Taxation and Regulation of E-Cigarettes in the US

Nov.15.2022
Taxation and Regulation of E-Cigarettes in the US
The US dominates the global e-cigarette market, with a 65% share projected by 2022. Taxation ranges across states.

The United States dominates the global electronic cigarette market. According to the "2022 Electronic Cigarette Industry Export Blue Book", the US market is very large and is forecasted to account for more than 65% of the total size of the overseas electronic cigarette market by 2022.


However, taxes differ between the federal government, states, and localities within the United States due to varying definitions and understanding of electronic cigarettes among legislative bodies.


In Wisconsin, an "electronic cigarette product" is defined as "a non-combustible product that uses heating elements to produce vapor or aerosol from a solution or substance that is intended for inhalation. The solution or substance may or may not contain nicotine and is depleted as it is heated.


In California, electronic cigarettes are defined as "any device or delivery system that packages and sells nicotine substances, which can be used to deliver nicotine to the human body in the form of aerosol or vapor, including but not limited to e-cigarettes, e-cigars, e-pipes, e-hookahs, or electronic water pipes.


As of July 1st, 2022, 30 states in the United States, along with the District of Columbia, impose a consumer tax on electronic cigarette products. The tax methods implemented by each state differ, with some states adopting a value-based tax principle, while others tax specific amounts of e-liquid/pods. Some states also impose different taxes on open and closed electronic cigarette products.


The following image illustrates the state of electronic cigarette taxation throughout the United States. The regions colored in grey indicate areas where no taxes are imposed on electronic cigarettes.


Source: Tax Foundation.


Minnesota has the highest wholesale tax rate at 95% among all states that impose such a tax, followed closely by Vermont at 92%. Delaware, Kansas, Louisiana, North Carolina, and Wisconsin are among the states with the lowest tax rates on tobacco products, charging just 5 cents per milliliter in consumption taxes.


Some states have inconsistent tax and regulatory policies within their borders.


On July 1st, 2022, California imposed a new retail tax of 12.5% on top of the existing wholesale tax of 61.74%. According to the Los Angeles Times, this additional tax is expected to generate $38.4 million in revenue for the government by 2023. This steep tax, combined with the ban on flavored e-cigarettes, has made the situation for the e-cigarette market in California even worse. Similarly, Massachusetts, as the first state in the US to ban flavored cigarettes and e-cigarettes, has a wholesale tax rate of up to 75% on e-cigarettes.


Looking at the states of New Jersey, New York, and Rhode Island, which have implemented a ban on flavored electronic cigarettes, it is noted that the tax rates on electronic cigarette products are relatively low and even as low as zero.


Exclusively compiled data on electronic cigarette taxation policies across various states in the United States, sourced from taxfoundation.org and presented by 2FIRSTS.


Lower taxes can encourage a shift in consumer habits, while high tax rates can lead people to abandon electronic cigarettes and return to traditional smoking, which can have negative effects on public health. In 2019, a survey found that Minnesota's excessively high wholesale tax rate drove more than 30,000 smokers away from electronic cigarettes, making it more difficult for them to quit smoking.


Governments around the world are increasing their regulation of electronic cigarettes, with taxes being considered as one tool for control. 2FIRSTS will continue to monitor the latest developments in electronic cigarette regulation across the industry globally. Stay tuned for further updates.


Article by Zhu Hongxu


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