E-Cigarettes and Excise Tax: Everything Retailers and Distributors Should Know

Is your company benefiting from the popularity of electronic cigarettes? If so, congratulations—it’s time to start becoming familiar with excise tax!

Even if your company hasn’t yet experienced its first wave of excise tax implications, it’s very likely only a matter of time before it will. While only a handful of states currently collect excise taxes on these and other vapor products, many more are considering legislation to impose it. After all, e-cigarettes have been growing in popularity since their 2007 market debut. In 2014, the electronic vaporizer market, which includes tank-style apparatuses as well as devices that mimic tobacco cigarettes, reportedly reached $2.5 billion in annual sales. On Wall Street, some expect e-cigs to surpass the traditional cigarette market by 2024. Millions of people are abandoning tobacco cigarettes in favor of electronic versions, which deliver nicotine without the harmful health effects of tar and smoke.

As tax dollars are diverted to new forms of smoking, federal and state governments are determining how to regulate this growing industry and ensure they collect fair shares of the profits.

In this post, we’ll take a high-level look at the current state of vapor excise tax, as well as where things are headed and what distributors and retailers should be prepared for.

Let’s dive in...

The Current State of E-Cigarette Excise Tax

So far, four states (Minnesota, North Carolina, Louisiana and Kansas) and the District of Columbia have implemented excise tax on vapor products. As is so often the case with excise taxes, each state has taken its own unique approach to rules, rates and filing requirements.

For example:

If you sell e-liquid in Louisiana and North Carolina, you’ll need to calculate taxes on a volume basis of five cents per milliliter. But if that same product is distributed to Minnesota and D.C., taxes are calculated based on a percentage of the wholesale price: 67% in D.C.; 95% in Minnesota—where, if it’s combined with other products in a starter kit, the whole package gets taxed at that rate.

And while D.C. exempts vapor products from sales, the states don’t. In MN, NC, LA and KS, you’ll also need to be prepared to calculate sales tax on top of excise tax.

Needless to say, it’s already confusing for the multi-state distributor or retailer even with just five taxing jurisdictions in the mix.

For the full scoop on how excise tax is determined, download our white paper:

The E-Cigarette Excise Tax Challenge

The Future of Vapor Excise Taxes

In Fiscal Year 2010, the federal excise tax on cigarettes brought in $15.5 billion in revenue. By 2013, the Congressional Budget Office was listing a 50% increase in per-pack cigarette excise tax as a feasible way to “reduce deficits” and “cause smoking rates to fall.” And in 2015, a steady free fall in tobacco tax revenues was officially predicted.

Now, taxing jurisdictions are deciding how they will make up for the declines. Lawmakers in more than two dozen states have drafted, introduced or considered legislation that would impose excise taxes on e-cigarettes at varying levels, from 18 cents per milliliter to 95% of wholesale prices.

In other words: If you sell it, the excise taxes will come. It’s just a matter of when.

Preparing for the Complexities of Excise Tax

Retailers and distributors that haven’t touched traditional cigarettes, and thus have not dealt with excise taxes, may not be aware of the stark differences between excise tax and retail sales tax. Unlike sales tax, for instance, excise taxes are often based on volume instead of retail price. This means each SKU will need to reflect the amount of liquid contained in the product. Another discrepancy can occur when vapor products are brought into inventory. Some states collect the excise tax as soon as items are stocked and shelved—instead of when they actually sell.

Most invoicing and point-of-sale systems are designed specifically to handle sales tax, and thus are not equipped to account for these and countless other excise tax nuances.

This is all the beginning of what’s bound to become a staple of the complicated excise tax landscape. Retailers who deal only with vapor products may not realize just how difficult it can be to navigate these complex roads—or how severe the penalties for noncompliance can be. We address these challenges in our white paper: The E-Cigarette Excise Tax Challenge. If you’d like to learn more, I highly recommend giving it a read.

P.S. Did you know? Avalara Returns Excise for Tobacco generates signature-ready tax returns from e-cigarette transaction data. If you’d like to learn more, click here.