IRS Pushes Back on Cannabis Tax Refund Claims as the 280E Battle Enters a New Era

WASHINGTON, D.C.-The Cannabis industry’s long-running battle with Section 280E has entered a pivotal new phase.

For years, one of the greatest financial challenges facing state-licensed Cannabis businesses has not been competition or regulation—it has been the federal tax code. Section 280E has prevented Cannabis operators from deducting ordinary business expenses because Cannabis remained classified as a Schedule I controlled substance under federal law.

Now, following the federal government’s decision to move medical Cannabis to Schedule III, many operators are seeking to recover millions of dollars in taxes they believe they overpaid. The Internal Revenue Service (IRS), however, is making it clear that it intends to challenge many of those claims.

The Cost of Section 280E

Section 280E was enacted by Congress in 1982 to prevent illegal drug traffickers from deducting business expenses. As legal Cannabis markets developed across the United States, the law had an unintended consequence: state-licensed Cannabis businesses became subject to tax rules unlike those faced by virtually any other legal industry.

While most businesses can deduct expenses such as payroll, rent, marketing, insurance, professional services and administrative costs, Cannabis companies generally have been limited to deducting only their cost of goods sold.

The result has been extraordinarily high effective tax rates, in some cases exceeding 70%, placing significant pressure on profitability, cash flow and growth.

Medical Cannabis Moves to Schedule III

In April 2026, Acting Attorney General Todd Blanche signed the final order transferring state-licensed medical Cannabis from Schedule I to Schedule III under the Controlled Substances Act.

That change is significant because Section 280E applies only to businesses trafficking Schedule I or Schedule II controlled substances. As a result, qualifying medical Cannabis businesses are no longer subject to 280E going forward.

Treasury and the IRS have indicated that additional guidance will be issued to clarify how the new tax treatment will be implemented, including transition rules and how businesses operating both medical and adult-use Cannabis will be treated.

The unanswered question is whether companies can also recover taxes paid in previous years.

Operators Pursue Millions in Refunds

Several publicly traded multi-state operators (MSOs) have adopted legal positions challenging the application of Section 280E and have filed amended tax returns seeking substantial refunds.

Among the companies publicly discussing their tax positions:

• Curaleaf has disclosed approximately $96.5 million in uncertain tax liabilities associated with Section 280E.
• TerrAscend has filed amended returns seeking approximately $26 million in tax refunds.
• Trulieve previously announced receiving approximately $112 million in tax refunds after filing amended returns.
• Verano, Ascend Wellness and other operators have also indicated they are evaluating tax strategies following medical rescheduling.

Across the industry’s largest operators, analysts estimate that the total potential tax benefit could reach well over $1 billion if Section 280E no longer applies to prior tax years.

IRS Begins Fighting Back

Despite growing confidence among Cannabis operators, the IRS is not backing down.

In May, the agency filed suit against TerrAscend seeking repayment of refunds it believes were issued improperly. The case signals that the government intends to closely scrutinize amended returns claiming relief from Section 280E.

Another closely watched dispute involves New Mexico Top Organics, better known as Ultra Health. The company argues that the government’s decision to move medical Cannabis to Schedule III supports the view that Section 280E should not apply to its historical tax liabilities.

The IRS disagrees.

In court filings, government attorneys argue that federal courts have consistently upheld Section 280E and that decades of established case law continue to support its application for the tax years in question.

The outcome of these cases could establish important precedent for the entire Cannabis industry.

A Landmark Tax Battle

Ultra Health’s legal team argues that the federal government’s own rescheduling decision reflects recognition that medical Cannabis should not have been treated as a Schedule I substance for tax purposes.

If the courts ultimately agree, the decision could open the door to significant tax recoveries across the industry.

If the IRS prevails, companies that have already received refunds may be required to repay them, while others may reconsider filing amended returns until greater legal certainty exists.

Either way, the litigation is expected to shape Cannabis taxation for years to come.

What Comes Next

Although medical Cannabis businesses have gained meaningful tax relief through rescheduling, the industry’s fight over historical tax liabilities is only beginning.

Treasury’s forthcoming guidance will help clarify how Section 280E should be applied going forward, but the courts are likely to decide whether companies can recover taxes paid under previous interpretations of the law.

For operators, investors and financial markets, the stakes are enormous. Billions of dollars remain tied to the outcome of these disputes.

The removal of Section 280E for medical Cannabis represents one of the most significant financial reforms the industry has seen. Whether that benefit extends into the past will now be determined not by policymakers, but by the courts.

As these cases move forward, they will help define the next chapter of Cannabis taxation in the United States.