The retail side of the marijuana business is often referred to as dispensaries or provisioning centers. The focus of this type of marijuana business is mainly sales.<\/p>\n\n\n\n
What would be the cost of goods sold (COGS) for Marijuana dispensaries<\/a> or provisioning centers?<\/p>\n\n\n\n Right off the bat, it seems logical that retailers will not have as much COGS as marijuana manufacturers. Most of their costs would likely go to non-COGS deductible expenses: wages for salespersons, bookkeeping, rent for the physical store, utilities, furniture, display cases, etcetera. All these are business costs incurred after the product has already been prepared for sale. In terms of the negative tax consequences of 280E<\/a>, this type of cannabis business is perhaps the hardest hit. Cannabis dispensaries and provisioning centers likely have the most credits and deductions for business expenses, but which they cannot, of course, avail of under the auspices of IRC 280E.<\/p>\n\n\n\n That said, there are still some costs that may be considered as included in COGS \u2013 and these would be the costs that went into the procurement, purchase, and transportation or freight costs of cannabis products. <\/p>\n\n\n\n In November 2018, the case of Patients Mutual Assistance Collective Corp., 151 T.C. No. 11 (2018)<\/em> (aka the Harborside case<\/a>) came before the U.S. Tax Court. This case involved a California-based cannabis dispensary that deducted IRC Section 162 business expenses and adjusted for indirect COGS under IRC Section 263A UNICAP Rules for producers. <\/p>\n\n\n\n The court held that first, IRC 280E prevented them from deducting ordinary and necessary business expenses under Section 162. Second, that adjustment for COGS for resellers should be under Section 471 instead of Section 263A. <\/p>\n\n\n\n In this case, the court made a distinction between marijuana producers and resellers and noted that there are separate regulations for COGS for these two types of businesses. One is a reseller if it did not have an ownership interest in the product, did not create it, maintain tight control over it, or take possession of everything that was produced.<\/p>\n\n\n\n Under Section 471<\/a>, resellers are to \u201cuse as their COGS the price they pay for inventory plus any transportation or other necessary charges incurred in acquiring possession of the goods.\u201d Specifically, 471-3(b) includes direct costs such as the following items:<\/p>\n\n\n\n Section 471 goes on to direct attention to 263A for \u201cadditional rules.\u201d Section 263A applies to both producers and resellers, whereby \u201cindirect inventory costs\u201d are to be included in COGS. It sort of gets complicated here because while 263A allows \u201cindirect inventory costs\u201d to be capitalized \u2013 something that producers can do under Section 471-3(c) but which resellers cannot, Section 263A goes on to state: \u201cAny cost which (but for this subsection) could not be taken into account in computing taxable income for any taxable year shall not be treated as a cost described in this paragraph.\u201d Essentially, the effect is that cannabis dispensaries don\u2019t have access to the benefits of 263A<\/a>, and they can only claim as COGS the costs that fall within the ambit of Section 471. Any other costs incurred that are otherwise nondeductible under 280E may not be deducted as COGS.<\/p>\n\n\n\nCOGS for Marijuana Retailers<\/h2>\n\n\n\n
What the US Tax Court Held as COGS for Cannabis Dispensaries in California Case<\/h2>\n\n\n\n