Federal tax relief could be on the horizon for New York cannabis companies with two multistate cannabis operators claiming to have found the secret to escaping the tax obligations imposed by Section 280E of the Internal Revenue Service tax code.
Florida-based Trulieve Cannabis Corp. said last month it saved $113 million in federal taxes over several years by finding a way to bypass 280E and claim business expenses. Now, New York-based Ascend Wellness Holdings recently claimed in its quarterly earnings call that it filed amended tax returns for years 2020, 2021 and 2022 that excluded 280E, and plans to approach its 2023 filing in the same way. The company said this strategy will result in refunds that will cover its 2023 tax burden, expected to be more than $33 million.
The 280E provision has long been a thorn in the side of cannabis companies that operate legally in certain states, but are considered illegal operations at the federal level. The 280E provision bars companies that sell Schedule I and Schedule II controlled substances from claiming standard business tax deductions. As a result, cannabis companies pay taxes on gross income, rather than the significantly lower adjusted amount of income legal businesses must pay.
Both Trulieve and Ascend Wellness remain tight-lipped about how, specifically, they are circumventing 280E. Trulieve CEO called it a “trade secret” and said it was related to the company’s specific position in the industry.
So, New York marijuana companies will likely have to wait to determine either company’s legal basis for circumventing 280E. There could be one or many strategies behind their claims. And, even though Trulieve claims to already have received its refunds, the IRS could audit the company and try to retrieve that money.
Unless there is a court case because the IRS denies the refund or fails to act, spurring one of the companies to file legal challenges, thereby introducing court documents into the public purview, we may never know. So, excitement must be tempered. Until more is known, cannabis companies in New York’s projected $2 billion market must still seek and follow legal and tax advice or risk penalties from the IRS.
Reasons for Cannabis Companies to be Optimistic
Still, this news and other happenings seem to indicate momentum for loosening tax restrictions on cannabis companies. With two thirds of states having legalized the sale of cannabis in some way and creating a multi-billion industry, the conflicting state and federal laws that create challenges with taxes, banking and interstate commerce are being eyed for change.
The U.S. Department of Health and Human Services (HHS) officially recommended cannabis be moved from a Schedule I drug to a Schedule III drug, and the U.S. Drug Enforcement Agency is expected to act on that recommendation later this year. Rescheduling would allow companies to take normal business deductions.
Cannabis operators also would be able to transport product across state lines for sale. Interstate commerce is illegal for Schedule I substances, but not Schedule III drugs.
Harris Beach’s New York cannabis attorneys closely watch the developing industry for new developments. If you have questions for Harris Beach’s marijuana lawyers, please reach out to a member of our Cannabis Industry Team: attorney Francis L. Gorman, III at (585) 419-8628 and flgorman@harrisbeachmurtha.com; attorney Heidi Schult Gregory at (585) 419-8720 and hgregory@harrisbeachmurtha.com; attorney Meaghan T. Feenan at (518) 701-2742 and mfeenan@harrisbeachmurtha.com; or the Harris Beach attorney with whom you most frequently work.
