Background:

Tobacco Products Regulation and Tax.

"Tobacco products" are defined as products that include tobacco prepared to be suitable for chewing or smoking, or for both chewing and smoking, as well as any other product that contains tobacco, and is intended for human consumption or placement in the oral or nasal cavity. This includes cigars, stogies, pipe or other smoking tobacco, snuff, fine-cut and other chewing tobaccos, etc. The term does not include cigarettes or vapor products.

The Other Tobacco Products (OTP) tax is due from a distributor for the sale, use, consumption, handling, and distribution of items defined as "tobacco products," including cigars, pipe tobacco, chewing tobacco, and other forms of tobacco, but excluding cigarettes. The OTP tax is due when the product is brought into or manufactured in Washington for sale in the state. The OTP tax is distinct from the cigarette tax. The OTP tax rate is imposed on the taxable sales price of most tobacco products at a rate of 95 percent. For cigars, the tax is capped at 65 cents per cigar. Dipping tobacco is taxed based on the net weight listed by the manufacturer at the rate of $2.526 per single unit of 1.2 ounces or less, and at a proportionate rate for larger single units. All OTP tax revenue is deposited in the State General Fund. Tobacco product distributors and retailers are subject to various regulatory requirements. Distributors must maintain records of their tobacco product transactions.

Tobacco product distributors and retailers must obtain a license from the Liquor and Cannabis Board (LCB). The distributor license fee is $650, and the retailer license fee is $93, annually. The LCB has the authority to revoke or suspend the license of a retailer or distributor for noncompliance with the OTP tax regulations. The LCB may seize tobacco products from: (1) an unlicensed distributor or retailer; or (2) a distributor or retailer selling tobacco products while their license is suspended or revoked. Shipment and transportation of tobacco products (other than cigars) ordered or purchased by mail, or through the internet, to anyone other than a licensed wholesaler or retailer is prohibited.

Vapor Products.

"Vapor products" are defined in state law to include any noncombustible product that may contain nicotine that employs a heating element or other electronic, chemical, or other means that can be used to produce vapor or aerosol from a solution or other substance. This is inclusive of electronic cigarettes, electronic pipes, and any vapor cartridge or other container that is intended to be used with or in an electronic cigarette or other similar device. The definition does not include cigarettes or other tobacco products.

In 2016 the Legislature established retailer, distributor, and delivery sale licenses administered by the LCB to regulate the sale and distribution of vapor products. Possession of one or more license types is required in order to engage in the sale, distribution, or delivery of vapor products. Vapor products are required to be labeled with various health and safety warnings. It is illegal for a person under the age of 18 to purchase or possess vapor products, and retailers must display signage clearly identifying that the sale of vapor products to persons under age 18 is prohibited.

The use of vapor products is prohibited in various places including inside child care facilities, schools, within 500 feet of schools, school buses, and elevators. The LCB has various enforcement powers related to the sale and distribution of vapor products, including the ability to enter and inspect businesses where vapor products are sold, to suspend or revoke a retailer, distributor, or delivery sale license, and to impose monetary penalties for license violations.

Vapor products are subject to normal sales and use taxes, but are not subject to any additional state taxes.

Tribal Compacting.

The Governor is authorized by statute to enter into compacts and agreements with the Indian tribes of the state regarding matters of mutual interest or concern. Among these contracts are those regarding the sale and taxation of cigarettes. In general, cigarettes sold on Indian lands during a contract term are subject to a tribal cigarette tax equal to the total combined rate of state cigarette and state and local sales and use taxes. Cigarettes sold on Indian land are exempt from state cigarette taxes, and from state sales and use taxes.

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Summary of Substitute Bill:

Vapor Products Tax.

The sale, use, consumption, handling, possession, or distribution of vapor products subject to a tax of 60 percent of the taxable sales price. "Vapor products" are defined as any noncombustible product containing a solution or other consumable substance, regardless of whether it contains nicotine, which employs a mechanical heating element, battery, or electronic circuit that can be used to produce vapor from the solution or other substance. For purposes of taxation, vapor products do not include tobacco cessation products, component ingredients in vapor products, or marijuana or tobacco products. The distributor is responsible for the payment of the tax, but the tax may be imposed on the consumer if it was not previously collected. The tax may be collected only once during the commercial distribution and retail sales process.

The tax applies to preexisting inventories of vapor products. Retailers and distributors must report the tax due on preexisting inventories of vapor products on or before October 31, 2019, and are responsible for payment of the tax by January 31, 2020. A penalty equal to the greater of $250 or 10 percent of the tax due is applied if the preexisting inventory tax is not paid. Bundled transactions that include a vapor product are subject to the tax on the entire selling price of the transaction.

The Department of Revenue (DOR) is responsible for administration of the tax and all agency administrative provisions apply with respect to collection and administration of the tax. The DOR and LCB have various enforcement powers, including inspection of records and premises of distributors and retailers, and seizure of illegally held vapor products. Distributors and retailers of vapor products must keep records, including itemized invoices, of vapor products sold in the state.

Essential Public Health Services Account.

The Essential Public Health Services Account (Account) is created in the State Treasury. For the 2019-21 biennium, the Account will be funded with 75 percent of the proceeds from the vapor products tax. Beginning with the 2021-23 biennium, 60 percent of the proceeds from the vapor products tax will be deposited into the Account.

The Department of Health must use the funds in the Account for four purposes: (1) 33 percent to fund foundational health services; (2) 33 percent to fund tobacco, vapor product, and nicotine control and prevention, and other substance use prevention and education programs; (3) at least 10 percent to support increased access and training of public health professionals at public health programs at institutions of higher education in Washington; and (4) no more than 12.5 percent may be provided to the LCB to enforce vapor products regulations.

Tribal Compacting for Vapor Products.

The Governor is granted the authority to enter into vapor products tax contracts with federally recognized Indian tribes located within the geographic boundaries of the state of Washington. Contracts must require that the tribal vapor products tax rate be 100 percent of the combined sum of the state vapor products tax and state and local sales and use taxes. Contracts with the Puyallup Tribe may set the tribal tax rate at 90 percent of the state vapor products tax. Any vapor products tax agreement with the Puyallup Tribe may also require the tribe to remit to the state 30 percent of all vapor products tax revenue it collects. The tribal vapor products tax is in lieu of all state and local taxes that would otherwise be applicable to sales of vapor products.

The Governor may delegate the power to negotiate vapor product tax contracts to the DOR. The DOR must consult with the LCB during any such negotiations.

Staff Summary of Public Testimony:

(In support) The health impacts of electronic cigarettes and vapor products are huge. Claims of use of electronic cigarettes as a smoking cessation device are not true. People are more likely to smoke cigarettes if they vape. Juul has seen skyrocketing sales, and uses nicotine salts which give the user more nicotine and give it to the user faster and smoother than other vaping devices. This is a real problem for our youth. Many youth thought that when buying a Juul product that it did not have nicotine. This is false. The cost of electronic cigarettes is a fraction of the cost of the same pack of traditional cigarettes. Every other nicotine product is taxed at the 95 percent "other tobacco products" rate. This bill aims for parity surrounding payment of the tobacco products tax. There is a clear correlation between increasing the cost of cigarettes and decreasing the incidence of smoking. This will save lives through the prevention of addiction and smoking. Most claims about cessation of smoking using vaping products are overblown. The money from the bill will go into education, prevention, and foundational health services. Significant increases in the tax code on tobacco products are the most effective ways to reduce the incidence of kids smoking. Vapor products have not yet been approved by the Food and Drug Administration as cessation products. Underage possession of vapor products is subject to a civil infraction. About 20 percent of high school students use e-cigarettes, which is an alarming increase in youth use. These products contain highly addictive nicotine.

(Opposed) This bill will put many small businesses out of business. It will allow only large tobacco and other companies with distribution power to sell vapor products. Online sales are already much cheaper. Vaping is safer than smoking, there are many studies that have shown this. The New England Journal of Medicine says that electronic cigarettes are two times more effective for smoking cessation than traditional approaches. There are ways to keep these out of the hands of kids without harming other consumers. The tax penalizes people for making the correct health care decision. This tax will result in more people returning to the use of cigarettes. It will reduce jobs in the state. This will make vapor industry products out of reach to consumers. Vapor stores are vigilant about preventing underage sales. Vaping has saved lives through the prevention of smoking. Vaping also generates strong community. A real penalty should be provided for underage possession. That would be a better deterrent. There are varying levels of nicotine in different products. Providing vapor products is a public service to help people get off of cigarettes and move towards better health. Many vape shops do not carry Juuls, there are much better ways to quit smoking. Kids are getting cigarettes from convenience stores and gas stations, not from vapor shops. If you really want to stop kids from smoking, then empower the vapor shops that prevent youth access. Raising the cost will not keep vapor products out of the hands of children, they will simply find them elsewhere. Electronic cigarettes are a valid form of harm reduction.