The U.S. Department of Justice recently sued cannabis company TerrAscend Corp (TSE: TSND) (OTCMKTS: TSNDF) (FRA: TED), demanding it return an US$8.3 million tax refund plus interest. This marks the first known case where the government seeks to claw back a refund tied to the old 280E tax rule.
Section 280E prevents cannabis businesses that sell a Schedule I or II controlled substance from deducting normal business expenses on their federal taxes. For years, this rule forced operators to pay much higher effective tax rates than other companies. TerrAscend originally filed its 2020 taxes without claiming these deductions, as required. But in April 2024, the company filed an amended return claiming US$64.2 million in deductions and received the US$8.3 million refund in June of 2024.
The DOJ says TerrAscend was never entitled to those deductions because cannabis remained a prohibited substance under federal law in 2020. The government argues the refund was “erroneous” and that the company has not returned the money voluntarily. This lawsuit comes after federal rescheduling of medical cannabis to Schedule III in April, which ended the 280E burden going forward but left questions about past taxes.
In simple terms, TerrAscend bet that rescheduling would let it claim old deductions and get money back. The IRS issued the refund quickly, but now the DOJ wants it repaid. This case may signal how the government handles similar situations across the industry, where public companies hold about US$1.6 billion in uncertain 280E-related tax positions.
TerrAscend continues to perform well despite this dispute. The company reported strong Q1 results this month, with net revenue of US$65.5 million from continuing operations, a gross profit margin of 52.8 per cent and adjusted EBITDA of US$17.4 million (a 26.5 per cent margin). It posted its 15th straight quarter of positive operating cash flow.
TerrAscend’s stock has also shown positive performance over the past year following the broader cannabis sector downturn after legalisation developments.
Following rescheduling, TerrAscend’s outlook looks promising. The end of 280E should boost profitability, strengthen its balance sheet, lower the cost of capital and potentially open doors to uplisting on major U.S. exchanges. Management sees opportunities for expanded research, better margins and overall growth.
Challenges remain though. The MSO must resolve the ongoing tax dispute and deal with unclear rules from the U.S. Treasury on whether they can get tax breaks for past years.
Other large multi-state operators like Trulieve Cannabis Corp (CNSX: TRUL) (OTCMKTS: TCNNF) (FRA: T0A) and Curaleaf Holdings Inc (TSE: CURA) (OTCMKTS: CURLF) (FRA: 2XW1) carry much larger tax liabilities from the old 280E rules. Trulieve, for instance, has around $445 million while others carry hundreds of millions.
Read more: Cannabis telehealth operator Veri Medtech aims for Nasdaq uplisting
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