Extras on Excise: In Pennsylvania, ‘Integral’ E-Cigarette Components Not Subject to Tobacco Tax When Sold Separately


The Pennsylvania Commonwealth Court recently ruled against the Pennsylvania Department of Revenue (DOR) in a set of three cases defining which parts of an “electronic cigarette” are subject to tax under Pennsylvania’s Tobacco Products Tax Act. The cases are East Coast Vapor, LLC v. Pennsylvania Dept. of Rev. (I), Kingdom Vapor & Smoke 4 Less, LLC v. Pennsylvania Dept. of Rev., and East Coast Vapor, LLC v. Pennsylvania Dept. of Rev. (II). The petitioners successfully argued that the DOR improperly expanded the definition of “electronic cigarette” beyond the language of the statute by taxing separately packaged component parts. As a result, the court ruled that only the liquid or substance placed in the e-cigarette (e-liquid) or the entire e-cigarette device is subject to tobacco products tax instead of other “integral” component parts when sold separately.

Under Pennsylvania law, wholesalers and retailers are subject to a 40 percent tax on tobacco products. As a part of a provision in the 2016 Pennsylvania omnibus bill that went into effect in October 2016, electronic cigarettes are treated as tobacco products subject to the tobacco products tax. The bill added 72 Pa. Stat. § 8201-A, which defines an “electronic cigarette” as:

“An electronic oral device, such as one composed of a heating element and battery or electronic circuit, or both, which provides a vapor of nicotine or any other substance and the use or inhalation of which simulates smoking.

“The term includes:

(i) A device described [above], notwithstanding whether the device is manufactured, distributed, marketed or sold as an e-cigarette, e-cigar and e-pipe or under any other product, name or description.

(ii) A liquid or substance placed in or sold for use in an electronic cigarette.”

Prior to the court’s ruling, the DOR’s interpretation of this statute included “integral” component parts of an e-cigarette, meaning parts that could only be used in an e-cigarette such as replacement coils, regulated mods and tanks. If you’re unfamiliar with the component parts of an e-cigarette, a “tank” holds the e-liquid; a “replacement coil” is a piece of wire used in a tank to heat up the e-liquid; and a “regulated mod” is a power supply for a tank or atomizer with a digital display to adjust various settings of an e-cigarette. Because of the DOR’s interpretation, component parts of e-cigarettes were also subject to the 40 percent tax on tobacco products, regardless of whether the individual component contained tobacco or nicotine.

The petitioners in their respective cases challenged the DOR’s interpretation, noting that the statute does not contain the words “integral” or “component.” The DOR countered that if integral components of an e-cigarette were not taxed, companies would simply sell the component parts of an e-cigarette separately as a means to avoid paying the tax. The court did not find this argument persuasive.

 The court ultimately ruled on the side of the petitioners, holding that an electronic cigarette means a “singular, integrated device that contains both a heating element and a power source, which, working together, provides a vapor.”

In response to the rulings, the DOR released a bulletin summarizing the court’s holding and the procedure to apply for a refund of tobacco tax paid on component parts that are not subject to tobacco products tax.

Should states tax the component parts of an electronic cigarette? Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn

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