Quick Take
After the Department of Justice eased medical marijuana's legal status, full reclassification could come as early as this year – a move industry participants say would help level the playing field for cannabis businesses by lowering taxes and fostering financing and trade opportunities.
Santa Cruz County’s cannabis industry is getting a lift from the federal government’s easing of marijuana’s legal status.
The Department of Justice said last week it would reclassify state-licensed medical marijuana as Schedule III, placing it in the same category as Tylenol with codeine, steroids and ketamine.
The DOJ also said it would hold hearings on proposed full rescheduling for all forms of marijuana starting June 29, and was expediting the efforts “in order to move more efficiently toward … complete redesignation.”
That means full Schedule III reclassification could come as early as this year. The move would help level the playing field for cannabis businesses by lowering taxes and fostering financing and trade opportunities, industry participants say.
“It’s a huge step forward,” said Bryce Berryessa, owner of The Hook and Treehouse dispensaries in Santa Cruz. “We’re happy for anything we can get to lower our operating expenses at this point.”
California voters legalized medical marijuana in 1996 and recreational marijuana in 2006 using ballot initiatives. But marijuana’s Schedule I designation, passed by Congress in 1970, has kept cannabis in the same category as heroin at the federal level. That has resulted in higher taxes on California’s legal cannabis industry, and put up barriers to financing and out-of-state trade.
Santa Cruz County had 114 active business licenses for marijuana at the end of March, with about 51% for adult use and 44% for dual medical and adult use, according to data provided to Lookout by research firm Emerald Intel. The county ranks 18th in California by number of active licenses.
Tax relief under Schedule III is a boon for Santa Cruz’s cannabis industry. California’s cannabis businesses often pay effective federal tax rates that exceed 70%, compared with 21% among corporations, according to advocacy group Marijuana Policy Project. Schedule I bars businesses from deducting standard business expenses, including rent and salaries, due to Internal Revenue Code Section 280E’s penalty on drug traffickers.
“There’s going to be enormous tax relief,” Berryessa said, estimating tax savings between 10% and 40%. “Any money that we are able to maintain within the business and not pay in federal taxes goes directly to our bottom line and makes us more profitable.”
Regulations and high taxes are largely to blame for the shuttering of cannabis businesses in recent years, Berryessa said. Santa Cruz Naturals closed its flagship dispensary in Aptos this year after closing its Pajaro location in 2025, saying on its website: “… the level of state taxation and the increasingly burdensome regulatory structure have made it an impossible market for us to continue operating in sustainably.”
Now, there could be financial relief on the way. The DOJ’s order suggested medical cannabis businesses may reap tax deductions from past years, which could be extended to all businesses under full rescheduling.
“The Administrator encourages the Secretary of the Treasury to consider providing retrospective relief from Section 280E liability for taxable years in which a state licensee operated under a state medical marijuana license,” the DOJ said.
With money saved in federal taxes, Berryessa said he would reinvest in operations and “aim to increase our salaries across the board.” His company has about 60 employees.
“I think that most local businesses, with rising inflation in the economy, would love to pay their employees more,” he said.
For cannabis growers, Schedule III presents other opportunities in financing and trading. Some 46% of active marijuana licenses are for cultivators in Santa Cruz County, followed by about 20% for retailers and 19% for distributors, according to Emerald Intel.
“The possibility is huge,” said Darren Story, chief financial officer at Coastal Sun, which sold about 17,000 pounds of cannabis last year. It has three farms in Corralitos and is developing another in San Benito.
He said medical marijuana’s rescheduling is already creating an out-of-state and potentially international market for Santa Cruz-grown cannabis. The Drug Enforcement Administration is setting up the regulated market, Story said, and the DEA’s website registering medical marijuana dispensaries went live on Wednesday.
“The biggest possible windfall would be being able to export,” he said. “It helps take a lot of risk off the table so we aren’t geographically limited to where we sell our product.”
Schedule III is also expected to make financing easier for farming, he said. Farms typically take out lines of credit in the winter to prepare for the growing season, but those options aren’t available for cannabis cultivators, Story said.
“I think we are going to start seeing real commercial lenders come into the space,” he said. “That will really start freeing up traditional banking pathways for us.”
“Worst-case scenario,” he added, “we will just have a very robust medical market.”
Still, marijuana advocates say that Schedule III doesn’t go far enough. There are thousands of people in jail for cannabis possession.
“We need to see a full decriminalization of cannabis and there shouldn’t be anyone serving in state or federal prisons for cannabis charges,” Berryessa said. “I don’t think anyone should be serving jail time for possession of a plant.”
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