280E Considerations for California Retailers
Retail is the harshest position under Section 280E. As a reseller, a dispensary's cost of goods sold is limited to the invoice price of product plus the costs of acquiring it — inbound freight, and the narrow set of purchasing and handling costs the reseller inventory rules permit. Everything that makes the store work is disallowed federally: budtender wages, rent on the sales floor, security, marketing, delivery to the customer, POS software, insurance and management compensation.
Patients Mutual settled the question of whether retailers can push selling costs into inventory. They cannot. The practical response is not creative recharacterization but precision: capture every dollar of landed cost correctly at receiving, keep the inventory records defensible, and separate any genuinely distinct non-plant-touching business with real economics behind it.
Because the federal tax base is gross profit rather than income, gross margin management is tax management. A promotion that gives away four points of margin costs the operator the margin and the tax on it, with no deduction to soften either side.
- Inventoriable: invoice cost, inbound freight, permitted acquisition costs
- Disallowed federally: payroll, rent, security, marketing, delivery, software
- California decouples from 280E, so the state return deducts what the federal return denies
Cost Accounting, Inventory and METRC in a Store
Landed cost has to be recorded when the METRC transfer is accepted, not reconstructed from vendor statements later. Each SKU carries a unit cost, and that cost drives both the tax position and the category margin reporting the buyer uses to allocate shelf space.
Inventory integrity depends on a three-way monthly reconciliation between METRC package quantities, the POS inventory subledger and the general ledger. Variances get classified — receiving errors, voided sales that never reversed in track-and-trace, sampling, destruction, theft — rather than plugged. Unexplained variance is simultaneously a licensing exposure with the Department of Cannabis Control and a defect in the COGS figure the federal return depends on.
Aging matters too. Flower and edibles lose value and eventually get destroyed, and product written off at the back of the store is margin the federal return will not return to you. Days-on-hand by SKU belongs in the monthly package.
Tax Planning and Recommended Services
Planning for a retailer centers on three things: funding federal estimates against a gross-profit tax base, keeping excise, state and district sales tax, and local cannabis business tax accrued and remitted on their separate calendars, and holding discount discipline that protects the margin the tax is computed on. Los Angeles, Oakland and San Jose each run their own gross-receipts cannabis tax with its own filing rhythm, and penalties surface at license renewal.
We build the accounting system first and let the tax return follow it. If you operate a licensed California dispensary, a diagnostic review will quantify what your current treatment is costing you before any engagement begins.
