The Texas Supreme Court (the Court) recently issued an important tax decision for modern oral nicotine products, such as nicotine pouches. In Hancock v. RJR Vapor Co., LLC, the Court held in favor of Acting Comptroller Hancock, finding that RJR Vapor Co., LLC’s (RJR) VELO oral nicotine pouches are taxable as “tobacco products” under the Texas tobacco products tax, and reversed a lower court decision holding that they were not taxable “tobacco products.”

While the Court ruled for the comptroller on statutory interpretation grounds, it remanded the case for further consideration of RJR’s remaining constitutional challenge under the Texas Constitution’s “equal and uniform” taxation requirement. As a matter of statutory interpretation, the Court has effectively settled that these products are taxable “tobacco products” in Texas, thereby endorsing the comptroller’s position and confirming related licensing and excise tax obligations for those dealing in such products.

Background: Are Nicotine Pouches “Tobacco Products” in Texas?

RJR’s VELO pouches are small oral pouches containing nicotine and a plant-based filler (microcrystalline cellulose) but no tobacco leaf. The question before the Court was whether these pouches qualify as “tobacco products” under Texas Tax Code § 155.001(15), which includes traditional products like cigars, smoking tobacco, chewing tobacco, and snuff, and also:

“an article or product that is made of tobacco or a tobacco substitute and that is not a cigarette or an e-cigarette.” Tex. Tax Code § 155.001(15)(E).

Previously, both the trial court and the Texas Court of Appeals had held that RJR’s nicotine pouches were not taxable as “tobacco products.” The Court of Appeals ruled that the phrase “made of tobacco or a tobacco substitute” does not apply to the nicotine pouches. It found that, “under both the plain meaning and technical meaning” of “tobacco substitute,” the term means “something to take the place or function of tobacco leaves,” and it concluded “that nicotine isolate is not a ‘tobacco substitute.'” RJR Vapor Co., LLC v. Hegar, 681 S.W.3d 867, 881-82 (Tex. Ct. App. 2023).

Nicotine isolate cannot take the place of tobacco leaves in a product (i.e., is not a “tobacco substitute”), the Court of Appeals reasoned, because nicotine isolate lacks key qualities of tobacco leaves. Although nicotine isolate contains nicotine, the “argument that nicotine isolate is a substitute for tobacco leaves requires us to assume that nicotine is the only reason consumers use tobacco products. The number and variety of tobacco products on the market disproves that assumption. If consumers cared only about obtaining nicotine, then the source would not matter.” Id. at 880.

The Court of Appeals also noted that “tobacco substitute” is a term used within industry as a material “characterized by good taste and aroma; which can be mixed in wide proportions with cured tobacco without noticeable change in the smoking characteristics of the resulting products.” Id. at 881. This, the Court of Appeals said, further supports the conclusion that RJR’s nicotine pouches are not “made of … a tobacco substitute” because the evidence presented suggests that nicotine isolate would not be considered a “tobacco substitute” as that term has been used in the industry.

Holding: Nicotine Pouches Are “Made of … a Tobacco Substitute”

Reversing the two courts below, the Court concluded that VELO pouches fit within § 155.001(15)(E) because they are products “made of … a tobacco substitute.” The court reasoned that a product is “made of … a tobacco substitute” if it is primarily composed of ingredients that take the place or function of tobacco plant matter in the product.

The Court reasoned as follows:

• The pouches’ primary ingredient is processed plant matter (microcrystalline cellulose), combined with nicotine isolate. This departs from the approach of the Court of Appeals, which focused on nicotine isolate (not nicotine isolate + plant matter) as the potential tobacco substitute.
• This plant-matter-and-nicotine blend takes the place and performs the function of the tobacco plant matter used in traditional products — particularly the pulverized tobacco used in snuff and similar products taxed under § 155.001(15)(D).
• As a result, the cellulose–nicotine mixture qualifies as a “tobacco substitute,” making the pouches taxable as “tobacco products.”

Further, the Court reasoned that the statutory context of the “tobacco product” definition and excise tax structure favored including nicotine pouches as products “made of … a tobacco substitute.” The Court found that “tobacco substitute” must refer to a substitute for tobacco as it is used in one of the enumerated examples of “tobacco products” in subsections (A) through (D). On this point, the Court noted that the plant-matter-and-nicotine blend in a nicotine pouch essentially operates as a substitute for ground tobacco in snus, and both of these substances have similar weight properties for purposes of the by-weight excise tax.

In this case, the VELO pouches at issue contain tobacco-derived nicotine. Although the Court did not expressly reference non-tobacco-derived nicotine pouches, the underlying reasoning here may allow the comptroller to take the position that non-tobacco-derived nicotine pouches are similarly classified as tobacco products.

Remaining Issues on Remand

Although the Court resolved the statutory question, it did not fully close the book on the case. RJR previously had raised two constitutional challenges left unresolved by the lower court:

1. Vagueness – arguing that the comptroller’s interpretation of the tax statute rendered it unconstitutionally vague; and
2. Equal and uniform taxation – arguing that applying the tobacco products tax to VELO pouches violates the Texas Constitution’s requirement that taxes be “equal and uniform.” See Tex. Const. art. VIII, § 1(a).

The Court held that its interpretation of the statute rendered the tax’s application to VELO pouches unambiguous (which is an interesting conclusion, given that the lower court held that the tax did not apply), eliminating the need for a separate vagueness analysis. That claim effectively fell away.

Because the Court of Appeals had previously resolved the case solely on statutory grounds, however, it had never reached the equal-and-uniform claim. At RJR’s own request, the Supreme Court followed its “preferred practice” and remanded the case to the Court of Appeals to consider the equal-and-uniform challenge in the first instance. Thus, while the scope of the statute is now settled, the constitutionality of its application to VELO pouches under the equal-and-uniform clause remains an open question on remand.

Why It Matters

From a practical perspective, the Court’s decision potentially clarifies the Texas excise tax and licensing landscape for nicotine pouches, subject to the Court of Appeals’ decision on remand. Although this ruling is binding only in Texas, some other states’ excise tax statutes contain similar definitions of “tobacco products.” See, e.g., Alaska Stat. § 43.50.390(4) (defining “tobacco product” for excise tax purposes to include “an article or product made of tobacco or a tobacco substitute, but not including a cigarette”); Okla. Stat. tit. 68, § 327(c) (defining “tobacco products” for excise tax purposes to include “any other articles or products made of tobacco or any substitute therefor”). In these other states, this case’s plain meaning analysis could prove persuasive if a similar challenge arises with respect to what constitutes a “tobacco substitute.”

More generally, this case serves as a reminder for tobacco industry members that the interpretation of state excise tax obligations — including follow-on obligations of licensing and reporting — require careful consideration. If you have questions about the implications of these developments for your business, our team is happy to assist.