DOJ Sues to Recover Cannabis Tax Refund in Industry First

The Justice Department is suing TerrAscend (TSND.TO ) for $8.3 million in what appears to be the first federal lawsuit to claw back a cannabis tax refund — a move that puts every operator who pursued retroactive relief in the government’s crosshairs, even as Treasury is still finalizing the guidance that would resolve those claims for good.

Filed May 18, 2026, in the federal district court in New Jersey, the complaint was brought by the DOJ’s Tax Litigation Branch on behalf of the IRS. It alleges that the New Jersey-based multistate operator received an “erroneous” refund after filing an amended return that claimed deductions federal law does not permit cannabis businesses to take. The government’s complaint states that TerrAscend “was not entitled to take deductions for any amount incurred in carrying on its trade or business during tax year 2020.”

What TerrAscend Did — and What the Government Says Was Wrong

The chronology is specific. TerrAscend filed its original 2020 federal tax return in October 2021, claiming zero business deductions — the standard position for cannabis operators barred from writing off ordinary business expenses under the federal tax disallowance that applies to Schedule I drug traffickers. In April 2024, as multistate operators began mounting challenges to that disallowance, TerrAscend filed an amended return claiming $64.2 million in deductions. The IRS processed it and issued an $8.36 million refund in June 2024. TerrAscend cashed the check.

That same month, the IRS released a bulletin making its position explicit: operators filing amended returns to claim this kind of relief were “not entitled to a refund or payment” and the agency was “taking steps to address these claims.” The complaint notes the refund was not reviewed by the IRS’s Joint Committee on Taxation — a step required for refunds of this size — and that TerrAscend “has not voluntarily returned the erroneous refund to the United States.”

The timing of the lawsuit is pointed. On May 7, 2026, eleven days before the complaint was filed, TerrAscend Executive Chairman Jason Wild told investors that rescheduling had eliminated the federal cannabis tax burden and described anticipated retroactive relief as “meaningful upside not reflected in valuations.” The DOJ filed the complaint less than two weeks later.

The Broader Exposure Across the Industry

TerrAscend’s situation is not unique — it just became the most visible. TerrAscend’s first-quarter 2026 financial results show the company carries $138.8 million in uncertain tax position liabilities, up from $128.8 million at year-end 2025. The government is suing for over $8.3 million of that. What happens to the remainder depends on Treasury guidance that has been promised but not yet delivered.

Across the industry, according to public company disclosures, the disputed amounts are far larger. Trulieve carries approximately $445 million in exposure tied to the tax disallowance challenge. Verano shows roughly $378 million. Cresco Labs reported $171.5 million in uncertain tax position liabilities as of year-end 2025, up from $122.5 million the year prior. Curaleaf has disclosed a significant tax position but has not quantified it. Based on figures from public filings, the total disputed amount across publicly traded multistate operators has reached approximately $1.6 billion.

What happens to TerrAscend is, in this sense, a template question for the entire sector. Most of the industry’s exposure reflects taxes withheld or amended positions taken in anticipation of retroactive relief — not refunds already paid out and cashed. Whether the government treats those two situations differently is precisely what Treasury’s forthcoming guidance needs to address.

Where Rescheduling Guidance Leaves This

In April 2026, the DOJ finalized a rule placing marijuana contained in FDA-approved products and marijuana subject to a state medical marijuana license into Schedule III, removing the federal tax disallowance for those activities. On April 23, 2026, Treasury and the IRS announced they would issue guidance clarifying the tax consequences of that order, including a transition rule addressing which tax year the change first takes effect.

Treasury’s announcement confirmed that rescheduling “generally removes” the deduction bar for businesses that, as a result of reclassification, no longer traffic in Schedule I or II controlled substances. Guidance will also address how the rules apply to operators with mixed activities — state-licensed medical programs alongside other business lines.

What the announcement did not address is the question the TerrAscend case now makes unavoidable: how the government will treat operators that moved before that guidance arrived. The IRS had already reinforced its position in its March 6, 2026, brief filed in the Tax Court case New Mexico Top Organics v. Commissioner — the first case to test operators’ disallowance challenges before a federal tribunal — arguing that cannabis remained subject to the bar until rescheduling was formally complete, and that treating it otherwise would produce an absurd result.

The DOJ’s lawsuit against TerrAscend is the first time that legal position has moved from a Tax Court brief to a federal civil complaint. For operators waiting on Treasury’s guidance to understand where they stand, the limits of what rescheduling can resolve are now considerably clearer: the guidance will address the forward picture for licensed medical operators; the government is handling the refund question separately in court. TerrAscend held $39 million in cash as of March 31, 2026. The US District Court for the District of New Jersey has the case.