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