Los Angeles city officials are hoping to cut their losses and collect what they can from struggling cannabis businesses that owe more than $400 million in delinquent tax payments – a figure reported by the city treasurer in October.
City council members voted unanimously, 13-0, on March 3 to move forward on a proposed tax amnesty program for more than 500 of the city’s 738 licensed cannabis businesses with outstanding taxes. Under the program, roughly $35 million in accrued interest and $100 million in penalties would be forgiven.
Businesses that apply for the amnesty program could enter into installment agreements with the city, affording them 36 months to pay off their back taxes. However, City Treasurer Diana Mangioglu projected that the city could receive as little as $30 million through the program.
She based that projection on an anticipated program participation rate while also considering that only about $150 million of the $400 in delinquent tax payments remains collectible because some liabilities are past their three-year statute of limitations, while others are connected to businesses that are no longer operating.
Mangioglu, who also serves as director for the Los Angeles Office of Finance, included these details in an October letter she sent to city councilmembers recommending the amnesty program.
The letter outlined how 329 of the city’s 500 tax-delinquent cannabis businesses owed less than $200,000, while 48 businesses owed more than $2 million.
“Finance has not historically offered industry-specific amnesty,” Mangioglu wrote. “However, we recognize that the current business environment in the cannabis industry is extremely challenging. Due to widespread noncompliance with tax and permit regulations feeding a thriving black market, combined with a tax burden which vastly exceeds the rates paid by other industries, legally permitted cannabis businesses face a daunting task.”
The Los Angeles excise tax rates on licensed cannabis businesses include 10% on adult-use sales, 5% on medical cannabis sales, 2% on manufacturing and cultivation, and 1% on transportation, testing and research. This is in addition to the state’s 15% cannabis excise tax that’s compounded on the city excise tax at retail, and a 9.75% sales-and-use tax rate that’s compounded on both.
This means adult-use cannabis products are taxed roughly 39% at dispensaries in Los Angeles.
The March 2 city council vote instructs the Los Angeles Office of Finance to draft language to implement the tax amnesty program, appropriating $300,000 to the office to enact the program once the council and mayor provide final approval.
Councilmember Imelda Padilla, who chairs the Government Operations Committee, indicated during Tuesday’s meeting that until the finance office provides answers to the city council’s pending questions, not all councilmembers may be on board.
“The topic of properly addressing the tax delinquency of our licensed cannabis stakeholders is a priority of mine, and ensuring the full support of my colleagues is imperative,” Padilla said. “So, I know there’s still work to do. With the tax amnesty program, the city finds itself with a unique opportunity to bring businesses into compliance and, at the same time, properly fund cannabis industry-centric programming that directly impacts the economic success of those who are already here operating in our city and want to stay in our city.”
Tuesday’s vote instructs the city finance office to prepare and present to the city council a finalized business tax amnesty program plan. It also instructs the office to report back to the city council within 45 days of the deadline for businesses to apply for the amnesty program with:
- The number of businesses applying;
- The number of businesses provided amnesty;
- The total amount of liability waived; and
- The amount of additional revenue anticipated based on participation in the program.
Of the tax revenue collected under the amnesty program, 20% would go to the Los Angeles general fund, in part to reimburse the finance office, 40% would go to the police department and city attorney’s office to enforce unregulated cannabis operations, and 40% would fund social equity business grants.
Los Angeles’ tax-delinquent cannabis businesses that participate in a forthcoming tax amnesty program would need to sign an agreement, provide gross receipts and commit to making their required payments. At that point, their taxes owed would become a legally enforceable liability, according to Mangioglu.
“While forgiving a portion of outstanding tax liability will not address these challenges going forward, it could present an opportunity for some of these businesses to get themselves on the right side of the law and gain some financial stability and certainty,” the treasurer wrote to the councilmembers. “At the same time, to the extent that participating businesses are successful in paying off liability they would not otherwise have paid, this will generate additional business tax revenue to the city.”
Daniel Sosa, who owns four social equity dispensaries in Los Angeles, called the amnesty program proposal a “small band-aid to a gaping wound,” comparing the city’s 10% excise tax rate on cannabis to the much lower rates on the guns, tobacco and alcohol industries.
Sosa also suggested that if the city council moves forward with the amnesty program, it should add enforcement teeth, establishing a “clear pathway” to shutting down tax delinquent dispensaries that don’t participate as well as those that default under the program.
He pointed to the 48 businesses that owe more than $2 million apiece in back taxes.
“Let’s be real, these businesses are not paying back [their] taxes,” Sosa said. “They are not paying tax as a business model, and you are allowing them to stay open. So not only are we competing against the illicit market, we’re competing against licensed dispensaries that the city is allowing to stay open, who have made it their business model to not pay tax.”
The amnesty proposal comes as the city council voted last month to place a separate proposal on the June 2 primary ballot in an effort to tax unlicensed cannabis businesses as an additional revenue stream.
Social Equity LA, a nonprofit organization, is urging industry stakeholders to oppose the proposal, which it believes would further disadvantage licensed operators through legitimizing “illegal operators without requiring them to meet the costly licensing, compliance and social equity obligations imposed on lawful businesses.”
While the amnesty program earmarks tax revenue for funding cannabis enforcement, industry stakeholders suggest that money would not be put to meaningful use, given the city’s history of a blind eye toward unlicensed operators, and now the proposal to tax them instead.
