Does Trulieve’s Tax Strategy Tie Into a Bigger Cannabis Industry Battle?

All eyes have been on multistate cannabis operator Trulieve and its amended tax return filings, which resulted in the IRS issuing the company a multimillion-dollar tax refund.

In October 2023, Trulieve filed amended federal tax returns for 2019, 2020, and 2021, claiming $143 million in refunds, due to what it said were overpaid taxes filed under Section 280E of the Internal Revenue Code (IRC), according to the company’s Q4 2023 and year-end 2023 financial report released Feb. 29. It filed corresponding amended state returns claiming $31 million in refunds. The Tallahassee, Fla.-based company also reported that it had received $113 million in tax refunds (as of the Feb. 29 report), including $62 million received at the end of 2023, in response to the amended returns.

IRC 280E prohibits state-legal, plant-touching cannabis businesses from taking normal business deductions available to other companies due to cannabis’s federally illegal status.

Speculations on Trulieve’s strategy for claiming overpaid taxes were posted on social media and discussed in webinars and private conversations between industry constituents and Cannabis Business Times; some speculations centered around the possibility that the company was playing the “THCA” card, which relates to the 2018 Farm Bill, what qualifies as “hemp” under the bill’s legal definition, and the fact that hemp is not subject to 280E.

For example, The Dank Informer speculated Trulieve’s position was related to this, and posted on X, “Hemp farmers are not subject to 280E but have now entered the flower D9 [delta-9] THC market under the guise that it is THCa, not THC. All cannabis flower is THCa!”

Why is this the case? “Almost all cannabinoids in the intact cannabis plant are stored in their cannabinoid acid forms, i.e., tetrahydrocannabinolic acid (THCA), cannabidiolic acid (CBDA), cannabigerolic acid (CBGA), etc. Heat and light will remove the carboxylic acid group from the cannabinoid acid through a decarboxylation reaction, which is why most raw flower is smoked or vaped to release the cannabinoids (THC, CBD, CBG, etc.),” CBT reported.

So, some hypothesized that Trulieve was claiming it paid 280E taxes on what was technically “hemp,” and therefore not subject to 280E.

Others, particularly those in cannabis accounting and tax circles, theorized that the company’s strategy was most likely related to the complex legal issues surrounding intrastate commerce, especially since this strategy is behind at least one other company’s amended tax returns and a major lawsuit headed for oral arguments May 22.

Dean Guske, CPA, of Guske & Co. Inc., which serves medical and adult-use state-legal cannabis businesses, told CBT that after talking with other CPAs and attorneys about Trulieve’s amended returns and subsequent refund, he believed he and his peers had arrived at a likely explanation.

“One of the thoughts was maybe the IRS has conceded this issue that 280E doesn't apply to these businesses because they are an intrastate business,” Guske said. “They don't sell across state lines, and therefore the CSA [Controlled Substances Act] does not apply to them because … there's a thinking that the federal government doesn't have the authority to regulate these businesses because they are not conducting interstate commerce. And I believe that's the basis of what their amended returns are. We have clients that want to amend returns on this same basis, and we've done a few already. It's complicated.”

Trulieve has been tight-lipped about its strategy, aside from noting that it believes it paid taxes that it didn’t owe. “It was a straight refund claim,” Trulieve CEO Kim Rivers told CBT in an interview in December 2023. “And those are pretty straightforward with the IRS. You're just basically saying, ‘We don't believe that we owe you this money. We made an error in our filing.’”

But when asked if the company was sharing its rationale for the claims, Rivers told CBT, “It would not be to our advantage from a positioning perspective—in terms of we don't want to harm our chances of success ultimately by doing that. We don't want to give anyone more time than they should have to be able to prepare for what we will be arguing.”

Ascend Wellness also filed amended tax returns and outright stated that those were based on a legal interpretation that 280E doesn’t apply to intrastate commerce. The company claimed refunds for 2020 and 2021 “and a refund and/or reduction of tax for 2022 which had been incurred as a result of the application of Section 280E based on a legal interpretation that Section 280E does not apply to solely intrastate cannabis-related business activities,” according to the company’s 2023 annual report. “The company intends to continue to take this position for the 2023 filing year. There is no guarantee that the IRS will not challenge our refund request and prevail in such challenge.”

Nick Richards, tax attorney, partner, and co-chair of the Cannabis Law practice group at Greenspoon Marder LLP, told CBT that he believes Trulieve’s tax refund claims are woven into a thread that ties to a 2004 lawsuit, “Gonzales v. Raich,” and a 2023 suit, “Canna Provisions Inc. et al v. Garland” (often called “the Canna Provisions suit”) filed against U.S. Attorney General Merrick Garland. Both suits focus on the CSA and the Commerce Clause of the United States Constitution, which authorizes Congress to regulate interstate commerce. This seems to be the same thread being pulled by Ascend.

The Canna Provisions suit “seeks to confirm the rights of Massachusetts and other states to regulate cannabis within their borders, and to confirm the corresponding limits on the federal government's power to regulate commerce,” CBT reported. “The federal government's power to regulate commerce is based on the Interstate Commerce Clause of the Constitution. The law at issue in this suit, the Controlled Substances Act, exceeds that limited authority: It bars the production, distribution, and possession of cannabis, regardless of whether those activities cross state lines or, as in the case of plaintiffs' cannabis businesses, are intrastate.”

Plaintiffs in the suit include Canna Provisions, Gyasi Sellers (CEO and founder of Treevit), Wiseacre Farm, and Verano Holdings, and foundational supporters of the suit include Ascend Wellness Holdings, TerrAscend and Green Thumb Industries, as well as Eminence Capital and Poseidon Investment Management, CBT reported.

The primary ruling of Gonzales v. Raich, however, was that even in states where medical cannabis is permitted, Congress maintains the authority to prohibit the use and cultivation of cannabis under the Commerce Clause. Former U.S. Supreme Court Justice John Paul Stevens “argued that the court's precedent ‘firmly established’ Congress' commerce clause power to regulate purely local activities that are part of a ‘class of activities’ with a substantial effect on interstate commerce. The majority argued that Congress could ban local marijuana use because it was part of such a ‘class of activities’: the national marijuana market,” as summarized by Oyez.

Here, Richards shares his insights into this high-profile tax case, the relevance and significance of the Gonzales v. Raich ruling—and why the relevance of its ruling is being called into question—and the Canna Provisions suit, for which a motion hearing is set to begin at 10:30 a.m. ET on May 22. He also explains the big-picture significance of these cases to the industry at large and the legality of 280E.

Noelle Skodzinski: Because Trulieve hasn’t publicly shared the strategy behind its amended tax return filings, many people have been speculating on it, whether it’s related to intrastate commerce or perhaps the THCA/hemp position. What are your thoughts?

Nick Richards: [Regarding the intrastate commerce position], about two years ago, Supreme Court Justice [Clarence] Thomas made a statement that a case called Gonzales v. Raich may no longer be good law because the facts that the opinion relied upon are no longer true. That started the legal industry courting the cannabis industry through industry groups … and others to challenge the case.

The position itself in Gonzalez v. Raich is the Interstate Commerce Clause.

There is no right to regulate drugs to the federal government in our system. It doesn't exist. The only way they have the power to regulate drugs is through the Interstate Commerce Clause.

The way our system works is that the Constitution says that any power not specifically given to the federal government is reserved for the states. So there is no federal governmental power to regulate drugs in the Constitution.

But that's not practical, right?

We have a number of things that aren't specifically enumerated in the Constitution that give the federal government powers—for example, environmental regulations. Not in the Constitution, right?

So, the only way the federal government has the right to regulate the environment—think about the Clean Water Act and the Clean Air Act, and all that stuff—is through the Interstate Commerce Clause.

The Interstate Commerce Clause originally gave the federal government the right to regulate interstate commerce, commerce that crosses state borders. And it was necessary at the time because in the early days of our Republic, the states were punishing each other. If you were in a state that had a port, you taxed the hell out of those inland companies to get to your port. And it wasn't good for the overall commerce of our nation.

The federal government needed the ability to prevent states from punishing each other. That was the original intent of the Interstate Commerce Clause.

It was then expanded to allow the federal government to regulate activities that were not commernce and to allow the government to regulate intrastate commerce—commerce that does not cross state lines.

That's what Gonzalez v. Raich was about. The intrastate cannabis industry in California in 2005.

Participants [in the medical cannabis program there] sued the federal government and said, “You don't have the power to regulate our intrastate activity under the Interstate Commerce Clause.”

And they lost.

They lost because, at that time, the federal government was locking people up for engaging in the early cannabis industry … because it was maintaining its war on drugs and had a national policy of eradicating marijuana from the United States. Their interstate goal was to eliminate marijuana from all states.They couldn't give California an exception, because if they did, it would pretty much eliminate that interstate goal. So, they had a reasonable basis, a rational reason, to regulate California's intrastate activity.

Skodzinski: Can you explain how the Clean Water Act relates? And you mentioned that three “very key things have changed” since the Gonzales v. Raich ruling. Can you explain those?

Richards: Number one, that fact that there is no federal effort to eliminate marijuana from the United States anymore. They have abandoned their interstate goal. So that fact is no longer true—that central fact that supported the holding in Gonzales v. Raich is no longer true.

Second, the Interstate Commerce Clause. The legal basis for the Interstate Commerce Clause is also changing.

That expansion of the Interstate Commerce Clause to allow the federal government to regulate intrastate commerce is now being reversed. And in a case last year called Sackett [Sackett v. EPA], which dealt with the Clean Water Act—[the ruling was that] the federal government has the power to regulate the water under the Interstate Commerce Clause, which gives the federal government the right to regulate interstate waterways. Not intrastate waterways.

But over the years, in order to protect the environment, that has been expanded because if some farmer fills in their wetland 10 miles away from some river that's connected underground, science would say that it has an effect upon that interstate waterway.

So, the Interstate Commerce Clause has been expanded to allow the federal government to stop that farmer from filling in that wetland.

Well, Sackett held that unless there was a surface water connection between the two, that underground connection was no longer sufficient.

So, they are pulling back on this expansion. That's the second thing that has changed jurisprudence around the Interstate Commerce Clause.

And then the third thing that has changed is the court itself. The court, when Gonzales v. Raich came out, was perhaps evenly divided conservative versus liberal. Now the court is solidly conservative and more importantly, it's what's known as an originalist court—meaning that the court believes that when we interpret laws, we should stick to the original intent of the Constitution.

Think overruling Roe v. Wade. The court had to get around the kind of impact of overruling precedent, and it was a big deal. Can they overrule precedent? Is that right?

So, they had to justify it. And they, in their opinion, said that they would overrule precedent that doesn't honor the original intent of the Constitution.

They have long been criticizing the expansion of the Interstate Commerce Clause as beyond the original intent of the Constitution.

So those three things are coming together and allowing tax attorneys like me to write tax opinions for cannabis companies saying, “Look, there's a chance this is no longer good law.”

And you if you take this position on your return and disclose it, you should be able to escape penalties because there's a reasonable basis for the opinion. Does it mean it's more likely than not? It's less likely than not because Gonzales v. Raich is still binding precedent. We haven't overturned it yet.

But that's the battle. That's the fight. You're going to see it playing out this year.

You're going to see a number of different companies do it as well, and it's going to start to move forward in the courts.

Canna Provisions is set for oral argument on the 22nd of this month, I believe. And this is a big deal, it's big dollars.

Even for a medium-sized, nonpublic cannabis company, this is, you know, $6- $10- $15-million bucks.

Skodzinski: Some people have mentioned they were surprised Trulieve got the refund, and how quickly they got it.

Richards: I'm not a CPA. I don't really know how quickly large sums of money are typically refunded.

The IRS generally issues refunds to companies and then if they think it's wrong, they'll audit them and ask for it back. And the IRS does that because if they have to issue the refund and they don't pay it right away, then they have to pay interest.

So, the IRS says, “OK if this isn't frivolous and there's a chance it could work, whether it's right or not, we would rather issue the refund and then ask for it back than have to pay interest if we lose.”

And that's the analysis that occurred. It was reviewed by the Joint Committee on Taxation.

We're going to see a fight in the courts. Trulieve is going to be asked to pay that money back, and they're going to have to fight it off.

That might not happen, but I would be shocked if it didn’t.

Skodzinski: What about the THCA/hemp theory?

Richards: The THCA position is based upon the 2018 Farm Bill and the definition of hemp in the Farm Bill. And it's an intriguing argument.I'm not sure how much practical use it has because, yes, the Farm Bill specifically says that everything is marijuana unless it's hemp. And hemp is specifically defined as 0.3% or less delta-9 THC, not THCA.

Raw marijuana flower has THCA in it, but it can get delta-9 in it just by sitting there or being processed. So, it's hard to know how much within that low threshold the marijuana industry's flower is.

But it's an intriguing argument, because there's a case out there called AK Futures LLC v. Boyd Street Distro, LLC that says that the only thing that matters is 0.3% delta-9 THC.

It could be an interesting standalone argument that some portion of the sales aren't marijuana subjected to 280E or it could be an additional fact supporting the Gonzalez v. Raich argument.

Skodzinski: What about the medical-only rumor that is out there?
[Editor’s note: This rumor is based on a premise that Forbes explained: “Some practitioners argue that there is a distinction to be made between businesses that sell cannabis for medical use and those that sell cannabis for recreational use. They argue that a 2005 Supreme Court case [Gonzales v. Raich], which upheld the ability of Congress to pass laws prohibiting the cultivation of medical marijuana in one’s home under state law, may no longer be precedential because of limitations that Congress subsequently placed on the federal government’s ability to fund prosecutions of state-sanctioned medical marijuana. In other words, they argue that Congress’ subsequent decision to cut off funding for the enforcement of state-sanctioned medical marijuana somehow negates or undercuts the plain language of the CSA, which generally makes the manufacture, distribution, and possession of marijuana illegal, and of section 280E, which generally denies tax deductions for businesses that consist of trafficking in controlled substances that are ‘prohibited’ by federal law.”]

Richards: The medical-only rumor is useful, but there's no legal significance there. There's factual significance because the underlying fact that Gonzales v. Raich is no longer good law. Those facts are a little more robust for medical marijuana, specifically because the Rohrabacher-Farr amendments were medical only. [Editor’s note: The Rohrabacher-Farr amendment was an appropriations rider prohibiting the U.S. Department of Justice from spending funds to interfere with state medical cannabis laws/programs.]

Because of that medical-only fact, the evidence that Gonzales v. Raich is no longer good law is a little better for medical, but the law is the same regardless of whether you're medical or adult use. So I don't think it has a whole lot of significance.

*This interview has been edited for length and clarity.