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E-Cigs: How Should They Be Taxed?

As an avid sports fan and season ticket holder, I have now become more accustomed to seeing fellow fans smoking vapor products–a battery powered pen-like device that heats liquid nicotine into vapor-in the stadium seats. While some may wonder how people can possibly get away with smoking vapor products at stadium seats, or even at restaurant tables, I often ponder about how the vapor products are taxed at the state level. Are vapor products really tobacco products, are they cigarettes, or are they something completely different, and if so, are vapor products taxed at the wholesale level, as a sales tax, or some combination thereof?

While Minnesota and North Carolina already have laws in place to tax e-cigarettes–where they included “vapor products” into statutes imposing a tax on the wholesale dealer or retail dealer who first brings the vapor product into the state–many states still don’t have a sales and use tax, due to failed legislation. According to Tobacco E-News: Delaware, Hawaii, Indiana, Kentucky, New Jersey, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, Vermont and Washington all introduced e-cigarette tax proposals last year, yet none of them were passed. How could states possibly not be actively attempting to drive their revenue streams up by taxing smoking vapor products at the wholesale level?

To further my point that states have been scrambling to attempt to introduce bills, the vapor industry has grown astronomically over the past few years. In fact, the industry doubled in size from 2013 to 2014 to a whopping $6 billion–think about all the potential revenue a state could possible generate by a tax. Further, various estimates from the Euromonitor, a London-based market research firm, predict the vapor market may exceed $50 billion by 2030.

One potential reason for the quick growth of the industry may be demonstrated by a simple personal example, over the past year I have even gone to music festivals and concerts seen these exact products being handed out as single individual samples. The smoking vapor products could have been seen everywhere throughout the music venues with users ranging from barely of age and up. For many, the popularity may be derived from the ability to stay put in one’s seat and not miss any of the action. Through various marketing strategies, the global vapor industry has turned many cigarette users on to vapor products as supplement to traditional cigarettes.

It is no surprise that states have been failing in their efforts to tax these products. In a surprising turn of events, the American Cancer Society openly opposed various state proposals making sales of e-cigarettes to minors illegal. Although, I may add that American Cancer Society believes that the various legislations have a negative impact that could cause more people to become addicted to nicotine. Further, other health groups have joined this same campaign stating that the e-cigarette bills may have negative impacts making smoking appear “normal” again.

With the lobbying efforts of the big players in the e-cigarette industry, it almost appears to be the same thought process used by the tobacco industry decades ago when they protected themselves form policies so that their product would remain cheap for everybody, including kids. With the current trend, many lawmakers suggest that with the situation the industry is in right now, a whole generation of people will soon be addicted to the products. This may be the direct reason why states have not succeeded in their ability to tax these products, because law makers are more concerned with the regulation and not the taxability of the products coming into the state–one can’t tax without regulation.

However, how can lawmakers protect kids without killing the industry–which generates plenty of tax revenue for each state–because without the industry states will lose money? Currently, the legislative fight is about placing an age restriction on the products to protect minors from purchasing vapor products. With that, the battle to tax the products is far from even beginning.

While cigarette sales are dropping, state revenue is also dropping. Therefore, I fully expect states to attempt to tax e-cigarettes, with many laws causing serious debate as to their legality, and follow the growing trend to tax the entity at the wholesale level who first acquired or handles the vapor product in each state. Until then, while the vapor industry is still relatively new, the upside and growth of the market keep growing. Time will tell how or if the states will attempt to boast their revenue stream by taxing the smoking vapor products.

About the authors: Mr. Donnini is a 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’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. If you have any questions please do not hesitate to contact him via email JerryDonnini@Floridasalestax.com or phone at 954-642-9390.

Mr. Appel is a law clerk with a Moffa, Gainor, & Sutton, PA based in Fort Lauderdale, Florida. Mr. Appel’s primary practice areas are Florida sales and use tax and multi-state sales and use tax. Mr. Appel earned a B.S. in Accounting and a Minor in Legal Environment of Business from The Pennsylvania State University. Mr. Appel is currently a Juris Doctorate Candidate at Nova Southeastern University Law School with an expected graduation in May 2016. Presently, Mr. Appel is the Executive Editor of ILSA Journal of International and Comparative Law, a Student-Coach and Advocate for Phillip C. Jessup International Law Moot Court, and a member of Nova Trial Association.