Trulieve Replace – Rescheduling, 280E Tax And Canna Provisions Case (OTCMKTS:TCNNF)

Whereas we eagerly look ahead to Trulieve Hashish Corp (“Trulieve”) (OTCQX:TCNNF) (CSE:OTC:TRUL)’s 2024 Q2 monetary outcomes to be introduced on August 6, a number of occasions came about which might be worthwhile for an replace to maintain fellow traders knowledgeable.

In the long term, I nonetheless suggest a “Purchase” ranking on Trulieve, however within the quick time period, a “Maintain” ranking could also be extra prudent if you have already got acquired or added positions of Trulieve.

Introduction

Trulieve is among the largest multi-state hashish operators. As of July 21, 2024, Trulieve operates a complete of 205 dispensaries throughout its regional hubs, that are Florida, Pennsylvania, and Arizona.

Whereas Trulieve opened 3 new dispensaries in 2024 Q1, it seems that Trulieve opened 5 extra dispensaries in 2024 Q2 because it added its two hundredth dispensaries on June 3.

In July 2024 alone, Trulieve opened one other 5 dispensaries (1 in Pennsylvania and 4 in Florida). This actually exhibits the expansion trajectory that Trulieve is on, particularly in Florida, making ready for the potential legalization of adult-use hashish in November 2024.

For 2024 Q2, because of the opening of 12 dispensaries alone (5 in 2023 This fall, 3 in 2024 Q1, and 5 in 2024 Q2), I might count on important income development in comparison with the identical quarter final yr and average income development in comparison with 2024 Q1.

Rescheduling and 280E Tax

In April 2024, along with the information that the Florida Supreme Courtroom authorized the poll measure to legalize leisure hashish in November 2024 if this poll will get over 60% vote, the U.S. Drug Enforcement Administration (“DEA”) initiated the method to reschedule hashish from Schedule I to Schedule III.

The hype on the time propelled Trulieve’s inventory value to extend by nearly 40%. This hype has since pale away, leading to Trulieve’s inventory value falling again to $10.33 per share, nearly precisely what it was buying and selling at previous to the information from the DEA on April 29, 2024.

This fallback in inventory value is primarily a results of three causes, it seems:

1. The market appears to have realized that it’s going to take a while earlier than hashish is modified to Schedule III.
2. The market could have realized that even when hashish is modified to Schedule III, apart from its impression on 280E tax, such rescheduling will not profit the broad trade as a lot.
3. IRS not too long ago warned hashish operators that 280E tax should nonetheless be paid, holding their place.

Prolonged Rescheduling Course of

The chart under exhibits very properly how lengthy the rescheduling can doubtlessly take. In some cases, rescheduling of a drug took 9 years. Nevertheless, there are cases the place rescheduling of a drug took as quick as 180 days from the second the method is initiated.

The chart under was revealed on Could 14, 2024. The DEA really proceeded to the following step by publishing the Discover of Proposed Rulemaking on Could 21, 2024. The proposed interval for public remark will finish on July 22, 2024. Nonetheless, even with the best-case state of affairs, there may be a while forward earlier than hashish is formally labeled as a Schedule III drug.

Rescheduling Influence to Hashish Operators

There are three adjustments that the U.S. hashish trade desperately wants general:

1. Removing of 280E tax
2. Allowance of interstate commerce
3. Allowance of normal banking and itemizing on U.S. inventory exchanges

Rescheduling of hashish will impression level #1 above, however will not have any impression on level #2 or #3. whereas there isn’t a enforcement from the federal businesses on state-legal hashish operators when hashish is assessed as Schedule I, it’s doubtless that there’s nonetheless no enforcement when hashish is assessed as Schedule III.

Having hashish as a Schedule III drug would supply extra alternatives for researchers to review the medicinal impact of hashish, doubtlessly opening doorways for factors #2 or #3. Nevertheless, these research will take years to yield outcomes.

The allowance of interstate commerce will not doubtless happen till hashish is legalized on the federal degree.

The allowance of normal banking and itemizing on main U.S. inventory exchanges will not doubtless happen, both, until FinCEN points some form of steering to guard monetary establishments clearly from taking part within the state authorized hashish trade.

IRS Place on 280E Tax

Trulieve was the primary amongst hashish operators to publicly announce that they filed amended tax returns for the years 2019 to 2021 in October 2023 earlier than these returns had been statutorily barred as a part of their daring tax technique. These amended tax returns not solely tried to assert tax refunds from states however extra importantly, these tax returns tried to assert tax refunds from the IRS. Trulieve even acquired as a lot as $113 million in tax refunds from the IRS that it claimed for.

Shortly after this transfer by Trulieve, many different hashish operators adopted swimsuit to file amended tax returns, together with Ascend Wellness.

These amended tax returns are demanding a whole lot of thousands and thousands of tax refunds from the IRS.

On June 28, 2024, the IRS clarified in a press launch that 280E tax should nonetheless be paid and hashish operators who filed amended tax returns aren’t entitled to a tax refund, basically closing the floodgate.

Canna Provisions vs. Garland Case and Different Arguments

Whereas this clarification by the IRS has resulted in a slight decline in Trulieve’s inventory value, speculating that Trulieve’s daring tax technique could not work, Trulieve’s inventory value shortly recovered within the days after. The market could understand that Trulieve has already yielded important advantages from its daring tax technique, and this IRS announcement would not change a lot to what Trulieve holds.

Whereas Trulieve has not publicly acknowledged its rationale for submitting these amended tax returns with the IRS, there are a number of prospects.

One of many potential arguments, though a stretch I imagine, could also be that Trulieve is leveraging the 2018 Farm Invoice and the definition of hemp. Mainly, Trulieve may argue that hashish would not include a excessive amount of the psychoactive ingredient, THC, and should not be topic to 280E tax. Hashish solely accommodates THCa. THCa turns into THC solely when heated above a sure temperature.

The opposite argument that’s extra possible is expounded to the Canna Provisions vs. Garland, which tries to overturn the ruling from the Gonzales v. Raich case again in 2004.

In easy phrases, again in 2004, the ruling from Gonzales v. Raich case argued that unlawful hashish actions inside a state might be smuggled throughout the state border, and the 280E tax is enforced as such.

Nevertheless, the Canna Provisions vs. Garland case argued that it has been 20 years since 2004 and the state authorized hashish trade has advanced considerably. State authorized hashish actions are precisely tracked and documented, which proves that no authorized hashish merchandise have crossed the state line. In consequence, intrastate actions mustn’t have federal intervention together with the 280E tax.

Whereas these arguments together with different unknown positions held by Trulieve are unsure when it comes to its likelihood of profitable over the IRS, because the rescheduling of hashish and the Canna Provisions vs. Garland progress, different arguments could seem in favor of Trulieve.

It could be a authorized battle that the IRS would not need to interact in to get again the $113 million tax refunds already paid to Trulieve, so long as no different tax refunds are given.

For 2024 Q2, we count on some main updates from Trulieve on its tax technique and whether or not it intends to renew making 280E tax installments to the IRS. If Trulieve resumes making 280E tax installments, it could sign that Trulieve believes that there’s a actual likelihood that Trulieve’s arguments don’t stand.

Valuation

Trulieve’s valuation stands nonetheless at $1.92 billion presently, which continues to be fairly low in comparison with its friends (Inexperienced Thumb Industries – $2.63 billion and Curaleaf – $3.08 billion).

Click on to enlarge

Above is a fast comparability of those main MSOs’ valuation change between Could 21, 2024, and July 22, 2024. Whereas Trulieve’s valuation continues to be the bottom, the hole between them has shrunk considerably.

We’ll dive deeper into Trulieve’s valuation when 2024 Q2 outcomes are revealed in early August 2024.

Between at times, I like to recommend a “Maintain” ranking to attend and see.

Conclusion

As we await Trulieve’s 2024 Q2 monetary outcomes on August 6, a number of noteworthy occasions occurred that required consideration. Trulieve’s enlargement continues, with the addition of a number of new dispensaries signaling its development trajectory, notably in anticipation of Florida’s potential legalization of adult-use hashish. The rescheduling of hashish and the implications of the 280E tax stay key drivers for the trade, with Trulieve on the forefront of navigating these challenges. In the long term, Trulieve stays a powerful purchase, however for now, a “Maintain” ranking is prudent for current traders as we monitor the upcoming monetary disclosures and regulatory developments.

Editor’s Observe: This text discusses a number of securities that don’t commerce on a serious U.S. alternate. Please pay attention to the dangers related to these shares.