What tobacco and vape businesses need to know about selling online and through marketplaces

With the rise in popularity of online shops and marketplaces and increasing demand from consumers for convenient shopping avenues, tobacco and vape businesses may be tempted to make the jump to the World Wide Web. But as with any new venture, there’s a lot to consider, especially for the tobacco and vape industry.

Is it even possible?

The short answer is yes, it is technically possible to sell tobacco and vape products online. The longer and more complicated answer is yes, but it depends on the state you’re selling from, the state you’re selling to, what shipping method you’re using, the flavor of the product, and so many more factors. Let’s get into it.

Flavor ban

A lot of restrictive legislation passed recently aims to make vape and tobacco access more difficult for teens; one of the ways legislators hope to achieve this is by restricting or banning vape flavors. Some states, like Massachusetts, New Jersey, and New York have banned flavors outright. Others, like Maryland, Oregon, and Texas have only banned the B2C (business-to-consumer) online sale of flavored products.

Shipping difficulties

Even if you’ve verified that you can sell tobacco or vape products into a state, do you know how you’re going to ship them? As of March 2021, the United States Postal Service issued a rule against shipping tobacco and other nicotine products, called Treatment of E-Cigarettes in the Mail. FedEx and UPS have since followed suit, with FedEx banning the shipment of any tobacco or vape products, and UPS only allowing tobacco shipments from licensed sellers and not allowing vape shipments at all.

Taxes

If you thought negotiating the array of flavor bans and finding a shipping method for your tobacco or vape products was complicated, you’ll want to buckle up for the next step: figuring out taxes. There are a number of factors that determine how tobacco and vape products are taxed, and they all vary by state: Some states only tax nicotine products; some, like Kansas, only tax liquid (with no tax on devices without liquid); some have no excise tax at all; and some tax everything. Other factors that go into calculating taxability include nicotine content and the type of delivery system (particularly for vape).

Some states tax vapor products differently based on whether the delivery system is open and able to be refilled, or a closed system, which is smaller and favored by younger vape users and thus taxed much more heavily. The city of Chicago, for example, taxes vapor products $1.20 per milliliter and $1.50 per cartridge. Indiana calculates open system taxes based on the retail price and closed systems based on wholesale price. If you’re a California manufacturer that sells direct-to-consumer, you’ll need to calculate both wholesale and retail prices to get the correct tax amount.

Cigar taxes are handled similarly — regular and premium cigar taxes are set at the federal level using 3 lbs. per 1,000 cigars as the divider. Several states use a different level to determine premium cigar vs. small cigar: 4 lbs., 4.5 lbs., and even 6 lbs. in Ohio. Other factors like tobacco content, what the wrapper is made of, what the tip is made of, and whether it requires a humidor all determine how cigars are taxed in each state.

PACT difficulties

Originally passed in 2009 to combat illicit sales of cigarettes, the Prevent All Cigarette Trafficking Act (PACT) was recently expanded to include all electronic nicotine delivery systems (ENDS), including vapes, vaporizers, vape pens, hookah pens, electronic cigarettes, and e-pipes. If your company sells or advertises any of these products, you’re required to register with both the Bureau of Alcohol Tobacco, Firearms and Explosives (ATF) and the tobacco administrator in the shipping state. You also have to get really good at record keeping; tobacco and vape sellers will have to provide extremely detailed reports to the states they’re selling into, including information about the buyer, seller, product code, carrier, and more. Penalties for not complying can include a $5,000 fine and three years of jail time.

Furthermore, businesses are now required to collect and remit all applicable federal, state, and local sales and excise tax for each state. If your small company has been flying under the radar thus far, you might find yourself with a lot of paperwork and registration fees to catch up on. Learn more about the PACT Act and how you can stay compliant here.

Advertising

Television and radio advertising for cigarettes have been banned since 1971, but new products call for new legislation. Google ads, Facebook, Twitter, Snapchat, and Instagram all have strict policies against using their platforms to advertise tobacco and vape products. If you do find a way to get the word out about your product via your website or other means, you’ll be required to register to pay and remit taxes in every state the advertisement appears in (if a consumer is able to see your website, it counts as advertising). And don’t even think about developing a cool cartoon mascot for your brand, or you may find yourself in violation of federal law for making your product attractive to potential underage smokers or vapers.

FDA regulations

Another hit to the industry are new FDA regulations. Cigarettes with flavors other than menthol have been prohibited in the U.S. since 2009 as part of the Family Smoking Prevention and Tobacco Control Act, and it seems like the vapor industry is following suit. In September 2020, the FDA started reviewing premarket tobacco applications and has since issued marketing denial orders for 55,000 flavored ENDS products, on the grounds the applicants don’t have sufficient evidence that the benefit to adult smokers outweighs the risk to youth.

Solutions

As a tobacco or vape seller, all these changes to your industry can feel overwhelming. As far as taxes go, the first step is knowing where you need to register and getting your business licenses in order. The Avalara Excise team can help. We can also streamline other tax calculations, filing, certificate management, and more. Contact Avalara Excise today to learn how to stay compliant no matter how hazy the world of tobacco and vape industry legislation gets.

Recent posts
5G and the Internet of Things: Networked smart devices are here, tax policy is sure to follow
Selling goods in a virtual world can have real tax implications
Emerging online marketplaces must consider sales tax compliance

It’s here! Read Avalara Tax Changes 2022

Review sales tax updates and trends, plus get a forecast of what’s to come

It’s here! Read Avalara Tax Changes 2022

Stay up to date

Sign up for our free newsletter and stay up to date with the latest tax news.