Tobacco Regulatory Update

CHICAGO — When it comes to the success of tobacco, nicotine and the other product segments that make up the behind-the-counter space, perhaps nothing bears greater sway than government regulations. So much so that virtually every retailer and supplier that participated in our virtual roundtable listed state, local or federal regulations as the biggest challenge to the category.

The industry has faced ongoing battles over flavor bans, age restrictions, tax rates, pack sizes and even outright banning all tobacco sales (as Beverly Hills did in 2019).

2020 provided the rare reprieve as governmental bodies at every level hunkered down to handle the unprecedented public health emergency that is the COVID-19 pandemic. The U.S. Food and Drug Administration (FDA) postponed a number of deadlines in response to the pandemic. At the state and local level, measures that had already been approved (including a menthol flavor ban in Massachusetts) went into effect, but few to no new proposals came forward, even in the most active regulatory parts of the country.

“Local activity definitely slowed down in 2020 as boards of health had other priorities,” says Jon Shaer, executive director of the New England Convenience Store & Energy Marketers Association (NECSEMA).

2021 has started off slow as well. But as the country hesitantly reopens, so too have the legislative floodgates. Here’s a look at six regulatory issues retailers should be aware of at the federal, state and local level ...

With the 2020 election putting Democrats in (limited) control of the U.S. Senate, House and White House, the looming question is what this means for tobacco regulations at the national level and overall leadership at the FDA.

Bryan Haynes, a partner specializing in tobacco industry regulatory compliance and enforcement matters at Richmond, Va.-based Troutman Pepper, says that because the FDA Center for Tobacco Products has only existed since 2009, there’s “limited precedents” on how a change of administration affects FDA.

What there is precedent for is how a Democrat-controlled legislature handles tobacco-related bills. There are several that have already been proposed or passed in the House since the party took control in 2018. Haynes points to bills on flavor bans, additional regulation of electronic nicotine devices (ENDS) and advertising/marketing restrictions.

“There are things that didn’t happen over the last four years that I think very well could happen during the next four to eight,” he says. “They all have a higher chance of moving forward.”

One major legislative deadline that did hold up in 2020 was the Sept. 9 due date for ENDS manufacturers to submit premarket tobacco product applications (PMTAs) to the FDA in order to remain on the market. Theoretically, all products that submitted a PMTA by the deadline are allowed to stay on the market until this Sept. 9, unless the FDA rejects the application.

The FDA released a list on May 20 of which products have had their PMTAs accepted by the agency, and which have been rejected, making them illegal for retailers to sell.

The FDA accepted 318,146 electronic nicotine delivery systems (ENDS) for review as of April 1. The agency continues to review applications for tobacco products submitted through this pathway—which total more than 6 million products—as well as applications submitted through the substantial equivalence (SE) and exemption from substantial equivalence (EX REQ) pathways.

Even with the list though, retailers must be diligent at monitoring the situation as the FDA completes its four-step PMTA process.

List or no list, retailers have to continue to be diligent in monitoring the situation as the FDA completes its four-step PMTA process. Once the agency has processed and accepted the applications, there will be a review, followed by a decision on whether or not each product is authorized.

“The agency is required by a federal court order to complete the one-year review process by Sept. 9, 2021,” says Thomas Briant, executive director of the National Association of Tobacco Outlets (NATO). “However, the agency has publicly stated that it is unlikely all of the PMT applications will be fully processed by the September 2021 deadline.”

Since 2017, major U.S. tobacco companies have been required by a federal court order to run what’s known as corrective statements: TV and print ads about the consequences of smoking. The U.S. Department of Justice (DOJ) is now asking the courts to require that retailers who sell tobacco—but who were not included in the original DOJ lawsuit that led to the corrective-statements order—also display 18 different corrective statement signs throughout their stores.

“There’s two fundamental problems: There’s no allegation or proof the retailers had done anything wrong, and there’s a little thing called the First Amendment,” says Haynes, adding that DOJ proposed a “compromise” that only requires corrective statements on manufacturer-supplied signage. “Retailers, I think, still have a legitimate concern. If customers walk into the store and see an ad that effectively says ‘Don’t buy this product,’ it’s a problem.”

There is no date yet for when, or if, retail corrective statements will be required.

An evidentiary hearing that was scheduled for this July is now expected to take place over up to four weeks sometime during the period beginning May 23, 2022, through July 31, 2022. At the hearing, the federal court overseeing this ongoing litigation will determine whether to approve, deny or modify the DOJ’s proposal, according to Briant.

Another federal requirement that could directly affect retailers is if the FDA’s long-proposed graphic warning labels for cigarettes become a reality.

“The FDA rule would require 11 different graphic images, each with its own accompanying text message, be printed on cigarette packaging and cigarette advertisements on a rotating basis,” explains Briant.

The graphic warning requirement was originally set to go into effect on June 18, 2021. The FDA delayed the move to Oct. 16, due to COVID-19 disruptions. Pending lawsuits filed by tobacco manufacturers, however, have continued to delay the start date, which now stands at July 13, 2022.

“I don’t expect FDA to cede any territory,” Haynes says. “The way to end this cycle would be a more conclusive decision of whether the requirement as Congress has outlined exceeds First Amendment boundaries. Congress might come up with a warning that fits within the First Amendment … but that might well look like the warnings we already have.”

Both retailers and industry associations like NATO and NECSEMA list expansive state and local flavor bans as perhaps the biggest threat to tobacco retailers. While many such proposals came to a halt during the pandemic, Briant says, “an increasing number of state legislatures are also now debating full flavor bans, which would prohibit the sale of menthol cigarettes, mint and wintergreen smokeless products, flavored cigars, pipe tobacco and flavored electronic cigarettes.”

Shaer of NECSEMA has seen what such flavor bans can do to a state’s tobacco sales first-hand: Massachusetts’s full flavor ban went into effect in June of 2020.

“According to our sampling, total in-store sales are off 10% in Massachusetts since June and running through December,” he says. “New Hampshire stores are up 93%, and Rhode Island stores are up 15%.”

Despite the $62 million reduction in cigarette excise taxes Massachusetts experienced after the ban, at least 16 other states have proposed banning either all flavored tobacco products or all flavored ENDS products.

“Retailers should be very concerned,” Briant says. “(They should) reach out to their state elected officials to explain their business model and what the loss of being able to sell flavored tobacco products would mean to their business and their employees’ jobs.”

As state and local governments face overwhelming budget deficits as a result of the pandemic, it will surprise few that many are turning to cigarette taxes as a fix. NATO is tracking 20 states with proposals to raise cigarette or tobacco product taxes so far.

“Proposed tax increases are always a concern for NATO and its retail members because higher state excise tax rates create greater disparities between neighboring state tax rates and encourage cross-border purchasing and cigarette smuggling,” Briant says. “This puts retailers in higher-taxed states at a severe competitive disadvantage to retailers across the border in lower-taxed states.”

Both Briant and Shaer encouraged retailers to engage with lawmakers on flavor bans, taxes and other onerous proposals.

 “Oftentimes, lawmakers are not aware of the economic impact that flavored tobacco bans and higher taxes have on retail operations,” says Briant.

“Call your elected officials and attend hearings to defend your business and your family,” Shaer says. “Engage with your customers and ask them to contact elected officials to express displeasure with the policies. Talk about the benefits of a legal, licensed, regulated and enforced framework and, while you don’t have to like tobacco products, you must acknowledge they are safest when sold through this framework. It is hard to argue with that logic.