E-Cigarette and Vape Product Regulations

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.

Dissolution and Winding Up a Business

Since the beginning of the pandemic, one of the main questions I get from struggling business owners is how to dissolve a business or declare bankruptcy. There is a litany of reasons to close your business. The most common problem right now is that company owners get so in debt to their landlords and vendors that, even if business suddenly turned around, they won’t be able to dig themselves out of debt. When faced with that situation, sometimes the only answer is to wrap up the business.

Dissolution vs. Bankruptcy

If you’ve decided to close your business, you might wonder if declaring bankruptcy is a good option for you. For most owners, bankruptcy for the business usually means bankruptcy for them personally. This occurs because most business owners have personally guaranteed the debts of their company. Therefore, if they declare bankruptcy in their business, the debts would simply pass to them personally. Then they would need to either pay the debts themselves or declare personal bankruptcy to avoid the liability. For many owners that is not a good option.

By dissolving the company, an owner still maintains the power to negotiate the debts owed. In many cases, the creditor is willing to negotiate to settle the claim. For example, a landlord will usually agree to settle an outstanding balance if it means terminating the lease. They get some money and, hopefully, a new renter that can actually afford to pay.

I don’t want to give the impression that all creditors negotiate. The fact is that some creditors have been unwilling to work with debtors during the pandemic, and because most of the protections put in place don’t apply to businesses, creditors are not as incentivized to negotiate. For example, there is no moratorium on evictions for commercial spaces.

Dissolution Triggers

How do you start a dissolution? Pursuant to 805 ILCS 180/35-1, dissolution can be commenced in one of five ways: (1) upon an occurrence of an event specified in the operating agreement, (2) upon the consent of all members, (3) if there are no members for 180 days, (4) by judicial decree, or (5) if the company has been administratively dissolved.

The most common of the above circumstances is based on consent of all members. Basically, everyone agrees that it’s time to close the business.

What if the owners can’t agree? One member may petition the court to dissolve the company. In that case, the company will be dissolved under the fourth item listed above.

What Happens in a Dissolution?

When you dissolve a company or LLC, you must satisfy all debts to creditors before distributing anything to the owners of the company. Pursuant to 805 ILCS 180/35-10, only after everything is satisfied can the rest be divided among the owners of the company.

That seems fairly straightforward, but in practice this can get a bit messy. For example, what if an owner is also a creditor? If an owner loaned the business money, which happens all the time, that owner may be eligible to receive payment for its loan before a distribution can be made to the owners. This can cause quite a bit of in-fighting among members of a company.

 What Can Go Wrong in a Dissolution?

The easy answer is that a lot can go wrong. Obviously, the larger the company and more complex the structure, the more trouble is caused. Generally, if the owners pocket money or assets without observing formalities, they will be liable to other owners and creditors. The dissolution cannot turn into a free-for-all.

In the event formalities are not followed, creditors will likely be able to pierce the corporate veil, which means target owners individually. Therefore, if you don’t follow the rules, you run the risk of being held personally liable for the debts of the company, essentially defeating the purpose of the limited liability company.

Commercial Leases – Part 4

It’s been a while since I wrote about commercial leases, but I wanted to finish up my series by discussing use, maintenance and repairs, and subleasing. If you’re interested in my last articles, you can find them here.

Use

When I discuss use in the context of a lease, I’m referring to the way that a tenant is allowed to use it’s space. Technically, a lease allows you exclusive possession of a space to use as you like, but most leases limit your use to something reasonable for the building.

For example, I have an office in a bank building. There are other offices in the building. I’m permitted to use my space for any reasonable office function. I happen to run a law firm, but I could be an accountant or architect or something similar. I cannot open a glass blowing studio. That would require serious changes to my space that are not permitted by my lease.

Other specific uses might be outright banned by a lease. For example, it’s common for a retail lease to ban using the space for a second-hand resale shop. That’s because the landlord wants to project a certain image of its tenants and a resale shop might detract from that image.

Dangerous uses are usually banned as well. No storing dangerous items, for example. You’ll also see provisions banning strip clubs and adult book stores. The image is a problem, but there are also liability issues associated with those locations.

Maintenance and Repairs

Who is responsible for maintenance? This is a hot topic among clients. It usually comes up when something breaks. That’s when a tenant learns that they are on the hook for a new furnace or HVAC unit. A tenant should always review this section of the lease very closely, and if they’re responsible for maintenance of big-ticket items, they should learn about how old those items are and factor the cost of repair or replacement into the cost of their lease.

Generally, the larger your space, the more you’ll be responsible for. If you rent a small office, you might not be responsible for anything. My building pays for lightbulbs, for example. It’s common to be responsible for anything directly within your unit. If you have a bathroom, you’re probably responsible for unclogging it, etc. Normally, you don’t have to pay for items that are shared between units, like an HVAC unit. However, landlords try to add these things in whenever they can.

If you rent an entire building, you’re probably responsible for much more. This is especially true if you have a longer lease. Furnaces, HVAC, and plumbing are all usually your responsibility. Therefore, as the tenant, you should inspect those items to determine what repairs or replacement will be necessary and budget those costs into running your business.

Subleasing

Subleasing is another hot topic because most leases explicitly say you cannot sublease your space. Tenants don’t usually notice these provisions until they want to sublease. Then it becomes a problem.

Almost every lease says that the landlord must approve a sub-tenant, but there is usually another line that states that the landlord shall not unreasonably withhold its approval. Sometimes landlords remove that line, but the courts will still hold them to that standard. The landlord can’t turn away a reasonable sub-tenant.

The original tenant is usually still on the hook if the new tenant doesn’t pay. That is standard. Therefore, you should not bring a sub-tenant who you don’t believe will pay the rent. You could be on the hook for two leases if you’re not careful.

The other thing to consider is that if you bring a new tenant to a building and want to break your lease, they pretty much have to accept the new tenant as a sublessor because suing you for unpaid rent will be extremely difficult. This is due to a legal concept known as a duty to mitigate damages. If I break my lease, you can sue me for the unpaid rent until you found a new tenant and for the difference between what I should have paid and what the new tenant is paying. A landlord can’t just leave a space vacant. They have a duty to release the space in order to reduce their damages. If you literally bring them a new tenant, they have to accept it so long as it’s reasonable because if they don’t, they are failing that duty.

Conclusion

I have posted four articles about commercial leases covering all sort of topics. I think this will be my last one, but if you have any specific questions about leases or anything else, please free feel to reach out to me at john@johnfbakerlaw.com.