After 11-straight quarters of rising tax revenue from cannabis cultivators, Santa Barbara County got a reality check in the fourth quarter of the 2020-21 fiscal year when revenues fell 34% from the previous quarter and plunged 45% from the fourth quarter of 2019-20.
During the 2021-22 budget workshops in April, supervisors discussed making cannabis taxes an ongoing revenue stream rather than one-time funds.
Staff recommended considering only a portion of the revenue ongoing income and maintaining a reserve to even out peaks and dips — like this one — in the flow of cannabis taxes.
Fourth-quarter cannabis tax revenue for the fiscal year that ended June 30 was listed at $3.8 million in a report delivered to the Board of Supervisors on Sept. 14.
By comparison, third-quarter revenue was $5.1 million, and 2019-20 fourth-quarter revenue was $5.5 million.
But Steven Yee, policy and financial analyst for the county, said the report held some good news: Overall cannabis tax revenue for the year — at $15.7 million — was up 29% from the previous fiscal year’s total.
Yee said the county doesn’t have access to the data needed to pinpoint the reasons for the fourth-quarter revenue slide.
“But given the information currently available to us, it appears that, statewide, an oversupply of wholesale cannabis product is beginning to develop, much as it did in other states that legalized … adult use of cannabis prior to California, such as Colorado and Oregon,” Yee said.
He said a glut on the market drives prices down, which reduces sales receipts and, in turn, cuts tax revenue.
But Yee pointed out only 11 of the county’s 112 cannabis operators failed to report gross receipts, the fewest since the inception of the program. He said that indicates compliance with state and county regulations is increasing.
The cannabis taxes collected for the fourth quarter came from 58 operators who reported gross receipts, while 43 operators — actually, 43 license holders — reported having no gross revenue for their operations.
Yee noted that some operators hold multiple licenses and may have reported gross receipts for one type of license but not the others.
Brittany Heaton, the county’s principal analyst for cannabis, said zero gross receipts might be reported because operations just came online during the fourth quarter or because nursery license holders are supplying their own cultivation operations.
She said having zero gross sales is also likely a factor of the seasonality of the cannabis industry.
To date, the county has received a total of 181 applications for land use permits, of which 30 were withdrawn, one was denied, 82 are under review, 22 are pending, 34 were issued and 12 are under appeal, according to the report.
But operators who have not yet obtained land use permits and business licenses are rapidly approaching a chokepoint — limits on cultivated acreage — that could pinch off their projects.
“The cultivation caps are quickly filling up,” Yee told supervisors.
The county has set a cultivation limit of 186 acres in the Carpinteria agricultural overlay area and 1,575 acres for the rest of the unincorporated area. When those caps are reached, would-be operators who have not obtained land use permits and business licenses will be left out in the cold.
So far in the Carpinteria overlay area, permits have been granted for 46 acres, and applications for another 176 acres are in the process, bringing the total to 222 acres, or 36 acres more than the cap.
But in the rest of the unincorporated area, the demand is nearly double what’s available, with 502 acres permitted and 2,619 acres in the pipeline for a total of 3,121 acres, or 1,546 acres more than the cap.
Heaton advised those with approved land use permits to “get into the business license process immediately if they want a place in the acreage cap.”
As of the end of the fourth quarter, 24 business licenses had been granted, with another 58 pending for cultivation, 29 for nurseries, 10 for distributors and two for nonstorefront retail operations.
Yee said most of the pending business licenses are for applicants who have not yet obtained land use permits.
As for retail storefronts, Heaton said the No. 1 ranked potential operators for Santa Ynez and Los Alamos have submitted applications to the Planning and Development Department.
The top-ranked potential operator for Orcutt — finalized as East Clark SB, doing business as Cookies, after appeals were resolved — has until mid-November to submit an application for a shop at 1604 E. Clark Ave.
“But we anticipate they will be submitting shortly,” Heaton said.