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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?

They tax it … heavily. In fact, more than 35 proposals were introduced nationwide to tax or regulate e-cigarettes so far this year. Leading the charge for a national movement against the product has been Utah. Utah recently had the idea to tax the e-cigarettes the same way regular cigarettes are taxed.
Upon further research, it appears Utah is attempting to tax the cigarettes at about 86%. Such a tax would put a tax of about $17.00 on my $20.00 example above. The Utah Legislature believes such a tax will reduce those who use the dangerous product and will generate about $1.6 million a year in tax revenue for the state.
From a state tax attorney’s perspective, the concerns are obvious. For starters, if Utah passes the law, many other states will seize the opportunity to pounce on new revenue by enacting a similar tax law. It will be interesting to see if Utah passes legislation to tax this product and how many other states follow suit.

The bigger concern are states that think along the lines of Rep. Ray and believe the products should be subject to the tobacco tax. It is important to remember that, if your company or your client’s company is faced with a tobacco tax audit or assessment, tax statutes are to be narrowly construed against the government, and if the product does not fit squarely into your state’s tobacco or cigarette tax statute, then to question or challenge the assessment.

For example, my home state of Florida places a tax on “tobacco product.” Under Florida law, a tobacco product means:

loose tobacco suitable for smoking; snuff; snuff flour; cavendish; plug and twist tobacco; fine cuts and other chewing tobaccos; shorts; refuse scraps; clippings, cuttings, and sweepings of tobacco, and other kinds and forms of tobacco prepared in such manner as to be suitable for chewing; but “tobacco products” does not include cigarettes, as defined by s. 201.01(1), or cigars.

In addition, Florida law places a tax on “cigarettes.” Florida defines a cigarette as:

Any roll for smoking, except one of which the tobacco is fully naturally fermented, without regard to the kind of tobacco or other substances used in the inner roll or the nature or composition of the material in which the roll is wrapped . . .

In Florida, it would be tough for even a state or local tax professional to argue that an e-cigarette is a cigarette or a tobacco product from a state tax perspective.

If your company or your client’s company is audited in any state by any agency, always start with the basics and think about whether a particular product is even subject to the tax at issue. Further, if you have already paid tax, then it may be worth going after a refund if a particular product is not subject to the tobacco or cigarette tax to begin with. Taking it a step further, many states aggressively not only tax the tobacco or cigarette product themselves, but also tax other costs such as shipping and federal taxes. As shown by the recent Micjo case in Florida, a challenge to items or costs that should apply for the taxable base should be challenged and are not challenged frequently enough. It is our job as state tax attorneys and tax professionals to constantly hold the state and its agencies at bay and only give them money to which they are rightly entitled to.

About the author: 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 is also a co-author in the CCH Expert Treatise Library, an author for, and he is currently pursuing his LL.M. in Taxation at NYU. If you have any questions please do not hesitate to contact him via email or phone at 954-642-9390.

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