U.S. states introduce excise taxes on vapor products

Several U.S. states including Illinois and New York adopted legislation during the first half of the year that extends excise taxes to vapor products such as electronic cigarettes and liquid nicotine.

Many of these new taxes were included in state budgets as revenue measures. Governor J. B. Pritzker of Illinois included several provisions for higher taxes in the fiscal year 2020 budget proposal which he submitted to the General Assembly. Among these is Section 15-65 which amends the state’s Tobacco Products Tax Act of 1999 to apply a tax of 15% on the wholesale price of electronic cigarettes. The tax went into effect on 1 July 2019.

Similarly, in New York Governor Andrew Cuomo included a proposal to tax vapor products in his annual budget proposal. The bill amends current tax law by adding Article 28-C, Supplemental Tax on Vapor Products. Effective 1 December 2019, a tax of 20% will be applied on the retail sales price of vapor products, which are defined as “any noncombustible liquid or gel, regardless of the presence of nicotine therein, that is manufactured in to a finished product for use in an electronic cigarette, electronic cigar, electronic cigarillo, electronic pipe, vaping pen, hookah pen or other similar device.”

Ohio closed its fiscal year on June 30 without an approved budget for fiscal year 2020. The state operated on an interim budget until the legislature passed and the Governor signed a new one on July 18. The new budget contained a tax on vapor products including liquid solutions or other substances containing nicotine that are depleted when used in an “electronic smoking product”. The rate of tax is $0.01 per one tenth of a milliliter of liquid or one tenth of a gram if the vapor product is sold in a nonliquid form.

In New Mexico, a new tax on e-liquid also came into effect on 1 July 2019. The measure was contained in House Bill 6, which amended many current tax laws. Its passage coincided with a regulatory change that adds vaping to the indoor smoking ban.

Sections 42 and 43 of the bill, which Governor Michelle Lujan Grisham signed on April 4, amend the state’s Tobacco Product Tax by creating a two-tiered tax on e-liquid based on the nature of the container in which it is sold. On the sale of e-liquid a tax of 12.5% of the value is imposed on the first purchaser, generally a wholesaler.

However, in the case of a closed system cartridge, an excise tax at a rate of fifty cents ($.50) per closed system cartridge is imposed. The Tobacco Products Tax as amended defines a closed system cartridge as “a single-use, pre-filled disposable cartridge containing five milliliters or less of e-liquid for use in an e-cigarette”.

Open vs. Closed system taxes

New Mexico’s tax is noteworthy as it sets up a dichotomy between open and closed system products, a trend which has been observed in other states as well. Washington State will see a new tax on 1 October 2019 based on the volume of e-liquid used in vapor products regardless of whether it contains nicotine. According to Section 102 of House Bill 1873 liquid contained in closed systems products with less than 5 milliliter capacity  will be taxed at $0.27 per ml.

A different rate, however, applies to larger containers which the consumer can open to refill tanks and cartridges. “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.”

Differentiated taxation was also approved in Connecticut where the General Assembly adopted Governor Ned Lamont’s budget proposal.  Closed system e-cigarettes products that are prefilled and not intended to be refilled by the consumer will be taxed at “forty cents per milliliter of the electronic cigarette liquid contained therein.” 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, will be subject to a tax of ten per cent of the wholesale sales price of such product.

The taxes go into effect on 1 October 2019.

In 2018 New Jersey introduced a single tier specific tax of 10 cents per milliliter of e-liquid containing nicotine. In June of this year the state legislature introduced an ad valorem tax of 10% of the retail price of “container e-liquid”, which Assembly Bill 5385 defines as a container of liquid nicotine or other liquid for use in an electronic smoking device. Prefilled cartridges are explicitly precluded.

In fact, the ad valorem component will not fall on closed system products such as disposable e-cigarettes or prefilled cartridges for which the consumer never handles the liquid directly. The law also exempts container e-liquid from the original 10 cent per ml tax introduced in 2018.

Anti-vaping objectives

Legislators in Vermont and Nevada who supported excise taxes on e-cigarettes were motivated by anti-vaping sentiment. Vermont State Representative George Till (D), a physician and sponsor of H.47, the bill which extends the Tobacco Products Tax to e-cigarettes and liquids, was driven to increase prices on vapor products in order to reduce their consumption by young people.

Since 1 July 2019 both electronic cigarette devices and e-liquids are taxed as other tobacco products which carry a 92% levy on the wholesale price.

Nevada Senator Julia Ratti, a key sponsor of Senate Bill 263 maintained that the goal of the legislation was to reduce usage of vapor products by raising their price. The bill, which sponsors describe as an “Act relating to public health”, classifies vapor products as other tobacco products. This classification renders them subject to the 30% tax on the wholesale price and requires wholesale and retail dealers of vapor products to obtain a license from the Department of Taxation. The bill was signed by Governor Steve Sisolak on June 12 whereupon vapor products were immediately classified as other tobacco products subject to the tax.  

With these new taxes the number of states collecting excise revenue from vapor products has increased 89% to seventeen.