Tobacco and vape
The tobacco and vape industries face both challenges and opportunities brought about by federal enforcement, increased tax complexity at the state level, and the reopening of sales channels shut down during the COVID-19 pandemic. Meanwhile, cannabis businesses are attracting attention at the federal level as more states legalize marijuana.
FDA cracks down on candy-flavored e-cigarettes, sales of disposable products rise
The U.S. Food and Drug Administration (FDA) continues to put pressure on manufacturers of e-cigarettes with fruity, sweet flavors that appeal to teens. A survey by the FDA and Centers for Disease Control and Prevention found that 14.1% (2.14 million) of high school students and 3.3% (380,000) of middle school students use e-cigarettes. Almost 85% prefer flavored products.
A recent report from the Federal Trade Commission (FTC) found that sales of flavored disposable e-cigarettes and menthol e-cigarette cartridges surged in 2020. According to the FTC, “This significant increase, which coincides with a federal ban on the flavored cartridges popular with young smokers, suggests that youth e-cigarette use shifted to substitute products rather than declined.”
Flavored disposable vaping devices account for one-third of U.S. e-cigarette sales, up from less than 2% in 2019, according to a Reuters review of retail sales data. The data shows consumers spent more than $2 billion annually on the new generation of disposable e-cigarettes.
Vape product manufacturers had until September 2020 to submit applications to the FDA for authorization to be a deemed tobacco product. In order to be approved, they needed to provide clinical trial data showing their products met regulatory standards for health effects. Makers of e-cigarettes containing synthetic nicotine had less than two months to apply to the FDA for authorization after Congress passed a law giving the FDA authority over lab-created nicotine products.
As of June 2022, the FDA had approved applications for 23 electronic nicotine delivery systems (or ENDS), but has rejected about a million other applications. Many of the rejected applications were for flavored vape products. In June 2022, the FDA banned the sale and distribution of Juul vaping products, one of the most popular brands on the market, and ordered those already in stores to be removed. Juul immediately went to court and received a temporary stay on the ban. This isn’t over.
While cigarette sales are declining, the global vaping market was valued at $18.1 billion in 2021 and is expected to grow at a rate of 30% through 2030. The FDA will likely continue to tighten the reins on the vaping industry. A Gallup survey of American adults shows 61% of respondents want laws on e-cigarettes to be made stricter. Some in the industry wonder what will happen to existing inventory for products that can no longer be sold in the U.S. In certain cases, the FDA is allowing manufacturers to export their vapor products to other nations. Thirty-six countries prohibit the sale of vaping products.
Sales of cigars and cigarillos rebound as consumers seek luxury
The COVID-19 pandemic saw cigar manufacturers turn to online sales as a means to offset decreased sales brought on by factory closures and the unavailability of tried-and-true retail venues, like cruise ships and smoke shops. Now sales in traditional channels are rebounding.
Analysts predict the global cigar and cigarillo market to grow at a rate of 4.3% annually. They note that though consumers may use fewer cigars and cigarillos, they’re willing to spend more to “maximize indulgence.” High tax rates on cigarettes are also encouraging more smokers to switch to these products, which tend to be taxed at lower rates than cigarettes.
The global luxury cigar market was valued at $11.6 billion in 2020 and is expected to grow at a rate of 7.2% annually. Experts attribute growth to a rise in hotel cigar lounges, as well as increased tobacco use among millennials.
While cigarettes can’t be sold online, the internet remains a lucrative sales channel for cigars with global online sales expected to expand at a rate of more than 6% annually.
Other issues likely to affect the tobacco and vape industries in 2023
Easing of restrictions on cannabis businesses generates talk at federal level
Another issue sure to see developments in 2023 is cannabis. It’s been a decade since Colorado and Washington legalized the sale of recreational marijuana, and today, adult-use cannabis is legal in more than 21 states. Another five or six states are actively pursuing legalization. Yet because the federal government still classifies cannabis as a Schedule 1 controlled substance, cannabis businesses are blocked from using FDIC banks and prohibited from taking the tax deductions available to other businesses.
President Biden has asked the Health and Human Services Department and the U.S. Attorney General to review how marijuana is regulated under federal law. It’s a start to a conversation that’s been a long time in coming, and what happens next will also take time to unfold. “Declassifying cannabis would take considerable time,” says Scott Peterson, VP of Government Relations at Avalara. “It would also likely be challenged in court and in Congress.”
Compliance complexity swells as more states tax vaping products
Currently, 33 states and the District of Columbia collect taxes on vaping products. Compare that to 2015, when only three states and the District of Columbia taxed e-cigarettes, and it’s easy to see how tax compliance for the vaping industry has grown increasingly complex.
While additional states are likely to impose excise tax on vape products, some holdouts remain. Alaska’s governor vetoed a bill that would have taxed electronic cigarettes and increased the age to legally possess tobacco products from 19 to 21, explaining that the tax increase would have been too significant. Certain municipalities within the state collect a local tax, including Anchorage and Juneau.