San Francisco Pot Initiative Provision Based on ‘Wayfair’

Daily Tax Report: State provides authoritative coverage of state and local tax developments across the 50 U.S. states and the District of Columbia, tracking legislative and regulatory updates,...

By Joyce E. Cutler

Recreational marijuana would be taxed up to 5 percent under a gross receipts tax initiative headed to San Francisco voters this fall.

The measure would also expand taxes to out-of-town pot producers and sellers.

The proposed initiative would set a tax rate of 1 percent to 5 percent, depending on the type of business activity and gross receipts amount, starting Jan 1. 2021, Board of Supervisors President Malia Cohen said.

The legislation would also incorporate the U.S. Supreme Court’s June 21 South Dakota v. Wayfair decision. That ruling tossed Quill Corp. v. North Dakota, the court’s 1992 physical presence threshold for when states could tax remote sales. So pot distributors, producers, and sellers located outside San Francisco could be taxed for sales generated in the city beginning Jan. 1, 2019, according to the initiative, allowing the city to generate tax revenue in 2019 while delaying full implementation until 2021.

San Francisco expanding the definition to include businesses that lack a physical presence is “doing what many states are looking to do on the sales tax side” since the Wayfair decision and “rushing to expand their nexus,” Amanda Fried, San Francisco Treasurer & Tax Collector policy and legislative manager, told Bloomberg Tax.

California approved medicinal cannabis in 1996. Recreational pot was legalized in 2016, with sales starting in January. Delaying full implementation “gives the industry time to adapt to legalization and the regulatory oversight for the environment that they’re currently operating in,” Cohen told supervisors July 31.

“Voting for this legislation now with the Wayfair amendment in place gives us the seed funding for programs that are essential for normalization, for the educating of the population after decades of misinformation, and essential for building out an access to medicine,” Cohen said.

Three supervisors of 11 voted against putting the initiative on the ballot. “The retail cannabis industry is barely 6 months old and, in my view, needs more time to stabilize before we as a city should be imposing additional restrictions,” Supervisor Rafael Mandelman said.

$2 Million to $16 Million

The initiative, if approved, has a lower tax rate for startups, doesn’t kick in until $500,000 in receipts, and exempts medicinal marijuana. A board vote could adjust the tax rate.

The tax would raise $2 million to $4 million in 2019, and $7 million to $16 million beginning in 2021, according to estimates by the city Controller’s office.

Taxing entities that sell to San Francisco-located business conservatively would generate $2 million to $4 million for the city, Controller Ben Rosenfield told supervisors.

The impact of adopting the out-of-town tax provision is difficult to quantify “because it involves having a lot of insight into how supply chains work between companies that have no physical presence in San Francisco selling to companies that do,” Rosenfield said. Revenue might be significantly higher, $1.5 million for each $100 million of sales, information that will only be known over time.

Estimating tax revenue is tricky. California has a 15 percent excise tax on all marijuana. However, the state has collected less pot tax revenue than anticipated, the Legislative Analyst’s office said in May. Original estimates were $175 million for the year, and only $34 million in state taxes was collected in the first quarter.

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