Medical marijuana dispensaries in Sacramento are under-reporting revenue to tax collectors and failing to comply with city operating requirements, according to an audit that will be discussed at Tuesday’s City Council meeting.
The critical audit comes as some of the city’s 30 dispensaries are ramping up to sell pot to recreational users on Jan. 1, when state law allows sales of non-medical marijuana to begin.
Before that can happen, however, dispensaries will have to prove they are not in violation of local regulations, as some were in the report issued by the Office of the City Auditor, said the city’s pot czar, Joe Devlin.
“I take the findings very seriously,” he said. “It provides a good road map for regulation.”
MuniServices, a company hired by the city to review all business tax revenue, examined proceeds from 10 dispensaries over three years and found that they had underpaid the city $139,000, according to the audit. But the amount of under-reported revenue is possibly much higher because of problems with how the industry records revenue, auditors concluded.
Auditor Jorge Oseguera said in the report that staff sought information to document dispensary revenues and operating procedures but encountered operators who were unable to provide comprehensive financial records. In one case, a dispensary owner refused to allow city officials access to the property.
Several dispensaries identified in the audit did not respond to requests for comment, nor did the California Cannabis Industry Association.
The audit notes that some of the financial reporting problems stem from the dispensaries’ position as cash-only businesses. Because marijuana still is illegal under federal law, many dispensaries have limited access to banking services.
City auditors sought financial records from a sampling of six dispensaries it had selected. None of them provided all the documentation requested, even though city ordinance requires them to do so, the audit states.
In five of those cases, auditors found a discrepancy between gross revenue receipts and income reported to the city. “One dispensary reported $220,000 less in gross receipts to the city than on its financial statement, which indicates that the dispensary may be under-reporting its gross receipts,” the audit states.
In addition, only one of the six dispensaries would provide auditors with a list of its members. Auditors wanted the lists to make sure the dispensaries were only selling to eligible patients.
Auditors were not able to determine much of anything about All About Wellness, a dispensary on 19th Street, because it would not grant the city access to its property, the report says. The dispensary did not return a message seeking comment.
According to the audit, another dispensary, Sacramento Community Cannabis Collective, sold 50 plants to a patient, when state guidelines allow up to 12 immature plants. A woman who answered the dispensary’s phone Monday said no one was available to comment.
Auditors found that another dispensary sold marijuana to a patient with an expired recommendation letter and that an employee of another dispensary consumed marijuana on-site, in violation of city ordinance.
The findings raise questions about the dispensaries’ ability to properly sell marijuana for recreational use, Devlin said. The City Council expects to discuss commercial pot sales on Nov. 28. Dispensaries will need a state permit as well as a local permit to sell recreational marijuana.
“There are numerous opportunities for improvement,” Oseguera said of the audit, adding that many of the problems are the result of a relatively new industry in Sacramento and California.