"Tobacco Tax"

Published on: May 30, 2013

TAXES SHAPE PUBLIC POLICY: UTAH TAXES E-CIGARETTES?

In an attempt to quit smoking, many Americans purchase a piece of equipment for about $50 and e-juice for about $15. When heated by the equipment, the e-juice, nicotine laced liquid, becomes an inhalable vapor that can be used as a cigarette replacement for many nicotine addicts. The electronic cigarette, or e-cigarette, first became widely available in Europe in the early 2000’s. From there, the industry grew to several thousand users in 2006, and now some analysts estimate that this has become roughly a two billion dollar industry in 2013. Are these battery-powered devices safe? What are the long term effects of inhaling nicotine through an e-cigarette?

The Food and Drug Administration’s (“FDA”) current stance appears to be that it does not know the answer to either of these questions. However, unlike medications and patches, the e-cigarettes have not been approved by the FDA. Many officials, such as tobacco policy analyst with the National Conference of State Legislatures, Karmen Hanson, seem to think so. Hanson went so far as to believe that the e-cigarettes are a “prominent public issue,” and “it’s up to the states” to deal with. Others, such as Rep. Paul Ray (Utah), strongly believe the e-cigarettes to be “terrible stuff,” and that “the industry . . . kills their clientele” by “peddling stuff that they know will absolutely kill people.”

On the other side of the coin are proponents of the product, like Stauffer of West Point, Utah. He has claimed that the e-cigarette eliminated smoking from his life. He does not believe vilifying the product is warranted because “[q]uitting smoking has never been easier.” He truly believes the e-cigarette is less harmful for his body and if Utah “is serious about helping [the people] make healthy choices, then [e-cigarettes] should be encouraged.”

So what do states do when they believe that a particular practice is against public policy, they are unsure about a product, or they want to influence certain behavior?
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Published on: April 10, 2013

ANOTHER STATE TOBACCO TAX CASE SHOWS THE ‘CLARITY’ OF TOBACCO TAX LAWS

By Jerry Donnini, Esq.

It is no secret that states generate high amounts of tax revenue from excise tax. For public policy and political reason, alcohol and tobacco seem ripe for state governments to extort money from its citizens. As a result of high tax rates, businesses that buy and sell large quantities of alcohol and tobacco products find it worthwhile to fight rogue state agencies, such as the various Departments that regulate alcohol and tobacco tax. In a recent Louisiana case, McLane lost against the Department of Revenue in its challenge of the state’s tobacco tax.

Like many states, Louisiana levies a 20% excise tax on the distribution of smokeless tobacco in its state. Louisiana takes the position that the first person to distribute tobacco in Louisiana is liable for the tobacco tax. Specifically, the Louisiana law says that tax is due on 20% of the “invoice price” — an “invoice price” being the “manufacturer’s net invoiced price as invoiced to the tobacco dealer by the manufacturer.” Clear enough? In this particular case, McLane purchased its smokeless tobacco from US Smokeless Tobacco Brands, which is a subsidiary of UST Manufacturing. McLane then sells its tobacco to customers in Louisiana.

At its core, McLane had a simple and straightforward argument that it should not be liable for the tax. McLane argued that it was not a manufacturer so how could Louisiana tax them at the “manufacturers net invoice” price because it buy tobacco from UST Brands, which is not a manufacturer. Even if it was liable for the tax shouldn’t the tax be at the invoice price charged from the Manufacturer to its sales arm?
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Published on: March 22, 2013

AVOID THE TOBACCO TAX BY MAKING YOUR OWN CIGARETTES AT HOME

By Jerry Donnini, Esq.

Due to the rising cost and high taxes of cigarettes throughout the country, individuals and businesses are coming up with creative ways to avoid the tax on cigarettes and tobacco. From clubs, to specialty stores, and even peoples’ homes, establishments that allow smokers to make their own cigarettes are on the rise. Companies such as RYO have installed thousands of machines throughout the nation in an effort to combat the rising costs of cigarettes, which are over $66 per carton in some states. The machines can reduce costs to as low as $20 per carton in some states, which has resulted in an industry that has quadrupled in size over the past few years. What is often overlooked by many of these do-it-yourself stores is whether allowing customers to partake in cigarette making morphs them into a cigarette manufacturer. In most states, becoming a cigarette manufacturer can impose strict and expensive license requirements as well as burdensome state taxes.

For example, in January, 2013, a nonprofit club in Michigan acquired a cigarette making machine. The club purchased the machine as a convenience for its members in a non-commercial setting. Concerned as to whether this practice turned the company into a “manufacturer” of tobacco products under Michigan law, the company requested a Letter Ruling, specifically LR 2013-1, Michigan Department of Treasury, January 31, 2013. The club took it a step further and asked whether the club member operating the cigarette machine would also be a manufacturer.

Under Michigan law, MCL 205422(m)(ii), any person who operates or allows another to operate a “cigarette making machine” for the purpose of generating a cigarette is a “manufacturer.” The defined “cigarette making machine,” means a machine or device that 1) is capable of being loaded with tobacco, cigarette papers or tubes, or any other component related to a cigarette, 2) is designed to produce a cigarette, 3) is commercial grade, and 4) is powered by something other than human power. Applying this nice narrow and concise definition, the state determined that the machines used were the dreaded “cigarette making machine.”