In yet another example of Covid-era benefits not applying to cannabis companies, a federal court in Washington ruled the Employee Retention Credit (ERC) is not available to marijuana businesses, thanks to the 280E tax deduction restriction.
“Nothing in the plain text of Section 280E limits its application to income tax credits,” said District Judge John Chun in his May 9 ruling, granting the government’s motion to dismiss in the case of Receivership Estate of Solstice Group Inc. et. al v. United States of America in the Western U.S. District of Washington.
The ERC was created by the Coronavirus, Aid, Relief, and Economic Security Act and was intended to aid companies that resisted laying off workers between March 12, 2020, and Jan. 1, 2022. Similar to the Paycheck Protection Program (PPP), ERC claims proved to be attractive to con artists looking to bend federal regulations for a cash windfall. In both cases, the benefits were technically not supposed to go to any marijuana-related companies while the plant remained federally illegal.
Seattle-based cannabis manufacturer Solstice Group Inc., or actually the former company’s creditors, sued the government after their ERC claims were denied.
Solstice was forced to suspend operations from second quarter 2020 through third quarter 2021, in part due to Covid restrictions limiting the company’s ability to cultivate product. By Jan. 3, 2024, the company was administratively dissolved under receivership.
Solstice filed for ERC relief for the last three quarters of 2020 and the first three quarters of 2021, for a total of $1.37 million. The IRS denied the claim for the 2021 third-quarter tax relief on July 16, 2024, but has yet to make a determination for the other 2021 claims. Despite the IRS not ruling on those claims, the court ordered that they also be denied due to ineligibility.
The plaintiffs argued that 280e, which bars companies from claiming business expenses if their business is involved in Schedule I narcotics, should only apply to income taxes and not tax credits.
Tax credits don’t transfer, judge rules
The plaintiffs also argued that 280e should not apply to them because the underlying cannabis company is in receivership, and so any refunds would go to its creditors, who are not plant-touching cannabis companies.
The court was unpersuaded. Chun wrote that tax credits do not automatically transfer to a new recipient unless there is a law that specifically directs or allows that transfer.
“Because plaintiff cites no authority to support his assertion, the Court rejects it,” Chun wrote.
Solstice is not the only company that has attempted to take advantage of the ERC.
Jushi Holdings Inc., a Florida-based MSO, also claimed numerous ERC exemptions, according to a Feb. 18, 2025, press release in which the financially embattled company announced it had sold the rights to $6 million in ERC exemptions to an unnamed third-party for $5.1 million. The announcement also included a note that the company had retained about $3 million in ERC claims.
Despite the credit sale, the company would later announce a $17 million loss for the quarter in which it sold its ERC claims during its first-quarter earnings report.
Meanwhile, the IRS announced a moratorium on processing any new ERC claims on Sept. 14, 2023, out of concern over an alleged flood of improper claims. About a month later, the IRS announced it would allow companies to withdraw their applications for ERC and avoid any penalties they would have accrued if their claim was found to be ineligible.
“The IRS is increasingly alarmed about honest small business owners being scammed by unscrupulous actors, and we could no longer tolerate growing evidence of questionable claims pouring in,” said then-IRS commissioner Danny Werfel in a statement. “The further we get from the pandemic, the further we see the good intentions of this important program abused.”
PPP investigations apparently paused
There was growing concern last year that the federal government might crack down on cannabis-related businesses that applied for the federal loan. Those concerns have since quieted.
Much of the SBA’s enforcement of PPP loans came through qui tam legal actions, which require a private individual to dig up the alleged loan fraud in exchange for a portion of the penalty if the wrongdoing goes to court.
Last year, Docklight Brands, which owned the rights to use Bob Marley’s brands for cannabis-related products, agreed to a nearly $1 million settlement with the government over improperly awarded PPP loans.
Earlier than the Docklight Brands case, the Department of Justice charged Austin Hsu on Oct. 26, 2020, for wire fraud related to allegedly improper PPP loans for three different Washington dispensaries.
Last month, the Department of Justice accused the owner of a hemp shop in Colorado of making a fraudulent PPP loan claim, but the charge was related to the defendant allegedly making false claims to inflate the loan amount, rather than being involved with cannabis.
There does not appear to have been any new qui tam lawsuits directed at cannabis companies based on a search on PACER, which is the federal court system’s e-file database. Attorney Jason Marcus, who represented Sidesolve in its case against Docklight Brands, could not be reached for comment.
It remains unclear to what extent the government plans to continue to investigate alleged fraud from PPP loan recipients because President Donald Trump fired the inspector general at the Small Business Administration who was responsible for leading those investigations against PPP loans.
