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E-cig tax proposal goes to full House

electronic cigarettes e-cigarette

WINSTON-SALEM, N.C. — A small tax on electronic and vapor cigarette products has passed the state House Finance Committee and will be presented to the full House on Tuesday.

The tax is included in House Bill 1050, titled the Omnibus Tax Law Changes. If passed, it would become effective July 1.

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

The proposal is a 5 cent-per-milliliter tax to the nicotine mixture used in e-cigs.

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

E-cig users already pay sales taxes on the device and the nicotine mixture used in it.

The surging popularity of e-cigs has Reynolds American Inc. choosing to be proactive on the inevitability of a state excise tax on the products. David Powers, a company vice president, offered Reynolds’ 5 cent-per-milliliter tax proposal to the Revenue Laws oversight committee Tuesday.

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.”

Some anti-tobacco advocates may find it interesting that a provision in the bill adds e-cigs to tobacco products banned within state correctional facilities:

“The General Assembly finds that in order to protect the health, welfare and comfort of inmates … and to reduce the costs of inmate health care, it is necessary to prohibit inmates from using tobacco and vapor products on the premises of state correctional facilities.”

The ban also affects employees and visitors, but carves out an exemption for authorized religious purposes and within the confines of a motor vehicle in a designated parking area.

Inmates found in violation of the law could lose sentence credits. Individuals who provide an inmate with a vapor product could be found guilty of a Class 1 misdemeanor.

Rep. Julia Howard, R-Davie, is one of the bill’s primary sponsors. She could not be reached for immediate comment today about the bill being sent to the full House.

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

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 secondhand smoke risk. Some public-health advocates say there is no clear-cut evidence of a lack of secondhand 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.

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.

Some House Finance committee members said they prefer to wait on setting an excise tax on e-cigs until the Food and Drug Administration determines how it will regulate the products.

The FDA released April 24 an initial range of potential regulations that come across as an attempt at finding common ground among public health, scientific and economic standpoints, according to analysts and advocates.

Among the main FDA recommendations are a ban on sales to underage youths, requiring health warning labels, FDA review of existing and future products and no more free samples.

However, the FDA did not call for an outright ban of e-cigs, as some anti-tobacco advocates had pushed for. It did not curtail Internet sales or current marketing efforts that include television and social media. It also is not recommending curtailing flavorings, such as candy and fruits, that anti-tobacco advocates say make e-cigs appealing to youths.

The agency could propose more regulations once approved standards are in place. Analysts warned it could take several years to get initial standards in place.

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 that 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 healthcare 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 overall e-cig revenue at $2 billion 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.