City Council Report 915 I Street, 1 st Floor Sacramento, CA

City Council Report 915 I Street, 1 st Floor Sacramento, CA 95814 www.cityofsacramento.org File ID: 2018-00959 June 26, 2018 Public Hearing Item 28 Title: Ordinances Amending Title 5 and Title 17 Relating to Cannabis Distribution (Noticed 06/15/2018; Passed for Publication 06/19/2018; Published 06/22/2018) Location: Citywide Recommendation: Conduct a public hearing and upon conclusion, pass: 1) an Ordinance amending business regulations in Chapter 5.150 to remove the distribution business permit square footage requirements and re-configure the types of distribution permits into Distribution, Self-Distribution, and Transportation Only; and 2) an Ordinance amending the special use regulations for cannabis production in Chapter 17.228 to waive the conditional use permit requirement for the Self-Distribution and Transportation Only types of distribution businesses. Contact: Joe Devlin, Chief, (916) 808-4772; Zarah Cruz, Program Specialist, (916) 808-8925, Office of Cannabis Policy and Enforcement, Department of Finance; Joy Patterson, Principal Planner, (916) 808-5607, Community Development Department. Presenter: Joe Devlin, Chief, (916) 808-4772, Office of Cannabis Policy and Enforcement, Department of Finance. Attachments: 1-Description/Analysis 2-Title 5 Ordinance (Clean) 3-Title 5 Ordinance (Redline) 4-Title 17 Ordinance (Clean) 5-Title 17 Ordinance (Redline) Susana Alcala Wood, City Attorney Mindy Cuppy, City Clerk John Colville, City Treasurer Howard Chan, City Manager Page 1 of 15

File ID: 2018-00959 Public Hearing Item 28 Description/Analysis Issue Detail: On November 28, 2017, Council adopted Ordinance No. 2017-0060 adding various provisions to Chapter 5.150 establishing a cannabis distribution business permit. Under the Title 5 ordinance, two types of cannabis distribution business permits were created: 1) Type C (Distribution Center) for a cannabis distribution business operating on a site larger than 2,500 square feet 2) Type S (Distribution Service) for a cannabis distribution business operating on a site that is 2,500 sq. ft or less Distribution is an important component of the supply chain. According to State law, cannabis and cannabis products can only be transported by a business holding a distribution State license and local permit. Distributors are responsible for collecting the Cannabis Cultivation Tax (CCT) from cultivators and the Cannabis Excise Tax (CET) from dispensaries and they also ensure that all cannabis products have been tested. The lack of licensed and permitted distributors can result in a de-facto cannabis shortage, as seen in the State of Nevada just weeks following the roll-out of recreational cannabis in July 2017. Given State law and regulations approved after the distribution ordinance was approved, certain provisions of the ordinance need to be amended to create a reasonable policy that will allow local businesses to comply with both State regulations and the City Code without creating an additional and unnecessary burden. To ensure a proper and legally functioning cannabis industry, staff is proposing amendments to the City s distribution regulations. The proposed ordinance amending Chapter 5.150 of the City Code will eliminate the current building square footage requirements, re-configure the permit types and will add a third permit type for a transport-only business (Attachment 2). The proposed amendments to Titles 5 and 17 re-configure the cannabis distribution permit types as follows: 1) Type D - a distribution permit involving all functions of a cannabis business distribution business, which may include wholesale, transport between permitted businesses, tax collection and arrangements for testing. It can be a stand-alone distribution center or operated in conjunction with another cannabis business. A Type D permittee may store cannabis and cannabis products onsite and the land use requires a conditional use permit (CUP). The proposed Type D distribution permit fees will be tiered by gross receipts as follows: City of Sacramento June 26, 2018 powered by Legistar Page 2 of 15

File ID: 2018-00959 Public Hearing Item 28 D1 - Distribution permits with annual gross receipts of up to $5 million D2 - Distribution permits with annual gross receipts of up to $20 million D3 - Distribution permits with annual gross receipts of over $20 million 2) Type S (self-distribution) - an add-on distribution permit that will allow small manufacturers currently exempt from the CUP requirement to store and transport their own cannabis products through the supply chain, including dispensaries. A small manufacturer is defined under Sacramento City Code as a cannabis manufacturer whose operations are limited to infusion or production of edibles and topicals or packaging and labeling with gross receipts under $100,000. The self-distribution component of a small manufacturer s operation is currently required to have a designated distribution premise separate from its manufacturing premises. This is not proposed to change. The small manufacturer with a Type S permit will also be responsible for the other functions of distribution including remitting the taxes to the State and arranging for their cannabis products to be tested by a licensed laboratory. Staff is proposing that the CUP waiver also be extended to the distribution component of their operations. 3) Type T (transport-only) - allows a permit holder to move cannabis products through the supply chain without storing, collecting taxes or arranging for testing. A Type T permit can transport products to and from a cultivation, manufacturing and testing laboratory, but cannot transport to a dispensary except when transporting immature plants. Since this type of permit will not allow for the storage of cannabis products, it is proposed that a CUP for the premise not be required. The CUP waivers proposed for a Type S and Type T distribution permits are outlined in the proposed ordinance amending Title 17 (Attachment 5). Policy Considerations: The City s current cannabis distribution regulations were adopted prior to the release of the State s Emergency Regulations for the implementation of Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA), which provided the regulations for all commercial cannabis activities, including distribution. As a result, certain provisions of the ordinance need to be amended to create a reasonable policy that will allow local businesses to comply with both State regulations and the City Code without creating an additional and unnecessary burden. The proposed amendments to the distribution ordinance will create a path for smaller distributors, small manufacturers transporting their own products, as well as transport-only City of Sacramento June 26, 2018 powered by Legistar Page 3 of 15

File ID: 2018-00959 Public Hearing Item 28 businesses. These changes will also create a path for small manufacturers to vertically integrate and add a distribution permit without being burdened by CUP fees. All other City regulations for distribution will remain in place. These include background checks for all drivers, owners, managers and other interested parties, obtaining a motor carrier permit and compliance with motor vehicle requirements and all other state requirements pertaining to electronic manifests and mandatory adherence to the track-and-trace system. Proposed fees for the different types of distribution permits will be submitted to the Budget and Audit Committee on July 3, 2018. Economic Impacts: None Environmental Considerations: This action is exempt from CEQA because it is the adoption of an ordinance, rule, or regulation that requires discretionary review, including environmental review, and approval of permits, licenses, or other authorizations to engage in commercial cannabis activity (CEQA Guidelines 15061(B)(1), Bus. and Prof. Code 26055(h)) and because it does not have the potential for causing a significant effect on the environment (CEQA Guidelines 15061(b)(3)). Sustainability: Not applicable. Commission/Committee Action: On June 12, 2018, the Law and Legislation Committee passed a motion with a vote of 3 ayes and with one member absent, forwarding the ordinances amending Title 5 and Title 17 to the City Council for adoption. On June 14, 2018, the Planning and Design Commission considered the proposed amendments to Title 17 and recommended approval of City Council by a vote of 10 ayes with three members absent. Rationale for Recommendation: The proposed solutions presented in this report will better align the City s distribution permit system with the State s distribution license fees which are also tiered by gross receipts. The proposed ordinances will address the challenges encountered by applicants by eliminating the limits on square footage and creating a path for small manufacturers exempted from obtaining a CUP to legally distribute/transport their own products through the supply chain without utilizing a third-party distributor or going through a lengthy and expensive CUP process. The transport-only distribution permit type will create a path for businesses to participate in the movement of cannabis goods without assuming the full administrative privileges and responsibilities of a distribution center. Exempting transport-only distributors from a CUP City of Sacramento June 26, 2018 powered by Legistar Page 4 of 15

File ID: 2018-00959 Public Hearing Item 28 requirement will make the process more cost effective, as their function is solely to move products through the supply chain and they do not store cannabis on site. Distribution is a critical component of the cannabis supply chain. The lack of permitted distributors may cause market disruption in the form of limited supply, or potentially contribute to the proliferation of the black market. These proposed solutions will address the needs of the industry and make permitting and enforcement more straightforward for staff as local regulations will, for the most part, be uniform with State regulations. Financial Considerations: Financial impacts associated with the above recommendations will have an overall positive impact by encouraging the development of a legal distribution industry. The tiered permit structure will allow a distributor to obtain a business permit and pay only the fees appropriate to the size of their operations. Waiving the CUP requirement for Type S and Type T may provide access to the market and encourage smaller operators to participate in the industry. Local Business Enterprise (LBE): Not applicable City of Sacramento June 26, 2018 powered by Legistar Page 5 of 15

ORDINANCE NO. Adopted by the Sacramento City Council Date Adopted AN ORDINANCE AMENDING SECTIONS 5.150.1100, 5.150.1110, 5.150.1130, AND 5.150.1140 OF THE SACRAMENTO CITY CODE, RELATING TO CANNABIS DISTRIBUTION BE IT ENACTED BY THE COUNCIL OF THE CITY OF SACRAMENTO: SECTION 1. Section 5.150.1100 of the Sacramento City Code is amended to read as follows: 5.150.1100 Cannabis distribution permit required. A. No person shall operate a cannabis distribution business without a valid cannabis distribution permit issued pursuant to this chapter, or inconsistently with the type of permit issued. B. Types of cannabis distribution business permits issued pursuant to this chapter include the following: 1. Type D (distribution), for a business involving all aspects of a cannabis distribution business. A type-d permittee may store cannabis and cannabis products on the distribution site, and transport cannabis and cannabis products between any cannabis business permittee, including storefront and delivery-only cannabis dispensaries. 2. Type S (self-distribution), for a business that also holds a valid permit for a cannabis manufacturing business and is operating within the limitations of the nonvolatile cannabis manufacturing use described in section 17.228.900.C. A type-s permittee may store only cannabis and cannabis products that have been manufactured by the permittee on the distribution site; and transport only cannabis and cannabis products that have been manufactured by the permittee, between any cannabis business permittee, including storefront and delivery-only cannabis dispensaries. 3. Type T (transportation only), for a business involving only the transportation of cannabis and cannabis products between cannabis businesses. A type- T permittee may not store cannabis and cannabis products on the distribution site; and may not transport cannabis and cannabis products to a storefront cannabis dispensary or a delivery-only cannabis dispensary, unless the type-t permittee is transporting only immature cannabis plants or cannabis seeds from a nursery. 723274 1 Page 6 of 15

SECTION 2. Section 5.150.1110 of the Sacramento City Code is amended to read as follows: SECTION 3. 5.150.1110 Cannabis distribution permit program fee. The cannabis distribution permit program fee is established and imposed. The city council shall establish by resolution the amount of the cannabis distribution permit program fee, and any related penalties. The fee and penalties may be established at various amounts based on the type of permit. The fee and penalties for a type-d permit may also be established at various amounts based on the size of the business or its gross receipts. Section 5.150.1130 of the Sacramento City Code is amended to read as follows: SECTION 4. 5.150.1130 Cannabis distribution site buildings. The buildings on the sites of a type-d or type-s cannabis distribution permittee must comply with the following requirements: A. Entrances. All entrances into the buildings on the distribution site must be locked at all times with entry controlled by the cannabis distribution permittee s managers and staff. B. Main entrance and lobby. The distribution site must have a building with a main entrance that is clearly visible from the public street or sidewalk. The main entrance must be maintained clear of barriers, landscaping, and other obstructions. Inside of the main entrance, there must be a lobby to receive persons into the site and to verify whether they are allowed in the areas where cannabis or cannabis products are stored. C. Storage area. The distribution site must have adequate storage space for cannabis and cannabis products being distributed. All storage areas in any building on the distribution site must be separated from the main entrance and lobby, and must be secured by a lock accessible only to managers and staff of the cannabis distribution permittee. D. Transport area. Each building with a storage area must have an area designed for the secure transfer of cannabis between a vehicle and the distribution site. Section 5.150.1140 of the Sacramento City Code is amended to read as follows: 723274 2 Page 7 of 15

SECTION 5. 5.150.1140 Cannabis distribution site security. The security plan for a type-d or type-s cannabis distribution permittee must include the following: A. Security surveillance cameras. Security surveillance cameras and a video recording system must be installed to monitor all doors into the buildings on the distribution site, the parking lot, loading areas, and all exterior sides of the property adjacent to the public rights of way. The cameras and recording system must be of adequate quality, color rendition, and resolution to allow the identification of any individual present on the distribution site. The recording system must be capable of exporting the recorded video in standard MPEG formats to another common medium, such as a DVD or USB drive. B. Security video recording and retention. Video from the security surveillance cameras must be recording at all times (24 hours a day, seven days a week) and the recording shall be maintained for at least 90 days. The video recordings shall be made available to the city upon request. C. Alarm system. Professionally and centrally-monitored fire, robbery, and burglar alarm systems must be installed and maintained in good working condition. The alarm system must include a private security company that is required to respond to every alarm. Section 5.150.1220 of the Sacramento City Code is amended to read as follows: 5.150.1220 Storage of cannabis and cannabis products. A. Type-D and type-s cannabis distribution permittees shall only store cannabis or cannabis products in a fully enclosed building on the distribution site. No cannabis or cannabis products in possession of the cannabis distribution business may be stored in any other facility, such as a separate storage facility or a cannabis product manufacturing facility. B. Type-D and type-s cannabis distribution permittees shall not allow cannabis or cannabis products on the distribution site to be visible from the public right of way, the unsecured areas surrounding the buildings on the site, or the site s main entrance and lobby. C. Type-T cannabis distribution permittees shall not store cannabis or cannabis products on the distribution site. 723274 3 Page 8 of 15

SECTION 2. Section 5.150.1110 of the Sacramento City Code is amended to read as follows: SECTION 3. 5.150.1110 Cannabis distribution permit program fee. The cannabis distribution permit program fee is established and imposed. The city council shall establish by resolution the amount of the cannabis distribution permit program fee, and any related penalties. The fee and penalties may be established at various amounts based on the type of permit. The fee and penalties for a type-d permit may also be established at various amounts based on the size of the business or its gross receipts. Section 5.150.1130 of the Sacramento City Code is amended to read as follows: SECTION 4. 5.150.1130 Cannabis distribution site buildings. The buildings on the sites of a type-d or type-s cannabis distribution permittee must comply with the following requirements: A. Entrances. All entrances into the buildings on the distribution site must be locked at all times with entry controlled by the cannabis distribution permitee s managers and staff. B. Main entrance and lobby. The distribution site must have a building with a main entrance that is clearly visible from the public street or sidewalk. The main entrance must be maintained clear of barriers, landscaping, and other obstructions. Inside of the main entrance, there must be a lobby to receive persons into the site and to verify whether they are allowed in the areas where cannabis or cannabis products are stored. C. Storage area. The distribution site must have adequate storage space for cannabis and cannabis products being distributed. All storage areas in any building on the distribution site must be separated from the main entrance and lobby, and must be secured by a lock accessible only to managers and staff of the cannabis distribution permittee. D. Transport area. Each building with a storage area must have an area designed for the secure transfer of cannabis between a vehicle and the distribution site. Section 5.150.1140 of the Sacramento City Code is amended to read as follows: 723274 2 Page 10 of 15

ORDINANCE NO. Adopted by the Sacramento City Council Date Adopted AN ORDINANCE AMENDING SECTION 17.228.900 OF THE SACRAMENTO CITY CODE, RELATING TO CANNABIS PRODUCTION BE IT ENACTED BY THE COUNCIL OF THE CITY OF SACRAMENTO: SECTION 1. The city council finds the following: 1. As amended by this ordinance, the Planning and Development Code complements, supports, and facilitates the implementation of the goals, policies, and other provisions of the general plan and the city s specific plans and transit village plans. 2. The amendments in this ordinance promote the public health, safety, convenience, and welfare of the city. SECTION 2. A. Subsection C of section 17.228.900 is amended to read as follows: C. A conditional use permit is required for cannabis production, except for the following: following: 1. Nonvolatile cannabis manufacturing that complies with the a. The use is limited to only packaging and labeling of cannabis or cannabis products, or producing edible or topical cannabis products using an infusion process; b. Extraction processes are not being conducted; and annually. c. The gross revenue of the use is under $100,000 724984 1 Page 12 of 15

2. Cannabis distribution in accordance with a type-s cannabis distribution permit, as described in article VIII of chapter 5.150. 3. Cannabis distribution in accordance with a type-t cannabis distribution permit, as described in article VIII of chapter 5.150. B. Except as amended by subsection A above, all provisions of section 17.228.900 remain unchanged and in full effect. 724984 2 Page 13 of 15