States Differ in Approach to E-Cigarette Taxes

WASHINGTON, D.C. — Cigarette taxes have been the target of state legislators nearly every year; however, more states are taking aim at adding levies to electronic cigarettes and vapor products.

According to a new report by the Tax Foundation, four states, Washington, D.C., and three local jurisdictions have enacted taxes on vapor products as of Jan. 1. In addition, at least an additional 23 states considered excise taxes on vapor products in 2015.

But, the organization noted, "The methods and levels of taxation vary dramatically."

As of Jan. 1, Kansas, Louisiana, Minnesota, North Carolina and Washington. D.C., passed state levies on e-vapor products. Kansas tax is 20 cents per milliliter of liquid, and Louisiana and North Carolina tax is 5 cents per milliliter of liquid.

Minnesota and Washington, D.C., tax is based on the wholesale price. Minnesota's levy is 95 percent of wholesale. Washington, D.C.'s levy is 70 percent of wholesale, according to the Tax Foundation.

As for individual jurisdictions, Montgomery County, Md.'s tax stands at 30 percent of wholesale; Cook County, Ill.'s tax stands at 20 cents per milliliter of liquid; and Chicago's tax is 80 cents per unit plus 55 cents per milliliter of liquid.

Minnesota and North Carolina began taxing vapor products in 2012 and 2014, respectively, the organization added.

Most state excise taxes on products like alcohol, traditional cigarettes, and gasoline are levied as what is called a "specific" tax, or a tax based on volume. Minnesota, by contrast, currently taxes vapor products on an ad valorem basis, meaning as a percentage of the sale price of the product. In Minnesota, the tax is levied at the point of wholesale, explained Scott Drenkard, director of state projects for the Tax Foundation. 

However, whether intentionally or not, using ad valorem taxes on vapor products results in disparate tax treatment of these products, he said. 

"Some vapor products are single-use, while others are rechargeable and refillable. An ad valorem tax hits disposable e-cigarettes harder than a specific tax, since disposables include the value of the plastic device itself, not just the fluid, in its sale price," Drenkard said. "Because single-use e-cigarettes do not require the prior purchase of a personal vaporizer device, they may be favored by lower-income smokers, upon whom the comparably higher tax could fall disproportionately.

"Moreover, for either type of device, high taxes may prove prohibitive for low-income smokers wishing to transition away from traditional cigarettes," he added.

According to the Tax Foundation, some Minnesota lawmakers attempted to modify their current method of taxation through two different bills in 2015. The two proposed measures would have switched the e-vapor tax to a specific tax of 30 cents per milliliter of liquid. 

However, neither bill received a floor vote.

E-cigarettes and vapor products are still relatively new and states are just beginning to grapple with questions of if, and how, to tax them, Drenkard acknowledged. 

"A sound approach to the taxation of vapor products would avoid discriminating between disposable and rechargeable vapor products; it would avoid extending punitive tax rates from traditional cigarettes to vapor products, and would not hinder consumer opportunities for the use of vapor products as a method of smoking cessation," he concluded.

To read the full Taxation Foundation report, click here.