It is difficult to drive up the road in your city and not pass by at least a few new vapor shops. Vapor shops, which are centered on electronic cigarettes, or e-cigs, have taken the local smoke shops by storm. An e-cigarette is a smoking product that transfer nicotine to its user by vaporizing a flavored liquid solution. Rather than a smelly and tar filled cigarette, the vapor products are odorless and tar free. Customers of vapor shops appear to be able to put away their cigarettes after the first use and often do opt for the better flavored product for their nicotine fix.
For those that don’t believe that vapor is a new fad, the numbers don’t lie. Many sources show an increase in cigarette use in 2014 by about .3 to .5 percent. During the same period, the vapor industry more than double. Admittedly, there were many more cigarette smokers, but in total the emerging vapor market boaster sales of around $6 billion in 2014. Of that $6 million, an estimated $3 million of that market seems to be American consumers, who are likely driven by the fad of a theoretically healthier product to replace their harmful cigarette competitors.
While the true health effects of vapor remain up in the air, the writings on the wall are clear. If people are going to use it and it resembles something “bad” for humans to do, states are going to do their best to tax it. Like most shifts in the economy and technology, states are not adept at moving quickly. In other analogous situations, states act quickly and often not wisely. As we will explore in future blogs, as states attempt to enact tax legislation, one can almost guarantee tax loopholes and imprecise taxing policy.
To date, the theme of state taxation of e-cigarettes is incredibly uncertain. States are trying to stuff e-cigarettes into traditional wholesale tobacco tax concepts. However, with different supply chains, different markets, and very different suppliers states are struggling to capture the tax.
Perhaps the home of tobacco, North Carolina was the first state to tax vapor products. Similar to tobacco products, North Carolina is trying to impose tax on the first person to bring the product into the state. North Carolina broadly defined a vapor product to mean
Any nonlighted, noncombustible product that employs a mechanical heating element, battery, or electronic circuit regardless of shape or size and that can be used to produce vapor from nicotine in a solution. The term includes any vapor cartridge or other container of nicotine in a solution or other form that is intended to be used with or in an electronic cigarette, electronic cigar, electronic cigarillo, electronic pipe, or similar product device.
The tax is levied at 5 cents per fluid milliliter. The state has also lumped retailer dealer of e-cigs as those required to pay tax. This may result in the state administering thousands of retailers who may be selling the product. This can be an administrative disaster for the state.
Louisiana followed the lead and became the second state to tax vapor. Effective August 1, 2015, Louisiana instituted a similar 5 cents per milliliter on similarly defined vapor products. Louisiana also places the tax burden on the first distributor, manufacturer, or retailer that brings it into the state. Similar to potential problems in North Carolina, Louisiana retailers, who are not used to paying wholesale taxes, may be forced to file returns. On the flip side, the state agency will now have thousands of “wholesalers” to administer, rather than a few hundred.
As the emerging market for vapor products continues to grow, states will almost certainly amp up the taxes on them. For now, the trend is that a few states, in an effort to just get a tax on the books, are just trying to sweep anyone selling vapor under their purview. While in theory it may be wise, in practicality, states are likely biting off more than they can chew in an area they admittedly do not understand. If you or your client sells vapor in these states beware, the states will come knocking for their taxes as soon as they can. If you sell vapor in the other states, then keep your eyes and ears open as the tax is coming soon.
If you or your client sells vapor and you have any questions about the taxability of it, then please do not hesitate to call or email me at [email protected].
Additional Sources:
North Carolina Department of Revenue – FAQ’s - http://revenue.louisiana.gov/LawsPolicies/RIB%2015-032.pdf
Louisiana – Tax On Vapor Overview - http://revenue.louisiana.gov/LawsPolicies/RIB%2015-032.pdf
50 State Review – E-Cigs Regulations - http://publichealthlawcenter.org/resources/us-e-cigarette-regulations-50-state-review & Full Report http://publichealthlawcenter.org/sites/default/files/The-Legal-Landscape-for-Electronic-Nicotine-Delivery-Systems-07102015.pdf
About the author: Mr. Donnini is the president and founder of Tobacco Tax Refunds, Inc. He is also multi-state sales and use tax attorney and an associate in the law firm Moffa, Gainor, & Sutton, PA, based in Fort Lauderdale, Florida. Mr. Donnini has extensive knowledge handling wholesale tax controversy and refunds.
In his law practice Mr. Donnini's primary practice is multi-state sales and use tax as well as state corporate income tax controversy. Mr. Donnini also practices in the areas of federal tax controversy, federal estate planning, Florida probate, and all other state taxes including communication service tax, cigarette & tobacco tax, motor fuel tax, and Native American taxation. Mr. Donnini obtained his LL.M. in Taxation at NYU. Mr. Donnini is licensed to practice law in Florida. If you have any questions please do not hesitate to contact him via email [email protected] or phone at 954-639-4496.