Is a novel e-cigarette-style device whose capsule contains granulated tobacco leaves a taxable 'tobacco product' under the Illinois Tobacco Products Tax Act?

Plain-English summary

An Illinois-registered company planned to sell a new device that looked and worked like an e-cigarette: a battery, a cartridge that produced a nicotine-free, tobacco-free vapor, and a separate capsule filled with granulated tobacco leaves that the vapor passed through before the consumer inhaled it. Before launching the product in Illinois, the company asked the Department of Revenue to confirm that the device -- battery, cartridge, and capsule together -- did not meet the statutory definition of "tobacco products" under the Illinois Tobacco Products Act of 1995, 35 ILCS 143/10-5. The company's outside counsel argued that "granulated" tobacco, as used in the statute's list of examples, was really referring to pipe tobaccos and other items meant to be lit and smoked or chewed, and that the capsule -- which was never lit -- fell outside that category.

The Department disagreed and ruled against the requested classification. The statute's definition of "tobacco products" explicitly lists "granulated ... tobacco" as one of the covered forms, and the Department read that definition broadly: the list also sweeps in "shorts," "refuse scraps, clippings, cuttings, and sweeping of tobacco," and a catch-all for "other kinds and forms of tobacco, prepared in such manner as to be suitable for chewing or smoking in a pipe or otherwise." Because a distributor selling a product generally cannot know how the end consumer will ultimately use it, the Department concluded that if tobacco can possibly be smoked or chewed, it is a "tobacco product" subject to tax -- regardless of whether it is packaged inside a modern vaping-style device rather than sold loose.

Applying that reading, the Department found that the granulated tobacco leaves inside the capsule were a taxable tobacco product. The tax itself falls on distributors, not on retailers or consumers, at a rate of 36% of the wholesale price under 35 ILCS 143/10-10 (moist snuff is taxed differently, at $0.30 per ounce). If the company bought the granulated tobacco from an Illinois-licensed distributor, that distributor -- not the company -- owes the tax (though the distributor may choose to pass the cost along without labeling it as "tax"). But if the company instead purchased the granulated tobacco from an unlicensed out-of-state distributor and brought it into Illinois itself, whether in bulk or already loaded into capsules, the company would have to register as a distributor and pay the Tobacco Products Tax directly on the wholesale price of the tobacco brought into the state.

The ruling notes it was issued as a Private Letter Ruling (PLR) binding only on the Department and only as to this taxpayer, and it further states that this PLR "has been supplemented and modified by ST 17-0012-PLR."

What this means for you

If you sell or import a product containing any form of processed tobacco

Do not assume that packaging tobacco inside a modern device -- an e-cigarette-style cartridge, capsule, pod, or similar -- takes it outside the Tobacco Products Tax Act. The statutory definition of "tobacco products" is broad and expressly includes granulated tobacco, and the Department reads it to cover any tobacco that could possibly be smoked or chewed, no matter the delivery mechanism or whether it is ever lit.

If you are a distributor bringing tobacco into Illinois

Who owes the tax depends on the supply chain. Buying granulated tobacco from an Illinois-licensed distributor generally means that distributor is the one liable for the 36%-of-wholesale-price tax (they may or may not pass the cost to you, but cannot call it "tax" if they do). Buying from an unlicensed out-of-state source and bringing the tobacco into Illinois yourself -- in bulk or already packaged -- makes you the distributor responsible for registering with the Department and paying the tax on the wholesale price.

If you're relying on this specific ruling

This is a Private Letter Ruling: it binds the Department only as to the taxpayer who requested it, and only to the extent the facts given were complete and accurate. The ruling text itself states it "has been supplemented and modified by ST 17-0012-PLR," so anyone researching this classification question should be aware a related, later ruling exists on the same general topic.

Common questions

Does putting tobacco inside an e-cigarette-style device avoid the Tobacco Products Tax?
No. The Department ruled that a capsule containing granulated tobacco leaves is still a "tobacco product" under 35 ILCS 143/10-5, even when it is part of a battery-and-cartridge vaping device, because the statutory definition explicitly includes granulated tobacco and is construed broadly to cover anything that could possibly be smoked or chewed.

Who actually pays the Tobacco Products Tax -- the manufacturer, the distributor, or the consumer?
The tax is imposed on distributors, not on retailers or consumers. Under 35 ILCS 143/10-10, a distributor selling or otherwise disposing of tobacco products to retailers or consumers in Illinois owes tax equal to 36% of the wholesale price (moist snuff is taxed at $0.30 per ounce instead).

What if I buy the tobacco from an out-of-state supplier who isn't registered in Illinois?
If you bring granulated tobacco leaves into Illinois yourself -- whether loose or already inside capsules -- after buying from an unlicensed out-of-state distributor, you must register as a distributor with the Illinois Department of Revenue and pay the Tobacco Products Tax on the wholesale price of that tobacco.

Can I rely on this ruling for my own similar product?
Not directly. This is a Private Letter Ruling, which under 2 Ill. Adm. Code 1200.110 binds the Department only as to the specific taxpayer who requested it and only if the facts described were complete and correct. The ruling also notes it has been supplemented and modified by a later ruling, ST 17-0012-PLR.

Citations and references

• 35 ILCS 143/10-5 -- Illinois Tobacco Products Act of 1995, definition of "tobacco products" and "distributor"
• 35 ILCS 143/10-10 -- Illinois Tobacco Products Act of 1995, imposition of the tax on distributors
• 2 Ill. Adm. Code 1200.110 -- Department regulation governing Private Letter Rulings
• 2 Ill. Adm. Code 1200.120 -- Department regulation governing General Information Letters
• 410 ILCS 82/10 -- Smoke Free Illinois Act, definition of "smoke" or "smoking"
• 410 ILCS 64/10 -- Smoke-Free Campus Act, definition of "smoke" or "smoking"
• People v. Diggins, 919 N.E.2d 327, 332 (Ill. 2009) (quoting Hayes v. Mercy Hosp. & Med. Ctr., 557 N.E.2d 873, 885 (Ill. 1990) (Calvo, J. dissenting)) -- cited by the taxpayer for the noscitur a sociis canon of statutory interpretation
• Related ruling referenced in the text: ST 17-0012-PLR (stated to supplement and modify this ruling)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2017.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2017/st-17-0010-plr.pdf

Original ruling text

ST 17-0010-PLR 09/22/2017 TOBACCO PRODUCTS TAX ACT
The tax is on any person engaged in business as a distributor of tobacco
products. See 35 ILCS 145/10-10). This PLR has been supplemented and
modified by ST 17-0012-PLR. (This is a PLR.)

September 22, 2017

Request for Confirmation of Product Tax Classification Under the Illinois Tobacco
Products Act of 1995
Dear Xxxxx:
This letter is in response to your letter dated April 12, 2017 in which you
requested information. The Department issues two types of letter rulings. Private Letter
Rulings (“PLRs”) are issued by the Department in response to specific taxpayer
inquiries concerning the application of a tax statute or rule to a particular fact situation.
A PLR is binding on the Department, but only as to the taxpayer who is the subject of
the request for ruling and only to the extent the facts recited in the PLR are correct and
complete. Persons seeking PLRs must comply with the procedures for PLRs found in
the Department’s regulations at 2 Ill. Adm. Code 1200.110. The purpose of a General
Information Letter (“GIL”) is to direct taxpayers to Department regulations or other
sources of information regarding the topic about which they have inquired. A GIL is not
a statement of Department policy and is not binding on the Department. See 2 Ill. Adm.
Code 1200.120. You may access our website at www.tax.illinois.gov to review
regulations, letter rulings and other types of information relevant to your inquiry.
Review of your request disclosed that all the information described in paragraphs
1 through 8 of Section 1200.110 appears to be contained in your request. This Private
Letter Ruling will bind the Department only with respect to COMPANY, for the issue or
issues presented in this ruling, and is subject to the provisions of subsection (e) of
Section 1200.110 governing expiration of Private Letter Rulings. Issuance of this ruling
is conditioned upon the understanding that neither COMPANY, nor a related taxpayer is
currently under audit or involved in litigation concerning the issues that are the subject
of this ruling request. In your letter you have stated and made inquiry as follows:
On behalf of COMPANY (“COMPANY”), a registered Illinois business
(Illinois Secretary of State File ####), I am writing to the Illinois
Department of Revenue concerning tobacco product definitions and
classification, for the purposes of taxation as outlined in the Tobacco
Products Act of 1995, of a novel product known as “PRODUCT” that will
enter commerce in the State of Illinois later this year.
The PRODUCT is similar to an e-cigarette, except it contains a capsule
with granulated tobacco leaves. The product also contains a battery and
cartridge. Vapor, in the form of an aerosol, is generated from the liquid in

ST 17-0010-PLR
Page 2
the cartridge, which does not contain nicotine or tobacco. The vapor
passes through the tobacco capsule, which the consumer then inhales.
Illinois’ Tobacco Product Act of 1995 defines “tobacco products” as
follows:
“[t]obacco products” means any cigars, including little cigars;
cheroots; stogies; periques; granulated, plug cut, crimp cut,
ready rubbed, and other smoking tobacco; snuff (including
moist snuff) or snuff flour; cavendish; plug and twist tobacco;
fine-cut and other chewing tobaccos; shorts; refuse scraps,
clippings, cuttings, and sweeping of tobacco; and other kinds
and forms of tobacco, prepared in such manner as to be
suitable for chewing or smoking in a pipe or otherwise, or
both for chewing and smoking; . . . . [35 Ill. Comp. Stat.
143/10-5 (ellipses omitting impertinent exceptions)]
The PRODUCT device battery and cartridge do not contain tobacco,
therefore we do not believe they are to be considered a tobacco product.
Although the capsules contain granules of tobacco, the term “granulated”
in the Act does not appear to encompass them in the statutory context.
Under noscitur a sociis, “[t]he meaning of questionable words or phrases
in a statute may be ascertained by reference to the meaning of words or
phrases associated with it.” People v. Diggins, 919 N.E. 2d 327, 332 (Ill.
2009) (quoting Hayes v. Mercy Hosp. & Med. Ctr., 557 N.E.2d 873, 885
(Ill. 1990) (Calvo, J. dissenting)). The word “granulated” appears in this
list: “granulated, plug cut, crimp cut, ready rubbed, and other smoking
tobacco.” 35 Ill. Comp. Stat. 143/10-5 (emphasis added). These are
various pipe tobaccos, as further clarified by the use of “other smoking
tobacco.” See Webster’s Third New International Dictionary of the English
Language, supra, at 2152 (defining “smoking tobacco” as “tobacco
suitable for the manufacture of cigarettes and pipe tobacco”). This class
of tobaccos does not include the PRODUCT capsules.
Further, the statute’s definitional language of “other kinds and forms of
tobacco, prepared in such manner as to be suitable for chewing or
smoking in a pipe or otherwise, or both for chewing and smoking;” 35 Ill.
Comp. Stat. 143/10-5 does not fit as a classification for PRODUCT
Capsules. Very clearly, PRODUCT capsules have not been “prepared in
such a manner as to be suitable for chewing or smoking in a pipe” and
have not been prepared “both for chewing and smoking.”

ST 17-0010-PLR
Page 3
To address any ambiguity resulting from the term “smoking”, which is
undefined in the Tobacco Products Act of 1995, one may look to where
the Illinois Legislature has elsewhere defined the term.
Under the Smoke Free Illinois Act definition:
“Smoke” or “smoking” means the carrying, smoking, burning,
inhaling, or exhaling of any kind of lighted pipe, cigar,
cigarette, hookah, weed, herbs, or any other lighted smoking
equipment. “Smoke” or “smoking” means the carrying,
smoking, burning, inhaling, or exhaling of any kind of lighted
pipe, cigar, cigarette, hookah, weed, herbs, or any other
lighted smoking equipment. . . [410 Ill. Comp. Stat. 82/10
(emphasis added)]
To similar effect is the first part of the Smoke-Free Campus Act: “’Smoke’
or ‘smoking’ means the carrying, smoking, burning, inhaling, or exhaling of
any kind of lighted pipe, cigar, cigarette, hookah, weed, herbs, or other
lighted smoking equipment . . .” Id. 64/10 (emphasis added) (alteration in
original) (ellipses omitting impertinent exceptions).
No aspect of PRODUCT involves “lighting” or as a consequence,
“smoking” – at least as the term has been defined and understood by the
Illinois Legislature.
COMPANY would like to understand if the Department of Revenue agrees
with COMPANY and its guidance from outside counsel that, based on the
facts outlined above, for the purposes of taxation and product
classification, the PRODUCT, including individual elements of battery,
cartridge and capsule, does not meet the statutory definition of “tobacco
products”, as defined in the Illinois Tobacco Products Act of 1995, 35 Ill.
Comp. Stat. 143/10-5.
Enclosed are renderings of the PRODUCT device, cartridge and capsule
to illustrate the products specifications and operation.
There are currently no tax periods at issue, as the product has yet to enter
commerce in the State of Illinois. However, 2017 is expected to be the
applicable tax year in future.
To the best of COMPANY’s knowledge, the Department has not
previously ruled on this specific matter concerning PRODUCT, nor on a
materially similar issue given the novelty of the product in question.

ST 17-0010-PLR
Page 4
To the best of COMPANY’s knowledge, given the specificity and novelty of
the product in question, the above represents a discussion of the relevant
statutes and authorities in question, including those both favorable and
contrary to the taxpayer’s viewpoint.
Thank you in advance for your assistance in this matter. We would
welcome the opportunity to discuss this matter verbally or in-person to
provide greater clarity as necessary. Please do not hesitate to contact me
if you have any questions about the product and/or its operation.
DEPARTMENT’S RESPONSE:
A tax is imposed on any person engaged in business as a distributor of tobacco
products, as defined in Section 10-5, at the rate of 36% of the wholesale price of
tobacco products sold or otherwise disposed of to retailers or consumers located in this
State; except that, beginning on January 1, 2013, the tax on moist snuff shall be
imposed at a rate of $0.30 per ounce, and a proportionate tax at the like rate on all
fractional parts of an ounce, sold or otherwise disposed of to retailers or consumers
located in this State. 35 ILCS 143/10-10. The impact of the tax levied by this Act is
imposed upon distributors engaged in the business of selling tobacco products to
retailers or consumers in this State.
"Tobacco products" means any cigars, including little cigars; cheroots;
stogies; periques; granulated, plug cut, crimp cut, ready rubbed, and other
smoking tobacco; snuff (including moist snuff) or snuff flour; cavendish;
plug and twist tobacco; fine-cut and other chewing tobaccos; shorts;
refuse scraps, clippings, cuttings, and sweeping of tobacco; and other
kinds and forms of tobacco, prepared in such manner as to be suitable for
chewing or smoking in a pipe or otherwise, or both for chewing and
smoking; …
"Distributor" means any of the following:
(1)

Any manufacturer or wholesaler in this State engaged in the
business of selling tobacco products who sells, exchanges, or
distributes tobacco products to retailers or consumers in this
State.

(2)

Any manufacturer or wholesaler engaged in the business of
selling tobacco products from without this State who sells,
exchanges, distributes, ships, or transports tobacco products
to retailers or consumers located in this State, so long as that
manufacturer or wholesaler has or maintains within this State,
directly or by subsidiary, an office, sales house, or other place

ST 17-0010-PLR
Page 5
of business, or any agent or other representative operating
within this State under the authority of the person or
subsidiary, irrespective of whether the place of business or
agent or other representative is located here permanently or
temporarily.
(3)

Any retailer who receives tobacco products on which the tax
has not been paid.

The tax is imposed on the distributors of tobacco products, not the retailer or
consumer.
At the time the distributor sells the tobacco product to a retailer or
consumer, the distributor must determine whether the product meets the definition of
“tobacco product.”
The definition of “tobacco products” identifies common types of products that are
generally considered to be included within the definition: cigars; various forms or types
of tobacco that are smoked, although the list is not all-inclusive; snuff; various forms of
chewing tobacco, although the list is not all-inclusive; miscellaneous forms of tobacco,
such as refuse or scraps; “and other kinds and forms of tobacco, prepared in such
manner as to be suitable for chewing or smoking in a pipe or otherwise”.
The definition must be construed broadly. Although it identifies specific types of
tobacco that are generally smoked or chewed, the definition explicitly includes “shorts;
refuse scraps, clippings, cuttings, and sweeping of tobacco”. The definition concludes
by including “other kinds and forms of tobacco, prepared in such manner as to be
suitable for chewing or smoking in a pipe or otherwise.” After reviewing the definition,
the inescapable conclusion is, if one can possibly smoke or chew the tobacco, the
product is a “tobacco product” and subject to tax. This is the analysis the distributor
must make because the distributor is not in the position of knowing what the ultimate
use of the product will be.
Your letter states that the capsules contain granulated tobacco leaves.
Granulated tobacco is explicitly identified in the definition of the “tobacco products.” If
you purchase the granulated tobacco from an Illinois distributor, the distributor must pay
tax on the granulated tobacco leaves sold to COMPANY. The distributor may or may
not elect to pass the tax to COMPANY. If it does, the distributor may not identify the
reimbursement as a tax.
If the granulated tobacco leaves are purchased from an unlicensed out-of-State
distributor and brought into Illinois by COMPANY, whether in bulk or contained in
capsules, COMPANY must register as a distributor and pay tax on the wholesale price
of the granulated tobacco leaves brought into Illinois.

ST 17-0010-PLR
Page 6
If you have further questions related to the Illinois sales tax laws, please visit our
website at www.tax.illinois.gov or contact the Department’s Taxpayer Information
Division at (217) 782-3336.
Very truly yours,

Richard S. Wolters
Chairman, Private Letter Ruling Committee

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