We recently had the opportunity to attend, and present at, the industry portion of the 2024 Federation of Tax Administrators Tobacco Tax Annual Conference in Mobile, Alabama.

Presentations at the conference included topics of interest to state tobacco tax administrators and industry (the agenda is located here). The conference was well attended by both industry members and state and federal agencies responsible for enforcing tobacco and nicotine laws. Our team has attended this conference for several years and it always provides a great opportunity for collaboration between government and industry, and this year was no different.

Below is a summary of our key takeaways.

ATF PACT Act Update

ATF was represented by Andrew Blacker and Edward Clark, and below is summary of the key takeaways from their presentation.

• The presenters stated that in-state delivery sales are covered by PACT Act.

• It is clear that the PACT Act applies in states that impose a specific excise tax on the applicable tobacco product, but the presenters also expressed the view that it may also apply in states that impose broader taxes on the tobacco products, like sales and use taxes.

• The presenters noted ongoing litigation on the topic of whether a business that is not lawfully operating could be considered a “consumer” under the PACT Act for purposes of the law’s delivery sale requirements. The presenters indicated that even if a business is licensed in a state, but it is not compliant with state reporting or recordkeeping requirements, for example, it could be considered a “consumer” because it is not lawfully operating within the state. This interpretation of the law would significantly impact suppliers that sell and ship covered tobacco products in interstate commerce to business customers because, if those customers are not lawfully operating within their states, the supplier could be subject to burdensome delivery sale requirements under the PACT Act.  One wonders how a supplier is expected to confirm its business customers are 100% compliant with such laws. 

• The presenters discussed the types of products that are covered by the PACT Act.
  • Notably, they indicated that roll-your-own tobacco, which is a covered product under the PACT Act, would not necessarily include pipe tobacco that is properly labeled and sold as such, but that it does cover blunt wrappers.
  • They also expressed the view that the PACT Act’s definition of electronic nicotine delivery system (ENDS) is broad enough to cover accessories like chargers and batteries, as well as hemp-derived cannabidiol, marijuana, herbal consumables, or other substances used in the ENDS.
  • Furthermore, the presenters noted an evolving ATF position regarding whether little cigars could be considered cigarettes under the PACT Act:  in some circumstances, ATF believes little cigars could qualify as such under both the PACT Act and the Contraband Cigarette Trafficking Act. The presenters also acknowledged that this issue may need to be resolved by Congress or courts.

• The presenters acknowledged that the PACT Act requires excise taxes to be prepaid in the context of delivery sales. But they also indicated that, if states require the excise taxes to be paid with a return the month after a sale, ATF will not initiate enforcement action so long as the seller is otherwise compliant with state law and pays the taxes.

State Vape Directories

This presentation included a panel of state agencies from Alabama, Louisiana, Oklahoma, and Wisconsin. As more states have passed new vapor product directory laws in the last couple of years, this was a hot topic. We have blogged on this topic in the past. A notable issue with these new state laws is that they provide states the authority to seize vapor products not listed on the directories, but the statutes do not directly address how to handle the destruction of those vapor products. In some states, the agency responsible for the directory is not the same as the agency responsible for seizure and destruction. Because destruction of vapor products must comply with federal and state waste disposal requirements, their destruction can be very expensive. States vary in their approach on how to recoup the costs of that destruction.

Trends in the Tobacco Industry

Don Burke from Management Science Associates, Inc. (MSAi) presented on this topic, which provided a good overview of sales trends in the tobacco industry based on retail sales data. Below is a summary of the key points.

• Convenience stores and gas stations continue to account for the majority of retail sales.
• MSAi is projecting an overall 6-7% decrease in tobacco and nicotine product sales by end of year. But the sole bright spot is the modern oral nicotine product category, which has experienced significant growth over the last 4-5 years.
• The presenter also showed data indicating that when there is an excise tax increase on cigarettes, consumers tend to travel to jurisdictions that impose less excise tax to purchase their cigarettes there.
• The presenter showed data indicating that the California flavor ban, which we have blogged about in the past here, here, and here, has led to consumers also traveling to other jurisdictions to purchase menthol cigarettes. The data also showed that, if consumers are too far away from other jurisdictions in which it is legal to purchase menthol cigarettes, they tend to purchase tobacco flavored cigarettes instead of switching to other tobacco or nicotine products or quitting altogether.

Obtaining Informal Guidance from Tax Agencies

This was the topic on which our team presented. State tax agencies play a critical role within the tobacco and nicotine industry because they are the agencies tasked with enforcing excise tax and licensing laws, and some agencies also enforce laws related to tobacco or nicotine product marketing and promotions. In the complex world of regulatory compliance, informal tax agency guidance plays a pivotal role in helping businesses navigate the often-murky waters of legal requirements. Our presentation focused on the essence of informal guidance from state tax agencies, its various forms, and its significance for businesses in the tobacco and nicotine industry. Below are the key points.

• Guidance can come in many forms, including, but not limited to: informal communications with state agencies, online agency publications and resources, and more formal private letter rulings or similar opinions. Some types of agency guidance can be binding on the agency, and the requesting party may rely on it, while other types of guidance are not.

• Notably, some states like Texas, Virginia, and Nebraska, among others, may provide taxpayers relief, like abatement of penalties, under taxpayer bill of rights statutes or regulations if they rely on erroneous advice from an agency representative that is provided in writing, the taxpayer identified itself, the taxpayer followed the advice, and the taxpayer suffered or will suffer harm.

• Sometimes courts opine on taxpayer reliance on guidance. In a 2022 case out of Washington, for example, a state court found that the taxpayer relied on a guide that the Department of Revenue had published regarding taxes on interior decorators, designers, and consultants, but despite inconsistencies between the guide and the applicable statute, the statute controlled. See Dynamic Resources, Inc. v. Department of Revenue, 21 Wn. App. 2d 814, 823, 508 P.3d 680 (2022).

• In some cases, businesses may disagree with agency guidance and seek clarification through litigation. In a current Texas case, for example, RJR Vapor Company received guidance from the Texas Comptroller that its oral nicotine products are “tobacco products” subject to the tobacco tax because they contain nicotine extracted from tobacco. See RJR Vapor Co., LLC v. Hegar, 681 S.W.3d 867, 871 (Tex. App. 2023). RJR disagreed but paid the tax under protest and sued the state to recover its payments arguing that the language “made of tobacco or a tobacco substitute” in the statute did not include its products. In December 2023, a Texas appellate court determined that RJR’s products were not covered by the applicable language and ordered the Comptroller to issue a refund. The court’s decision has been appealed to the Texas Supreme Court.

• Several state agency representatives provided feedback during the Q&A portion of our presentation. Some states prefer that businesses provide clear examples of the situations for which they are receiving guidance, and others prefer that they receive a summary of the situation or issue and that they be given some time to consider the request before providing a response.

• In general, informal guidance is a vital tool for businesses in the tobacco and nicotine industry seeking to comply with complex regulatory frameworks. By understanding its forms, importance, and the process of obtaining it, businesses can better navigate legal requirements and mitigate risks. Before requesting agency guidance, it is important to consult legal counsel or other professionals with experience requesting such guidance to ensure that the right questions are asked of the appropriate agency personnel, and the right procedures are followed.