Sonoma County slashes tax paid by commercial cannabis growers, offering relief to ailing industry

The Sonoma County Board of Supervisors has agreed to cut nearly in half the tax paid by local cannabis growers, offering a lifeline to growers who say they are drowning under the county and state’s taxes and fees.

Based on county figures, the cut amounts to more than $1.6 million in forgone future county tax revenue through mid-2023, when the cut is set to expire.

But many local farmers say the board did not go far enough, having pressed the county to eliminate the cultivation tax altogether.

The board’s unanimous approval of a 45% rate cut to the cultivation tax charged to cannabis growers in the county is “a step in the right direction,” said Erich Pearson, a board member of the Cannabis Business Association of Sonoma County, and owner of SPARC, a Santa Rosa-based dispensary with a farm in Glen Ellen.

The county tax on cultivation is one in a layer of local and state taxes paid by cannabis growers, who say they face a heavier tax burden than other farmers.

“We don’t think it’s fair,” Pearson said. “We still would like to be taxed like any other agricultural industry.”

There are 171 permitted cultivators in the county jurisdiction, and they are taxed at different rates on a per-square-foot basis for outdoor, indoor and mixed-light crops.

While lobbying the county for tax relief over the past several months, cannabis farmers have painted a dire picture of financial distress, with many saying the steep taxes and fees charged by the state and county are forcing them either out of business or toward the illicit market.

The tax cut, approved unanimously by the board Tuesday, will be retroactive to July 2021 and effective through mid-2023. In that time, county officials are expected to study the benefits and costs of taxing cultivators by gross receipts rather than square footage.

“If we don’t take action we are killing permitted businesses in this county,” said Supervisor James Gore, the board chair.

Based on figures provided by the county, the 45% rate reduction could reduce the county’s projected annual baseline tax revenue from marijuana growers by $1.64 million.

At the end of the next fiscal year, the cannabis fund is projected to have a $1.2 million balance after the 45% reduction, Christina Rivera, assistant county administrator, informed the board on Tuesday.

County staff had initially recommended a 10% reduction to ensure reserves in the county’s cannabis fund, but all five supervisors indicated they were comfortable with a larger reduction so long as the fund could continue to cover operational costs, which includes permitting.

The board’s discussion Tuesday illuminated lingering questions regarding the costs associated with the county’s permitting and inspection processes, and where the funds from taxes and fees go.

“The difficulty is that we’re hearing some very real situations and numbers and they’re coming at us as anecdotes,” Gore said about growers’ complaints and the county’s lack of data on what farmers are experiencing. “And we don’t have any validation from our staff of what that is.”

The county’s cannabis fund has amassed a surplus, according to county figures. The current balance in the cannabis fund is $5.9 million, but the basic annual cost of running the program was around $1.9 million this fiscal year. The county also set aside about $2.5 million this fiscal year for its upcoming environmental study and ordinance review.

Supervisors were surprised to learn that fines paid by growers to resolve county code enforcement cases have been funneled into the county’s general fund, the main source of discretionary spending. Cannabis code enforcement cases generated nearly $600,000 for county coffers last fiscal year, staff confirmed Tuesday.

Supervisors David Rabbitt and Gore debated whether that arrangement needed to be changed.

“Code enforcement is not a moneymaker,” Rabbitt said.

By the time the tax break expires, county staff are expected to have provided a comprehensive look at taxing growers based on gross receipts — a move the board said in 2017 that it wanted to make once the state’s track and trace program was in place.

“We have been taxed out of existence,” said Cameron Hattan, owner of local cannabis farm Fiddler’s Greens, during the board’s meeting.

Hattan was one of about 11 local farmers who presented their concerns Tuesday and called for the county to eliminate the cultivation tax altogether.

The recent outcry from industry advocates and local farmers reflects a statewide push from the cannabis industry to lighten the financial load. Compounding the expense of taxes and regulations is a drop in prices across the industry.

With some exceptions, California has not seen the type of mega-boom in commercial cannabis — and corresponding tax revenue — predicted at the time when voters legalized production and sales for adult use in 2016. The supply of cheaper black-market product is seen as one culprit. Regulatory and tax costs are another factor, growers say.

Though supportive of a tax cut, Supervisor Chris Coursey said government taxation was not solely to blame for the financial challenges facing the cannabis industry.

“The bottom has fallen out of your prices for market reasons. We can’t help you fix that,” Coursey said. “We’re limited in how we can help you on the tax issue as well. We may be able to lighten the load.”

Less than a quarter of participating California cannabis growers said they were profitable, according to a recently published survey of about 400 U.S. growers by the National Cannabis Industry Association.

In Sonoma County, all but 30 of the growers governed by county regulations have outdoor operations. Cities also have permitted operations and can add their own taxes.

The state taxes growers by the ounce. State and local jurisdictions also charge excise tax at point-of-sale of up to 15%.

Some Sonoma County residents on Tuesday said they opposed any tax relief for cannabis operators. They contended the board instead should approve tax breaks for everyone.

“I won’t subsidize an industry like this asking for a free tax break,” said a Sonoma County resident, who identified herself only as Anne, during the meeting’s public comment period.

Marijuana growers and neighbors have been at odds for years over expansion of the legalized industry, which has bogged down amid what industry advocates and growers have called a slow, burdensome permitting process.

Neighbors have voiced concerns over safety, water use and other neighborhood impacts, and have called for more stringent oversight — issues the board intends to review in a long-anticipated environmental impact study.

After a lengthy back and forth Tuesday, Supervisor Lynda Hopkins was the lone supervisor to make a motion and proposed the 45% reduction.

In addition to the tax cut and the review of a gross-receipts taxation system, the board also committed to supporting state Senate Majority Leader Mike McGuire’s bill, SB 1074, which aims to help small cannabis cultivators by eliminating California’s cultivation tax in favor of a higher excise tax that would include growers.

That support comes with a stipulation that the state does not reduce the cannabis revenue it dedicates toward First 5, the state-chartered organizations that tackle local health care and social service issues related to early childhood.

Hopkins is a commissioner for First 5 Sonoma County.

You can reach Staff Writer Emma Murphy at 707-521-5228 or emma.murphy@pressdemocrat.com. On Twitter @MurphReports.