280E by license type

Why the same statute produces different tax bills

Section 280E disallows deductions and credits but leaves cost of goods sold alone. So the question for every license type is the same: how much of what this business spends can lawfully sit in inventory cost? The general rule and the 2026 medical carve-out are explained in 280E for buyers and sellers. This page covers how the answer changes by license.

The IRS position in Chief Counsel memorandum 201504011 is that cannabis businesses use the section 471 inventory regulations as they stood when 280E was enacted in 1982. Those regulations split taxpayers into two groups:

	Resellers, Reg. 1.471-3(b)	Producers, Reg. 1.471-3(c) and 1.471-11
Who	Retail, delivery, most distribution, lounges	Cultivation, manufacturing, extraction, infusion
In COGS	Invoice price less discounts, freight-in, other costs of acquiring the goods	Raw materials, direct labour, and indirect production costs such as production utilities, repairs, production supervision, and facility costs of the production space
Outside COGS	Store rent, sales payroll, security, marketing, software, G&A, interest	Selling and marketing, distribution to customers, general administration not tied to production, financing costs

The later section 263A capitalisation rules cannot be used to enlarge COGS. The Ninth Circuit confirmed that in Harborside in 2021.

Illustrative comparison at the same profit

Illustrative only. Three adult-use C corporations, each with $5,000,000 of revenue and $500,000 of pre-tax profit, federal rate 21%, state tax ignored. Only the split between COGS and other expenses differs.

	Retailer	Manufacturer	Cultivator
Revenue	$5,000,000	$5,000,000	$5,000,000
COGS	$2,750,000	$3,250,000	$3,500,000
Disallowed expenses	$1,750,000	$1,250,000	$1,000,000
Pre-tax profit	$500,000	$500,000	$500,000
280E taxable income	$2,250,000	$1,750,000	$1,500,000
Federal tax	$472,500	$367,500	$315,000
Effective rate on profit	94.5%	73.5%	63%

An ordinary business with the same profit would owe $105,000. The cost ratios are assumptions chosen to show the mechanism, not benchmarks; use the target’s own figures in the 280E effective tax rate calculator.

Dispensaries and delivery

Retail carries the heaviest 280E load. A dispensary is a reseller, and its biggest costs after product are exactly the ones the reseller rule leaves out: occupancy, retail labour, security, point-of-sale and compliance software, local fees, and advertising. Delivery operators are in the same position, with drivers and vehicles treated as selling costs.

Attempts to reclassify retail costs have failed repeatedly:

• In Richmond Patients Group (2020) the dispensary argued it was a producer because it inspected, tested, trimmed, dried, packaged and labelled what it bought. The Tax Court held it was a reseller.
• In Alterman (2018) the dispensary lost both its claimed second business and part of its COGS because its records could not support them, and the accuracy penalty was upheld.
• In Harborside, selling T-shirts and offering free wellness services did not create a second trade or business.

For a buyer, a retail seller showing an unusually high COGS percentage on its tax return compared with its books is a flag, not a feature.

Cultivation

Cultivators are producers. Grow labour, nutrients, growing media, water, electricity for lighting and climate control, depreciation and rent on the cultivation space, testing of product for sale, and harvest, trim and packaging labour are the kinds of costs the producer regulations bring into inventory. What stays out: sales staff, brand and marketing spend, delivery to customers, executive and back-office overhead not tied to production, and interest.

Two practical points. First, costs are capitalised into inventory and recovered only when the product sells, so a grower sitting on unsold biomass has paid the costs but not yet recovered them against income. Second, the allocation of shared costs, such as one building with cultivation and offices, or a manager who supervises both growing and sales, needs a documented method applied consistently. Examiners test it.

Manufacturing and extraction

Manufacturers are also producers. Input biomass or distillate, solvents, packaging components, production labour, lab and extraction-room costs, and equipment depreciation for production assets are inventoriable. Manufacturers usually sit between cultivators and retailers because branded products carry heavier selling costs: sales teams, trade marketing, slotting or promotional allowances, and brand licensing fees paid for marketing rights rather than production know-how. Research and development that is not part of production is another disallowed bucket.

Distribution, transport and wholesale

A distributor that takes title and resells is a reseller: product cost and inbound freight are in, and warehousing for sale, outbound logistics and sales costs are generally out. Where state rules make the distributor arrange testing and final packaging before sale, as California does, some of those costs of preparing goods for sale have a better COGS argument, but Richmond Patients Group shows the limits. A pure transport licensee that never takes title still handles a Schedule I substance for customers; treat its position as unsettled and get a written opinion.

Vertically integrated operators and microbusinesses

A vertically integrated group or microbusiness applies producer rules to what it grows and makes, and reseller rules to third-party product it buys for its stores. Retail operating expenses remain disallowed either way. Where the activities sit in separate entities, the intercompany transfer price moves taxable income between them, so it needs to be supportable against market wholesale prices. Buyers should reconcile intercompany prices to the state track-and-trace transfer records.

Management companies, landlords and other ancillary businesses

Moving costs into an affiliate does not automatically move them outside 280E. In Alternative Health Care Advocates (2018) the Tax Court held that a management company whose employees performed the dispensary’s purchasing, sales and operations was itself trafficking, and disallowed its deductions. By contrast, a business that never buys, sells or handles marijuana, such as an unrelated landlord, an equipment vendor or a software provider, is generally analysed as outside the statute. See ancillary cannabis businesses. Testing laboratories possess samples but do not sell marijuana; advisers differ on their exposure, and a buyer should ask for the lab’s written tax position.

Medical versus adult-use after April 2026

The 28 April 2026 order moved marijuana subject to a state medical marijuana license to Schedule III, and Treasury has said 280E will apply only to activities still involving Schedule I or II substances, with expenses apportioned. For license types this means:

• A medical-only dispensary, grower or processor deducts ordinary expenses going forward.
• A dual-license store or a grower supplying both channels must split expenses. The IRS had not published a method as of mid-September 2026; revenue mix, units and transaction counts are the obvious candidates, and they give different answers.
• In states where one license covers both channels, such as a combined medical and adult-use retail license, the documentary proof of which sales were medical will matter. Patient-sale flags in the point-of-sale and track-and-trace data are the record to preserve.

The valuation effect of these differences is covered in how 280E affects valuation. This page is general education, not tax advice.