v3.25.1
Income Taxes
 12 Months Ended
Dec. 31, 2024
Income Tax Disclosure [Abstract]  
Income Taxes
14.
INCOME TAXES
The components of tax expense (benefit) were as follows:
 
    
Year Ended
  
    
December 31, 2024
     
December 31, 2023
     
December 31, 2022
  
Current tax expense
         
Federal
    $ 47,009    $ 27,904    $ 48,273
State
      3,167      3,481      9,797
  
 
 
     
 
 
     
 
 
  
Total current tax expense
      50,176      31,385      58,070
Deferred tax expense (benefit)
         
Foreign
      (6,384 )       (5,611 )       (4,326 ) 
Federal
      (6,494 )       (18,404 )       (40,781 ) 
State
      (312 )       (9,017 )       (28,502 ) 
  
 
 
     
 
 
     
 
 
  
Total deferred tax expense (benefit)
    $ (13,190 )     $ (33,032 )     $ (73,609 ) 
  
 
 
     
 
 
     
 
 
  
Change in Valuation Allowance - US
      (62 )       1,425      —   
Change in Valuation Allowance - Foreign
      6,383      5,611      4,326
  
 
 
     
 
 
     
 
 
  
Provision (benefit) for income taxes
    $ 43,307    $ 5,389    $ (11,213 ) 
  
 
 
     
 
 
     
 
 
  
The Company accounts for income taxes in accordance with ASC 740 – Income Taxes, under which deferred tax assets and liabilities are recognized based upon anticipated future tax consequences attributable to differences between financial statement carrying values and the tax bases for the respective items.
The Cannabist Company Holdings Inc. is organized in Canada but operates inside the United States. Due to the Company’s structure, the Company is subject to income tax both in the United States and Canada. The Company maintains full valuation allowances on its net operating losses at each of the foreign jurisdictions it operates in, resulting in a 0% effective tax rate for the foreign jurisdictions. The Company’s domestic effective tax rate for the years ended December 31, 2024, 2023, and 2022 were (70.1)%, (3.2)%, and 2.6% respectively.
The reconciliation of the Company’s income tax expense (benefit) on income (loss) before taxes at the U.S. federal statutory rate compared to the Company’s effective tax rate was as follows:
 
    
Year Ended
  
    
December 31, 2024
    
December 31, 2023
    
December 31, 2022
  
Loss before provision for income taxes
    $ (61,819 )      $ (168,898 )      $ (432,694 )   
Tax using the company’s domestic tax rate
      (33,097 )      53.5 %      (35,471 )      21.0 %      (90,866 )      21.0 % 
Tax effect of:
             
State taxes, net of federal benefits
      3,626       (5.9 %)      (4,957 )      2.9 %      (20,744 )      4.8 % 
280E limitations
      32,624       (52.8 )%      36,737       (21.8 )%      42,443       (9.8 )% 
Non-deductible
partnership income
      2,476       (4.0 )%      2,602       (1.5 )%      2,799       (0.6 )% 
Other Permanent Tax Differences
      28,928       (46.8 )%      1,558       (0.9 %)      (3,956 )      0.9 % 
Share-based compensation
      1,668       (2.7 )%      955       (0.6 )%      8,710       (2.0 )% 
Change in tax status
      —        —        —        —        —        —  % 
Other items
      6,846       (11.1 )%      2,538         741       (0.2 )% 
Provision to Return Adjustment
      236       (0.4 )%      (2,126 )        13,825       (3.2 )% 
Goodwill impairment
      —        —  %      3,553       (2.1 )%      35,835       (8.3 )% 
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
   $ 43,307     (70.1 )%    $ 5,389     (3.2 %)    $ (11,213 )      2.6 % 
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
The Company operates in the legal cannabis industry but is subject to Section 280E of the Internal Revenue Code (“IRC”) which prohibits the Company from deducting non cost of goods sold related expenses. Section 280E was originally intended to penalize criminal market operators, but because cannabis remains a Schedule I controlled substance for Federal purposes, the IRS has subsequently applied Section 280E to state-legal cannabis businesses. Cannabis businesses operating in states that align their tax codes with the IRC are also unable to deduct normal business expenses from their state taxes. The result of Section 280E’s application to the Company results in permanent disallowance of ordinary and necessary business expenses. As a result of 280E the Company’s effective tax rate can be highly variable and may not necessarily correlate with
pre-tax
income or loss. The
non-deductible
expenses shown in the effective rate reconciliation above is comprised primarily of the impact of applying IRC Sec. 280E to the Company’s businesses that are involved in selling cannabis, along with other permanent tax adjustments as prescribed by relevant tax code.
The tax effects of the temporary differences giving rise to deferred tax assets and deferred tax liabilities as of December 31, 2024, 2023, and 2022 are summarized in the table below:
 
    
Year Ended
  
    
December 31, 2024
     
December 31, 2023
     
December 31, 2022
  
Deferred Tax Assets
         
Net Operating Loss Carryforwards
    $ 24,421    $ 20,888    $ 14,066
Derivative liability
      336      65      125
Inventory
      1,796      1,639      1,275
Stock Based Compensation
      1,112      3,420      3,288
Capitalized Expenses
      18,869      20,737      20,769
Reserves
      9,964      2,622      2,741
Right of Use Assets
      30,131      42,965      37,652
Sale Leaseback
      1,499      1,554      1,552
Other Assets
      3,761      1,965      1,626
  
 
 
     
 
 
     
 
 
  
Gross Deferred Tax Assets
      91,889      95,855      83,094
Valuation Allowance
      (22,561 )       (16,238 )       (9,202 ) 
  
 
 
     
 
 
     
 
 
  
Total Deferred Tax Assets, net
    $ 69,328    $ 79,617    $ 73,892
  
 
 
     
 
 
     
 
 
  
Deferred Tax Liabilities
         
Property, Plant and Equipment
    $ 2,938    $ 748    $ (2,427 ) 
Intangibles
      (11,032 )       (13,459 )       (32,661 ) 
Accruals
      (90 )       (90 )       (91 ) 
Debt discount
      (1,240 )       (3,556 )       (5,712 ) 
Right of Use Liabilities
      (27,699 )       (40,290 )       (35,904 ) 
  
 
 
     
 
 
     
 
 
  
Gross Deferred Tax Liabilities
    $ (37,123 )     $ (56,647 )     $ (76,795 ) 
  
 
 
     
 
 
     
 
 
  
Net Deferred Tax Liabilities
    $ —     $ —     $ 2,903
Net Deferred Tax Assets
    $ 32,205    $ 22,970    $ — 
Deferred tax assets are reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company’s management assesses both positive and negative evidence regarding the Company’s ability to realize its deferred tax assets and records a valuation allowance when it is more likely than not that deferred tax assets will not be realized. The valuation allowance as of December 31, 2024, 2023, and 2022 are $22,561, $16,238, and $9,202 respectively. The total change in the 2024 and 2023 valuation allowance, which was an increase of $6,321 and $7,036 respectively, is related to foreign activity and other activities.
 
During the year ended December 31, 2024 the company recorded a deferred tax asset pertaining to a deemed asset acquisition. The future tax benefit related to this acquisition is expected to be subject to Section 280E.
As of December 31, 2024, the Company has $0 of gross federal net operating loss carryforwards which will not expire. The Company has $43,490 of gross state net operating loss carryforwards which begin to expire in 2036. The company has $76,710 of gross foreign net operating loss carryforwards which begin to expire in 2028.
Under Internal Revenue Code Section 382, utilization of net operating losses may be subject to annual limitations in the event of any significant future changes in its ownership structure. These annual limitations could adversely affect the company and result in the expiration of net operating losses prior to utilization.
The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by federal, state, and foreign jurisdictions, where applicable. Such examinations may result in future tax, penalty, and interest assessments by the respective taxing jurisdictions. For uncertain tax positions the Company believes does not meet the more likely that not threshold of being sustained upon examination by the relevant taxing authorities, the Company records a tax reserve in the period in which it arises. The Company adjusts its unrecognized tax benefit liability and provision for income taxes in the period in which the uncertain tax position is settled, the statute of limitations expires for taxing authority to examine the position or when new information becomes available that requires a change in the recognition and/or measurement of the liability.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
 
Balance as of December 31, 2021
    $ 4,111
  
 
 
  
Reductions for Expiration of Statute of Limitations
      (1,337 ) 
  
 
 
  
Balance as of December 31, 2022
      2,774
  
 
 
  
Reductions for Expiration of Statute of Limitations
      (761 ) 
  
 
 
  
Balance as of December 31, 2023
      2,013
  
 
 
  
Increases (Decreases) for prior years
      8,018
Reductions for Expiration of Statute of Limitations
      (2,013 ) 
  
 
 
  
Balance as of December 31, 2024
    $ 8,018
  
 
 
  
As of December 31, 2024 and 2023, the Company had $8,018 and $2,013 respectively of gross unrecognized tax benefits, $0 and $0 respectively of which would impact the effective income tax rate if recognized. As of December 31, 2024, 2023, and 2022 the Company recognized interest and penalties related to uncertain tax positions of $2,489, $903, and $554 respectively. The unrecognized tax benefits recorded by the company relate to historical tax positions taken by businesses previously acquired by the Company. The Company is subject to indemnification of any assessments related to these specific positions and has established a receivable for the same amount of the reserve. The US federal statute of limitations remains open for the tax year 2019 through the present. The state return statute of limitations generally remains open for the tax year 2019 through the present.