Now that two multistate operators have found a way around 280E – the federal tax code provision that drives up the effective tax rate for the entire legal marijuana industry – many in the wider trade may be salivating at the thought of enjoying similar savings after Florida-based Trulieve Cannabis Corp. estimated it would be receiving a refund of more than $100 million, and Ascend Wellness Holdings now poised for a refund in the tens of millions.
In the wake of Ascend’s annual earnings filing this week, CEO John Hartmann again sat down with Green Market Report to talk about the highlights, including the company’s new tax strategy, which the company said it expects will cover its entire 2023 tax bill after it amends three prior year returns.
Although Hartmann couldn’t say for sure whether the new strategy would be successful or not, or how much the company would be getting in refunds from the Internal Revenue Service, his remarks suggested that the new strategy may be one employable by the broader sector for the current tax season.
The amended returns and the strategy, he said, are connected to an ongoing federal lawsuit filed last year by Ascend and other cannabis companies, including MSO’s Green Thumb Industries (CSE: GTII) (OTCQX: GTBIF) and Verano Holdings Corp. (VRNO:CA) (OTCQX: VRNOF). The federal government has asked that the case be dismissed, but it’s still pending in U.S. District Court in the Western Division of Massachusetts.
John Hartmann
This interview has been edited for length and clarity.
So you guys figured out the 280E puzzle?
I don’t know that we necessarily figured it out. But we certainly have a strategy.
Are you at liberty to share anything about what the strategy is, what it pertains to, and if other companies might be able to employ it?
Sure, it’s a pretty common-sense approach. Our strategy is based on what we think is a very sound tax position, one that our external tax attorneys have validated. Based on that strategy, we have amended and submitted revised, amended 2020, 2021 and 2022 tax returns. And so those are in process as we speak. And we expect that the refund due based on amended tax returns will cover any existing tax liability we have for 2023. And on a go-forward basis, currently, we are paying our quarterly estimated federal taxes, non-280E taxes.
This is something that a lot of different companies have been fighting the IRS over for a long time. Recently, Trulieve announced that they were getting over $100 million in refunds from the IRS; is this the same or a similar strategy?
I’m not privy to anything that any other company is doing here in this particular strategy of how we’ve managed our amended returns. You’re probably well aware that Ascend and others are participants in a lawsuit regarding 280E currently, and I think this is not at all dissimilar from that approach. I think the approach is that the federal 280E taxes are viewed as incongruent with the state’s ability to regulate and manage a legal business. Therefore there’s a conflict between the states’ rights to regulate and manage the cannabis industry – as the seven states that we operate in do – and the imposition of these burdensome 280E taxes on legitimate legal businesses within each of those states is the crux of the lawsuit that we’re part of. It’s working its way through the federal system currently, and this is fully aligned with that with that lawsuit.
Do you think that this is going to be an approach that will be kind of a milestone, a trendsetter for a lot of the rest of the cannabis industry nationally?
Well, I’m not an industry spokesperson. Generally speaking, my colleagues across the industry who I speak to frequently share the belief that the 280E taxes on cannabis businesses are inappropriate. Some other companies have talked about their approach. Our approach is, I think, a very direct and common sense approach, which just says that based on the lawsuit that we’re participating in, and based on other activities in the industry, we think that this is the right time for us to submit those amended returns, and we have. The broad sense is that the reclassification of cannabis from Schedule I to Schedule III would have ancillary benefits, like the elimination of 280E. There’s a concentration of activity right now around us. It’s been a subject that our company has been studying very closely for the last couple of years. And I believe over the last number of months, we’ve honed in on exactly what that strategy is, and have had terrific support from very credible tax counsel from outside of our company. And that’s how we’ve ended up here today.
It sounds like this probably is an approach that could be utilized by the rest of the cannabis industry. Is that Is that fair to conclude?
I welcome you to draw whatever conclusions are appropriate. For us, this is certainly in line with what we’re seeing and what we’re hearing as it relates to reclassification and 280E. And whether it’s appropriate for other companies, I think every company will make that decision for themselves.
Tell me about how big of a game changer this is for Ascend in terms of financial flexibility, how much the company will be able to do now with so much more capital at its fingertips with these tax savings?
We are incredibly proud of where we are in our journey right now from a cash perspective. As you heard in our earnings yesterday, we shared that it was our first full year of cash flow positive. It’s reflective of where the company is in terms of the maturity curve and being able to stand on our own two feet from a cash perspective. Of course, the 280E component of that is helpful, but it’s not the be-all, end-all. The fact of the matter is, that the company just achieved its fourth consecutive quarter of free cash flow from operations and its first full year of positive free cash flow. So not withstanding the benefit from these 280E refunds that we believe that we’re entitled to, the company can stand on its own two feet and generate free cash flow year over year. So that is I think the headline for us, that absolutely, we believe there’s an appropriate position that we’ve taken as it relates to 280E, but not withstanding that benefit, we are in a position of cashflow positivity, and the expectation of our board is that will continue.
Regarding the change in the tax strategy approach, has there been any pushback from the IRS on that? Or has the IRS in correspondence pretty much accepted the position that Ascend has taken?
We don’t have an ongoing dialogue with the tax authorities. Like any other taxpayer, we’ve submitted our returns and our amended returns and we will in due course wait to hear the response.
Anything else you can share about Ascend’s new tax strategy? That seems like some of the some of the biggest news coming out of the company’s most recent quarter.
I think the actual headline is probably not the tax strategy; the headline is double-digit top-line growth, double-digit EBITDA growth, the great story around cashflow, and the continued expansion of our footprint, those are probably really the headlines. We’ve just opened today our new store in Monaca, Pennsylvania, which is a suburb of Pittsburgh, and we’re very excited to now be at 36 dispensaries. At the end of the fiscal year 2022, we were at 24 dispensaries. And today, we’re at 36. So we’ve substantially increased our footprint, and we have a healthy pipeline of additional new stores that are coming yet this year. So there are a lot of important messages. Certainly, the tax one is of interest. But the overall financial health, the overall financial performance, and really what’s to come, as we move forward into a period of really leveraging our major investments and driving densification in our markets – these are things that we’re very excited about for the coming months and quarters.
When the President of the United States stands up in front of the nation and declares that cannabis should be legal and accessible to all patients and customers and that there’s a parallel path here that the administration is working on to reclassify cannabis from one – a ridiculous classification, where it sits today at number one – down to level three, or perhaps off completely, this is a very critical milestone. While we drive our growth strategy, while we plan for continued double-digit revenue growth this year, double-digit EBITDA growth, and continued cash flow expansion, we look with excitement at what may come for the industry in the near term.
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