Stanislaus County cannabis dispensary owes $232,000 in fees. Will it go out of business?

Mark Ponticelli has fought the downward spiral of his permitted cannabis dispensary on Lone Palm Avenue in Modesto, troubles that he attributes to fees charged by Stanislaus County.

The business owner received some sympathy from the county Planning Commission Thursday evening. Instead of recommending cancellation of the development agreement with Peoples Remedy, for nonpayment of fees, the commission recommended that county supervisors consider new terms and conditions for Ponticelli to remedy $232,000 in fee debt.

The Board of Supervisors will be deciding if cannabis permit holders like Ponticelli are put out of business before a cannabis tax measure goes before voters in November. The proposed 8% tax on gross sales would replace fees in development agreements that Ponticelli and others say are crushing legal cannabis businesses in a time of depressed sales.

If the county cannabis tax measure is put on the ballot and gets majority approval, it would create a simple 8% sales tax rate for cannabis shops and replace the permit holder development agreements. Under that arrangement, businesses would pay more tax when sales are up and less when sales are down, rather than a minimum quarterly fee demanded regardless of market conditions.

County supervisors could decide Tuesday to put the measure on the ballot.

The Planning Commission considered a staff recommendation to cancel the Peoples Remedy development agreement and order closure of the business within 30 days. Some commissioners were surprised by the hefty fee obligations. County staff said a few more cases of nonpayment of fees will likely be brought to the commission.

“I don’t agree (cancellation) is the right way of going about this,” Commissioner Lars Willerup said, expressing concern legal businesses would be replaced by illegal sellers.

Ponticelli did not deny he owes the fees but stressed the Peoples Remedy has paid almost $2.3 million since a development agreement with the county was approved in 2020. “Show me another business in the county that paid that kind of money,” he said.

The county’s annual fee was set at $600,000, or 8% of gross sales, whatever was largest, in the original August 2020 development pact with Peoples Remedy and was supposed to rise to $700,000 on an assumption of escalating cannabis sales. But sales began to slide and have kept sliding.

The county agreed in early 2022 to amend the agreement with Peoples Remedy at a lower minimum fee of $331,270 annually, because of poor market conditions and competition with lower-cost illegal marijuana. A county staff report said the agreement is in default because the dispensary made only partial fee payments in each quarter since early 2022. Its last payment in January wasn’t the full amount.

Ponticelli, who has other businesses, said he offered a payment plan of $50,000 upfront and $20,000 each month to pay down the six-figure debt, but county staff rejected the offer.

Ponticelli told the commission that other jurisdictions in the state have dropped minimum fees in response to struggling legal businesses in the cannabis industry.

“Stanislaus County is over-taxing license holders,” Ponticelli said. “It was once $150,000 a quarter for my business. Can you imagine paying $50,000 a month?”

The business owner said his minimum flat rate owed to the county is now $82,800 a quarter, representing 20% of the dispensary’s revenue based on recent sales. Plus, the store has to pay 15% excise tax and 8% sales tax.

Ponticelli said the reason for the unpaid fees is market saturation. His Lone Palm dispensary competes with at least 26 other cannabis stores in the county, in addition to illegal dealers who charge far less to customers.

His fees owed to the county were based on 8% of average sales for the year 2019, when only four dispensaries operated in the entire county and sales were more robust, Ponticelli said.

County officials have said the fees in development agreements are justified to cover costs of the responsibilities placed on counties by Proposition 64, the legalization initiative in California. The county must handle permitting, ensure a safe supply for consumers, enforce permit requirements and conduct inspections, along with law enforcement raids to eliminate illegal grows. The annual costs are budgeted at $4.4 million.

The proposed cannabis tax on licensed businesses in county incorporated areas would generate an estimated $1.7 million annually for the county, not enough to cover the cannabis program budget.

Ponticelli told The Modesto Bee the Lone Palm dispensary is not making money and keeps operating for the 12 remaining employees. He said he would get a $50,000 loan and pull $20,000 a month from his other businesses to pay down the debt to the county.

There are 16 permitted cannabis operations in the county jurisdiction and it’s not clear yet what options county supervisors will offer those with defaulted development agreements.