November 16, 2021
Business Editors' Pick Lifestyle Money Retail Small Business Taxes Vices

Small Businesses Scrambling To Figure Out New State Vaping Rules And Taxes

A provision tucked into the Covid Relief bill passed by Congress in December 2020 now has vaping businesses and states regulatory departments scrambling to meet new federal requirements. And in many cases, it will increase the cost of doing business.

“For the vape industry, this was the worst Christmas present ever,” said Avalara excise tax expert John Beaty.

The provision added vaping products sold online and in vape shops to the Prevent All Cigarette Trafficking (“PACT”) Act, which regulates the sale of tobacco products. It means that anyone who sells, transfers, or ships e-cigarettes must comply with various complex registrations in every state they sell to, comply with various reporting requirements, and collect excise and/or sales tax in those states.

The industry was given just three months to comply (the amendment went into effect on March 27) or face stiff penalties. The cost for businesses who don’t register is $5,000 per month, per state — that can amount to as much as $3 million a year for businesses that don’t comply.

I sat down with Beaty and Avalara’s Bubba Lange to understand what this means for business reporting requirements and state taxes.

The new reporting requirements mirror those for tobacco companies — even for nicotine-free vape products.

Vape companies now have to:

  • Register with the Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF) and the tobacco tax administrators of any state they sell in or even just advertise in.
  • Include the name and address of the persons delivering and receiving the shipment and the brand and quantity of the “cigarettes” that were shipped. This includes direct sales to consumers and B2B sales.
  • Find out which states prohibit sales of flavored vape products.

“In some states you have five or six registrations to take care of,” said Lange. “And across 50 states, that gets really hairy.” What’s more, he added, “states were caught flat-footed” on this new requirement, so many of them don’t have the infrastructure and rules in place yet for vaping registrations.

The state tax situation for vaping is complex.

Vape companies now have to navigate sales and excise tax rules across 50 states and excise taxes in particular can be thorny. Currently, 29 states plus the District of Columbia tax vape products. That’s where the simplicity ends.

  • Nine states (California, Colorado, Delaware, Louisiana, Minnesota, New Hampshire, North Carolina, Virginia and Wyoming) only tax vape products with nicotine.
  • The tax is levied differently. Some states apply a tax rate on the wholesale price, others tax based on the retail price and others levy a per-pack charge.

Plus, more states are starting to tax e-cigarettes.

A total of 13 states now have pending legislation that would create a tax on vape products. All of them were introduced after the PACT Act amendment. While the federal action doesn’t deal with taxes, Beaty said there’s a correlation.

“I can see how it’s motivating states that didn’t previously have a tax to have one,” he said. “You can see the thought process of, ‘If we didn’t have [tax] legislation before, now’s the time because we have to collect these transactions and report it at the federal level anyway.”

The new rules are changing the supply chain.

Online vaping companies report they’re having a harder time getting their products into the hands of consumers. “Online sales for vape are not banned but the PACT Act has made it harder for us,” says a recent blog post by Vaping.com. “But we are determined to rise to this challenge and continue to sell a great range of products at competitive prices.”

This is because the PACT Act prevents USPS from carrying any vaping products and that mail ban went into effect this week. What’s more, FedEx

FDX
and UPS have also said they’ll also stop carrying vaping products, so this has created a huge delivery issue for companies that sell directly to consumers online. 

Now, they not only have to find new shipping partners across the country but those home deliveries also now require a signature from a recipient at least 21 years of age.