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County Loses Cannabis Tax Appeal

Ruling could result in return of millions in revenue

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The Humboldt County Board of Supervisors overstepped when it modified the cannabis tax that county voters approved in 2016, a three-judge appellate court has ruled, upholding a Humboldt County Superior Court's finding last year that the board's changes "impermissibly broadened the scope of the tax."

Passed with 66 percent of the vote, Measure S imposed a $1 to $3 per-square-foot excise tax on commercial cannabis cultivation countywide. Under the language of the measure, the tax was to be imposed on cultivators based on the area of land they were growing cannabis on. The measure also stated the tax was to be collected "biennially," or once every two years, when its authors intended it be collected "biannually," meaning twice a year.

The Board of Supervisors voted unanimously in 2017 to modify the measure to make it easier to implement by imposing the tax on landowners rather than cultivators and basing it on the permitted square footage rather than the actual cultivation area, as well as to clean up its "biennial" mistake and allow for the millions in tax dollars to be collected twice a year. But a pair of attorneys — Ed Denson and Fred Fletcher — filed suit in 2018 alleging the board acted illegally in making the changes and demanding the county return an estimated $4 million in tax revenue it had collected.

Humboldt County Superior Court Judge Kelly Neel dismissed the "biennial" to "biannual" change as a "scrivener's error" because it did not change the amount of taxes collected, just the times of collection. But the judge found that the other changes — though "well meaning" — overstepped.

"A landowner leasing their property to another for the purpose of cultivation cannot be said to be actively engaged in cultivation absent further involvement," Neel wrote in her ruling. "The voters approved a measure whereby an individual involved in cultivation is the person responsible for the tax. ... In review of the language of Measure S as it relates to what is to be taxed, the county did expand the clear language of the measure. A person obtaining a permit is reserving the right to cultivate and abide by certain rules and regulations; it does not obligate them to actually engage in cultivation. ... The tax was supposed to begin accruing when cultivation starts rather than when a permit is issued."

Plaintiffs in the case argued that some permitted cultivators had opted not to plant their gardens yet still faced hefty tax bills from the county, including the case's plaintiff Karen Silva. According to the attorneys, Silva paid more than $94,000 in cultivation taxes over the span of two years despite the fact that no cannabis was grown on her property.

It's unknown exactly what's at stake with the ruling, which Denson has previously said applies to three groups of people: landowners renting or leasing properties to cannabis farmers but who weren't involved in cultivation; people who obtained permits but didn't grow cannabis; and people who obtained permits but grew on fewer square feet than permitted for.

Robert "Woods" Sutherland of the Humboldt-Mendocino Marijuana Advocacy Project, which backed the lawsuit, said it's still unclear how many people would pursue refunds if the ruling stands, saying he's heard "different figures tossed around." But he said he's repeatedly heard figures in the millions.

The county can still petition the appellate court for another review or take the case to the California Supreme Court, and has a little more than a month to make that decision. Jay Moller, an attorney who handled the appeal for the plaintiffs, said in a press release that he believes there would be little point, calling the initial appeal "near-frivolous" and saying there's "no chance of overturning this bullet-proof appellate decision."

For his part, Deputy County Administrative Officer Sean Quincey did not answer a Journal inquiry asking for the number of properties potentially impacted by the ruling or the potential liability for the county.

"The county is disappointed with the court's ruling and considering its options with respect to the litigation," Quincey said in an email to the Journal. "However, it does wish to maintain a collaborative relationship with cannabis growers in the county and will continue dialogue with growers and their representatives regardless of the outcome of this suit."

Thadeus Greenson (he/him) is the Journal's news editor. Reach him at 441-4200, extension 321, or thad@northcoastjournal.com. Follow him on Twitter @thadeusgreenson.

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