In a recent press release, the Federal Trade Commission (FTC) issued its second e-cigarette report, analyzing domestic sales and marketing trends for the years 2019 and 2020. While FTC has issued a similar report for cigarettes and smokeless tobacco products since 1967 and 1987, respectively, it only recently decided to analyze this type of data for e-cigarettes. FTC collected information from the nation’s largest domestic e-cigarette manufacturers (reporting companies) that account for almost the entire U.S. e-cigarette market. The e-cigarette report is important because it will likely serve as a basis, at least in part, for considering future policies with respect to e-cigarettes sold in the U.S.

Below is a summary of key points from the e-cigarette report.

  • There was significant growth in e-cigarette sales during 2019, but that growth stalled in 2020. FTC credits this decline to products sold by new or growing market participants (i.e., not reporting companies), rather than an overall decline in sales.
  • Cartridge-based unit sales declined, and disposable product sales increased in 2020.
  • There was a significant reduction the sale of nonmenthol-flavored cartridges between 2018 and 2020. Menthol-flavored cartridge and flavored disposable e-cigarette sales, however, increased substantially from 2019 to 2020.
  • The largest category of advertising expenses during 2019 and 2020 was attributed to e-cigarette price discounting.
  • Distribution spending for free and deeply discounted e-cigarettes (e.g., $1 products) doubled from 2019 to 2020.
  • The reporting companies stated that in 2019 and 2020, they used self-certification methods to age verify visitors on their websites and third-party age-verification services before a customer was allowed to make a purchase on their websites.
  • Several reporting companies advertised via social media and, where available, used tools allowing account holders to designate age restrictions before allowing an individual to access a company account.

The above FTC-identified trends and data points can inform the industry in several key ways:

  • The data does not necessarily provide evidence about whether sales increased or declined after the September 9, 2020 deadline to submit marketing applications to FDA for products on the market as of August 8, 2016. The 2020 data in the e-cigarette report is not broken down by month or quarter.
  • There is no current, federal minimum pricing law for e-cigarettes, and we are not aware of any similar laws at the state or local levels. If the trend of steep price discounts continues, however, it is possible that legislatures may consider passing minimum price laws that regulate the price at which e-cigarettes may be sold, especially if there is already a free sample ban in that jurisdiction.
  • As more companies advertise and sell e-cigarettes directly to consumers online, regulators may consider passing laws, if not already in existence in their jurisdictions, to require online sellers and marketers to age verify website visitors and customers through third-party services or impose age restrictions on social media accounts.

Litigation challenging FDA’s cursory denial of thousands of premarket tobacco product applications (PMTAs) continues. We have previously written about electronic nicotine delivery system (ENDS) manufacturers’ claims that the Food and Drug Administration (FDA) acted arbitrarily and capriciously by, among other things, denying their PMTAs without fully considering all elements of the applications. Numerous appeals of PMTA denials are pending before several different federal appellate courts, and decisions continue to trickle in. Continue Reading Eleventh Circuit Sets Aside FDA Marketing Denial Orders Issued to Bidi Vapor and Others

In a prior update, we discussed the ongoing legal challenges to the U.S. Food and Drug Administration’s (FDA) March 2020 rule on a graphic-warning requirement for cigarettes. Initially slated to take effect June 18, 2021, the rule would require 11 new textual, health warning statements accompanied by color, “photorealistic” images displayed on the top 50% of the front and rear panels of cigarette packs and top 20% of cigarette ads. Tobacco manufacturers have challenged the FDA’s graphic-warning rule in federal courts in Texas and the District of Columbia. See R.J. Reynolds Tobacco Co. v. U.S. Food & Drug Admin., No. 6:20cv176 (E.D. Tex. Apr. 3, 2020); Philip Morris USA, Inc. v. U.S. Food & Drug Admin., No. 1:20cv1181 (D.D.C. May 6, 2020). And, in each case, the manufacturers have asked the court to postpone, or the court has postponed on its own, the effective date of the rule for various reasons. In keeping with this trend, Judge Barker of the Eastern District of Texas recently issued an order, granting the plaintiffs’ request for postponement and therefore delaying any obligation to comply with the Tobacco Control Act’s warning requirements and the deadline tied to the effective date of the FDA rule for an additional 90 days, until October 6, 2023.

In its latest request for postponement, the plaintiffs made the same or similar arguments for postponement as in previous requests, which include:

  • The rule would cause the plaintiffs irreparable harm, including substantial compliance costs.
  • The plaintiffs would need to redesign packaging, modify the printing process, purchase and engrave printing cylinders, print compliant packages, and redesign, modify, and replace point-of-sale advertisements at hundreds of thousands of retailers.
  • The actions required to comply would cost millions of dollars and thousands of employee hours, which the plaintiffs would not be able to recover or obtain reimbursement from the government if they prevail.

The FDA strongly encourages companies to submit cigarette plans as soon as possible, but no later than December 7, 2022. Practically, however, the rule has now been postponed eight times, with the possibility of further delay. While companies should be prepared to submit plans to the FDA and comply with the rule when required to do so, it is also prudent to focus on enforceable requirements, such as the FDA’s current warning statements and filing cigarette rotational health warning plans with the Federal Trade Commission.

The Troutman Pepper Tobacco Team is attending the Federation of Tax Administrators (FTA) 2022 Tobacco Section Annual Conference in Portland, Maine, August 21 to August 23, 2022.

This conference gives attendees the opportunity to hear from various federal and state tobacco regulators and agents regarding best practices, compliance innovations, trends relating to the tobacco industry and tobacco tax.

We look forward to seeing our clients and friends at the conference.

In determining whether the commerce clause of the U.S. Constitution prohibits a state’s taxation of a remote seller, the U.S. Supreme Court for decades has upheld a tax if (1) there is a substantial nexus between the taxing state and the taxpayer; (2) the tax is fairly apportioned; (3) the tax does not discriminate against interstate commerce; and (4) the tax is fairly related to the taxing state’s provision of services to the taxpayer.[1]

What kind of nexus is substantial enough to allow a state to tax a business’s sales in interstate commerce? In its 2018 decision in South Dakota v. Wayfair, Inc., the U.S. Supreme Court held that a business’s physical presence in the taxing state is not required.[2] Describing the remote-seller litigants as “large, national companies that undoubtedly maintain an extensive virtual presence,” the Court held that substantial nexus was clear in view of “both the economic and virtual contacts” that the remote-seller litigants had with South Dakota.[3] The U.S. Supreme Court recited the general rule that substantial nexus exists when a taxpayer has availed itself of the substantial privilege of carrying on business in the taxing state, and it appeared to describe “virtual contacts” and “virtual presence” as follows: “Between targeted advertising and instant access to most consumers via any internet-enabled device, ‘a business may be present in a State in a meaningful way without’ that presence ‘being physical in the traditional sense of the term.'”[4] Wayfair left many questions unanswered, including whether (and, if so, how) “virtual contacts” and “virtual presence” may be required for a substantial nexus to tax in compliance with the commerce clause.
Continue Reading State Taxation of Remote Sellers: US Supreme Court Declines Review of First Post-Wayfair Decision from a State Supreme Court

The Department has issued updated guidance addressing remote sellers’ cigarette and tobacco tax responsibilities after the Minnesota Legislature’s mid-2021 amendments to the State’s cigarette and tobacco tax and tobacco product delivery sales statutes, Congress’ late-2020 amendment of the Jenkins Act, and a 2018 decision of the U.S. Supreme Court on permissible state taxation of remote sales.

On May 9, 2022, the Minnesota Department of Revenue (the “Department”) issued Revenue Notice # 22‑02 on remote sellers’ tax payment responsibilities under the State’s cigarette and tobacco tax and tobacco product delivery sales statutes. The notice applies to all delivery sales after December 31, 2021, and it revokes and replaces the Department’s earlier notice on these subjects. Continue Reading Minnesota Department of Revenue Revokes and Replaces Guidance on Remote Sellers’ Tobacco Tax Responsibilities

On July 28, the Iowa attorney general’s office filed suit against Philip Morris, USA, R.J. Reynolds Tobacco Co., and 16 other tobacco companies, accusing them of defrauding Iowa of over $133 million by allegedly engaging in bad faith disputes over amounts due under the Master Settlement Agreement (MSA).

Tobacco company signatories to the MSA, also known as participating manufacturers (PMs), must pay the settling states their portion of $9 billion dollars on an annual basis. These payments are subject to a handful of various upward and downward adjustments, one of which is known as the “Non-Participating Manufacturer Adjustment” or “NPM Adjustment.” The NPM Adjustment may reduce the amount of money a state is due from the PMs in a given year if the state did not enact and “diligently enforce” an “escrow statute,” requiring non-participating manufacturers (NPMs) to place money in proportion to their sales made into that state into an escrow account. Continue Reading Iowa Attorney General Brings Suit Against Participating Manufacturers to the Master Settlement Agreement

FDA reports that the progress of its review of popular vapor products’ pending PMTAs remains in line with its first report.

On July 28, 2022, FDA filed a status report in American Academy of Pediatrics, et al. v. FDA, et al., No. 8:18-cv-00883 (D. Md.), addressing its review of pending premarket tobacco applications (“PMTAs”) for certain popular vapor products.  FDA filed the status report pursuant to a court order previously covered on this blog.  This is FDA’s second status report filed pursuant to that order, the first having been filed on May 13. Continue Reading Deeming Regulations Litigation Update – FDA Files Second Status Report on Pending Vapor Products PMTAs

On July 5, the U.S. District Court for the District of Columbia ruled that the decision of the Food and Drug Administration (FDA) to “deem” premium cigars subject to the same federal law as other tobacco products like cigarettes was “arbitrary and capricious.” In reaching this conclusion, Judge Amit Mehta relied heavily on industry comments regarding the relative public health risks and negligible youth use of premium cigars, as well as related studies — which the court said FDA either ignored or glossed over. The opinion underscores the importance of the role of public comments in agency rulemaking. Continue Reading Industry Comments Loom Large in DC Court, Finding FDA Regulation of Premium Cigars “Arbitrary and Capricious”

Bryan Haynes of Troutman Pepper’s Tobacco Team was quoted in a recent article in Bloomberg Law discussing FDA’s recent proposals to ban menthol in cigarettes and “characterizing flavors” in cigars.

Haynes noted that FDA “has authority to implement tobacco product standards,” but that this authority is “not without limits.”  Haynes also noted that bans on menthol and flavored cigars could “penalize responsible companies and drive this activity into the black market.  This is particular concern where there is “already a whole host of unauthorized products on the market that FDA is doing very little to nothing to take enforcement action against.”