IRS Challenges Cannabis Tax Refund Claims As 280E Disputes Move To Court

The Internal Revenue Service is stepping up efforts to recover cannabis-related tax refunds it says were improperly claimed, creating a new legal battleground as multi-state operators await formal guidance following the federal government’s decision to move state-licensed medical cannabis to Schedule III.

The growing dispute centers on Section 280E of the Internal Revenue Code, which historically prevented businesses trafficking Schedule I or II controlled substances from deducting ordinary business expenses. While the Department of Justice’s April rescheduling order fundamentally changes that framework for state-licensed medical cannabis going forward, questions remain over prior tax years and amended returns already submitted by operators.

Several of the industry’s largest companies have taken increasingly aggressive positions in recent years, seeking substantial tax refunds or reducing uncertain tax liabilities based on legal interpretations that 280E should not apply to their operations.

Operators Bet On Significant Tax Savings

Potential savings are substantial.

According to reporting by Zack Huffman of CRB Monitor, the largest multi-state operators could collectively save roughly $1.6 billion if 280E no longer applies to their businesses.

Among the companies publicly discussing the issue:

• Curaleaf reported approximately $96.5 million in uncertain tax liabilities related to Section 280E in its May interim financial statements.
• TerrAscend expects as much as $26 million in tax refunds through amended returns.
• Ascend Wellness Holdings also submitted amended returns seeking refunds but has not publicly disclosed the expected amount.
• Trulieve previously announced it received approximately $112 million in tax refunds following amended filings.

Executives have also begun discussing the issue more openly following the rescheduling announcement.

During Verano’s first-quarter earnings call, CEO George Archos said the company expected to benefit immediately from the tax implications of medical cannabis rescheduling, while noting that management continues evaluating Treasury Department and IRS guidance as it becomes available.

IRS Pushes Back

The federal government, however, is not conceding those positions.

According to CRB Monitor, the IRS filed suit against TerrAscend in May seeking repayment of refunds the agency argues were issued improperly.

The case follows an earlier lawsuit involving New Mexico Top Organics, widely viewed as one of the first federal attempts to recover cannabis tax refunds that regulators believe violated Section 280E.

In court filings submitted earlier this year, the IRS argued that federal courts have consistently upheld Section 280E’s constitutionality and its application to cannabis businesses while marijuana remained federally classified as a Schedule I substance.

Rescheduling Adds A New Layer Of Complexity

The legal landscape shifted significantly on April 22, when the Department of Justice announced that FDA-approved cannabis products and state-licensed medical marijuana would move to Schedule III under the Controlled Substances Act.

Because Section 280E applies only to businesses trafficking Schedule I or II controlled substances, the change potentially eliminates one of the industry’s largest federal tax burdens moving forward.

The unresolved question is how that change affects previous tax years.

In filings responding to the IRS, attorneys representing New Mexico Top Organics argued that the government’s rescheduling decision reflects an acknowledgment that medical cannabis belonged in Schedule III long before the formal administrative action occurred.

Whether courts ultimately accept that reasoning remains uncertain.

Treasury Guidance Remains Critical

Despite the significance of the rescheduling announcement, cannabis companies continue to wait for formal implementation guidance from both the Treasury Department and the IRS.

That guidance is expected to clarify how operators should account for taxes going forward, how previously accrued liabilities should be treated, and whether amended returns submitted before rescheduling will withstand federal scrutiny.

Until then, operators remain in a transitional period where the regulatory landscape has changed faster than the tax rules governing it.

For public companies, the outcome could materially affect reported earnings, cash flow, and balance sheets.

Litigation May Define The Next Chapter Of 280E

While rescheduling represents one of the most consequential federal policy changes in decades, the industry’s tax battle is far from over.

Court decisions involving companies such as TerrAscend and New Mexico Top Organics may help determine how aggressively operators can pursue historical tax refunds and whether the federal government can successfully recover payments already issued.

For now, the industry’s long-running fight over Section 280E has shifted from Capitol Hill to the courtroom.

This article is based in part on reporting by Zack Huffman of CRB Monitor.