Awaiting FDA, states pursue their own e-cigarette rules

October 29, 2013

(Chris Ratcliffe/Bloomberg)

The decades-long battle between big tobacco companies and the health-care community has evolved from a debate over stinky bars and second-hand smoke to a debate over vapor flavored like Fruit Loops and gummy bears.

Those are just two of the flavors available to consumers of electronic cigarettes. The product looks like a cigarette, but it delivers nicotine in the form of water vapor. They are different enough from regular cigarettes that existing federal and state laws didn’t cover them, setting up a race to impose new regulations — and they’re becoming big business for tobacco companies that have seen sales flag elsewhere.

Legislators in dozens of states are facing three questions when they consider regulations: Who should be able to use the product? How should the product be taxed? And what, exactly, is it in the first place?

The last question is the most vexing, to industry advocates and health activists alike. Whether state legislatures decide they should be viewed as tobacco products or as something separate will determine how they are taxed, and if they are subject to the same indoor bans most states have imposed on regular smoking materials.

Health advocates want e-cigarettes classified in the same category as regular cigarettes. Doing so, they say, would allow states to treat e-cigarettes under existing law.

“We want them included in the definition of tobacco product. It’s really one of the easiest ways to handle them,” said Thomas Carr, director of national policy at the American Lung Association. “Nothing else has to change, really.”

But the industry says that unfairly stigmatizes their product as a tobacco product. They hope to position e-cigarettes as a safer alternative to cigarettes, even as a step toward quitting smoking altogether.

“Our goal as an industry is to distinguish ourselves from cigarettes, and there’s a very important reason that we want to be defined at the state level not as a tobacco product,” said Eric Criss, president and chief executive of the Electronic Cigarette Industry Group. “We believe the product is a good alternative, and the goal should be to move people down the risk ladder from cigarettes.”

Four states — Utah, North Dakota, Arkansas and New Jersey, plus the District — have already sided with the American Lung Association by including e-cigarettes in indoor smoking bans. California, Connecticut and Massachusetts are considering following suit. And nine other states, ranging from New York and Colorado to Tennessee and Wyoming, have lumped e-cigarettes into the tobacco product category. California also restricts e-cigarette advertising online.

Seven other states have passed measures advanced by the e-cigarette industry that defines them as something other than tobacco products. Some states have followed Alabama’s lead in labeling e-cigarettes as “alternative nicotine product.” Other states, like North Carolina, more explicitly define them as “vapor products.”

While it’s no surprise that the tobacco companies that have cornered the market on e-cigarettes are pushing bills in many states, in an odd twist of legislative strategy, the bills those companies favor impose restrictions on their own products.

Since 2009, when the first e-cigarette bills were introduced, 25 states and the District of Columbia have passed measures defining and regulating them. Those states all restrict sales of e-cigarettes to minors, and most require purchasers to provide identification for both in person and online transactions.

“This is a product intended for adult consumers. It’s marketed toward adult smokers,” said Cynthia Cabrera, executive director of the Smoke Free Alternatives Trade Association. “It’s not intended to be a gateway.”

Health advocates charge that e-cigarettes are marketed toward children, given the flavored vapors in many products.

Electronic cigarettes are becoming assets to corporate bottom lines. There are more than 200 e-cigarette companies in the U.S., according to industry analysts, but only five make up a little more than 80 percent of the market. Lorillard, the maker of the Blu line of products and the driving force behind legislation in many states, said last week that e-cigarettes accounted for $63 million in sales during the third quarter of 2013, or a little less than 4 percent of its total sales. Wells Fargo estimated the e-cigarette market stands at about $2 billion.

That market  — which the bank said will hit $10 billion by 2017 — is another driver in the push to define e-cigarettes independently of tobacco products. After all, most states tax tobacco at very high rates. New York levies a $4.35 surcharge on each pack of cigarettes, while fourteen other states charge at least $2 per pack.

Therefore, if e-cigarettes are classified as tobacco products, they will qualify for those high taxes. If they are characterized in a different category, they won’t be subject to the same taxes.

Several states that took up e-cigarette legislation have already moved to tax them in specific ways. Minnesota, which defines e-cigarettes as an “other tobacco product,” requires them to be subject to a tax equal to 95 percent of their wholesale price, making the taxes paid on an e-cigarette in Minnesota greater than the taxes on a pack of regular cigarettes, according to Darryl Jayson, an industry analyst at the Tobacco Merchants Association. Legislators in Oklahoma and Utah tried to levy a tax on e-cigarettes equal to 10 percent of cigarette taxes, but those measures failed.

“The typical rationale for tax policy in the tobacco realm is to recover the social costs of those products,” said Bryan Haynes, a lawyer who represents tobacco industry clients at Troutman Sanders in Richmond. “If anything, there should be a different category that speaks to the fact that e-cigarettes are fundamentally different from tobacco products.”

Haynes said a number of other states are expected to take up legislation dealing with e-cigarettes in 2014 — especially focusing on the tax question.

The rush to define e-cigarettes at the state level comes as the Food and Drug Administration mulls its own rules and definitions. The proposed rule, which isn’t public, has been sent to the Office of Management and Budget and the White House’s Office of Information and Regulatory Affairs for review, said Jennifer Haliski, an FDA spokeswoman.

And there’s a possibility that an adverse federal rule could create a silver lining for the industry: If e-cigarettes are defined as tobacco products by the federal government, but explicitly defined in other categories under state law, the conflict would mean states would have to pass new tax rules, or redefine e-cigarettes, before they could earn revenue off sales.

But industry insiders think the FDA rule will lump e-cigarettes in with regular tobacco products. Cabrera, of the Smoke Free Alternatives Trade Association, said her group would file a Freedom of Information Act request to see the proposed rule.

“At the federal level, the battle might be over. But at the state level, it’s not,” Criss said.

Reid Wilson covers state politics and policy for the Washington Post's GovBeat blog. He's a former editor in chief of The Hotline, the premier tip sheet on campaigns and elections, and he's a complete political junkie.
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