On February 2, 2024, a California court granted the Petition of cannabis dispensary Central Valley Sierra Associates (CVSA) for a preliminary injunction stopping the City of Patterson (Patterson) from taking steps to shut down CVSA for not fully paying the Public Benefit fees charged by Patterson for their dispensary. CVSA is a Catalyst Branded dispensary operating in Patterson.
The dispute between CVSA and Patterson involves a development agreement (DA) between the parties that was approved in December of 2017. A DA is an agreement between a local government and a person with a legal interest in property, granting the right to develop the property. In the leadup to California beginning legal cannabis businesses in January of 2018, many local governments did not pass comprehensive cannabis ordinances, but authorized development agreements to clarify the rules for operating a cannabis business within their jurisdiction. The DA in this case was signed just before the state of California began accepting applications for state cannabis licenses.
According to the DA, CVSA was required to begin paying a monthly Public Benefit fee beginning six months after the effective date of the DA or one month after issuance of a conditional use permit, whichever is sooner. The initial payment was $10,000 or five percent (5%) of the gross receipts per month, whichever is greater. After thirteen months, the fee increases to $25.000 or five percent (5%) of gross receipts. The DA talks about the benefits conferred to CVSA and the burdens on Patterson and the fee is to offset the burdens on Patterson. The problem with this “fee” is that it is a revenue generator, which is not allowed under California law unless approved by the voters.
This case raises taxation questions that have been the subject of four (4) voter initiatives in California since 1978. Since 2010, California law requires that fees for governmental services or privileges be designed to pay for the cost of the benefits or privileges to the local government. Fees are not allowed to generate revenues so careful accounting is required for how the fees are spent. Any revenue generating “fees” are illegal and unconstitutional. Any revenue generating costs must be approved by the voters in the jurisdiction. The DA’s required Public Benefit fees generate revenue without voter approval. That is a major theme of this litigation.
The court has ordered the dispute to be arbitrated so we may not know how this dispute is resolved. The theme of taxing without voter approval will continue since cannabis businesses are considered cash cows and local governments want to milk that cow. The demand from Patterson is already at $1.4 million and counting. There was a point where Patterson was demanding eighty percent (80%) of the revenue generated by CVSA to pay the past owed fees to remove any problems from not paying the fees. If you’re required to pay fees and taxes before profitability, the cannabis business plan will need a sugar daddy. A business-friendly jurisdiction would also be desirable.
