Starting a business can be difficult, and anyone looking to start a business selling e-cigarettes or vape products can easily be overwhelmed. Due to recent panics over e-cigarettes, as well as attempts to curb juvenile drug use, this business has been heavily litigated and regulated, both on the Federal and State level. Here we’ll outline some of the obstacles a potential startup business might face.
Illinois Tobacco Products and its Tax
Firstly, e-cigarettes, vape products, and whatever devices, solutions, or substances affiliated with them are classified by Illinois as Tobacco Products. It does not matter if the vape flavoring has nicotine or not. If it’s designed, produced, or marketed for use as an inhalant, it is a Tobacco Product, and therefore taxable under the Tobacco Products Tax.
The Illinois Tobacco Products Tax is a tax paid by the distributors. Distributors are usually manufacturers or wholesalers, but this can also apply to retailers (as we’ll address below). This tax rate is 15% of the wholesale price of products sold or disposed of over the course of a month. Furthermore, distributors must file a bond of at least $1,000, and after the first year of business, the bond amount must be equal to three times of the distributor’s average monthly tobacco tax liability, or $50,000, whichever is less.
Tobacco Retailer’s License
Retailers need a Tobacco Retailer’s License to sell tobacco products in Illinois – the license itself only costs $75 annually. Retailers are the ones handing the product directly to the customer. However, if a retailer happens to be manufacturing his own goods, or if he’s selling products that have not yet had the Tobacco Products Tax paid on them, then this person will have to register as both a retailer and a distributor.
The PACT Act
The PACT is a federal law that seeks to make cigarette trafficking as difficult as possible. “PACT” literally stands for “Prevent All Cigarette Trafficking.” E-Cigarettes and Vaping both apply. The Act sets stringent requirements for retailers, including double age verification on customers, extra labeling on packages, and then meticulous record-keeping that must be filed in a monthly report to the local state tobacco tax administrator. Anyone engaged in the business of selling these products across state lines will also be required to register with the ATF, the Bureau of Alcohol, Tobacco, Firearms and Explosives (yes, the Bureau’s name does not fit within its acronym), which is the organ of the Federal Government given authority to enforce the PACT Act. These are the smaller challenges.
The larger challenge is a nationwide moratorium on shipping tobacco products. Under the PACT Act, the United States Postal Service is forbidden from shipping these products. FedEx, UPS, and DHL also refuse to ship any tobacco products. Extremely small businesses might manage with personal deliveries, and larger businesses might be able to turn to third-party alternatives. But this leaves a lot of people in the middle who have no way to transport their products.
There is one silver lining on this thundercloud – the PACT Act is concerned with interstate commerce. Small businesses that operate only in Illinois do not need to register with the ATF. But the lack of shipping avenues still stands.
More to Come
As of April 23rd, 2021, Senator Dick Durbin proposed a new federal law that seeks to increase taxes on vape products. This is the “Tobacco Tax Equity Act of 2021,” and its goal is to stamp down on vaping and e-cigarettes by giving them the same tax burden as traditional tobacco products. As of writing this blog, this motion is too early in the legislative process to release any details to the public.
Overall, anyone looking to sell e-cigarettes or vape products has a host of taxes and legal considerations facing them. And it’s very possible these challenges will multiply. If you have any questions, or are looking to start a vape business, please let us know. We’d be happy to help.