Extras on Excise: The Great E-Cigarette Debate Continues within State Legislatures

Are e-cigarettes tobacco products or not tobacco products? That is what state legislatures are asking themselves as they consider proposals to enact taxes on electronic cigarettes and other vapor products. Only Minnesota and North Carolina currently levy e-cigarette taxes. Will other states follow their lead in 2015?

Support for e-cigarette taxes has been growing as the vapor product market expands. A Wells Fargo Securities report estimates the market is worth approximately $2 billion, and will only get bigger in coming years.

Minnesota began taxing e-cigarettes in 2013 by including e-cigarettes and vapor products within the state’s definition of “tobacco product,” which subjects e-cigarettes to Minnesota’s 95 percent excise tax on the wholesale cost of any product containing or derived from tobacco.

This May, North Carolina became the second state to enact a tax on e-cigarettes, which will go into effect in 2015. E-cigarettes and vapor products will be taxed at a rate of $0.05 per fluid milliliter of consumable product, which is lower than the tax on cigarettes of $0.45 per pack of 20.

Arizona and Virginia are the latest states to consider the various options available and additional revenue that could be generated from e-cigarette taxes.  

A Nov. 20 fiscal impact statement by the Arizona Joint Legislative Budget Committee (JLBC) found that e-cigarette taxes could generate between $283,700 and $13.5 million in revenue for Arizona, depending on the tax methodology.

Looking at how states like Minnesota and North Carolina currently tax e-cigarettes and proposals that were submitted to other state legislatures, the JLBC put together four options that the Arizona Legislature could consider if it wanted to enact e-cigarette taxes:

  • 95 percent of taxable sales price - $13.5 million in revenue per year (this option is similar to a proposal in Washington);
  • 95 percent of wholesale price - $9.7 million in revenue per year (this option is most similar to Minnesota's tax);
  • 42.5 percent of retail price - $6 million in revenue per year (this rate is equivalent to Arizona's current tax on cigarettes); or
  • $0.05 per milliliter - $283,700 in revenue per year (this option is most similar to North Carolina's tax).

But the JLBC statement also mentioned that tax avoidance could become a factor if the increased price of e-cigarettes drove consumers to purchase e-cigarettes online or in neighboring states without an e-cigarette tax.

The fiscal impact statement comes after Arizona Attorney General Thomas Horne (R) issued an opinion in July stating that electronic cigarettes are not subject to Arizona's tobacco luxury taxes or smoking prohibitions because they do not fall within the state’s statutory definition of a tobacco product.

In November, Virginia Del. Rob Krupicka (D) pre-filed H.B. 1310, which, if passed in 2015, will impose a $0.40 per milliliter tax on electronic cigarettes and other vapor products and allows local jurisdictions to tax vapor products as well. The $0.40 tax is higher than the cigarette tax rate of $0.30 per pack of 20.

E-cigarette taxes remains a hot topic among state legislatures and other states may soon join Arizona and Virginia in considering new tax proposals during the upcoming year.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Should e-cigarettes be treated like other tobacco products and taxed in a similar fashion? 

For more information about this and other state tax issues, sign up for a free trial of the Bloomberg BNA Premier State Tax Library. 

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