Harborside Says It's Making Strides For The Cannabis Industry With Latest Tax Court Ruling

A subsidiary of California-based, Canada-listed Harborside Inc. HBOR owes about $11 million in aggregate tax deficiency, according to the U.S. Tax Court. That’s good news for Harborside, the cannabis company said Monday, as the IRS originally demanded $25 million more.

What Happened

According to the IRS, Patients Mutual Assistance Corporation, owner of the Harborside Oakland cannabis dispensary, was deficient on taxes owed between 2007 and 2012.

The company said the sum — $36 million in taxes and penalties — reflected legitimate federal deductions mistakenly assumed under Section 280E of the IRS tax code, which prohibits cannabis companies from claiming federal deductions.

In 2018, the company unsuccessfully urged the court to exempt state-legal marijuana companies from Section 280E.

A year later, Harborside has made headway. The court’s latest decision reflects, among other things, a $6-million reduction related to penalties accrued for deficiency.

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Why It’s Important

Harborside said it considers the ruling a step in the right direction.

"The Tax Court's final computation of our tax obligation in PMACC's long-standing 280E case is a good outcome for Harborside shareholders,” CEO Andrew Berman said in a statement.

“By challenging the IRS's overly aggressive interpretation of the tax law as it applies to cannabis businesses operating legally under state law, we have succeeded in reducing Harborside's liability from the $36 million originally sought by the IRS to approximately $11 million.”

The decision is also good for the industry at large, the cannabis exec said. The court held that legal cannabis companies can claim deductions on the cost of goods sold — a decision lending legitimacy to and easing the financial burdens of operations that are still federally illegal. 

The ruling gives further hope to companies fearful of IRS policy changes that would increase audits on marijuana operations and lead to more lawsuits over unpaid taxes and penalties.

What’s Next

Harborside said it has retained counsel to appeal the latest decision and amend the court’s calculation of the cost of goods sold. It aims to eliminate 280E liability for state-legal operations across the country.

In the meantime, Harborside awaits a ruling on the alleged tax deficiency of its San Jose site. The company estimates $4.4 million owed in deficiencies and penalties before interest and said it has already recorded a one-time provision for the payment.

Harborside's Canada-listed stock was trading down 0.7% at CA$1.42 ($1.08) at the time of publication Monday. 

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