Annual report pursuant to Section 13 and 15(d)

INCOME TAXES

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INCOME TAXES
 12 Months Ended
Dec. 31, 2022
Income Tax Disclosure [Abstract]  
INCOME TAXES
 16. INCOME TAXES
Details of the Company’s income tax expense are as follows:
Year Ended December 31,
2022 2021 2020
Current tax expense:
   Federal $ 26,738  $ 25,501  $ 9,728 
   State 7,783  9,234  4,452 
$ 34,521  $ 34,735  $ 14,180 
Deferred tax benefit:
   Federal $ (17,780) $ (5,477) $ (2,650)
   State (8,332) (1,724) (962)
   Foreign (5,969) (3,874) (3,307)
$ (32,081) $ (11,075) $ (6,919)
Change in valuation allowance 6,008  5,965  3,362 
Total income tax expense $ 8,448  $ 29,625  $ 10,623 
The differences between the income tax expense and the expected income taxes based on the statutory tax rate applied to pre-tax earnings (loss) are as follows:
Year Ended December 31,
2022 2021 2020
Loss (income) before income taxes $ (193,876) $ 47,104  (201,892)
Statutory tax rate 21.00  % 21.00  % 21.00  %
Tax benefit based on statutory rates $ (40,714) $ 9,892  $ (42,397)
Difference in tax rates 2,500  16,753  (53,432)
Gain on fair value of derivative (44,106) (50,482) 83,498 
IRC Section 280E disallowed expenses 43,272  12,520  3,961 
Share-based compensation 10,509  2,361  2,099 
Interest expense and debt costs 13,718  3,616  1,549 
Change in valuation allowance 6,008  5,965  3,362 
State taxes, net 1,698  1,249  1,477 
Change in uncertain tax positions 8,618  26,823  11,857 
Change in state tax rates (2,557) —  — 
Impairment expense 8,289  —  — 
Bargain purchase gain —  —  (2,131)
Other differences 1,213  928  780 
Total income tax expense $ 8,448  $ 29,625  $ 10,623 
Effective tax rate (4.4) % 62.9  % (5.3) %
The amount of interest and penalties related to outstanding income tax liabilities recorded by the Company during the year ended December 31, 2022 was not material. Additionally, the Company’s income tax payable of $19,921 as of December 31, 2022 included deferral of certain 2022 estimated income tax payments. The Company files income tax returns in the U.S., various U.S. state jurisdictions, and Canada, which have varying statutes of limitations. As of December 31, 2022, with few exceptions, all tax filings remain open for assessment.
Year-end deferred tax assets and liabilities were due to the following:
Year Ended December 31,
2022 2021
Deferred tax assets:
   Lease liability $ 24,328  $ 26,261 
   Net operating losses 16,819  7,941 
   Financing fees 1,487  2,289 
   Start-up costs 661  820 
Inventory 1,555  — 
Property and equipment —  957 
Other deferred tax assets 619  1,295 
Valuation allowance (17,397) (11,389)
$ 28,072  $ 28,174 
Deferred tax liabilities:
Right-of-use assets $ (21,865) $ (24,406)
Intangible assets (5,235) (20,851)
Property and equipment (693) — 
Other deferred tax liabilities (80) (978)
$ (27,873) (46,235)
Net deferred tax asset (liabilities) (1)
$ 199  $ (18,061)
(1) Net deferred tax assets are included in other non-current assets while net deferred tax liabilities are included in non-current income tax liabilities in the consolidated balance sheets.

Realization of deferred tax assets associated with the net operating loss carryforwards is dependent upon generating sufficient taxable income prior to their expiration. A valuation allowance to reflect management's estimate of the temporary deductible differences that may expire prior to their utilization has been recorded at December 31, 2022 and 2021.
As of December 31, 2022, the Company had $50,412 of non-capital Canadian losses, $2,918 of capital Canadian losses, $8,177 of other foreign losses, $36,615 of state net operating losses which expire in 2032-2042. The Company has not recorded $14,531 of these state net operating losses as an unrecognized tax benefit. To the extent that the benefit from these loss carryforwards are not expected to be realized, the Company has recorded a valuation allowance as follows: $50,412 for non-capital Canadian losses, $2,918 for capital Canadian losses, $8,177 for other foreign losses, $1,840 for state net operating losses.

As the Company operates in the legal cannabis industry, the Company is subject to the limits of Internal Revenue Code ("IRC") Section 280E for U.S. federal income tax purposes as well as state income tax purposes for all states except for California and Colorado. Starting with the 2022 tax year, Massachusetts and New York also decoupled from IRC Section 280E. Under IRC Section 280E, the Company is only allowed to deduct expenses directly related to cost of goods sold. This results in permanent differences between ordinary and necessary business expenses deemed non-allowable under IRC Section 280E.
The Company’s tax returns benefited from not applying IRC Section 280E to certain entities of the consolidated group either due to the entity not yet starting operations or because the entity had a separate trade or business that was not medical or recreational cannabis operations. The Company has also treated certain expenses as cost of sales for tax purposes which were treated as selling, general and administrative expenses for financial statement purposes. The Company determined that it is not more likely than not these tax positions would be sustained under examination. As a
result, the Company has an uncertain tax liability of $57,200 and $41,990 as of December 31, 2022 and 2021, respectively, inclusive of interest and penalties, which is included in non-current income tax liabilities in the consolidated balance sheets. Additionally, there are unrecognized deferred tax benefits of $3,412 and $3,269 as of December 31, 2022 and 2021, respectively. The Company does not expect the unrecognized tax benefits will materially increase or decrease within the next 12 months.
The total amount of interest and penalties related to the uncertain tax liability recorded in income tax expense for the year ended December 31, 2022 were $2,907 and $4,783, respectively. The total amount of interest and penalties related to the uncertain tax liability recorded within income tax expense for the year ended December 31, 2021, was $643 and $2,742, respectively. The total amount of interest and penalties related to the uncertain tax liability recorded within income tax expense for the year ended December 31, 2020, was $45 and $nil.
A reconciliation of the beginning and ending amount of unrecognized tax benefits (exclusive of interest and penalties) are as follows:
Balance at January 1, 2021
 $ 21,135 
Additions based on tax positions related to the current year 20,368 
Balance at December 31, 2021
 $ 41,503 
Reductions based on lapse of statute of limitations (552)
Additions based on tax positions related to the current year 1,452 
Reductions based on tax positions related of the prior year (127)
Additions for tax positions of prior years recorded to goodwill 5,982 
Balance at December 31, 2022 $ 48,258