Europe seeks a clearer vision on future of e-cigarette taxation policy

ecbrussels-simonblackley-900x540As Europe considers harmonising policy on e-cigarette taxation, Philip Gambaccini looks at the development of vapour taxes on both sides of the Atlantic.

While the European Commission is engaged in a consultation process on the taxing of e-cigarettes, seven  EU member states have already instituted their own tax schemes.

Between them, a variety of rates have been set. Unlike in the U.S., however, where several states and local governments have applied taxes on an array of different principles, in Europe taxation has mostly been established on the principle of a set figure per millilitre of e-liquid.

Every four years the European Commission is required to review the rates and structures of excise applied to manufactured tobacco set forth in Directive 2011/64/EU and where appropriate propose changes. The directive mandates a framework for taxing tobacco products to ensure a harmonised approach among member states.

E-cigarettes are not currently included in the directive, and while heat-not-burn (HnB) products contain tobacco and are therefore subject to taxation, their treatment is not explicitly addressed.

A report from the Commission to the Council of Europe in December 2015 evaluating the directive recommended further analysis of the possibility of “including e-cigarettes in the scope of excise duty on tobacco products.” Six months later, in June 2016, the Commission issued an impact assessment of including e-cigarettes in the directive, among other revisions.

On 17th November 2016 the Commission launched its public consultation to gather the views of EU citizens and stakeholders on the revision of the directive. In particular, it was interested in opinions on the expansion of the directive’s scope to include e-cigarettes. The consultation period ends on 16th February 2017.

While the Commission inches slowly towards a decision on a harmonised approach to taxing vapour products, a growing number of EU member states have introduced excise taxes without waiting for guidance from Brussels.

In 2016 three member states (Latvia, Romania and Slovenia) adopted taxes on e-cigarettes and heated tobacco products, joining Italy and Portugal, which adopted the levies in 2014. Both Hungary and Greece have approved excise taxes on e-cigarettes that will come into effect in January 2017. Seven of the 28 EU member states will then have e-cigarette tax regimes, independent of any EU-wide mandate.


Emerging consensus


Despite the absence of a clear directive from the Commission on how excise taxes on e-cigarettes should be structured, a clear trend is emerging. The seven countries that have decided on taxation have all done so on the basis of the volume of liquid intended for use in e-cigarettes.

In 2014 Italy replaced a hastily introduced ad valorem tax calculated on the retail price of e-cigarettes, including devices and components, at the same rate as combustible cigarettes, with a flat levy of €0.3743 per millilitre of liquid.

Since then, other European countries have adopted similar specific taxes with lower rates based on the volume of liquid. Only Portugal has a rate higher than Italy’s, while Latvia applies a mixed tax structure of one euro cent per millilitre combined with half a cent per milligram of nicotine.

Serbia, which aspires to EU membership, introduced a specific tax of RSD 4.00 per millilitre of liquid in 2015 which it indexed for inflation and increased to RSD 4.06 (about €0.033) in July 2016.

Not surprisingly, these same European markets have amended their excise laws to recognise heated tobacco as a new product category. In all cases a specific tax is applied based on the weight of the tobacco blend.

Although heated tobacco is defined as a unique product category in Portugal’s excise law for purposes of applying the tax, it is grouped with chewing and smoking tobacco, which are subject to a mixed specific and ad valorem tax.

In May 2017, the Slovak Republic will introduce a specific tax of €73.90 per kg of “smokeless tobacco”, a new category of tobacco excluding chewing tobacco and snuff, which are consumed without burning.

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    U.S. fiscal diversity


    Just as in Europe, in the U.S. there is no unified policy on taxing e-cigarettes. In fact, there is an even greater variety of tax regimes.

    While there is no federal levy, an increasing number of lower authorities have climbed aboard the excise train. Seven states have introduced excise taxes on e-cigarettes, mostly recently California, where voters approved a ballot initiative to tax the devices as tobacco products. A similar initiative in North Dakota was defeated on election day.

    Four county governments, in states ranging from Alaska to Maryland, as well as the cities of Chicago and the District of Columbia also tax e-cigarettes. Minnesota was the first jurisdiction in the U.S. to tax vapour products and the only one to do so before 2015.

    In contrast to European markets,  no generally accepted method of taxing e-cigarettes has emerged in the U.S.

    Tax laws in Europe identify “liquid containing nicotine” (Slovenia, Romania and Portugal) or “liquid used in electronic cigarettes” (Latvia, Greece and Hungary) as the subject of the excise and create discrete tax categories for these products. Several U.S. states, as well the city of Chicago and Cook County, Illinois, follow a similar approach and logically levy a specific tax on the volume of liquid, which is easily measurable.

    Minnesota and Pennsylvania, along with Washington D.C. and several counties, have opted to group e-cigarettes or liquid containing nicotine in the same tax category as “other tobacco products”, a catch-all classification that excludes cigarettes but may include such diverse items as chewing tobacco, snuff and rolling tobacco. These are heterogenous products with no common basis for taxation other than price.

    In these cases, the most common and easily verifiable taxable base is the wholesale price. The rates of tax are often quite high as they are designed for mature products considered to have low price elasticity. High taxes are frequently used to deter consumption of other tobacco products. They are ill-suited to novel products, with price-sensitive consumers contemplating the switch to lower-risk alternatives.

    When Pennsylvania introduced a 40% tax on the wholesale price of e-cigarettes, including devices and liquids, in October 2016, the impact was devastating even before the tax came into effect. Rather than pay the tax, which also applied to retailers’ inventory and would nearly have doubled the price to consumers, dozens of vape shops across the state went out of business. The $13 million tax revenue target was no longer deemed achievable.

    California’s new tax may have an even greater impact. As of April 2017, e-cigarettes will be taxed at a rate equivalent to the state’s tax on tobacco cigarettes, which has been raised in the ballot initiative to $2.87 per pack of 20. Prices will rise sharply, reducing the incentive for smokers to try e-cigarettes as an alternative.


    What This Means: The public health and economic rationale for taxing e-cigarettes remains in dispute. Raising the price of vapour products through taxation reduces the incentive for smokers to experiment with lower-risk alternatives. While governments are concerned about declining tax revenues from traditional tobacco products, the ability of e-cigarettes to generate offsetting excise revenue is largely unproven.

    Both U.S. and European markets are currently in a position to design their own autonomous fiscal policy. Without a mandated framework in the form of an EU directive, European states have chosen to tax e-cigarettes as new products that should be treated differently from traditional tobacco products. In contrast, many U.S. authorities have opted to tax e-cigarettes the same as traditional tobacco products, a policy which has clear shortcomings.

    Prudence would suggest that the European Commission should consider these precedents while it ponders whether to include e-cigarettes in a revised excise directive on manufactured tobacco.

    – Philip Gambaccini ECigIntelligence contributing writer

    Photo: Simon Blackley

    The author: Geneva-based independent international business adviser Philip Gambaccini has specialised in tax affairs for Philip Morris International, Kraft Foods and PM Latin America. He has extensive global experience in government relations and fiscal affairs and has served as spokesman and liaison to news media, tax authorities and legislators in emerging markets. Gambaccini is editor of

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    This article was written by one of ECigIntelligence’s international correspondents. We currently employ more than 40 reporters around the world to cover individual vaping markets. For a full list, please see our Who We Are page.

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