case to move through the courts and can take measures such as chaining the locks or boarding up the doors once a judge grants the OK, according to Smith, the city manager.

The city could hold off on taking further action if Alvarez closes his shop or provides a copy of his permit, Smith said. He’ll continue to rack up fines, in the meantime, every day he remains open.

The city had not been informed as of Thursday afternoon that Alvarez planned to close and code enforcement officials will continue to conduct inspections, a city spokesperson said.

Alvarez was ordered to close the dispensary last month after city officials learned from state authorities his seller’s permit had been revoked. A city investigation also found he was in violation of several city codes and state tax laws related to the reporting and remittance of cannabis taxes.

The investigation followed a February notice filed with the city by the California Department of Tax and Fee Administration which sought to levy Alvarez’s business and other properties to recover more than $380,000 in unpaid state business taxes.

The Hook, the city alleges in court filings, “knowingly” and “overtly” continued to operate despite being out of compliance with various local and state requirements.

The business “will continue to commit unlawful business acts and practices, thereby causing irreparable injury and harm to the public’s welfare” unless it is forced to close, according to a copy of the complaint provided by the city.

The city notified Alvarez on Monday it planned to file the injunction and he was given 48 hours to voluntarily cease operating or provide proof that his state seller's permit was reinstated.

“The Hook has been out of compliance at both the state and local level, and operating illegally, for almost a year now,” Assistant City Attorney Adam Abel wrote in a letter to the business ahead of the injunction being filed.

“Thus, you must either cease operations of your cannabis business ― The Hook ― within 48 hours from receipt of this letter or show proof to the city that your state seller’s permit has been reinstated,” the letter states. “Otherwise, regrettably, you leave me, on behalf of the city, with no choice but to file the attached complaint for abatement, injunctive relief and civil penalties.”

Alvarez said he wasn’t made aware of the notice until Wednesday.

New details in court action

The court filing paints a clearer picture of Alvarez’s ongoing tax and permitting issues.

The California Department of Tax and Fee Administration notified Alvarez in April 2022 that his seller's permit had been revoked for not filing a tax return for the period October through December 2021 and for failure to pay business taxes.

He was required to file the late return and pay all owed taxes plus a $100 fee to have the permit reinstated, according to a copy of the notice attached to the complaint.

That followed notices in August 2021 and February 2022 indicating he was behind on taxes and warning him that the permit would be pulled if he didn't pay up.

The notices did not detail how much was owed.

The city said in its filing that state tax authorities have visited the dispensary on several occasions to seize cash or property to recover the unpaid taxes.

It wasn’t immediately known when those visits occurred.

State tax authorities also told city officials during recent discussions they had contacted the dispensary’s vendors to request they stop providing merchandise to the business because it was operating illegally.

The complaint states Alvarez was behind on city taxes totaling $38,000 for three quarters when the city ordered him to close in March.

He was ordered to immediately pay the backdue taxes, which he did, but when a code enforcement official asked about the status of the business permit, the complaint states the owner, presumably Alvarez, said it was active.

He was asked to provide proof by the end of the day but failed to do so. State officials later confirmed to the city the permit was still inactive.

A senior code enforcement official notified Alvarez that his permit was revoked and the business must close or would risk daily citations for continuing to operate illegally.

Alvarez asked for a grace period “which was respectfully rejected because The Hook had been knowingly operating without the necessary seller’s permit for some time,” according to the complaint.

Code officials on March 23 advised Alvarez of possible steps to become compliant.

The business must repay all state taxes owed or arrange a payment plan, which must be approved by the state tax authority. He also must meet certain state inventory requirements.

Alvarez has said he is complying with those steps and is working to get his license reinstated.

Tax authorities also are inspecting the business’s books after questions were raised about the shop’s business model, Alvarez said.

He said that examination has prolonged his efforts to get right with the state.

Alvarez said his product markup, the amount added to the cost of goods to cover overhead, is about 30%, far below the industry standard, which can top 80%, depending on the average price of products.

He defended the low rate and said he was not driven by profit.

“I just want to serve those that have given me everything,” he said.

Many in the community have been supportive of him and he hoped to reopen as soon as possible, he said.

“Maybe I’ve offended somebody because I don’t quit,” he said.

You can reach Staff Writer Paulina Pineda at 707-521-5268 or paulina.pineda@pressdemocrat.com. On Twitter @paulinapineda22.