• Taxation of Electronic Cigarettes is on the Rise
  • October 27, 2015 | Authors: David H. Godenswager; David M. Kall
  • Law Firm: McDonald Hopkins LLC - Cleveland Office
  • Background

    The Food and Drug Administration defines electronic cigarettes, as those “products designed to deliver nicotine or other substances to a user in the form of a vapor. Typically, they are composed of a rechargeable, battery-operated heating element, a replaceable cartridge that may contain nicotine or other chemicals, and an atomizer that, when heated, converts the contents of the cartridge into a vapor. This vapor can then be inhaled by the user...”

    In January, the Pew Charitable Trusts published a blog concerning state taxation of electronic cigarette products. Among other things, the article revealed the divide between supporters and opponents. For example, Utah’s Gov. Gary Herbert likes the idea of taxing electronic cigarettes like other tobacco products, because they are enticing to kids but contain harmful nicotine and other toxic and addictive components.

    Indeed, the Centers for Disease Control (CDC) confirms the harmful effects of nicotine on adolescent brain development, asserting that it is highly addictive, and “could result in lasting deficits in cognitive function.”

    On the other hand, electronic cigarette users say the products are healthier, and like the nicotine patch and nicotine gum, help to reduce smokers’ dependence on cigarettes. For that reason, these opponents say electronic cigarettes should not be taxed.

    There is no doubt that awareness and use of electronic cigarettes have skyrocketed. Summarizing CDC data, Pew reveals the following increases between 2010 and 2013:

    Category

    2010 

    2013 

    Percentage of people who are aware of electronic cigarettes

    40.9%

    79.7%

    Percentage of people who have used electronic cigarettes

    3.3% 

    8.5%

    Percentage of current smokers who have used electronic cigarettes 

    9.8%

    36.5%

    Percentage of former smokers who have used electronic cigarettes

    2.5%

    9.6%


    According to an analyst for the National Conference of State Legislatures, “[t]his is going to be one of the most introduced and debated topics in state legislatures this year, especially the tax issue.”

    Taxation on the rise

    In 2014, 12 state legislatures considered but ultimately did not pass bills providing for the taxation of e-cigarettes and e-vapor products, according to Convenient Store and Fuel News. These states are Delaware, Hawaii, Indiana, Kentucky, New Jersey, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, Vermont, and Washington.

    A Public Health Law Center 50 State Review through May of this year shows that only Colorado, Hawaii (effective Jan. 1, 2016), Minnesota, North Carolina, South Dakota, Utah, and Wyoming have, or will have in the near future, laws on their books that include electronic cigarettes in the definition of “tobacco product.” Among these, only two states assess a special excise or non-sales tax: North Carolina, which has a rate of $0.05/fluid ml. of consumable product, and Minnesota, whose tax rate is 95 percent of the wholesale price.

    Since May, a few other jurisdictions now subject electronic cigarettes to taxes. As of Oct. 1, 2015, the District of Columbia now imposes an excise tax of 67 percent on vapor products. Like cigarettes and tobacco products, vapor products are exempt from the District’s sales tax. In D.C., a vapor product is defined as “any non-lighting, noncombustible product that employs a mechanical heating element, battery, or electronic circuit, regardless of shape or size, that can be used to produce aerosol from nicotine in a solution or 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 or device.”

    In Kansas, the Tax Foundation reported that lawmakers passed an e-cigarette tax at the rate of 20 cents per milliliter of consumable material, effective July 1, 2016.

    Finally, in Louisiana, HB 119 levies a tax of five cents per milliliter of consumable nicotine liquid on vapor products and electronic cigarettes, as of July 1, 2015.

    Pew noted that in addition to the general increase in electronic cigarette awareness and usage, studies in both Utah and Michigan show that there is an uptick in the use of e-cigarette products by kids. In light of the dangers posed by this trend, along with states’ need for revenue, it seems likely that more lawmakers will attempt to tax these products.