Are non-combustible tobacco capsules used in a vaping device taxable 'tobacco products' under the Illinois Tobacco Products Tax Act?

Plain-English summary

A company that imports a tobacco vaping capsule product ("PRODUCT") asked the Illinois Department of Revenue's Private Letter Ruling Committee to reconsider an earlier determination about whether its capsules were subject to the Illinois Tobacco Products Tax. The company sells PRODUCT to Illinois consumers over the internet and to retailers, both directly and through distributors. It does not manufacture PRODUCT itself; it imports the completed capsules and components, which are made by contract manufacturers.

The Tobacco Products Tax Act of 1995 taxes any person engaged in business as a distributor of "tobacco products," generally at 36% of the wholesale price (with a separate per-ounce rate for moist snuff). See 35 ILCS 143/10-10. The key legal question was whether PRODUCT's tobacco capsules fall within the statutory definition of "tobacco products" in 35 ILCS 143/10-5, which covers cigars, snuff, chewing 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."

The company explained that PRODUCT works by generating a vapor that passes over the tobacco in a sealed capsule, extracting flavor and nicotine -- there is no lighting, burning, or combustion, and the capsule is usable only with the PRODUCT device. It supported this with a determination from the U.S. Treasury's Alcohol and Tobacco Tax and Trade Bureau (TTB) that the product is not a taxable "tobacco product" under federal law, plus a similar determination from a state professional-regulation agency.

Based on these facts, the Department agreed that the capsules and the tobacco inside them are not suitable for chewing or smoking and therefore fall outside the statutory definition -- so they are not subject to the Tobacco Products Tax. This ruling explicitly supplements and modifies the Department's prior private letter ruling on the same product, ST 17-0010-PLR (dated September 22, 2017), which had reached a different conclusion before the company supplied the additional facts described above.

What this means for you

If you sell a heat-not-burn or vaping tobacco product in Illinois

Whether your product is a taxable "tobacco product" under 35 ILCS 143/10-5 depends heavily on the specific facts: how the product is used, whether it is ever combusted or lit, and whether the tobacco component is "suitable for chewing or smoking." This ruling shows the Department will look closely at the mechanics of the device (heating vapor vs. combustion) and give weight to supporting documentation, such as a TTB determination on the same product's tax status.

If an earlier Illinois ruling addressed your product

This ruling illustrates that the Department can revisit and modify a prior private letter ruling on the same product when the taxpayer provides additional facts or evidence -- here, the September 22, 2017 predecessor ruling was superseded by this later, more favorable determination after the company submitted further analysis and enclosures. If you believe an earlier ruling on your product was based on an incomplete record, you may be able to request reconsideration by providing additional facts.

Remember this is taxpayer-specific

Because this is a Private Letter Ruling, it binds the Department only as to this particular company and only to the extent the facts it described are accurate and complete. Other sellers of similar products cannot rely on this ruling directly; they would need to request their own PLR or General Information Letter to get Department guidance on their specific product.

Common questions

Q: Does this ruling mean all vaping products are exempt from the Illinois Tobacco Products Tax?
A: No. The Department's conclusion here was based on specific facts about this one product -- a sealed, non-combustible capsule usable only with a particular device, imported as a finished component. Other vaping or tobacco-derived products could be taxed differently depending on their own facts.

Q: What made the Department change its mind from the earlier ruling?
A: The company provided additional facts and attachments that were not available when the Department made its earlier ruling, including that the product is imported as a completed plastic capsule not suitable for chewing or smoking. Based on these new facts, the Department determined the capsules are not subject to the tax.

Q: What is the difference between the tax rate on regular tobacco products and moist snuff?
A: Under 35 ILCS 143/10-10, tobacco products are generally taxed at 36% of the wholesale price sold or disposed of to retailers or consumers in Illinois, except that moist snuff has been taxed at $0.30 per ounce (and a proportionate rate on fractional ounces) since January 1, 2013.

Q: How long does this ruling remain binding on the Department?
A: Under 2 Ill. Adm. Code 1200.110(e), the ruling is revoked and ceases to bind the Department 10 years after the date of the letter, or earlier if there is a pertinent change in statutory law, case law, rules, or the facts recited in the ruling.

Citations and references

• 35 ILCS 143/10-10 -- imposes the Tobacco Products Tax on distributors, sets the 36% wholesale-price rate and the $0.30-per-ounce moist snuff rate
• 35 ILCS 143/10-5 -- defines "tobacco products" for purposes of the Act
• 2 Ill. Adm. Code 1200.110 -- Private Letter Ruling procedures and requirements
• 2 Ill. Adm. Code 1200.110(e) -- governs expiration/revocation of Private Letter Rulings (10-year limit)
• 2 Ill. Adm. Code 1200.120 -- General Information Letter procedures
• 26 U.S.C. § 5702(n) -- federal definition of tobacco to be smoked in a pipe
• 26 U.S.C. § 5702(o) -- federal definition of tobacco for making cigarettes or cigars
• ST 17-0010-PLR (September 22, 2017) -- the Department's prior private letter ruling on the same product, which this ruling supplements and modifies

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-17-0012-plr.pdf

Original ruling text

ST 17-0012-PLR 12/27/2017 TOBACCO PRODUCTS TAX ACT
The tax is imposed on any person engaged in business as a distributor of tobacco products.
See 35 ILCS 145/10-10). (This is a PLR.) This PLR supplements and modifies ST 17-0010PLR, dated September 22, 2017.

December 27, 2017

RE:

COMPANY

Dear Xxxxx:
This letter is in response to your letter dated October 20, 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:
This firm represents COMPANY. I write on behalf of COMPANY in response to your
letters dated September 22 and June 14, 2017. I apologize for the delay in responding
to your June 14 Letter, and have included responses to the questions raised in that
letter.
In addition, we request the PLR Committee’s reconsideration of the
determinations in your September 22 letter with the benefit of our responses as well as
the supplemental analysis and enclosures herein.
For your consideration, please find enclosed the determination of the U.S. Department
of Treasury’s Alcohol and Tobacco Tax and Trade Bureau (“TTB”) that PRODUCT is
not a taxable “tobacco product,” the determination of the STATE Department of
Business and Professional Regulation that PRODUCT is not a taxable “tobacco

ST 17-0012-PLR
Page 2

product”: and
determination.

renderings

of

PRODUCT’s

packaging

consistent

with

TTB’s

SUPPLEMENTAL ANALYSIS
As an initial matter, we note that “[a] tax statute must be strictly construed against the
government and in favor of the taxpayer.” Kankakee Cnty. Bd. of Review v. Prop. Tax
Appeal Bd., 226 Ill, 2d 36, 52, 871 N.E.2d 38, 47 (2007). “The obligation of citizens to
pay taxes is purely a statutory creation, and taxes can be levied, assessed and
collected only in the manner expressly spelled out by statute.” Millennium Park Joint
Venture, LLC v. Houlihan, 241 Ill. 2d 281, 295, 948 N.E.2d 1, 10 (2010).
The frame of reference here is the meaning of the “tobacco products” definition in 35 Ill.
Comp. Stat. 143/10-5. We do not believe that PRODUCT falls within this definition.
Insofar as one might suggest a connection between PRODUCT and the term
“granulated” tobacco, the statutory definition refers only to a specific sort of smoking
tobacco. This is evident from the term’s appearance alongside “plug cut, crimp cut,
ready rubbed” – all, specific smoking tobaccos – in a list culminating with “other
smoking tobacco.” See 35 Ill. Comp. Stat. 143/10-5 (emphasis added); Envtl. Prot.
Agency v. Pollution Control Bd., 186 Ill. App. 3d 995, 999, 542 N.E.2d 1141, 1143
(1989) (“[W]here two words or phrases of analogous meaning are employed together in
a statute, they are understood to be used in their cognate sense, to express the same
relations, and give color and expression to each other.”); cf., e.g., Venable v. Richards,
28 F. Cas. 1144, 1146 (C.C.E.D. Va. 1876) (No. 16,913) (observing, of the federal
excise statute’s use of “granulated tobacco,” that the court “must interpret it according to
the context” and, so doing, that ‘“granulated tobacco’ must be classed as a species of
chewing or smoking tobacco”), aff’d, 105 U.S. 636 (1881). No aspect of PRODUCT
falls within this class of smoking tobaccos as PRODUCT involves no smoking of
tobacco in a pipe, cigarette, cigar, or the like. The taxable smoking tobaccos, therefore,
as something much different from PRODUCT’s tobacco. Cf. Karlheinz Millitzer,
Smoking Tobacco, in Tobacco Encyclopedia pt. ll, at 432 (Ernst Voges ed., 1984) (“The
collective term ‘smoking tobacco’ can be understood to mean a) fine-cut for handmade
cigarettes, and b) pipe tobacco for smoking in tobacco pipes.” (emphasis added));
Smoking tobacco, Webster’s Third New International Dictionary of the English
Language 2152 (unabr. 2002) (“tobacco suitable for the manufacture of cigarettes and
pipe tobacco – compare BURLEY, MARYLAND”)
Insofar as one might suggest a connection between PRODUCT and the possibility of
smoking, the statutory inquiry is whether the product has been “prepared in such
manner as to be suitable for … smoking in a pipe or otherwise.” 35 Ill. Comp. Stat.
143/10-5 (emphasis added). PRODUCT’s tobacco capsules are suitable for use only
with PRODUCT, and there is no lighting, no combustion, and no smoking with them.
Simply put, there is no smoking with PRODUCT – and the capsules are neither suitable
for smoking nor intended to be smoked. And even if this issue were unclear, any
doubts must be resolved in COMPANY’s favor as the taxpayer. Kankakee Cnty. Bd. of
Review, 226 Ill. 2d at 52, 871 N.E.2d at 47; e.g., Final Order, COMPANY, No. 201707497, ¶¶ 30-31 (Fla. Dep’t of Bus. & Prof’l Regulation Sept. 21, 2017) (enclosed)

ST 17-0012-PLR
Page 3
(observing that “it is not clear that the product, as presented, qualifies as “loose tobacco
suitable for smoking”’ and quoting the rule of tax statutes’ strict construction in the
taxpayer’s favor).1
The foregoing is even more compelling given TTB’s determination that PRODUCT
incudes no taxable “tobacco to be smoked in a pipe,” see 26 U.S.C. § 5702(n), or
taxable “tobacco for making cigarettes or cigars,” see id. § 5702(o). Letter from Dir. Of
TTB Regulations & Rulings Div. (enclosed). These federal definitions have a similar
scope and are consistent with Illinois’s listing of smoking tobaccos and “other kinds and
forms of tobacco, prepared in such manner as to be suitable for . . . smoking in a pipe or
otherwise,” see 35 Ill. Comp. Stat. 143/10-5, evoking the Supreme Court of Illinois’s
recognition that federal interpretations “are of course persuasive when they construe a
statute similar to one of our own,” People ex rel. Liqnoul v. Chicago, 67 Ill. 2d 480, 484,
368 N.E.2d 100, 103 (1977).
ANSWERS TO THE PLR COMMITTEE’S QUESTIONS
Further to your letter of June 14, please find below our answers to the questions
(reproduced in bold) from the PLR Committee.

1. Will the product be sold [by] your company at retail over the internet? Will
   you sell to tobacco shops or other retailers?
   PRODUCT will be sold to Illinois consumers over the Internet. PRODUCT also will
   be sold to various retailers through distributors.
   COMPANY also may sell
   PRODUCT directly to retailers for the purpose of resale.
2. Do you manufacture the product and the individual components of the
   product?
   No. COMPANY imports PRODUCT and its components, and the products are
   manufactured by contract manufacturers.
3. Is nicotine extracted from the tobacco in the process of vaping? Or does the
   process only import taste to the vapor?
   Consumer use of PRODUCT extracts both flavor and nicotine from the tobacco.
4. Explain the process how the nicotine is extracted from the tobacco capsule
   while the product is being used?
   Vapor generated by the cartridge extracts nicotine and added flavors from the
   tobacco when the vapor passes over the tobacco. There is no burning or
   combustion of the tobacco.
   The general language of “kinds and forms of tobacco, prepared in such manner as to be suitable for . . . smoking in a pipe or
   otherwise” is not broadened by the preceding, specific language of “shorts; refuse scraps, clippings, cuttings, and sweeping of
   tobacco.”
   1

ST 17-0012-PLR
Page 4

5. Is the tobacco capsule purchased by the Company as a completed component
   or do you buy raw tobacco and make the capsules in-house?
   COMPANY purchases the capsule packages as a completed component.
6. Is the tobacco suitable for smoking in a pipe?
   No. As discussed in COMPANY’s Request, the tobacco in PRODUCT is not
   suitable for “smoking” (as defined under Illinois law) at all. This is because
   PRODUCT is not lighted or combusted. Moreover, the tobacco capsule is suitable
   for use only with the PRODUCT device.
   If there are any additional questions about this submission, please do not hesitate to
   contact me. Thank you for your time and attention to this matter.
   DEPARTMENT’S RESPONSE:
   The Tobacco Products Tax Act of 1995 imposes a tax 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; …
   As we noted previously, the definition must be construed broadly. However, you have
   provided a number of facts in your letter and the attachments that were not available to us when we
   made our earlier ruling. Based on your letter and the attachments, it is our understanding that the
   product is not made in Illinois, is imported into the United States and into Illinois as a completed
   product, or capsule, the completed product is made of plastic and is not suitable for chewing or
   smoking. Based on these additional facts, the Department has determined that the capsules and the
   tobacco contained in the capsules are not subject to Tobacco Products Tax. This letter ruling
   supplements and modifies our previous private letter ruling regarding the taxability of the tobacco
   contained in the capsules.
   The factual representations upon which this ruling is based are subject to review by the
   Department during the course of any audit, investigation, or hearing and this ruling shall bind the

ST 17-0012-PLR
Page 5

Department only if the factual representations recited in this ruling are correct and complete. This
Private Letter Ruling is revoked and will cease to bind the Department 10 years after the date of this
letter under the provisions of 2 Ill. Adm. Code 1200.110(e) or earlier if there is a pertinent change in
statutory law, case law, rules or in the factual representations recited in this ruling.
I hope this information is helpful. 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
RSW:bkl