TerrAscend (TSNDF) and Ascend Wellness (AAWH) are following in the footsteps of Trulieve (TCNNF) in amending tax returns with the argument that IRS tax code 280E should not apply to their multi-state cannabis businesses. At this point, none of these multi-state operators are being specific about their legal strategies, but at least one company is relying on an ongoing legal challenge to the Controlled Substances Act.
Under 280E, tax filers are unable to deduct business expenses if that business violates federal law. Recently, cannabis MSOs have been attempting to rebut that status, starting with Trulieve, which announced last fall that it intended to file amended tax returns that allowed their business expenses.
Trulieve announced during its quarterly earnings call on Feb. 29 that the company had received $113 million in tax refunds as a result of its amended claims. Trulieve executives were not willing to share their legal strategy during their earnings calls, but the company’s latest 10-K filing indicates that those tax refunds applied to West Virginia and Florida assets, which are exclusively medical.
TerrAscend assumes lighter tax loads in the future
TerrAscend and Ascend Wellness soon followed Trulieve with claims that they were also seeking tax refunds under new interpretations of 280E in their respective quarterly reports. In their cases, it is not clear whether medical or adult-use status is part of the strategy.
“Regarding taxes, after initiating a comprehensive evaluation in early 2023, and based on legal interpretations, we have changed our tax position related to the applicability of IRS Section 280E, which will result in amended returns and expected refunds of approximately $26 million,” said TerrAscend Executive Chairman Jason Wild during the March 14 earnings call.
TerrAscend CFO Keith Stauffer said that he expects the company will get a tax refund that is enough to cover its 2023 tax bill, and that moving forward, the company will be assuming a lighter bill.
“Our current income tax liability as of year-end is $4.8 million, and we plan to make payments as an ordinary taxpayer going forward without 280E,” he said.
Two days earlier, on March 12, Ascend Wellness held its own earnings call in which the company said it had filed amended tax returns based on their own legal opinion about 280E, with the expectation that they would get $26 million back, which would cover their 2023 taxes.
Ascend Wellness expects 2023 taxes to be covered by refunds
“We filed 2020, 2021, and 2022 amended federal tax returns. We plan to file 2023 federal return as a normal corporate taxpayer, excluding 280E,” said CFO Mark Casselbaum during the earnings call. “As a result of these amendments, we expect these refunds to cover our 2023 federal tax obligations.”
Much like Trulieve and TerrAscend, Ascend Wellness also noted in its 10-K filing that their tax move could attract greater scrutiny from the IRS.
“While there are currently several pending cases before various administrative and federal courts challenging these restrictions, there is no guarantee that these courts will issue an interpretation of Section 280E that is favorable to cannabis businesses,” said the report.
Similar to Trulieve’s tax announcement, the executives on the TerrAscend earnings call did not share their legal strategy, but Stauffer hinted that it was similar to an ongoing federal case out of Massachusetts.
“It’s very legal. We have outside counsel legal interpretation. I would say, generally, it’s along the lines of [Canna Provisions v. Garland] and some of the same legal aspects that are outlined in that lawsuit. I think that’s enough to sort of get an indication of the position there,” he said.
Canna Provisions v. Garland was filed in the U.S. District Court of Massachusetts on Oct. 26, 2023. The plaintiffs, who also include Verano Holdings and Wiseacre Farm, argue that the Controlled Substances Act unconstitutionally bans federally legal cannabis.
The last time there was a major federal challenge to the CSA’s application to state-legal cannabis was in 2005 with Gonzales v. Raich. At the time, the court reasoned that the CSA was justified because of the federal government’s continued efforts to eradicate commerce in cannabis along with the government’s unwillingness to differentiate between interstate and intrastate cannabis.
At the time, only 10 states had legalized medical cannabis and none had legal adult use. Since then, there are now 24 states with legal adult-use and 14 more have legal medical cannabis programs. Meanwhile, the federal government has since instituted policies and laws that reflect an unwillingness to crack down on legal cannabis.
The federal government has filed a motion to dismiss the CannaProvisions case over a lack of jurisdiction, and the plaintiffs are currently preparing their response, based upon their latest motion on March 13 to file excess pages in their rebuttal.
