Reining in Cannabis Tax Scofflaws

Some cannabis operators in Santa Barbara County still don’t pay taxes, but there are signs that the county is closing in on them.

Of 106 licensed cannabis growers and processors in county unincorporated areas, 15 failed to report their gross revenues during the most recent quarter, from October 1 to December 31, according to a recent update for the county Board of Supervisors. That’s down from 22 tax scofflaws in the previous quarter. 

The county has put growers on notice that it will withdraw its “letter of authorization” for cannabis state business licenses if they fail to pay county taxes, said Assistant County Executive Officer Barney Melekian.

“The word went out that we were paying attention to that,” he said, adding that one grower was forced to surrender his state license and shut down last month; two others promptly paid up, and a fourth has been summoned to a county administrative hearing.

With 1,164 active state licenses for cannabis, Santa Barbara County is second in California only to Humboldt County in its embrace of the lucrative crop. The rapid influx of industrial-scale “grows” into the scenic Santa Ynez and Carpinteria valleys in recent years has produced an outcry for better enforcement and stricter regulations.

On Tuesday, the board authorized Melekian’s office to draw up a memorandum of understanding with the state Department of Food and Agriculture for use of its “Track-and-Trace” database for 60 days. As part of this pilot program, the county will investigate 250 state cannabis licenses in unincorporated areas, beginning later this year. 

The state tracks the bar codes that are embedded in cannabis plants and products, following the crop throughout the commercial supply chain. Access to this database, Melekian said, will allow an auditing firm contracted by the county to check whether a grower’s self-reported tax revenues line up with the number of his plants. A mismatch, he said, could indicate that the grower is selling on the black market in California or diverting cannabis illegally to other states.

Monterey and Yolo counties also will participate in the pilot program. In the future, the state is expected to expand local access to track-and-trace data throughout California.

Tax rates for cannabis in Santa Barbara County are as follows: 1 percent of gross revenues for nurseries and distributors, 3 percent for manufacturers, 4 percent for growers, and 6 percent for retailers and microbusinesses.

Melekian reports that from July 1 to December 31 — the first six months of the current fiscal year — Santa Barbara County collected $4.8 million in tax revenues from cannabis. That’s a 50 percent increase over the first six months of fiscal year 2018-2019, when the county collected only $3.2 million.

“People are doing a more accurate job of reporting, and there is more growth and more sales,” Melekian said. “The first two quarters of fiscal year 2018-2019, everybody was just getting their feet under them. County tax collection is more efficient now.”

Forty-eight cannabis operators reported zero gross receipts and paid no taxes during the most recent quarter, from October 1 to December 31, 2019 — but that’s likely because outdoor grows were dormant and some nurseries had no sales, Melekian said. Here, too, he said, the state track-and-trace data will help the county determine whether growers are telling the truth.

Meanwhile, raids on illegal cannabis operations slowed dramatically from October 1 to December 31, partly because of the scope and complexity of ongoing investigations, Melekian said. The county Sheriff’s Department confiscated and destroyed only 100 marijuana plants and 74 pounds of dried marijuana during that time, representing a total value of $79,000. In the previous quarter, the department confiscated 17,000 plants and 1,200 pounds of dried marijuana, a $5 million value in all.

During fiscal year 2018-2019, county records show, the department confiscated 985,000 plants and 65,000 pounds of dried marijuana valued at $288 million during searches at illegal operations. By comparison, licensed growers reported only $169 million in gross revenues to the county that year. 

Every cannabis grower must obtain state and county business licenses; every landowner must obtain a county zoning permit. To date, records show, the county has issued permits for cultivation on 221 acres in inland areas and 22 acres.

Last year, responding to a barrage of citizen complaints about the pungent, skunk-like smell from cannabis, the county set caps of 1,575 acres and 186 acres of cultivation in inland and coastal areas, respectively.

Most of the cannabis farms in the county are designated as “legal, non-conforming.” That is, the landowners claimed to have been cultivating cannabis for medicinal purposes before January 19, 2016. Beginning on that date, the county allowed cannabis cultivation to continue on those properties under temporary state licenses, but the landowners were required to apply for county zoning permits.

A total of 156 permit applications are pending in various stages of county review. They would cover more than 2,000 acres — hundreds more than what is allowed under the county caps.