Is a heat-not-burn tobacco vapor system -- a battery, liquid cartridge, and sealed tobacco capsule -- subject to Virginia's tobacco products tax?

Plain-English summary

Virginia's tobacco products tax (Va. Code Sec. 58.1-1021.02) is a state excise tax on a distributor's tobacco products. It applies only to things that fit the statutory definition of a 'tobacco product' in Va. Code Sec. 58.1-1021.01, which borrows the federal definitions in IRC Sec. 5702 for cigar, smokeless tobacco, and pipe tobacco, and adds loose leaf tobacco.

The manufacturer's product is a heat-not-burn vapor system: a rechargeable battery, a liquid cartridge, and a small sealed capsule of granulated tobacco. In use, the battery heats the liquid (not the tobacco) to create vapor, and the vapor passes through the tobacco capsule before being inhaled. The tobacco itself is never heated enough to produce vapor and is never burned.

The Commissioner ruled the product is not a taxable tobacco product:

• It's not a cigar (not a roll of tobacco) and not pipe tobacco (the capsule can't be smoked in a pipe); cigars and pipe tobacco must be smoked.
• It's not smokeless or loose leaf tobacco, which are defined as tobacco not intended to be smoked -- and the sealed capsule isn't intended to be smoked either, so it doesn't fit those categories.
• Following P.D. 06-48 (whole leaf tobacco), the Department defers to the federal Alcohol and Tobacco Tax and Trade Bureau (TTB). Here the manufacturer submitted the battery, cartridge, and capsules to the TTB, which found none met any IRC Sec. 5702 tobacco-product definition; the Department concurred.
• The Virginia General Assembly considered but declined to tax electronic vapor devices: 2019's Senate Bill 1371 defined 'nicotine vapor product,' 'heated tobacco product,' 'liquid nicotine,' and 'alternative nicotine product' -- and products within those definitions are not tobacco products for this tax. A separate 2019 bill (SB 1606) that would have taxed nicotine vapor products was not enacted.

Currency note (built into the disclaimer). Effective July 1, 2020, the 2020 Appropriation Act (House Bill 30, Item 3-5.21) raised tobacco-tax rates on all taxed products and imposed the tobacco products tax on liquid nicotine at $0.066 per milliliter. See the Guidelines and Rules for the Tobacco Products Tax, P.D. 20-76 (5/4/2020). Anyone relying on this ruling today should confirm how these and later changes affect a specific product.

What this means for you

Manufacturers and distributors of vapor / heat-not-burn products

Whether Virginia's tobacco products tax applies turns on the federal TTB classification and the statutory categories -- not on marketing labels. A product the TTB finds isn't a cigar, smokeless, pipe, or loose leaf tobacco generally falls outside the tobacco products tax as it stood in 2020. But the rules moved: liquid nicotine became taxable July 1, 2020, and rates changed. Confirm current treatment before relying on a 2020 ruling.

Retailers

This ruling addresses the distributor-level tobacco products tax on a specific device; it doesn't resolve every state or local tax that might apply, and later law changes may reach liquid-nicotine components.

Common questions

Why does Virginia defer to the federal TTB? Because the state definition references IRC Sec. 5702, so the Department follows the TTB's determination of whether the product meets a federal tobacco-product definition (P.D. 06-48).

Isn't there tobacco in the capsule? Yes, but the tax categories require either a smokeable product (cigar/pipe) or tobacco not intended to be smoked (smokeless/loose leaf). A sealed capsule that vapor merely passes through fits none of them.

Is this still the rule? Treat it with caution. Effective July 1, 2020, Virginia raised tobacco-tax rates and began taxing liquid nicotine at $0.066/mL (P.D. 20-76); verify current law for your product.

Citations and references

• Va. Code Sec. 58.1-1021.01 -- definitions of 'tobacco product,' 'loose leaf tobacco,' and the 2019 vapor-product terms.
• Va. Code Sec. 58.1-1021.02 -- imposition of the tobacco products tax.
• IRC Sec. 5702 -- federal definitions of cigar, smokeless tobacco, and pipe tobacco.
• P.D. 06-48 (4/11/2006) -- deference to the federal TTB classification (whole leaf tobacco).
• 2019 Senate Bill 1371 (Acts of Assembly 2019, Ch. 790) -- vapor-product definitions; SB 1606 (not enacted) would have taxed nicotine vapor products.
• House Bill 30 (2020 Appropriation Act), Item 3-5.21 and P.D. 20-76 (5/4/2020) -- July 1, 2020 rate increases and the liquid-nicotine tax.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 20-103

Original ruling text

June 16, 2020

Re: Request for Ruling: Tobacco Products Tax

Dear *:

This will reply to your letter in which you request a ruling on behalf of * (the “Taxpayer”) regarding the application of the Virginia tobacco products tax to the sale of tobacco utilized in a device manufactured by the Taxpayer. I apologize for the delay in responding to your request.

FACTS

The Taxpayer manufactures a tobacco vapor system. This system is comprised of three components: a tobacco capsule, a cartridge, and a rechargeable lithium-ion battery and charger. Each cartridge is synchronized for use with five tobacco capsules and are packaged and sold together. The battery and charger are sold separately. The components can only be used as part of the Taxpayer’s tobacco vapor system.

The tobacco capsule is a small, self-contained unit containing granulated tobacco leaves that are not accessible or visible without destroying the capsule. During operation of the system, the battery unit heats the liquid in the liquid cartridge to create a vapor. The vapor then passes through the tobacco capsule and is inhaled by the customer. The tobacco itself is not heated, nor is it exposed to heat sufficient to produce a vapor during the operation of the product.

The Taxpayer indicates that its tobacco vapor systems will be sold to distributors, retailers, and consumers in Virginia. The Taxpayer requests that the Department rule that its tobacco vapor system is not subject to the tobacco products tax because it does not meet the definition of a tobacco product.

RULING

The Virginia tobacco products tax is levied pursuant to Virginia Code § 58.1 1021.02. It is imposed on a tobacco products distributor that: (1) brings or causes to be brought into the Commonwealth from outside the Commonwealth tobacco products for sale; (2) makes, manufactures, or fabricates tobacco products in the Commonwealth for sale in the Commonwealth; or (3) ships or transports tobacco products to retailers in the Commonwealth to be sold by those retailers. The tobacco products tax, however, is due when tobacco products are sold in the Commonwealth and not when the tobacco products are brought into the Commonwealth for sale. The tax is imposed once, and only once, on all tobacco products for sale in the Commonwealth. Virginia Code § 58.1 1021.01 provides that:

“Tobacco product” or “tobacco products” means (i) “cigar” as defined in § 5702 (a) of the Internal Revenue Code, and as such section may be amended; (ii) “smokeless tobacco” as defined in § 5702 (m) of the Internal Revenue Code, and as such section may be amended; (iii) “pipe tobacco” as defined in § 5702 (n) of the Internal Revenue Code, and as such section may be amended. “Tobacco products” shall also include loose leaf tobacco.

Pursuant to Internal Revenue Code (IRC) § 5702, a cigar is any roll of tobacco wrapped in leaf tobacco or in any substance containing tobacco other than a roll of tobacco that is a cigarette. Smokeless tobacco is snuff and chewing tobacco. Snuff is a tobacco product consisting of finely cut, ground, or powdered tobacco that is not intended to be smoked. Chewing tobacco is any leaf tobacco not intended to be smoked. Pipe tobacco is any tobacco, which, because of its appearance, type, packaging, or labeling, is suitable for use and likely to be offered to, or purchased by, consumers as tobacco to be smoked in a pipe. Although IRC § 5702 does not define loose leaf tobacco, Virginia Code § 58.1 1021.01 defines loose leaf tobacco as any leaf tobacco that is not intended to be smoked, but does not include moist snuff.

The Taxpayer’s tobacco vapor system is not a cigar because it is not a roll of tobacco. It is not pipe tobacco because the tobacco capsules are not suitable to be placed in a pipe and smoked. Both cigars and pipe tobacco must be smoked in order to be consumed. Smokeless tobacco, including snuff and chewing tobacco, as well as loose leaf tobacco are defined as tobacco that is not intended to be smoked. The tobacco capsule in the Taxpayer’s tobacco vapor system is not intended to be smoked.

In P.D. 06-48 (4/11/2006), the Tax Commissioner determined that whole leaf tobacco was not a tobacco product because the Alcohol and Tobacco Tax and Trade Bureau of the United States Treasury (the “TTB”) found that this type of tobacco did not meet any of the definitions as provided by IRC § 5702. The Tax Commissioner concluded that because the definition of tobacco products in Virginia Code § 58.1 1021.02 referenced IRC § 5702, there was no reason not to adopt the TTB’s conclusion.

In this case, the Taxpayer submitted the battery unit, liquid cartridge and tobacco capsules to the TTB to evaluate whether it met the federal definition of a tobacco product. The TTB determined that neither the battery unit, liquid cartridge nor tobacco capsules met the definition of any tobacco product under the IRC. As such, the Department concurs with the TTB’s conclusion that the Taxpayer’s tobacco vapor system does not meet any of the definitions of tobacco products in the IRC.

Virginia Code § 58.1 1021.02, however, also includes loose leaf tobacco as a tobacco product for purposes of the Virginia tobacco products tax. Because loose leaf tobacco, like smokeless tobacco is not intended to be smoked, the tobacco capsules do not qualify as loose leaf tobacco.

Moreover, the Virginia General Assembly contemplated making electronic vapor devices subject to the Virginia tobacco products tax, but declined. The 2019 Virginia General Assembly passed Senate Bill 1371 ( Acts of Assembly 2019, Chapter 790) which amended Virginia Code § 58.1 1021.01 to include the following definitions:

“Alternative nicotine product” would be defined as any noncombustible product containing nicotine that is not made of tobacco and is intended for human consumption, whether chewed, absorbed, dissolved, or ingested by any other means. “Alternative nicotine product” does not include any nicotine vapor product or any product regulated as a drug or device by the U.S. Food and Drug Administration (FDA) under Chapter V (21 U.S.C. § 351 et seq .) of the Federal Food, Drug, and Cosmetic Act.

“Heated tobacco product” means a product containing tobacco that produces an inhalable aerosol (i) by heating the tobacco by means of an electronic device without combustion of the tobacco or (ii) by heat generated from a combustion source that only or primarily heats rather than burns the tobacco.

“Liquid nicotine” means a liquid or other substance containing nicotine in any concentration that is sold, marketed, or intended for use in a nicotine vapor product.

“Nicotine vapor product” means any noncombustible product containing nicotine that employs a heating element, power source, electronic circuit, or other electronic, chemical, or mechanical means, regardless of shape or size, that can be used to produce vapor from nicotine in a solution or other form. “Nicotine vapor product” includes any electronic cigarette, electronic cigar, electronic cigarillo, electronic pipe, or similar product or device and any cartridge or other container of nicotine in a solution or other form that is intended to be used with or in an electronic cigarette, electronic cigar, electronic cigarillo, electronic pipe, or similar product or device. “Nicotine vapor product” does not include any product regulated by the FDA under Chapter V (21 U.S.C. § 351 et seq. ) of the Federal Food, Drug, and Cosmetic Act.

The Taxpayer’s tobacco vapor system may meet one of the definitions included in Senate Bill 1371. Products that fall within these definitions are not tobacco products subject to the Virginia tobacco products tax. Senate Bill 1606, which would have imposed a tax on nicotine vapor products, was also introduced in the 2019 Virginia General Assembly, but was not enacted. Accordingly, because the Taxpayer’s tobacco vapor system does not meet the definition of a tobacco product it is not subject to the Virginia tobacco products tax.

Please note that effective July 1, 2020, Item 3-5.21 of House Bill 30 (the 2020 Appropriation Act) increases the tobacco products tax rates on all products subject to the tax for taxable sales or purchases occurring on and after such date. This provision also imposes the tobacco products tax on liquid nicotine products at the rate of $0.066 per milliliter of liquid nicotine, effective July 1, 2020. See Guidelines and Rules for the Tobacco Products Tax , Public Document 20-76 (5/4/2020) for more information.

I trust the aforementioned responds to your inquiry. This response is based on the facts provided as summarized above. Any change in facts or the introduction of new facts may lead to a different result.

The Code of Virginia sections, and the public documents cited, along with other reference documents, are available on-line at the Laws, Rules and Decisions section of the Department’s web site. If you have any questions about this response, you may contact * in the Department’s Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1556.B

Related Documents

06-48

20-76