California raises the excise tax on e-cigarettes and other tobacco products
In November 2016, California voters approved Proposition 56, which amended the definition of “tobacco products,” under the California Cigarette and Tobacco Products Tax Law to include additional tobacco products, among these, electronic cigarettes. The ballot initiative also raised the excise tax on cigarettes by two dollars from $0.87 to $2.87 per pack of 20 sticks effective April 1, 2017.
Proposition 56 mandated an “equivalent tax” for electronic cigarettes and e-liquids, which have been classified as tobacco products. Accordingly, as of April 1, devices sold in combination with nicotine which deliver a vapor or aerosol as well as e-liquids became subject to the then current tobacco products tax rate of 27.30 percent of the wholesale cost of the product.
Following April’s $2 per pack tax increase and the ensuing increase in prices of cigarettes, the California State Board of Equalization set about recalculating the “equivalent tax” that must be applied to other tobacco products. On July 1, 2017, the BOE announced the rate of tax on tobacco products including electronic cigarettes, had been revised upward to 65.08 percent of the wholesale cost.
Analysts have expressed concerns that the tax may compel retailers to increase prices dramatically which could slow the pace of switching by smokers to non-combustible vapor products. In 2016, a similar tax of 40% of the wholesale cost of e-cigarettes introduced in Pennsylvania as part of a balanced budget led to the closure of scores of retail vape shops and failed to generate the targeted tax revenue.