There are many federal restrictions on the sale of vaping products, but at least for now, there are no federal-level taxes on vaping products in the United States.
February 26 – Thirty US states and the District of Columbia began a new year taxing vaping products on January 1.
It is a rapid increase in just a few years. For example, in 2015, only three states and the District of Columbia imposed taxes on vaping products. But since then, a steady stream of states have either expanded their existing tobacco excise taxes to include vaping products or passed tax laws that specifically tax vapes or e-liquid.`
It has been a dramatic change for vaping product sellers in a short time. Ten years ago, a retailer of vaping products only had to worry about taxes in their state. Today, every shipment a retailer makes across state lines may be subject to varying degrees of excise tax – or even no tax at all.
Accurate calculation and reporting become very difficult.
Thirty different sets of state rules.
There are many federal restrictions on the sale of vaping products, but, at least for now, there is no federal-level tax on vaping products in the United States.
Instead, sellers of vaping products must collect state excise taxes on their products, although two states have sales taxes specific to vapes. Some states also allow local jurisdictions to establish their vaping taxes.
For vaping retailers who sell online, the need to comply with the laws and regulations of the customer’s state, including sales tax nexus requirements, adds to the complexity.
At this point, it is easier to list states that do not have excise taxes on vaping products than it is to record conditions that do.
According to the Federation of Tax Administrators, the states without vape taxes until February 2022 are Alabama, Arizona, Arkansas, Florida, Hawaii, Idaho, Iowa, Michigan, Mississippi, Missouri, Montana, Nebraska, Oklahoma, Rhode Island, South Carolina, South Dakota, Tennessee, and Texas.
At this writing, Indiana does not have a state vape excise tax, but it will affect on July 1 of this year. Alaska does not have a statewide excise tax on vape, but certain cities in the state impose local taxes, including Anchorage and Juneau.
As of January 1, all other US states (and the District of Columbia, Puerto Rico, and the US Virgin Islands) have a vape excise tax. In addition, two states currently have local jurisdictions that impose additional excise taxes on vaping products: Chicago, Illinois, in Cook County, and Montgomery County, Maryland.
More states may soon begin imposing excise taxes on vaping products. At our last count, 12 states were considering specific vape tax increases.
Current rules are complicated.
There are two basic ways to calculate excise taxes on vaping products: a percentage of the sales price or a volumetric tax, on a per-unit basis for vape devices and per-milliliter base for e-liquid.
In some states, it can be both. For example, Illinois imposes a 15% excise tax on the wholesale price of all vaping products sold anywhere in the state; however, Cook County and Chicago impose an additional surcharge of 20 to 55 cents per milliliter on e-liquid sold within their jurisdictions.
Similarly, Connecticut, Georgia, and Kentucky tax certain vaping products at a per-unit rate, while others are taxed as a percentage of the wholesale price.
Most states that tax as a percentage of the sales price would add taxes at the wholesale level. However, Maryland and New York would add specific vape excise taxes at the retail level.
In addition, Maryland is one of eight states that impose different excise taxes on various products.
In Maryland, the tax rate is 60% of the retail price for cartridges of 5 milliliters or more; otherwise, it is 12%. Puerto Rico does the same, levying a $3 per unit tax on electronic vapes and a 5-cent per unit tax. A milliliter tax is imposed on nicotine solutions.
Among states that charge based on a percentage of the wholesale price, there is a significant difference in rates between Minnesota (95%), which has the highest rate, and Vermont (92%), which has the lowest wholesale rate of 8% (available units) among all states with any tax.
Among states that charge a per-milliliter basis, excise tax rates range from 5 cents per milliliter in Delaware, Kansas, North Carolina, and Wisconsin to 40 cents per milliliter in Connecticut for closed system devices.
Vaping products do not exist in a purely local market. Data show that online sales account for a significant portion of total purchases, about 28% of total US purchases.
Traditional retailers – primarily convenience stores, grocery stores, and pharmacies – are the preferred destination for vapers, selling a little more than half of all vaping products purchased nationwide.
Most of the public debate about the online sale of vaping products has focused on the requirement to restrict purchases by underage buyers.
However, tax compliance is a significant issue that cannot be ignored, just like other online merchants.
From a tax compliance perspective, any retailer selling vaping products online must unravel the tax rules by jurisdiction to ensure they collect and pay the correct amount of excise tax. It can be not very easy for online merchants who may accept orders from buyers in a dozen different states in any given week.
For example, suppose you are an online seller of vaping products in Indianapolis. In that case, you don’t have to collect an excise tax on sales made in that state today, but you do have to pay 15% of the total retail sales of the electronics since July 1.
Shipping to buyers in neighboring states in Indiana will require a tax of 1 cent per vapor volume to Ohio buyers. 15% of the wholesale price from Illinois buyers (plus an additional surcharge per milliliter in Cook County or Chicago). $1.50 per closed-system cartridge, or 15% of the wholesale price of all refillable systems sold to Kentucky.
Sales in Michigan do not have any excise tax requirements at all.
Accurate record-keeping is critical.
To comply with the new Indiana law means keeping accurate records of how much you paid your wholesale distributor for each item and how much you sold.
Good records are also needed to document how many items were shipped to each buyer in each state and what they paid for them. There is a need to track sales of battery chargers, which may not be subject to state excise tax but may be subject to state and local sales tax.
There are many challenges. Companies must invoice customers correctly to ensure that the correct taxes are collected.
Altogether, in addition to tax compliance obligations, it would also be a customer service disaster to miscalculate tax rates and charge “MN” rates on goods to “MI” customers (95% wholesale tax in Minnesota) (no vape tax in Michigan).