Why Buying at $20 Wholesale Doesn’t Mean You Make $10 in NY Cannabis Retail

What this page covers

• Why gross margin is not profit
• The real costs that come out of each sale
• A per unit profit calculator you can reuse
• A realistic $500,000 monthly sales example
• How 280E changes what “profit” even means
• What to do differently when you price, discount, and reorder

The key idea

If you buy for $20 and sell for $40, your gross profit is $20.

Your real profit is what is left after you pay for:

• Labor to run the store
• Rent and utilities to keep it open
• Security and compliance overhead
• Cash handling and deposits
• Payment processing fees (if you have them)
• Taxes that hit harder under 280E

Gross margin vs net profit

Gross margin

Gross margin is based on product only.

Retail price minus wholesale cost = gross profit

Example:
$40 retail minus $20 wholesale = $20 gross profit

Net profit

Net profit is what is left after operating costs.

Gross profit minus operating costs = net profit

In cannabis retail, operating costs are often heavy. Under 280E, the tax impact can also be heavy because many normal business deductions do not apply at the federal level.

The real costs that come out of every sale

These are the buckets that quietly eat your “$10 profit” idea.

Labor

Budtenders, managers, inventory intake, compliance tasks, scheduling coverage, training, payroll administration.

Labor cost is not just wages. It includes payroll taxes, workers’ comp, and often overtime coverage.

Rent and occupancy

Base rent plus common area maintenance and taxes if you are on a triple net lease.

Security and compliance overhead

Cameras, alarms, storage controls, monitoring, maintenance, audits, and the human time spent keeping it compliant.

Cash handling and cash risk

Cash pickups, counting time, reconciling drawers, shrink controls, vault controls, and the risk cost of holding cash.

Payment fees

If you use any kind of debit, ACH, or other payment program, fees can reduce your gross profit per unit.

280E tax pressure

The federal rule is the killer detail.

If you are subject to 280E, many ordinary business expenses are not deductible federally. That means you can owe tax based on a number closer to gross profit than true net profit, depending on your facts and your accounting.

A practical $500,000 per month example

This example is meant to feel like a real NY operator scenario. Your exact numbers will differ by location, headcount, hours, security setup, and how you buy.

Step 1: Start with monthly sales and gross margin

Assume monthly sales: $500,000

Dispensary gross margin commonly lands around the mid range in many markets, but varies a lot by pricing, discounting, and product mix.

Assume gross margin: 45% (example)

• Cost of goods sold: 55% of $500,000 = $275,000
• Gross profit: 45% of $500,000 = $225,000

Step 2: Subtract realistic operating costs

Below is a realistic structure, shown as a range so you can plug your numbers.

• Payroll and payroll burden: $95,000 to $140,000
  (Example midpoint: $120,000)
• Rent and occupancy: $25,000 to $60,000
  (Example midpoint: $40,000)
• Security and compliance overhead: $10,000 to $25,000
  (Example midpoint: $15,000)
• Insurance: $2,000 to $10,000
  (Varies widely by coverage, carrier appetite, and claims history.)
• POS, tech, back office, accounting: $5,000 to $15,000
  (Example midpoint: $8,000)
• Cash handling and banking friction: $5,000 to $20,000
  (Example midpoint: $10,000)

Example midpoint operating costs total:
$120,000 + $40,000 + $15,000 + $6,000 + $8,000 + $10,000 = $199,000

Step 3: What is left before taxes

Gross profit: $225,000
Minus operating costs: $199,000
Equals: $26,000 left before tax

That is a 5.2% pre tax net margin on $500,000 sales.

Step 4: Where 280E changes the ending

Under 280E, the taxable income calculation can be much higher than that $26,000 because many operating expenses are not deductible federally.

That is how a dispensary can look “profitable” in sales and still feel broke:

• Cash goes out for payroll, rent, security, and purchases.
• Taxes can still hit based on a higher taxable figure than your real cash left.

True per unit profit calculation

Use this when you are deciding whether a product is actually worth stocking.

Step 1: Start with the unit economics

Assume:

• Wholesale cost: $20
• Retail price: $40
• Gross profit: $20

Step 2: Allocate operating costs per unit

Pick a simple method. The goal is consistency, not perfection.

Method A: Allocate as a percent of sales
If your operating costs run about 40% of sales, then on a $40 sale:

40% of $40 = $16 operating cost allocation

Now your $20 gross profit becomes:
$20 minus $16 = $4 left before tax and shrink

Method B: Allocate per transaction
If you average 12,000 transactions per month and monthly operating costs are $199,000:

$199,000 divided by 12,000 = $16.58 operating cost per transaction

That is the same reality, just a different method.

Step 3: Adjust for shrink and discounting

If you discount that $40 item to $36, your gross profit becomes $16.
If you have shrink, comps, or returns, it drops again.

This is why discounting can feel like “moving product” while silently deleting profit.

The most common operator mistakes

Treating markup like profit

Doubling a price is not doubling profit. It is just gross margin.

Pricing without knowing your operating cost rate

If you do not know your operating costs as a percent of sales, you cannot know real margin.

Overbuying slow inventory

Dead inventory turns into forced discounting, which turns $4 of real margin into zero.

Using “cash left” as the signal

Cash left in the bank is not profit. It is timing plus taxes plus bills due.

What to do instead

Set a target operating cost ratio

Know your operating cost percentage. Track it monthly.

Require a minimum true margin for new products

Do not bring in new SKUs unless they clear your minimum true profit threshold after allocations.

Treat discounting like a controlled tool

Discounting should be tied to inventory aging, sell through, and cash flow needs, not panic.

Build pricing around your actual model

Your menu should support the math of payroll, rent, security, cash handling, and taxes.

The Operational Lesson

Before approving a new SKU, ask:

• What is the true per-unit operating profit?
• What happens if we discount 10%?
• How fast will it sell through?
• Does it increase inventory days on hand?
• Does it increase accounts payable pressure inside the 30-day window?

If you cannot answer those, the margin is theoretical.

Go Here Next

• How Much Working Capital Does a NY Dispensary Actually Need?
• Why Inventory Is Draining Your Dispensary’s Cash
• Understanding Accounts Payable in a NY Cannabis Dispensary
• What IRS 280E Drains Your Bank Account

Source Material

• 26 U.S.C. § 280E (Internal Revenue Code)
• IRS Chief Counsel Memorandum discussing 280E and cost treatment