Trulieve’s Amended Returns and Navigating Uncertain Tax Positions: A Comprehensive Analysis

Trulieve Cannabis Corp recently disclosed crucial information regarding amended returns and uncertain tax positions in its latest 8-K filing (dated February 29, 2024). This article aims to dissect the implications of these revelations and the potential use of amended returns for other operators in the cannabis industry.

The following developments were included on the agenda of the 8-K Fourth Quarter and Full Year 2023 Investor Presentation:

• In Q4, Trulieve filed amended federal tax returns for 2019, 2020, and 2021 claiming $143 million of refunds and corresponding amended state returns claiming $31 million of refunds
  
• Amended returns were supported by legal interpretations that challenge the tax liability under Section 280E of the Internal Revenue Code
  • Refund checks of approximately $113 million received to date of $174 million claimed
  • $62 million in Q4:23 and $50 million in Q1:24
  • Received one rejection notice for return-seeking $1.2 million refund
    
• Trulieve continues to make tax payments as a customary U.S. taxpayer without tax payments associated with 280E of the tax code until final resolution is reached
  
• While the challenge is ongoing, taxes are swept into an uncertain tax position
  • Balance sheet includes refund checks received, overpayments made in 2022 and 2023, and estimated payments made in 2023
  • Balance sheet uncertain tax position was $180 million on December 31, 2023, with $152 million related to this tax challenge
  • Cash flow reflects the net of cash taxes paid and refunds received
  • Fourth quarter reported operating cash flow would have been an estimated $32 million without the $62 million refund checks and with $37 million tax inclusive of 280E tax liability
    
• Uncertain Tax Position
  • $180 million at December 31, 2023
    • $28 million unrelated to the challenge of the applicability of 280E to Trulieve
    • $152 million related to the challenge of the applicability of 280E to Trulieve
      • $62 million cash refunds received in Q4:2023
      • $49 million net Q3:2023 280E tax liability accrual
      • $40 million net Q4:2023 280E tax liability accrual
        
• Not included in Uncertain Tax Position at December 31, 2023
  • $50 million cash refunds received in Q1:2024
  • $60 million remaining refund claims from amended returns 2019-2021 (no guarantee of receipt)
  • Incremental 280E tax liability accrual for 2024

Companies operating in the cannabis industry have historically been subject to crippling tax burdens due to the classification of THC products as Schedule I controlled substances. U.S. Code § 280E generally disallows any deduction or credit associated with the trade or business of trafficking in controlled substances (within the meaning of Schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State.

Section 280E precludes cannabis operators from sourcing tax relief from the ordinary and necessary expenses that come with operating a business, such as costs for personnel, management, general and administrative expenses, interest, security, and rent. Operators have only been capable of deducting costs pertaining directly to the purchase, creation, or development of inventory (Costs of Goods Sold) at the federal level. This lack of tax relief, coupled with the already difficult state of banking and financing for the industry, has led to financial ruin for many operators.

Professionals and operators within the cannabis industry have been questioning both the constitutionality and applicability of section 280E. It is arguable that with the U.S. Department of Health and Human Services (HHS) and many legislators recommending rescheduling in conjunction with the ever-growing number of states and districts legalizing recreational use (including Washington D.C.), the persecution and criminalization of those legally trafficking THC products is no longer a federal priority.

It is important for operators in the industry to consider the statute of limitations on claiming tax refunds related to such a position. Operators will not be eligible for a refund if they do not timely file amended returns during the statutory period. Taxpayers must generally file the return within three years of the due date of the original return, or within two years after the date they paid the tax, whichever is later. It is also essential to keep good financial records of company activity in the event of any audits or examinations.

There are also financial statement implications to claiming refunds on this position. ASC 740 requires disclosure of uncertain tax positions where the company takes or expects to take a tax position that may not be ultimately allowed by the relevant taxing authority. Many corporations must also file Schedule UTP with its tax return if the corporation has recorded a liability for unrecognized U.S. federal income tax benefits in audited financial statements with respect to an uncertain tax position or recognized the tax benefit because the corporation expects to litigate the position.

The acceptance of uncertain tax positions and the walking back of section 280E will lead to significant improvements in cash flow for cannabis operators and a greater sense of economic viability for new companies looking to enter the industry. It is undeniable that the result of Trulieve’s amendment is likely to send echoes of hope for financial health across the industry.

It should be emphasized that this analysis is based on the information available in the 8-K filing and may be subject to change. We encourage any entities interested in making amendment claims to conduct further research and seek professional advice before making major decisions.

If you or your company have questions on amended returns or any matters of cannabis taxation, feel free to reach out to Kurt Seifert at HBK Cannabis Solutions at (330) 758-8613.