The 30 U.S. states now impose excise taxes on e-cigarettes and have not yet imposed a federal tax

Blue Hole New Consumption Report, February 26 news, according to foreign news reports, 30 states in the United States and the District of Columbia began a new year of taxation of e-cigarette products and e-cigarettes on January 1.

This is a rapid growth in just a few years. For example, in 2015, only three states and the District of Columbia imposed taxes on e-cigarette products. But since then, a steady stream of states have either expanded existing tobacco excise taxes to include e-cigarette products or passed tax laws that specifically tax e-cigarettes or e-cigarette juices.

This is a huge change for e-cigarette product sellers in a short period of time. Ten years ago, an e-cigarette retailer only had to worry about taxes in its state. Today, every shipment a retailer conducts across state lines may be subject to varying degrees of excise duty – or none at all.

Accurate calculations and reporting become very difficult.

Thirty different sets of state rules

There are many federal restrictions on the sale of e-cigarette products, but at least for now, the United States does not impose a federal tax on e-cigarette products.

Instead, sellers of e-cigarette products must impose state excise taxes on their products, although two states have sales taxes specific to e-cigarettes. Some states also allow local jurisdictions to establish their own e-cigarette taxes.

For e-cigarette retailers selling online, the need to comply with the laws and regulations of the customer's state, including sales tax association requirements, adds complexity.

At this point, it is easier to list states that do not have excise taxes on e-cigarette products than it is to list states that have excise taxes.

According to the Federation of Tax Administrators, the states that did not have e-cigarette taxes as of February 2022 were: Alabama, Arizona, Arkansas, Florida, Hawaii, Idaho, Iowa, Michigan, Mississippi, Missouri, Montana, Nebraska, Oklahoma, Rhode Island, South Carolina, South Dakota, Tennessee, and Texas.

At the time of writing, Indiana does not have a state e-cigarette excise tax, but it will take effect on July 1 this year. Alaska doesn't have a statewide excise tax on e-cigarettes, but some cities in the state impose local taxes, including Anchorage and Juneau.

As of January 1, all other U.S. states (as well as the District of Columbia, Puerto Rico, and the U.S. Virgin Islands) have imposed excise taxes on e-cigarettes. In addition, two states currently have local jurisdictions that impose additional excise taxes on e-cigarette products: Chicago, Illinois, Cook County, and Montgomery County, Maryland.

More states may soon start imposing excise taxes on e-cigarette products. Our last count was that 12 states were considering adding specific e-cigarette taxes.

The current rules are complex

There are two basic ways to calculate the consumption tax on e-cigarette products: as a percentage of the sales price or as a volume tax, for e-cigarette appliances, calculated per unit, and for e-cigarette oil, calculated per milliliter.

In some states, it can be both. For example, Illinois imposes a 15 percent excise tax on the wholesale price of all e-cigarette products sold anywhere in the state; however, Cook County and Chicago impose a surcharge of 20 to 55 cents per milliliter on e-cigarette oil sold within their jurisdiction.

Similarly, Connecticut, Georgia and Kentucky tax certain e-cigarette products at a unit rate, while others are taxed as a percentage of the wholesale price.

Most states tax the percentage of the sales price and raise taxes at the wholesale level, however, Maryland and New York add specific e-cigarette excise taxes at the retail level.

In addition, Maryland is one of eight states that impose different excise taxes on different products.

In Maryland, the tax rate for a cigarette bomb of 5 milliliters or more is 60% of the retail price; otherwise, it is 12%. Puerto Rico did the same, imposing a tax of $3 per unit and a tax of 5 cents per unit on e-cigarettes. A ml tax is levied on nicotine solutions.

Among states that charge based on percentage of wholesale prices, there is a huge difference in rates between Minnesota (95 percent) and Vermont (92 percent), with the latter having the highest rate, while New Hampshire's wholesale rate of 8 percent (open units) is the lowest of all states with any tax.

In states that charge per milliliter, excise tax rates range from 5 cents per milliliter in Delaware, Kansas, North Carolina, and Wisconsin to 40 cents per milliliter imposed on closed containers in Connecticut.

Sell online

E-cigarette products and e-cigarettes do not exist in a purely local market. The data shows that online sales account for a large portion of total purchases, accounting for about 28% of total purchases in the United States.

Traditional retailers — mostly convenience stores, grocery stores and pharmacies — are the go-to destination for e-cigarette users, selling a little more than half of all e-cigarettes purchased nationwide.

Most of the public debate about the online sale of e-cigarette products has focused on the requirement to restrict underage purchasers.

However, just like other online merchants, tax compliance is a major issue that cannot be ignored.

From a tax compliance perspective, any retailer selling online e-cigarettes would have to unravel the tax rules by jurisdiction to ensure they collect and pay the correct amount of GST. This can be a complicated thing for online merchants, who may accept orders from buyers from more than a dozen different states in any given week.

For example, if you're an online e-cigarette product seller in Indianapolis, you don't have to levy excise tax on sales made in the state today, but you do have to pay a 15 percent tax on total retail sales of electronics. Cigarettes are sold starting July 1.

If a product is shipped to a buyer in a neighboring state of Indiana, a tax of 1 cent per steam volume is levied on the Ohio buyer, 15 percent of the wholesale price is charged from the Illinois buyer (plus an additional milliliter tax if they are in Cook County or Chicago), and the tax is $1.50 per closed cigarette, or 15 percent of the wholesale price of all refillable systems sold to Kentucky.

Sales in Michigan do not have any excise tax requirements at all.

Accurate documentation is essential

That means keeping an accurate record of how much you pay to wholesale distributors for each item, and how much you sell — just to comply with the new Indiana law.

Good records are also needed to record how many items were shipped to each buyer in each state, and how much they paid for it. Sales of items such as battery chargers need to be tracked, which may not be subject to state excise taxes but may be subject to state and local sales taxes.

There are a lot of challenges. Companies must properly invoice customers to ensure that the correct taxes are charged.

Completely in addition to tax compliance obligations, if the tax rate is miscalculated and the "MN" tax rate is charged to the goods of the "MI" customer (95% wholesale tax in Minnesota), it will also be a customer service disaster (Michigan no e-cigarette tax).