How a Cannabis Retailer Cut Its Effective Tax Rate With a Defensible COGS Method
Sam's List Editorial | 2026-06-23
How a Cannabis Retailer Cut Its Effective Tax Rate With a Defensible COGS Method A dispensary can be profitable on paper, pay its rent, pay its staff, run a tight store, and still owe federal tax on almost every dollar it brings in. That's not a horror story. That's the default. It's what Section 280E does to anyone selling a federally controlled substance. And it's the exact trap this cannabis 280E COGS case study walks through, step by step, with the math. One quick note before we start: the dispensary below is an illustrative composite built for education. The numbers are hypothetical and meant to show how the rules actually work, not to report a specific audited client. Why a dispensary owes tax on revenue, not profit (the 280E COGS problem) Here's the part that catches new operators off guard. Section 280E denies any deduction or credit for a business that "traffics" in a Schedule I or Schedule II controlled substance. Marijuana is still Schedule I federally. So the IRS reads the statute literally: no deduction for rent, no deduction for payroll, no deduction for marketing, insurance, or your point-of-sale system. The ordinary operating expenses that every other retailer subtracts simply don't count. What's left is gross profit getting taxed like it's net profit. Consider the composite. Call it Stone & Sprout, a single-location dispensary doing $3M in revenue. It buys $1.5M of product at wholesale. It spends another $1.1M running the store: budtenders, lease, security, software, marketing. In a normal world its taxable income is $400K. Under 280E, the $1.1M of operating expense is denied, so its taxable income is closer to $1.5M. At a 21% corporate rate, that's roughly $315K of tax on a business that actually netted $400K. The effective tax rate on real economic profit pushes past 75%. That's the 280E problem in one line, and it's why dispensary tax planning starts and ends with one number. The COGS channel 280E never closed: the heart of this case study Now the good news, and it's the whole point of this cannabis 280E COGS case study. Section 280E disallows deductions . It says nothing about cost of goods. And COGS isn't a deduction. It's a reduction of gross receipts that happens before you ever calculate gross income. The Tax Court and the IRS have both confirmed this repeatedly: a cannabis business may still subtract the cost of its inventory to arrive at gross income, then 280E bites everything below that line. So the entire game for a dispensary is this: capture every cost the law legitimately lets you put into COGS, and not a dollar more....
