The inherent complexities and nuances of operating state-regulated cannabis businesses, forced to operate in closed economies, are costly and arguably excessive. This has continued since the Obama Administration gave the green light for adult use in 2012 (starting with Colorado).
We stand today in a more challenging environment as revenue growth remains hampered by a robust illicit market compounded by the proliferation of intoxicating hemp-based products. Sources of capital remain scarce, and the ability for many operators to continue as a going concern remains questionable. These, among other reasons, are keeping many investors on the sidelines.
But, given the progression of new state markets and the economic benefits that have materialized over the years, we are potentially on the cusp of a meaningful change to federal policy (with Schedule III). While timing is speculative, the impact would reset the industry at large – in other words, the dust would settle.
KEY POINTS
- Over the past 6.5 years (2019 – Q2 2025), since going public, the Top 8 Multistate Operators (MSOs) have generated $2.7B in Cash Flow from Operations (CFO). Assuming all unpaid 280E-related tax liabilities are satisfied, this amount is $1.0 billion, which suggests that ~$1.7B is owed ($2.7B less $1.0B). Total 280E recognized over the course of this timeframe is ~$2.5B; ~$800M has been paid.
- Of the $1.7B owed, approximately $217M is related to accrued penalties (which could be waived by the IRS) and interest, as well as approximately $115M in refunds received by Trulieve. In Q4, the statute of limitations could expire, which would mean that $115M of its tax liability is no longer applicable (assuming the IRS does not seek repayment); this could set a favorable precedent for the rest of the industry. The IRS assesses interest at 9% but penalties are 0.5% per month of the tax and interest.
- For most operators, the CFO is insufficient to cover the punitive 280E burden, and many have paused payment while the constitutionality of prohibition is being challenged in Federal court.
- It should be noted that the reported Uncertain Tax Position balances include interest and penalties, a portion of the non-current tax provisions (basically unrealized tax expense), as well as other tax disputes unrelated to 280E.
- Remarkably, Green Thumb Industries retains ~60% of its cash flow after satisfying its tax obligations. To put it in perspective, big alcohol retains about ~90%; tobacco and pharma ~80%.
- With the potential reclassification to Schedule III (and at some point, perhaps de-scheduling), the elimination of 280E and other prohibition costs (higher cost of capital, compliance, insurance, etc.), a significant acceleration in free cash flow profiles would materialize industrywide.
Full Article
The federal income tax burden associated with IRS Code Section 280E is arguably one of the most significant financial costs of cannabis prohibition. Businesses that sell cannabis (or any other Schedule I or II drug) pay federal income tax based on gross profit, NOT pre-tax income. Consequently, operators that post losses incur tax liabilities. Unlike any other corporate taxpayer, net operating losses generally cannot be carried forward to offset future taxable income.
Most operators have opted to pay taxes calculated at the statutory rate while deferring the incremental 280E burden. Also, many have filed amended tax returns claiming refunds for past 280E payments. Trulieve received $115M to date in Q4:23 out of $143M claimed for tax years 2019-2021.
Per the IRS, “an erroneous refund statute expiration date is two years from the date of the erroneous refund check or direct deposit.” Therefore, Q4 should reveal how this plays out for Trulieve. If the $115M refund is not claimed, this could set a favorable precedent for the rest of the industry.
Uncertain Tax Positions (included in long-term liabilities for those U.S. multi-state operators exceeding $200M in 2024 totaled $1.9B as of Q2 2025, which provides for estimated interest and penalties of $217M and refunds of $123M (Trulieve and Terrascend).
The current interest rate assessed by the IRS for underpayment of taxes and penalties is 9% compounded daily. Penalties are 0.5% per month of the tax and interest owed, capped at 25% of the unpaid balance. A corporation might avoid penalties if it can prove the underpayment was due to reasonable cause and not willful neglect.
Arguably, the decision to halt these tax payments is based on the advice of outside counsel, which may satisfy the reasonable basis criteria. On the other hand, on two occasions, the IRS reiterated that 280E is applicable to Cannabis companies. If the IRS ultimately moves to collect the unpaid 280E, it remains unclear if it will waive or seek collection of these penalties.
The IRS is a cheaper source of funding than most lenders. Most of the Operators’ cost of debt is above 9% (Trulieve and Curaleaf are slightly below), but if penalties are paid, the cost of capital becomes less appealing.
As the chart above illustrates, none of the operators has enough cash to satisfy the unpaid 280E tax obligations. But, as a point of reference, the IRS worked out a payment plan with now-defunct Harborside (StateStreet Holdings) to satisfy its delinquent tax balance, including a reduction in the amount owed. While the IRS could take a similar stance with unpaid 280E, the circumstances differ in that the Harborside case came about from a miscalculation in its expense allocation, which resulted in an understatement of its tax liability.
This is what the cash flow profile looks like over a 6.5-year period (since going public). With the exception of an elite few (Green Thumb Industries is the outlier), many do not generate adequate levels of cash to foot the tax bill.
It should be noted that the reported Uncertain Tax Position balances include interest and penalties, a portion of the non-current tax provisions (basically unrealized tax expense), as well as other tax disputes unrelated to 280E.
Because the larger players are able to scale, the group sits in a much better position than the smaller operators. To put in perspective, the following chart illustrates cash taxes paid as a percentage of cash flow from operations for the Tier 1 and a few of the other operators – reported and adjusted for unpaid 280E liabilities on a cumulative basis (2019 – Q2 2025).
What this shows, for example, is that for Green Thumb Industries 39% of its cash flow has gone to pay taxes (it retains 61%). In contrast, Jushi has effectively had to raise capital to foot its tax bill. In comparison to other industries such as Pharma, Tobacco and Alcohol, it’s very clear that federal prohibition has materially limited the industry’s cash flow capacity.
The Domino Effect of 280E
- There are still many complexities and unknowns, but for now, individual state rights will remain status quo while still operating under the shadow of federal law. We expect updated guidance from the DoJ upon a final ruling to clarify any ambiguities (Bondi Memo).
- Active and unrestricted capital market access is needed to maximize potential economic (and social) benefits. Safe Harbor provisions for banks and SEC-regulated activities (investment banking, custody, stock exchanges, etc.) remain in question, but the potential for economic growth is significant and promising.
- With rescheduling, updated FinCen (US Treasury Department) that includes such protections may suffice without specific legislation (such as SAFER Banking).
- In the meantime, Schedule III designation would expand permissions for research and bring to market new cannabinoid-based products, which is an exciting prospect for the industry’s future, presumably under the umbrella of FDA oversight.
- A rescheduling could also mark a significant step towards industry normalization that will inspire an ‘uplift’ of professional pedigree, which could propel the industry further and eliminate the stigma associated with cannabis.
The dichotomy between federal and state cannabis laws spans the course of 6 presidential administrations (Clinton, Bush, Obama, Biden, Trump 2x). The Trump Administration’s current priorities bode well for Cannabis reform:
