States introduce more complex taxes on vapor products

Connecticut and the State of Washington introduced excise taxes on vapor products today, joining a growing number of jurisdictions in the United States which tax the liquid used in electronic cigarettes and, in some cases, the vapor devices themselves.

The legislation in both states marks a new era of vapor products taxation in which the rates and structure of excise are driven by product format and volume.

Since excise taxes were first applied to electronic cigarettes in the United States by the Minnesota Department of Revenue in 2012, policymakers have embraced two simple but different approaches to taxation. The most prevalent tax structure has been a specific levy based on the volume of liquid used in e-cigarettes, such as 5 cents per milliliter in North Carolina.

An alternative method has been to classify the nicotine liquid as a tobacco product and subject it to the general tobacco products tax, which is a percentage levy on the wholesale price, such as 95% in Minnesota.

Differentiated taxation

Connecticut’s new excise tax differentiates between closed system products in which a disposable vaping device or cartridge is sold pre-filled with a liquid nicotine solution and open systems products for which the consumer is responsible for filling the tank or refillable cartridge with liquid generally sold separately from the device. In the two-tiered excise tax which this New England state has adopted closed system e-cigarettes products that are pre-filled and not intended to be refilled by the consumer are taxed at “forty cents per milliliter of the electronic cigarette liquid contained therein.”

An ad valorem tax of 10% is applied to the wholesale price of any other electronic cigarette product such as “electronic nicotine delivery systems, liquid nicotine containers, vapor products and electronic cigarette liquids”, which are open systems components. Initially, this tax will fall more heavily on the novice vaper purchasing his of her first set of components such as tanks and batteries. However, the tax applied to future purchases of nicotine liquid needed to refill the tank will be significantly less than the 40 cents per milliliter levied on disposable devices and cartridges which typically contain about one ml of liquid.

Also coming into effect today is Washington State’s two-tiered specific tax based on the volume of liquid used in vapor products regardless of whether it contains nicotine. Liquid contained in closed system products with less than 5 milliliter capacity are taxed at $0.27 per ml.

A different rate applies to larger containers which the consumer can open to refill tanks and cartridges. According to the legislation signed by Governor Jay Inslee in May “Any accessible container of solution, regardless of whether it contains nicotine, that is greater than five milliliters, is taxed at a rate equal to nine cents per milliliter of solution.”

The higher rate on closed pre-filled products such as Juul or Blu appears to be in response to the growing concern of their popularity among young people. I’m guessing that as the debate over youth vaping in the U.S. intensifies, more states will adopt similar two-tiered excise structures designed to raise the price of closed system products.