Extras on Excise: State Tax Treatment of E-Cigarettes is in the Vapors

Fifty years after the U.S. Surgeon General’s first report announcing the detrimental effects of smoking tobacco on the health of Americans, many people continue to ignore the warnings. Recently, electronic cigarettes, or e-cigarettes, have arisen as a substitute for smoking tobacco.  The new trend has left state lawmakers searching for answers on how to regulate the sale, use, and taxation of e-cigarettes. If legislative activity in Minnesota, Oklahoma, New York, and South Carolina is any guide, state approaches to taxing e-cigarettes are likely to vary.

A division among the states has already begun to emerge between the jurisdictions that seem to be in favor of taxing e-cigarettes as tobacco products and those that are leaning toward imposing a special tax on e-cigarettes.

In order to determine how e-cigarettes should be taxed, state legislatures must first decide whether e-cigarettes are tobacco products or something completely different.  The FDA currently regulates cigarettes, cigarette tobacco, roll-your-own tobacco, and smokeless tobacco. The agency is inclined to extend this same authority over e-cigarettes.  However, some states have not waited for the FDA to issue its rule, and, instead, have taken legislative steps to regulate and tax e-cigarettes.

Minnesota is the first state to place an excise tax on e-cigarettes.  The state takes the position that e-cigarettes contain nicotine, which is derived from tobacco, and are smoked or inhaled; each e-cigarette also contains a nicotine cartridge, which is deemed a component of tobacco products.  Therefore, Minnesota imposes a tobacco products tax on distributors.  By taxing e-cigarettes as tobacco products, Minnesota assumes that all nicotine used in e-cigarettes is derived from tobacco.

But other states are considering a different approach. In Oklahoma (2014 H.B. 2989) and South Carolina (2013 H.B. 4074) legislation was introduced that would create new tax regimes for the treatment of e-cigarettes. Both bills categorize and tax e-cigarettes as vapor products.  Imposing a separate tax on e-cigarettes would likely preclude taxpayers from claiming that e-cigarettes are exempt from existing excise taxes on tobacco.

Legislation (2013 S.B. 6255) is pending in New York that would include e-cigarettes in its definition of “smoking.” But it would exempt e-cigarettes from the tobacco products use tax.  If this bill is enacted, will New York eventually create a new tax for e-cigarettes?

Continue the discussion on the Bloomberg BNA State Tax LinkedIn Group: Will states perfunctorily lump e-cigarettes in the same category as tobacco products, thereby subjecting them to the tobacco products excise tax? Or should states draft legislation that taxes e-cigarettes as a separate product from tobacco?

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By: Jessica Lechuga