At least one issue is resolved. The Food & Drug Administration (“FDA”) will regulate electronic cigarettes (“e-cigarettes”) as tobacco products and not as drug-delivery devices. Yet, many other issues remain unresolved as a result of the FDA’s decision, including the taxation of e-cigarettes.
As e-cigarettes show promise as a growing tobacco subcategory, the taxation issue could affect its growth. A preliminary issue involves whether e-cigarettes will be taxed under other tobacco products (OTP) tax rates or under an ad valorem tax rate. Another related issue that remains to be resolved is the taxation of e-cigarette kits versus e-cigarette refills, and if the two should be separated for taxation purposes. For instance, assuming State taxes e-cigarettes at the OTP tax rate of 15% and that an e-cigarette kit costs $50 and refills cost $10, there is a $9 tax on this $60 purchase. Assuming, however, an ad valorem tax rate of 5% on just the kit, there is a $4 tax on this $60 purchase. This hypothetical illustrates that e-cigarette manufacturers have an interest in monitoring this issue in relevant state legislatures and determining how this issue will impact their business.
As state and local governments increasingly regulate the sale and use of e-cigarettes, the Troutman Sanders Tobacco Team will continue to monitor developments in this area.