California voters have approved Senate Bill 793, which prohibits tobacco retailers from selling flavored tobacco products or tobacco product flavor enhancers. A lawsuit has been filed in federal court claiming that it is unconstitutional.

On November 8, 2022, California voters said “yes” to Proposition 31, a referendum on a 2020 law that would prohibit the retail sale of certain flavored tobacco products. The constitutionality of the referenced law, Senate Bill 793 (“SB793”), is at issue in a case filed the next day in the U.S. District Court for the Southern District of California, R.J. Reynolds Tobacco Co., et al. v. Bonta, et al., No. 3:22-cv-01755 (S.D. Cal.); however, the plaintiffs’ success in that case will likely depend on the development of favorable precedents in other cases pending before appellate courts.

Continue Reading California Voters Approve Flavored Tobacco Ban in Referendum; Is It Unconstitutional?

On November 3, Judge Gary L. Sharpe of the U.S. District Court for the Northern District of New York issued a preliminary injunction, blocking cannabis regulators from issuing marijuana retail licenses for five geographic regions across the state, while a constitutional challenge to the program proceeds.

Continue Reading Federal Judge Finds NY Cannabis Residency Rules Likely Unconstitutional and Discriminatory Against Out-of-State Applicants

Dealing in goods subject to cigarette and other tobacco products (OTP) taxes presents considerable administrative burdens. The sale of cigarettes and other tobacco products, on which all 50 states impose an excise tax, requires accurate bookkeeping, regular reporting, and tax remittance practices. In addition, manufacturers, distributors, and wholesalers of these highly-regulated products will be the subject of audits by state revenue departments.

Continue Reading Practical Tips for Avoiding and Contesting Tobacco Tax Assessments

Over the past few years, at least five states and several hundred localities have passed, or attempted to pass, laws banning flavored tobacco products. There have been a number of challenges to those laws—few of which have been successful. In a recent ruling, the Washington County Circuit Court handed a win to businesses challenging a local ordinance (the Ordinance) seeking to impose a ban on the sale of flavored tobacco products.

Continue Reading Oregon Court Sides with Businesses Challenging Local Flavor Ban Ordinance

House Representatives Morgan Griffith (R-VA) and Brett Guthrie (R-KY) recently sent a letter to FDA Commissioner Robert Califf expressing “continued concerns involving systemic problems within the” Center for Tobacco Products (CTP). The first half of the letter asks FDA to explain its continued failure to issue meaningful regulations for CBD products, while the second half focuses on issues within CTP that have been echoed across the tobacco industry.

Continue Reading House Representatives Ask FDA to Explain its Handling of PMTAs and Other Issues Within Center for Tobacco Products

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