Opinion: Cannabis companies should file amended tax returns to claim 280E refunds

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Nick Richards (Courtesy photo)

Trulieve Cannabis Corp. announced in October that it claimed $143 million in federal tax refunds by filing amended federal tax returns for 2019-21.

The Florida-based multistate operator took the position in the amended returns that Section 280E, which prevents cannabis companies from deducting their business costs, no longer applies.

Meanwhile, in U.S. District Court in Massachusetts, several companies teamed up in Canna Provisions v. Garland, a case that is challenging the scheduling of marijuana under the Controlled Substances Act (CSA).

If the judges find that marijuana is no longer “illegal” under the CSA, then Section 280E would no longer apply and cannabis companies could deduct their costs.

These attempts at recouping 280E taxes are not long shots but cases with realistic chances of prevailing.

As such, all cannabis companies should consider filing amended returns claiming federal tax refunds.

In fact, company boards and executives might face difficult questions from shareholders – and, perhaps, lawsuits – if they don’t make an effort to claim these refunds.

It’s also important to know that refund claims are time sensitive because amended tax returns making refund claims must be filed within three years of the original filing date.

Court pathways to success

A Trulieve victory could establish that 280E didn’t apply starting in 2019, but the window to file amended returns for 2019 likely expired last year, and 2020 will expire this year.

It’s also likely the Trulieve and Canna Provisions cases will move slowly through the courts and ultimately end up at the U.S. Supreme Court.

That means additional three-year amendment periods will expire before there is an answer, so “waiting to see” might not be an option.

There are two ways to preserve the ability to claim a refund:

  • Filing an amended return, which is a request to process the return and issue a refund (if applicable).
  • Making a protective claim, which is a “just in case” return that, once filed, satisfies the three-year filing period but isn’t processed until the taxpayer requests.

Proving that 280E retroactively no longer applies is no slam dunk, but the position is not an unrealistic pipe dream.

The legal theory supporting the position was first heard by the U.S. Supreme Court in a case called Gonzales v. Raich, which involved participants in California’s newly legalized medical cannabis program who sued the federal government alleging it no longer had authority to regulate marijuana under the CSA. The plaintiffs lost.

Supreme Court Justice Clarence Thomas wrote the dissent in that 2004 case, and then, in 2021, he said that Raich might no longer be good law.

“Whatever the merits of Raich when it was decided, federal policies of the past 16 years have greatly undermined its reasoning,” Thomas wrote.

“Once comprehensive, the federal government’s current approach is a half-in, half-out regime that simultaneously tolerates and forbids local use of marijuana.”

Critically, Raich was decided by a majority that ruled based on previous jurisprudence relating to the U.S. Constitution’s commerce clause and a narrow set of facts.

The commerce clause authorizes the federal government to regulate interstate commerce – generally defined as commerce among the states.

But Raich was an intrastate situation in California that did not involve any cross-border activity.

Nevertheless, the Raich ruling held that the California MMJ program had a “substantial affect” (sic) on interstate commerce because marijuana from California could end up in other states.

Meanwhile, the court also held that it was necessary for the federal government to maintain uniform illegality throughout the states in order to enforce the Controlled Substances Act.

Today, Justice Thomas said, there is no more uniformity.

“The Federal Government’s current approach to marijuana bears little resemblance to the watertight nationwide prohibition that a closely divided court found necessary to justify the government’s blanket prohibition in Raich, Thomas wrote.

Specific changes since the Raich decision include:

  • The Cole Memos.
  • The federal government’s authorization of medical marijuana in Washington DC.
  • Congressional budget bills with riders that take away Department of Justice funding for marijuana enforcement.
  • The expansion of marijuana legalization to a majority of the states.

Supreme Court breakdown

In addition to these changes, the U.S. Supreme Court also has changed.

When Raich was decided, the high court was more or less split between conservative justices inclined to support states’ rights and liberal justices inclined to support the federalism facilitated by the commerce clause.

There are now six conservative and three liberal justices, leaving the commerce clause jurisprudence on which the Raich majority ruled on shaky ground.

The current conservative Supreme Court seems poised to overturn existing precedent that it believes does not honor the original meaning of the U.S. Constitution, and the expansion of commerce clause power is one such area.

Examples of this include the court striking down portions of the Affordable Care Act, limiting the Clean Water Act and overruling federal sports gambling laws.

It is plausible that marijuana could be legalized by the Supreme Court, thereby eliminating 280E and returning many cannabis companies to profitability.

Nick Richards is a Denver-based partner and co-chair of the Cannabis law practice group at Greenspoon Marder, where he represents marijuana operators in tax, M&A and regulatory matters. He can be reached at nick.richards@gmlaw.com.

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