The Business of Cannabis.

The Business of Cannabis.

Cities across Los Angeles County are preparing to cash in on a potential tax bonanza from legalizing recreational marijuana – and they are hoping to do so without the Wild West atmosphere that surrounded the opening of medical marijuana dispensaries nearly a decade ago.

Back then, many cities reacted with outright bans as dispensaries began sprouting up all over. That’s not as likely this time around, as years of crushing budget deficits have municipalities eying potential tax windfalls. Proposition 64, a November ballot measure that would legalize recreational pot use in California, also gives local governments far more oversight than they had with medical marijuana.

“We’re seeing much more interest from cities in revenue generation,” said Jeffrey Dunn, a partner in the Irvine office of law firm Best Best & Krieger who has consulted on medical marijuana issues for cities across the state, including several in Los Angeles County.

Proposition 64 would set up a statewide licensing system and tax fund, and allow “local regulation and taxation of marijuana.” It also would permit local governments to ban nonmedical marijuana businesses.

Under the measure, cities could have two tax revenue streams: allocations from a California marijuana tax fund, primarily for local law enforcement agencies, and any taxes they wish to impose, including sales taxes and business license fees or levies.

Dunn said many cities want to steer the additional tax revenue to public safety agencies that must grapple with the problems that often come with marijuana businesses, including robberies from the all-cash retail operations. Marijuana outlets operate outside the national banking system because the federal government considers cannabis a controlled substance.

It’s too soon for municipalities to project how much they expect to collect in taxes from weed, largely because they are still studying what form their laws will take. But if Adelanto (pop. 32,000), just west of Victorville, is an indication, it could be substantial. That town, which is trying to lure growers, estimated it could take in as much as $10 million annually in taxes.

Considered approach

Cities are preparing to use the one-year period before the law would take full effect in January 2018 to craft regulations, Dunn said.

“Cities got caught off-guard when medical marijuana dispensaries suddenly exploded here in Southern California,” he said. “Many received complaints from citizens and other businesses about the dispensaries suddenly appearing, and they reacted reflexively with moratoria and bans.”

Now, he said, many cities are seeking to get ahead of the situation. If the measure passes in November, they intend to be ready to put forward zoning restrictions, caps on the number of outlets, and limits on operating hours.

“They don’t want to see another explosion in dispensaries,” he said.

To that end, all eyes are on the city of Los Angeles, which tried twice to limit medical marijuana dispensaries. A decade ago, it imposed a moratorium but hundreds of new shops opened anyway, using a “hardship exemption” loophole.

That prompted the crafting of Measure D, which forbade any new dispensaries beyond the 135 operating before the moratorium. Voters passed the measure in 2013, but new dispensaries kept popping up anyway, faster than city officials could shut them down.

The city is now trying to enact regulations on medical marijuana dispensaries required under a law passed by the state Legislature last year. As part of that discussion, city officials are considering whether to craft a parallel regulatory framework for nonmedical marijuana businesses.

Officials are considering issues such as whether to limit how close marijuana dispensaries can operate to schools or other locations, if marijuana businesses should all be taxed at the same rate, and whether pot shops should be regulated through the city’s conditional use permit process.

The situation in Long Beach is even more complex. When Proposition 19 failed in 2010 to legalize marijuana, voters in that city nevertheless approved a sales tax on marijuana businesses of up to 15 percent. Some residents have qualified a measure for this November’s ballot repealing that tax; the City Council responded with its own measure to reinstate the levy should the repeal measure pass.

Even if the tax hurdle is overcome, there’s still a complete ban on marijuana-related businesses in the city, thanks to a court challenge to a lottery system Long Beach tried to enact for awarding licenses to dispensaries. The council would have to overturn that ban before any regulation can proceed.

If that happens, the city could impose zoning restrictions and cap the number of marijuana businesses.

“It’s even conceivable that the lottery system might return,” said Mike Mais, assistant Long Beach city attorney.

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