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Reynolds American suggests state tax rate for e-cigarettes

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WINSTON-SALEM, N.C. — The surging popularity of electronic cigarettes has Reynolds American Inc. opting to be proactive on the inevitability of a state excise tax on the products.

Electronic cigarettes, or ecigs, are battery-powered devices that heat a liquid nicotine solution in a disposable cartridge and create a vapor that is inhaled.

David Powers, a company vice president, offered Reynolds’ tax proposal to the Revenue Laws oversight committee Tuesday. The committee, co-chaired by Rep. Julia Howard, R-Davie, approved passing along the recommendation to the General Assembly for the short session that begins today.

The proposal is a 5 cent-per-milliliter tax to the nicotine mixture used in e-cigarettes. E-cigarette users already pay sales taxes on the device and the nicotine mixture used in it.

By comparison, a pack of combustible cigarettes carries a 45 cent per pack excise tax – one of the lowest in the country.

To put the Reynolds request into context, a typical e-cig cartridge offers about 200 puffs per use, while a typical combustible cigarette offers about 10 puffs per use.

Reynolds spokesman David Howard said the recommendation is aimed at establishing “a fair and reasonable” excise tax on e-cigs, “if a tax is deemed appropriate at all.”

The Vuse e-cig, made by R.J. Reynolds Vapor Co., is sold in Colorado and Utah, as well as select Tarheel Tobacco shops in the Triad. The company plans to begin national distribution by late June.

Gregg Perry, a spokesman for Lorillard Inc., said the company supports the e-cig excise tax proposal. Lorillard’s blu eCigs product is among the top-two brands in the United States.

“The proposal currently pending recognizes the tobacco harm reduction opportunity of electronic cigarettes and provides incentive for smokers to switch,” he said.

Peter Hamm, a spokesman for the Campaign for Tobacco-Free Kids, said his group hasn’t spent “a great deal of time on the e-cig tax policy side yet.”

“Until we know more about the devices and their value or risk to public health, we don’t want to weigh in on how they should be taxed.”

Howard and Powers acknowledged that an excise tax in North Carolina, as well as most states, is likely given the dynamic of increased e-cig usage compared with decreasing combustible cigarette usage.

That reality is adding to the regulatory and revenue tension between tobacco manufacturers and states.

Refill cartridges can be purchased in different sizes and flavors; five packs typically cost between $9 and $18. By comparison, a carton of cigarettes can cost between $25 and $50 for most name brands.

Bonnie Herzog, a Wells Fargo Securities analyst, said e-cig sales could grow fast enough to affect the payments states receive from the landmark Master Settlement Agreement.

Tobacco companies, including R.J. Reynolds Tobacco Co., agreed in 1998 to settle lawsuits filed by 46 state attorneys general over smoking-related health-care costs by paying those states about $206 billion over more than 20 years.

Most states have redirected much, if not all, of their MSA money to general expenditures, much to the chagrin of public health advocacy groups.

Herzog estimated there was $2 billion in overall e-cig revenue in 2013. She projects up to $10 billion by 2017.

She predicts Reynolds will have $4 billion in revenue from e-cigs in 2021, compared with $3.9 billion from conventional cigarettes. That’s compared with barely any e-cig revenue and $6.4 billion in conventional cigarette revenue for 2013.

“Given that the industry’s MSA payments are volume based, as e-cigs take share from traditional cigarettes, the decline in these payments to the states should accelerate,” Herzog said.

Howard and Powers said they believe e-cigs should be taxed at a lower rate in part because they do not contain tobacco, and the vapor produced does not create a second-hand smoke risk. Some public-health advocates say there is no clear-cut evidence of a lack of second-hand smoke harm from e-cigs.

“We don’t want a high excise tax to become a disincentive from consumer trial and use,” Howard said.

Some state legislatures, such as New Jersey and Ohio, are considering applying an e-cig excise tax near or equivalent to the tax on combustible cigarettes.

Being proactive with legislation is not new to Reynolds. It made a similar recommendation last year to ban e-cig sales to youths that legislators eventually passed.