Rules to Play By

E-cig industry, operators await federal regulatory and taxation measures

Erik J. Martin, CSP Correspondent

OAKBROOK TERRACE, Ill. -- Convenience store operators are used to giving quick and convenient service, but they’re getting the opposite from Uncle Sam—as they continue to wait for the U.S. Food and Drug Administration’s pending decision on how electronic cigarettes will be regulated.

Just yesterday Mitch Zeller, the director of the Center for Tobacco Products, addressed the interest in electronic cigarettes during a FDA-hosted webinar. He acknowledged that there’s “a continuum of risk for nicotine delivery products” and that the agency is “asking questions of the research community to try to get answers” about how electronic cigarettes are affecting public health. But Zeller would only give an admittedly bureaucratic “no comment” response when asked how or when the FDA might choose to regulate the segment.

Meanwhile, several states are positioned to lump the vapor products into existing smoking bans but are waiting for the FDA’s verdict first. Currently, 28 states have adopted laws that prohibit the sale of e-cigarettes to minors. Utah, New Jersey, North Dakota and Arkansas have included e-cigarettes in indoor smoking bans, and Massachusetts, New York, Connecticut and California (which also disallows online advertising of e-cigarettes) are pondering adoption of the same ban.

Nine states—Colorado, Tennessee and New York among them—have grouped e-cigarettes into the tobacco-product category, despite lack of tar or combustion, while seven other states have enacted measures defining e-cigarettes as something other than tobacco products. E-cigarettes are labeled as “alternative nicotine products” in some states; they’re defined as “vapor products” in other states.

In other words, it’s a regulatory mess out there.

“Age-restriction regulation continues to dominate at the state level,” Cynthia Cabrera, executive director for the Smoke Free Alternatives Trade Association (SFATA), Hallandale Beach, Fla., said. “And taxation bills continue to emerge from different states, although business advocates continue, many times successfully, to fight them.”

Indeed, in addition to pending federal regulations, retailers are equally eager to learn of any new tax ramifications on the category.

Minnesota, which imposes a tobacco-products tax on e-cigarettes at the rate of 95% of the wholesale cost, is the only state that taxes e-cigarettes. During 2013, however, bills were introduced in five other states to tax these products, including:

  • Hawaii, which seeks to apply the state’s cigarette tax to e-cigarettes;
  • Massachusetts, which is considering a tax at 90% of the wholesale cost;
  • Oklahoma and South Carolina, both of which are considering legislation to tax e-cigarettes as a vapor product at a rate of 5 cents per nicotine cartridge; and
  • Utah, which proposed a bill that would impose an 86% tax on the wholesale cost.

“With five states having introduced e-cigarette tax bills during 2013, more state legislative tax proposals are likely to be introduced and considered for 2014,” said Thomas Briant, executive director and legal counsel for the National Association of Tobacco Outlets (NATO), Minneapolis, Minn.

At present, there are no e-cigarette taxes on the municipal level. That said, more than 100 cities and counties across the country have banned e-cigarettes in public areas where other smoking products are prohibited. Various communities have also considered moratoriums on the number of new licenses and permits issued to e-cigarette retailers, restrictions on self-service displays of e-cigarettes, and bans against selling e-cigarettes to minors.

Los Angeles is contemplating adoption of an ordinance that would ban self-service displays of e-cigarettes. Also, Canton, Mass., considered a proposed ban on the sale of e-cigarettes by all retailers until NATO and members intervened and helped to scuttle the measure. In addition, Beverly Hills, Calif., is deliberating a proposed moratorium on the sale of e-cigarettes by all retailers, not just retailers seeking a new license to sell e-cigarettes.

Cabrera said strict legislation and taxation would majorly impact convenience retailers.

“If e-cigarettes become regulated under the Tobacco Control Act (TCA), they would be subject to the same in-store marketing and promotion controls—and additional expenses—that currently apply to traditional cigarettes in a retail store,” said Cabrera. “This would force products behind the counter and push them into the big tobacco company retail sets. Product advertising would also be limited, new warnings may be required on packaging and brand advertising, and the companies selling in these segments may be forced to redirect brand-building activities to brand reporting and registration activities with the FDA.”

Briant noted that a significant tax on e-cigarettes will likely undercut the segment’s growth and give rise to border rivalries. “It may result in cross-border purchases, with adults driving to adjacent states where the tax on e-cigarettes is either substantially less or even non-existent.”

Consider that the Minnesota tax of 95% of the wholesale cost essentially doubles the price of e-cigarettes, so that, Briant noted, a disposable premium e-cigarette brand retailing for $9.99 will cost Minnesotans in excess of $18 with the tobacco tax and sales tax included.

As the FDA prepares its deeming regulations, Briant said restrictions could range widely, including: good manufacturing practices; limits on flavored products; no self-service displays at retail; no free samples to adult customers; no sale to anyone under 18; and a requirement that retailers check the ID of anyone who appears to be under the age of 27.

However, it’s not just the FDA that will dictate e-cigarette regulations and taxes but also attorney generals and potentially even Congress.

Eyeing how the FDA may proceed, Cabrera said lawmakers should call on the agency to regulate this nascent industry under a different and more appropriate framework defined for vaporization products outside of the TCA.

“Such an approach would not only establish smoking products as a defined category with the FDA, but it would also give much needed specialized regulatory attention to a technology offering that could transform adult consumer nicotine consumption patterns going forward,” she said. “Misclassifying e-cigarettes and subjecting them to regulations intended for (the tobacco category) will only stifle innovation and limit adult smokers’ access to this non-tobacco alternative.”