UPDATE: San Jose eases rules on cannabis dispensaries

The San Jose City Council approved changes to existing regulations on dispensaries, expanding where they can set up shop and relaxing expensive annual audit requirements.

The council had been discussing revisions since late last year after industry complaints that the strict rules effectively barred cannabis storefronts from being able to open in most of the city. The pair of measures passed 10-1 as part of a wider discussion on next year’s 2023-24 budget, with Councilmember Domingo Candelas casting the lone no vote.

In easing some of its setback rules, council paved the way for dispensaries to have more flexibility in selecting a storefront in San Jose, which has historically been a nearly impossible barrier for those wanting to expand. Moving forward, restrictions on how far dispensaries must stay away from locations such as schools and daycares have been halved, from 1,000 to 500 feet, and also allow as many as four to open up in a 1,000 square-foot area.

Five councilmembers—Pam Foley, Sergio Jimenez, Omar Torres, David Cohen and Peter Ortiz—signed a letter last week ahead of tonight’s meeting that underscored their support for the relaxed audit requirements.

Foley, in advocating for the two changes during Tuesday’s council meeting, noted that cannabis tax revenues generate “decent income into our general fund,” but emphasized the need to undercut unlicensed cannabis sales with competitive legal shops.

“We need to make it not as easy for illicit vendors of cannabis to be out there selling,” Foley said at Tuesday’s hearing. “The way we do that is that we make our businesses more accessible.”

She also hinted that the council could soon take a look at permitting social consumption of cannabis at events. Ortiz went further, mentioning Assembly Bill 374, which is a state measure introduced this year by San Francisco Assemblymember Matt Haney that would allow for the permitting of cannabis “lounges,” where patrons could pair their pot with food or music.

“That’s something I’m just anticipating we need to get ready for,” Ortiz said.

Council also voted to lift a 2019 rule that required yearly audits on cannabis operations by an external reviewer.

Bruce Andersen, an accountant whose firm offers specific cannabis-focused tax services, said that external audits can be very expensive, costing pot shops several thousands of dollars per year. And he questioned the utility of those audits, given that digital point-of-sale systems already track customers’ purchases, which is what’s necessary for the city to determine tax revenue.

“If you have a hardware shop or something, you have an annual or license that you renew. But for the cannabis business, then you also have this additional cost, which is for financial auditing, (and) there’s a component for the operational audit as well,” he said. “So these localities are really taxing the hell out of these cannabis operations.”

In a June 2 memo, San Jose Police Chief Anthony Mata and Nanci Klein, San Jose’s economic development director, recommended the city only require external audits when a business is suspected of tax noncompliance or other misconduct. The council approved those recommendations Tuesday as well.

Rich De La Rosa, a lobbyist who works with Canna Culture, a dispensary located on the city’s south side, approved of the setback changes. But he noted an ongoing challenge for cannabis businesses has been finding amenable landlords, and that allowing four dispensaries to pack into the same area could incentivize them to cluster together wherever they’re allowed.

“That’s swinging the pendulum too far,” he told San José Spotlight.

As the industry still struggles to compete with unregulated, untaxed black market operations in the wake of cannabis legalization, De La Rosa said it’s more crucial for city authorities to focus on limiting illegal cannabis sales.

“There’s a lot of tax leakage from the city because of the illicit market,” De La Rosa said. “And we’re the ones that end up paying the price.”

Contact Graph Massara at [email protected] or follow him on Twitter @BylineGraph.