If the U.S. Drug Enforcement Administration reclassified marijuana as a less dangerous drug, it wouldn't eliminate the conflicts between the feds and states such as California that have legalized many uses of the substance.

But it would bring one significant shift that could give California's licensed pot companies a badly needed boost: a lighter tax burden.

The Associated Press reported Tuesday that the Drug Enforcement Administration will propose moving marijuana from the list of Schedule I drugs, which includes heroin and cocaine, to Schedule III drugs, which include ketamine and anabolic steroids. The proposal would still have to be reviewed and endorsed by the White House as well as be made available for public comment.

Industry insiders say the move, if approved, could become a lifeline to California's struggling cannabis industry. "We've been anticipating this," said Meital Manzuri, an attorney whose firm specializes in the cannabis industry. "This is big for the industry."

Lawful in California but illegal under federal law, the state's cannabis industry has operated in a difficult legal limbo. Stores and farms operate in the open, but they're cut off from benefits that other businesses enjoy, such as access to out-of-state markets.

Their murky legal standing has also meant that banking, credit card processing, insurance and other vital business services are out of reach for many marijuana businesses.

The tax burden, though, has been particularly onerous. Section 280E of the federal tax code bars businesses involved in "trafficking" of Schedule I or II substances from deducting the expenses they incur. As a result, they are taxed on every dollar they collect, not just their profits.

But if marijuana is reclassified as a Schedule III drug, "players in that industry for the first time will be able to take standard tax deductions that other businesses take," said Paul Armentano, deputy director of the National Organization for the Reform of Marijuana Laws, also known as NORML, which advocates for cannabis consumers. "The biggest change is going to be how the industry does business."

"The industry in California especially has been faltering in the last couple of years and this offers them a future," Manzuri said. "It might be a lifeline that they need to continue operating."

According to the California Department of Tax and Fee Administration, legal marijuana shops reported about $5.1 billion in revenue in 2023, less than the previous year and 11% less than in 2021.

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