Quarterly report pursuant to Section 13 or 15(d)

INCOME TAXES

v3.23.2
INCOME TAXES
 6 Months Ended
Jun. 30, 2023
Income Tax Disclosure [Abstract]  
INCOME TAXES
 16. INCOME TAXES
The following table summarizes the Company’s income tax expense and effective tax rates for the three and six months ended June 30, 2023 and 2022:
Three Months Ended June 30, Six Months Ended June 30,
2023 2022 2023 2022
Income (loss) before income tax $ (5,490) $ 19,776  $ (7,782) $ 5,070 
Income tax expense $ 8,546  $ 7,710  $ 18,694  $ 12,761 
Effective income tax rate (155.7) % 39.0  % (240.2) % 251.7  %
The Company has computed its provision for income taxes based on the actual effective rate for the six months ended June 30, 2023 and 2022 as the Company believes this is the best estimate for the annual effective tax rate. Therefore, the Company’s effective income tax rates for the three and six months ended June 30, 2023 and 2022 are not indicative of the effective income tax rate for each respective fiscal year of 2023 and 2022. The Company’s effective income tax rate is significantly higher than the statutory income tax rates due in part to (i) disallowed expenses under U.S. Internal Revenue Code of 1986, as amended (“IRC”), Section 280E, (ii) change in uncertain tax positions, (iii) fair value change of derivatives, (iv) interest and penalties accrual for tax liabilities, and (v) state income taxes.
Due to its cannabis operations, the Company is subject to the limitation of IRC Section 280E under which the Company is only allowed to deduct "costs of goods sold". This results in permanent differences between ordinary and necessary business expenses deemed non-allowable under IRC Section 280E. Therefore, the effective tax rate can be highly variable and may not necessarily correlate with pre-tax income which provides for effective tax rates that are well in excess of statutory tax rates.
The Company’s tax returns for the year 2021 and prior 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 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 $60,491 and $57,200 as of June 30, 2023 and December 31, 2022, respectively, inclusive of interest and penalties, which is included in income tax liabilities - non-current in the consolidated balance sheets. Additionally, there are unrecognized deferred tax benefits of $3,414 and $3,412 as of June 30, 2023 and December 31, 2022, respectively. The Company does not expect the unrecognized tax benefits will materially increase or decrease within the next 12 months.
The amount of interest and penalties related to outstanding income tax liabilities recorded by the Company during the three and six months ended June 30, 2023 was $644 and $1,533, respectively. The amount of interest and penalties related to outstanding income tax liabilities recorded by the Company during the three and six months ended June 30, 2022 was not material. Additionally, the Company’s income tax payable of $32,575 and $19,921 as of June 30, 2023 and December 31, 2022, respectively, included deferral of certain 2023 and 2022 estimated income tax payments.