Annual report pursuant to Section 13 and 15(d)

INCOME TAXES

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INCOME TAXES
 12 Months Ended
Dec. 31, 2023
Income Tax Disclosure [Abstract]  
INCOME TAXES
 20. INCOME TAXES
Details of the Company’s income tax expense are as follows:
Year Ended December 31,
2023 2022 2021
Current tax expense:
   Federal $ 27,303  $ 26,738  $ 25,501 
   State 3,608  7,783  9,234 
30,911  34,521  34,735 
Deferred tax benefit:
   Federal 2,281  (17,780) (5,477)
   State (1,386) (8,332) (1,724)
   Foreign (5,554) (5,969) (3,874)
(4,659) (32,081) (11,075)
Change in valuation allowance 5,554  6,008  5,965 
Total income tax expense $ 31,806  $ 8,448  $ 29,625 
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,
2023 2022 2021
Income (loss) before income taxes
 $ (33,296) $ (193,876) $ 47,104
Statutory tax rate 21.00  % 21.00  % 21.00  %
Tax expense (benefit) based on statutory rates
 (6,992) (40,714) 9,892 
Difference in tax rates (4,463) 2,500  16,753 
Gain on fair value of derivative (4,564) (44,106) (50,482)
IRC Section 280E disallowed expenses 10,862  43,272  12,520 
Share-based compensation 173  10,509  2,361 
Interest expense and debt costs 458  13,718  3,616 
Deemed interest income
 842  —  — 
Tax interest and penalties 383  —  — 
Change in valuation allowance 5,554  6,008  5,965 
State taxes, net 33  1,698  1,249 
Change in uncertain tax positions 24,888  8,618  26,823 
Change in state tax rates (474) (2,557) — 
Impairment expense 1,539  8,289  — 
Return to provision
 2,786  —  — 
Difference in foreign deferred and statutory tax rate
 348  —  — 
Contingent consideration
 311  —  — 
Other differences 122  1,213  928 
Total income tax expense $ 31,806  $ 8,448  $ 29,625 
Effective tax rate (95.5) % (4.4) % 62.9  %
The Company’s income tax payable of $5,190 as of December 31, 2023 included deferral of certain 2023 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, 2023, 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,
2023 2022
Deferred tax assets:
   Lease liability $ 17,760  $ 24,328 
   Net operating losses 22,661  16,819 
   Financing fees 830  1,487 
   Start-up costs 603  661 
Share-based compensation 817  — 
Interest carryforward
 563  — 
Inventory 419  1,555 
Property and equipment 1,149  — 
Other deferred tax assets 1,314  619 
Valuation allowance (22,951) (17,397)
$ 23,165  $ 28,072 
Deferred tax liabilities:
Right-of-use assets $ (18,414) $ (21,865)
Intangible assets (5,211) (5,235)
Property and equipment —  (693)
Other deferred tax liabilities (235) (80)
$ (23,860) $ (27,873)
Net deferred tax asset (liabilities) (1)
$ (695) $ 199 
(1) Net deferred tax assets are included in other non-current assets while net deferred tax liabilities are included in other non-current 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, 2023 and 2022.
As of December 31, 2023, the Company had $71,706 of non-capital Canadian losses, $1,560 of capital Canadian losses, $8,177 of other foreign losses, $56,881 of state net operating losses which expire in 2032-2044. The Company has not recorded $31,270 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: $71,706 for non-capital Canadian losses, $1,560 for capital Canadian losses, $8,177 for other foreign losses, $1,840 for state net operating losses.

Due to its cannabis operations, 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, and in 2023, Illinois 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. 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. In connection with the preparation and filing of the fiscal 2022 federal income tax return, the Company changed its previous application of 280E to exclude certain parts of its business. However, since the Company’s new tax
position on 280E may be challenged by the IRS, the Company elected to treat the deductibility of these related expenses as an uncertain tax position. As of December 31, 2023, the balances in income tax payable and unrecognized tax benefits on the consolidated balance sheets include the impact of the new tax position on 280E, which decreased current liabilities with a corresponding increase in non-current liabilities. There was no material impact to the consolidated statements of operations and comprehensive income (loss).
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 a liability for unrecognized tax benefits of $100,343 and $57,200 as of December 31, 2023 and 2022, respectively, inclusive of interest and penalties. Additionally, there are unrecognized deferred tax benefits of $17,303 and $3,412 as of December 31, 2023 and 2022, respectively. The Company anticipates that it is reasonably possible that its new tax position on 280E may require changes to the balance of unrecognized tax benefits within the next 12 months. However, an estimate of such changes cannot reasonably be made.
The total amount of interest and penalties related to the liability for unrecognized tax benefits recorded in income tax expense for the year ended December 31, 2023 were $6,676 and $0, respectively. The total amount of interest and penalties related to the liability for unrecognized tax benefits recorded within income tax expense for the year ended December 31, 2022, was $2,907 and $4,783, respectively. The total amount of interest and penalties related to the liability for unrecognized tax benefits recorded within income tax expense for the year ended December 31, 2021, was $643 and $2,742.
A reconciliation of the beginning and ending amount of unrecognized tax benefits (exclusive of interest and penalties) are as follows:
Balance at January 1, 2022
 $ 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 to the prior year
 (127)
Additions for tax positions of prior years recorded to goodwill 5,982 
Balance at December 31, 2022
 $ 48,258 
Reductions based on lapse of statute of limitations (1,946)
Additions based on tax positions related to the current year 19,843 
Additions based on tax positions related to the prior year
 38,470 
Balance at December 31, 2023 $ 104,625