How are major players in the cannabis sector handling their tax obligations, and what does it reveal about their financial strategies?

A recent equity report by Zuanic & Associates sheds light on the tax payments and liabilities of 16 Multi-State Operators (MSOs) in the industry during CY22.

The findings expose a wide range of approaches, sparking questions about accounting practices and the use of tax debts as a funding source.

Key Findings And Top Contributors

According to the report, the 16 MSOs reviewed collectively paid a staggering $761 million in income taxes in CY22. The report highlights that payments as a percentage of gross profits can vary significantly among MSOs. Ideally, the statutory rate for income taxes on gross profits should be in the low to mid-20s for most companies.

• Curaleaf (OTC:CURLF) and Trulieve (OTC:TCNNF) emerged as the top contributors, with $156 million and $147 million in tax payments, respectively.
• The three largest MSOs, including Green Thumb (OTC:GTBIF), accounted for a substantial 55% share of the total income taxes paid within the group during the period.
• Acreage (OTC:ACRHF) and Ascend reported ratios in the low to mid-30s, while Columbia Care (OTC:CCHWF), Curaleaf, Green Thumb, MariMed (OTC:MRMD) and Trulieve fell within the low to mid-20s.
• Planet 13 (OTC:PLNHF), Schwazze (OTC:SHWZ) and Verano (OTC:VRNOF) showed ratios in the mid to high teens, while TerrAscend (OTC:TRSSF), Cresco (OTC:CRLBF) and Jushi (OTC:JUSHF) were in the 10-12% range.
• 4Front (OTC:FFNTF) was an outlier with just 5%, while Tilt (OTC:TLLTF), being exempt from 280E due to its hardware accessories business, reported 1%.

Income Tax Puzzle

The report raises questions about the reasons behind the varying income tax to gross profit ratios. It suggests that accounting and deferred tax issues might play a role. However, it also might be that some companies are utilizing tax debts as a low-cost funding source.

“The income tax paid (or ST tax debt) to sales ratio may be less relevant given various levels of gross margins across MSOs: In CY22, only three MSOs had gross margins of 50% or higher (Green Thumb, Schwazze, Trulieve),” per the report. Meanwhile, MSOs like Ascend, Columbia Care, 4Front, Jushi, and Tilt had gross margins below 40%.

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Photo: Miha Creative and Branding Pot on Shutterstock.