What Cannabis Examinations Focus On
Examiners start with income. In a cash-intensive business they reconcile deposits, POS records and track-and-trace sales data, and use indirect methods — bank deposit analysis, markup analysis, cash-flow analysis — if direct records look weak.
They then move to cost of goods sold. Expect challenges to any cost that resembles a selling or administrative expense, to labor allocations without time records, to square-footage allocations without measurements, and to inventory balances that don't tie to physical counts or BioTrack data.
- Gross receipts and cash reconciliation testing
- Reseller versus producer classification of the taxpayer
- Composition of inventoriable costs and allocation methodology
- Related-party arrangements and separate-trade-or-business claims
- Payroll classification, including contractor versus employee
How We Manage an Examination
First, we take over all communication. The operator should never be answering examiner questions informally, by phone, or on site. Every information document request gets a written response, on time, with exactly what was requested and nothing beyond it.
Second, we reconstruct the position: rebuild the inventory rollforward, assemble allocation studies, tie the return to the general ledger, and identify weak points before the examiner does so the response strategy accounts for them from the start.
Building the Substantiation File
These cases are won on documentation. The strongest files contain contemporaneous records: time records showing what cultivation labor actually did, measured floor plans by function, purchase invoices matched to transfer manifests, signed and dated physical count sheets, and written methodology memos that predate the examination.
Where records are incomplete, reconstruction is possible but weaker. We're direct about which positions hold up and which are likely to be conceded, so the operator can decide deliberately where to spend the fight.
Appeals, Penalties and Resolution
Not every adjustment should be accepted at the examination level. IRS Appeals weighs hazards of litigation and frequently reaches a materially different outcome than a revenue agent, especially on allocation questions where reasonable methods differ.
We also address penalties directly. Accuracy-related penalties can often be abated where the taxpayer relied on a documented methodology and professional advice — one more reason the methodology memos matter long before an audit begins.
State-Level Examinations
The NM Taxation and Revenue Department examines cannabis excise tax and Gross Receipts Tax: whether tax was calculated on the correct base, whether medical-patient exemption documentation exists, and whether reported sales agree with BioTrack. These examinations often run in parallel with a federal case and pull from the same records, so we manage them together rather than in isolation.
How a Cannabis Examination Typically Unfolds
A cannabis examination usually opens with an information document request focused on inventory: how ending inventory was valued, what costs were capitalized, how labor was allocated, and how the amounts tie to BioTrack. The second wave asks about entity separation, related-party transactions and owner compensation. The third, in cash-intensive cases, addresses bank deposits and cash controls.
Preparation determines the outcome. Operators with a written costing methodology, allocation studies with time records, square-footage measurements, BioTrack reconciliations and consistent year-over-year treatment resolve examinations narrowly. Operators without them face reconstruction under time pressure with the burden of proof on their side of the table.
We manage the engagement end to end: we control the flow of information, respond in writing, prepare the client for any interview, and keep the examination inside its stated scope rather than allowing it to expand into an unbounded review.
- Scope control and a single written channel for all responses
- Reconstruction and organization of inventory and allocation workpapers
- Position memoranda supporting each significant treatment
- Appeals, penalty abatement and collection alternatives where needed
New Mexico State Examinations
Federal exposure isn't the only exposure. The NM Taxation and Revenue Department conducts excise and Gross Receipts Tax examinations that in cannabis frequently focus on medical exemption documentation, excise reconciliation and the completeness of reported gross receipts against BioTrack data. These examinations use the same evidence base as the federal one — POS records, BioTrack exports, bank deposits and the general ledger — so a single well-maintained reconciliation file serves both.
We represent operators at both the federal and state level and keep the positions consistent, because an inconsistency between a state filing and a federal one is exactly what an examiner looks for.
Where liabilities are established, the work turns to resolution: installment agreements, penalty abatement on reasonable-cause grounds, and structuring payment against seasonal cash flow so that resolving one year doesn't create failure in the next.
