Marijuana Business Audit

Arizona Department of Revenue (ADOR) conducts business audits using applicable Arizona Revised Statutes and Model City Tax Codes that govern the audit process. An audit by the Department is an educational process to continue voluntary compliance with tax obligations and to ensure taxpayers remit tax correctly. An auditor reviews financial records, verifies income, purchases, exemptions, deductions, and inventories. Auditors conduct the review professionally and efficiently with minimum disruption to taxpayers’ operations.

The Arizona Department of Revenue (ADOR) is tasked in A.R.S. Title 42, Chapter 5, Article 10 with collecting the excise tax (imposed only by the state) and transaction privilege tax (state, counties, and cities) imposed on adult use marijuana sales.

 

Adult Use Marijuana

ADOR conducts business audits on adult use marijuana establishments within the State of Arizona. An audit conducted by the Department’s Transaction Privilege Tax (TPT) Unit covers TPT, use tax, excise tax, and inventories. 

Adult use TPT business classes include, but are not limited to: 029, 030, 017, 420, 421, 422, and 920.

Adult use establishments that are also medical use (Dual License) will be classified as a joint audit.

• The auditor will require financial documentation to verify tax reported to ADOR.
  • Documents include, but are not limited to: inventories, general ledgers, purchase orders, vendor invoices, shrink/loss, and POS reports. An auditor may request additional information as needed throughout the audit.
  • Auditors will also audit reported inventory counts and may ask to be present during a taxpayer’s monthly inventory count.

 

Helpful Links:

• Examination of Records
• Standardized Audit Process
• Licensing and Registration

 

If you have any questions, please contact the Arizona Department of Revenue at [email protected].

 

Medical Marijuana

ADOR conducts audits on medical marijuana dispensaries within the State of Arizona. An audit conducted by the Department’s Transaction Privilege Tax (TPT) Unit covers the topics of TPT, use tax, and inventories.

Financial audits for medical marijuana dispensaries include the following TPT business classes: 029, 030, 017, 203, 221, and 222.

Medical marijuana dispensaries that are also adult use (Dual License) will be classified as a joint audit.

For reference, use the webpage TPT Audit to review the standardized audit process.

Review the Record Requirement List for documentation required for the financial and inventory audit. Additional information may be requested for the completion of the audit, such as:

• Use tax records.
• Complete inventory records:
  • Including beginning inventory, acquisitions/purchases, returns, and ending inventory.
• Displays not for sale.
• Record of shrinkage (includes reduction due to damage/waste, drying, or loss of moisture).
• Records of items removed from inventory:
  • Includes transfers and sample products.

 

Auditors may request additional records throughout the audit process based on findings.

If you have any questions, please contact the Arizona Department of Revenue at [email protected].

 

Compliance Tips

• Sample of how to file and report excise tax on Form MET-1 
• A schedule of inventory changes for the reporting period must be completed.
  • Be sure to include:
    • Destruction of unsellable products.
      • Documentation required: date, weight, retail value, with management verification.
    • Samples and products taken out of inventory.
      • Testing free samples provided to merchants or patients/customers.
    • Sales that consist of medical marijuana and accessories.
• In case of theft, please be prepared to provide records and documentation, including but not limited to: inventory updates/adjustments, police reports, and insurance claims.
• Sales for Resale: If you participate in wholesale distribution, please be prepared to provide invoices, exemption certificates, and shipping logs for verification purposes.
• Examples

  • How to handle buy one get one free (BOGO) items.

    BOGO items are considered items of reduced cost. Tax is going to be paid on the reduced sale price of those items. For instance, Business B is having a Buy One Get One Free sale. The cost of the item they sell is $10.00. If a consumer purchases that $10.00 item, they get a like item for free. When those items are run through Business B's POS system, it discounts each item by 50%, saving the consumer $10.00 - the equivalent of the free item. Then, the POS system for Business B will apply the state/county and municipality tax rates to the reduced cost of both items.

  • How to tax bundles/packages.

    Different business codes may be required to be use to file properly. If the items are being sold as a bundle (pen and cartridge), the sale should be reported under business class 203 (medical marijuana) or 420 and 920 (adult use and applicable excise tax). If the items are sold separately, the sale of the pen should be reported under business class 017 (retail), and the sale of the cartridge should be reported under business class 203 (medical marijuana) or 420 and 920 (adult use and applicable excise tax).

 

Helpful Links:

• Arizona Department of Health Services
• Definitions and Frequently Asked Questions
• Deduction Codes