280E Considerations for California Distributors
Distribution is a reseller activity when the distributor takes title, which means narrow inventoriable cost: purchase price plus inbound freight and permitted acquisition costs. Warehousing, outbound transport, sales staff and compliance personnel are generally disallowed federally, which is a difficult combination in a segment whose entire value proposition is logistics and compliance.
Where the distributor operates as a service provider rather than a buyer — moving another party's product for a fee, arranging testing, and handling regulatory duties — the economics and the accounting are different. Revenue is fee income, there is no inventory of owned product, and the cost structure is almost entirely non-inventoriable. Many California distributors run both models simultaneously and need them separated in the ledger.
- Owned-product model: reseller COGS, narrow inventoriable pool
- Fee-for-service model: service revenue, minimal inventory, high disallowed cost share
- Separate the two in the chart of accounts, not in a spreadsheet at year end
Cost Accounting, Inventory and METRC in Distribution
Distribution is where most of California's track-and-trace activity happens: transfers in, testing holds, sampling, remediation and transfers out. Every manifest is an inventory event, and package-level reconciliation between METRC, the warehouse system and the ledger is the core control. Inventory held on consignment or on behalf of a brand must be segregated so it never appears as owned inventory on the balance sheet.
Quarantine and testing failures need explicit accounting: product held pending results, product remediated, product destroyed. Destruction is a hard cost, and in a 280E context an expensed destruction has no offsetting deduction federally, so failure rates have a tax cost beyond the obvious one.
Route and customer profitability reporting is the operating counterpart. Cost to serve varies enormously between a single-stop Los Angeles route and a Central Valley run, and blended pricing hides which accounts are worth keeping.
Tax Planning and Recommended Services
Distributors face concentrated receivable risk and thin margins, so cash forecasting, credit policy and collections discipline usually deliver more value than tax structuring. Where excise-related obligations, consignment arrangements and multiple license types intersect, entity structure and clean intercompany documentation become the planning focus.
We build the accounting system first and let the tax return follow it. If you operate a licensed California distribution business, a diagnostic review will quantify what your current treatment is costing you before any engagement begins.
