Bryan M. Haynes /  bryan.haynes@troutmansanders.com / 804.697.1420 / http://www.troutmansanders.com/bryan_haynes/

The Tobacco Control Act gave FDA immediate authority over cigarettes, roll-your-own tobacco and smokeless tobacco.  The Tobacco Control Act also gave FDA authority to issue regulations covering additional tobacco products, such as cigars, pipe tobacco and electronic cigarettes.  After indicating in 2011 that it intended to issue the regulations later that year, FDA did not issue the regulations in 2011.  At a recent conference on tobacco regulatory issues, the head of FDA’s Center for Tobacco Products Dr. Lawrence Deyton advised that the process for issuing regulations was more complicated than originally thought.

The notice indicates that FDA intends to issue the “deeming regulations” this summer, but it does not specify the tobacco products that will be covered by the regulations.  The notice indicates that FDA has the authority to regulate cigars, cigarillos, hookah tobacco and e-cigarettes, but does not indicate whether all of these products will be covered by the deeming regulations (or whether pipe tobacco will also be covered).  In the meantime, there are federal legislative proposals that would strip FDA of authority to regulate so-called “traditional” large cigars.  Stay tuned this summer for which products FDA decides to regulate, and how FDA decides to regulate those products.

Bryan M. Haynes /  bryan.haynes@troutmansanders.com / 804.697.1420 / http://www.troutmansanders.com/bryan_haynes/

Specifically, the bill would:

• Raise the pipe tobacco rate by almost 800%, from $2.83 per pound to $24.78 per pound (equivalent to the rate for roll-your-own tobacco)
• Raise the snuff rate by almost 800%, from $1.51 per pound to $13.42 per pound
• Raise the chewing tobacco rate from 50 cents per pound to $5.37 per pound
• Maintain the same rate for large cigars (52.75% of the sale price), but impose a minimum tax of 5.033 cents per cigar (equivalent to the rate for cigarettes) and raise the maximum tax to $1.00 per cigar.

The bill has been touted by its sponsors as requiring all tobacco consumers to pay the same rates as cigarette consumers, although the rates for smokeless tobacco remain lower.

One provision that has not been discussed in the various press releases regarding the bill is a provision entitled “Other Tobacco Products.”  This provision imposes a new tax on “other tobacco products,” a definition which has been expanded to include “any other product containing tobacco that is intended or expected to be consumed.”  The provision taxes “other tobacco products” (including products determined to be a “tobacco product” by the FDA) at a rate equivalent to the tax rate for cigarettes, to be determined in accordance with regulations to be issued by the Treasury Department.

Given that the federal excise tax already covers cigarettes, roll-your-own tobacco, pipe tobacco, smokeless tobacco and cigars, the most obvious candidate for the new tax is e-cigarettes.  E-cigarettes (at least to the extent they contain tobacco) could be considered a product that is “intended or expected to be consumed.”  It is not clear how the Treasury Department would implement or collect the tax, given that there is currently no mechanism for licensing manufacturers or importers of e-cigarettes, or for reporting their sales.

Bryan M. Haynes /  bryan.haynes@troutmansanders.com / 804.697.1420 / http://www.troutmansanders.com/bryan_haynes/

The amendment has cleared the U.S. Senate.  The parallel version of the transportation bill passed by the U.S. House of Representatives did not contain the language applicable to cigarette rolling machines.  The respective chambers are meeting this week to attempt to iron out the differences between the two bills.

The “Baucus amendment” expands the definition of a “manufacturer of tobacco products” to include “any person who for commercial purposes make available for consumer use (including such consumer’s personal consumption or use . . .) a machine capable of making cigarettes, cigars, or other tobacco products.  A person making such a machine available for consumer use shall be deemed the person making the removal [i.e., subject to additional taxes for finished cigarettes] with respect to any tobacco products manufactured by such machine.”

Although proponents of the legislation state that it is designed to force retailers owning the store-based machines to pay higher taxes and become federally permitted, the actual language of the bill has a much broader impact by also applying to home-based machines. 

The language applies broadly to anyone who “makes available for consumer use” any machine “capable of making tobacco products.”  The language then goes on to make the person who “makes available” the machine — i.e., the retailer — liable for the taxes for any cigarettes produced by the machine.  This language applies equally to sales of tabletop machines (both manual and electronic) designed for home use.  A person who sells such machines to consumers “makes available” a machine that is “capable of making tobacco products.”  The retailer selling the home-based machine would be liable for all taxes produced by the consumer who bought the machine.  The retailer selling the tabletop machine would also have to become federally permitted.

It is not clear whether this is the intended consequence of the Baucus amendment, but if the law passes as written, it would have a significant and negative impact on the entire roll-your-own industry, and not just the store-based machines to which most of the attention has focused.

Bryan M. Haynes /  bryan.haynes@troutmansanders.com / 804.697.1420 / http://www.troutmansanders.com/bryan_haynes/

The article discusses the likelihood that FDA will assert jurisdiction over these products, as well as how regulation of these products may fit within FDA’s existing framework for regulating cigarettes, smokeless tobacco and roll-your-own tobacco.

The article can be found here.

Bryan M. Haynes /  bryan.haynes@troutmansanders.com / 804.697.1420 / http://www.troutmansanders.com/bryan_haynes/

Bryan M. Haynes /  bryan.haynes@troutmansanders.com / 804.697.1420 / http://www.troutmansanders.com/bryan_haynes/

Bryan M. Haynes /  bryan.haynes@troutmansanders.com / 804.697.1420 / http://www.troutmansanders.com/bryan_haynes/

The ordinance broadly prohibited any advertising of any tobacco product, where that advertising could be viewed from a city street.  The Supreme Court had decided in a previous case, Lorillard Tobacco Co. v. Reilly, that virtually identical speech restrictions were unconstitutional.  In Reilly, the advertising restrictions were actually narrower than the Worcester restrictions, prohibiting tobacco advertising within 1,000 feet of a school or playground, as opposed to prohibiting advertising altogether.  The City offered no viable basis for distinguishing the Reilly precedent.

As cities and towns become more active regulating the sale and advertising of tobacco products, retailers and manufacturers may end up spending considerable precious resources challenging such measures when the run afoul of the law, even where existing precedent makes clear that such measures never should have been enacted in the first instance.

Bryan M. Haynes /  bryan.haynes@troutmansanders.com / 804.697.1420 / http://www.troutmansanders.com/bryan_haynes/

Mississippi is one of four states that are not signatories to the MSA, having settled separately with the major tobacco companies.  Of the four non-signatories, Mississippi and Minnesota have enacted separate “equity fees” applicable to non-signatories, which require the non-signatories to make payments similar to the major tobacco companies’ settlement payments.  Cigarettes manufactured by the SPMs, which are part of the MSA but which have not settled with Mississippi, are subject to the “equity fees.”

House Bill 1630 would have exempted SPMs from Mississippi’s “equity fee,” even though the SPMs are not making settlement payments to Mississippi.  SPMs would have remained exempt from the equity fee until a “credit amendment” (crediting the SPMs’ MSA payments for any equity fee payments made to Mississippi) was made to the MSA. 

The bill died in committee shortly after it was introduced, suggesting an uncertain future for future efforts to exempt SPMs from these “equity fees.”

Bryan M. Haynes /  bryan.haynes@troutmansanders.com / 804.697.1420 / http://www.troutmansanders.com/bryan_haynes/

The 2009 Tobacco Control Act prohibits tobacco companies from using descriptors like “light” or “mild,” and from marketing their products as safer than other tobacco products, unless FDA has issued an order allowing the company to market its products as having modified risk.  Since the Tobacco Control Act took effect, however, the process for the required approvals has been unclear.

The draft guidance indicates that FDA has 360 days to act on a modified risk application.  The guidance describes two pathways for companies to show reduced risk.  The first requires robust scientific evidence to demonstrate that that a product actually reduces harm.  A more lenient standard applies where the evidence showing reduced harm is incomplete, but the evidence does show reduced exposure of a particular harmful constituent.

Although there is a fairly broad scientific consensus that certain types of non-combustible tobacco products, such as smokeless tobacco and electronic cigarettes, likely offer a lower cancer risk than cigarettes, FDA’s guidance does not categorize tobacco products for varying levels of evidence required for modified risk approval.  Nor does FDA’s guidance allow smokeless or electronic cigarette manufacturers to tout modified risk without the required scientific evidence. 

Bryan M. Haynes /  bryan.haynes@troutmansanders.com / 804.697.1420 / http://www.troutmansanders.com/bryan_haynes/