Cannabis Musings - March 8, 2024

The lesson of Trulieve's tax refund.

Mar 08, 2024

Friends, I’m kvelling over the fact that President Biden mentioned federal cannabis reform in last night’s State of the Union speech. Some may see this as election year schmoozing, but I think this is more than chopped liver. It’s another sign that the narrative is changing. Slowly, yes, but who would have imagined a decade ago that a President would use valuable verbal real estate to promote positive pot reform? Combine that with Congress including in its latest appropriations bill funding to study state cannabis regulatory frameworks, ostensibly in anticipation of future federal legalization, and I’d say that’s a pretty good week for cannabis (even the SAFER Banking Act, the Washington Generals of cannabis policy reform, got an honorable mention).

Separately, I’ve actively avoided writing about Trulieve’s purported 280E refund, but I’ve gotten enough questions about it from readers that I’m giving in. I didn’t want to do this, simply because there’s still so much about it that’s unknown (like, what did they do?), but there’s so much misunderstanding about it that I’m relenting. Sort of.

Back in October 2023, Trulieve, a large MSO, announced in a press release that it had filed amended federal tax returns for prior years claiming a refund of $143 million for taxes it “believe[s] it does not owe … supported by legal interpretations that challenge the Company's tax liability under Section 280E of the Internal Revenue Code.” I recall some kibbitzing about it at the time, and there was some analysis, but given the sheer lack of information in the press release about the nature of the claim, it mostly came and went.

Fast forward to the end of last month, when Trulieve announced as part its 2023 year-end financials release that it:

Filed amended federal tax returns for 2019, 2020, and 2021 claiming $143 million of refunds, also filed corresponding amended state returns claiming $31 million of refunds. Received $62 million in refunds in the fourth quarter and a total of $113 million in refunds to date alongside one rejection notice in the amount of $1.2 million.

Notice what’s missing from that statement? Detail. Specifically, how much of the refund came from the Internal Revenue Service because of Truileve’s 280E tax position that it announced back in October. The earnings call (a routine, quarterly public company exercise in which the public and analysts get to ask questions about the earnings release) shortly after the release was similarly opaque. Trulieve CEO Kim Rivers did respond “yes” on Twitter (now known as “X”) to the question of whether it “receive[d] a tax refund related to 280E,” but even that doesn’t answer whether and how much came from the IRS.

Understandably so! From what I can gather, Trulieve doesn’t want to share what’s effectively a trade secret that, if it works, would give it a significant financial edge. And yet, and yet, and yet, just about everyone in the industry seemingly ignored the details (or the lack thereof) and cheered Trulieve’s gambit as an unmitigated success, drawing the conclusion that the entire refund was due to 280E refunds. Now, others are wondering why other MSOs aren’t doing the same.

But, doing what? Unless I missed something (always possible – this is a free newsletter), it’s not clear from public filings or statements that any portion of Trulieve’s announced refunds came from the IRS and were related to amending its prior returns for 280E. To be totally clear, I don’t blame Trulieve at all for not being specific and not disclosing its strategy – I’m focused on the fact that everyone else seems to be misreading the situation. Additionally, Trulieve has been appropriately transparent (in their press releases, financial statements, and earnings calls) about the risk involved and the uncertainty of this 280E tax strategy. Assuming that a portion of the announced refunds indeed came from the IRS due to the 280E strategy, they’re still subject to audit.

The point here is that it’s schmontzes (“folly”) to conclude that what might be working for Truileve must work for everyone else. I’ve had innumerable conversations with accountants, lawyers, operators, analysts, and investors over the past few weeks trying to suss out what happened, and all I’ve been able to conclude is that we (outside of Trulieve, its tax lawyers, and its auditor, of course) don’t really know Trulieve’s strategy, and we may indeed never know. So, we can’t just assume that what’s good for the goose here is also good for the gander (I admit that’s not the most apt metaphor).

I sincerely hope that Trulieve’s 280E tax position indeed was accepted in full by the IRS – that would be a real win for the industry, and an impressive use of tax creativity. Prior strategies generally haven’t worked, so I don’t expect that the IRS will ignore 280E going forward, but maybe Trulieve truly cracked the code. However, the reaction to Trulieve’s announcement shows that we need to be careful about drawing conclusions from limited information, assuming that one size fits all, and expecting that every federal agency is that ready to change its tune regarding cannabis. Me ken dem barg mit a shpendel nit avektrogen. (“A mountain cannot be moved with a splinter.”)

Be seeing you!