September 2016

From Quaker State to Shakedown State: PA’s Vaping Tax Examined

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By John Castle

On July 14, 2016, a budget deal was announced for the State of Pennsylvania, which, if left unchallenged, could all but eliminate the vaping industry in that state with one of the most burdensome blanket tax schemes in existence.

The tax on vapor products sold at retail within Pennsylvania has been set at 40% of wholesale cost. We’ll get into what that means for retailers and for consumers in a moment, but let’s examine that compared to other states; while some states, as well as the District of Columbia, have floated proposals for tax rates even higher — Oregon, for example, has seen a proposed rate of 81.25% of wholesale — Pennsylvania is the first to actually enact their tax rate as law

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The Retailer Shakedown

This spells disaster for many retailers, who often operate on slim profit margins as it is. The 40% wholesale tax would raise the cost of investment to such a degree that in order to remain in business, logically, retailers would have to raise the prices of eliquids and hardware to compensate. This would drive business out of state or to online locations (more about that momentarily), driving vapor retailers in the state out of business and costing jobs. But it’s worse than that.

The 40% wholesale tax doesn’t just apply to new product purchased for retail sale. It applies to all product already in stock at every retailer in the state. If a retailer has already purchased $10,000 worth of stock for resale, they must now pay the state of Pennsylvania $4,000 out of their own pockets (metaphorically speaking) or face criminal penalties for tax evasion.

The negative effect of this tax on small businesses in the state of Pennsylvania cannot be overstated; many of them will have no choice but to shut down, either because they will be unable to afford the tax on their current stock, at the outset, or because they will see such a loss of business and revenue that their businesses will simply become unsustainable.

But it’s worse than that.

The Consumer Shakedown

I mentioned above that consumers, faced with higher retail prices in-state, will be driven to online retailers for their hardware and eliquids. Here’s the problem: the state of Pennsylvania considered that. And, rather than killing this tax in the formative state due to that consideration, they took a different, more totalitarian tack: they decided that consumers who want their hardware and e-liquids without this burdensome tax will be considered “unclassified importers” and will, therefore, also be subject to the same tax rate for the same products.

That’s right. After this law takes effect, if you live in the state of Pennsylvania and purchase your hardware or eliquid from any source other than a Pennsylvania retail location, you will be expected to pay the state of Pennsylvania 40% of the cost of your purchases, directly.

And if you don’t? You may be subject to criminal penalties for tax evasion, penalties of a fine of up to $5,000 or a prison term of up to five years.

But it’s worse than that.

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Because the tax not only applies to what you might want to buy — it also applies to the hardware you already own. Just bought the mod of your dreams? If you didn’t buy it from a Pennsylvania retailer, get ready to fork out more money for what you already own, give up your property, or face a fine or imprisonment.

If this sounds outlandish, it should; it is outlandish. Sadly, every word is true. Check out the following link (shortened for the convenience of our print edition readers): https://goo.gl/P8VpVv

The Consequences

The immediate consequences of this bill are disastrous for Pennsylvanians. According to Chris Hughes, owner of FatCat Vapor Shop in Montoursville and president of the state’s SFATA chapter.

“The state just passed a 40% wholesale cost tax on vapor products,” Hughes said. “This tax includes a “floor tax” that requires that every vape shop in PA write a check to the state for 40% of the wholesale value of their entire inventory. No shop can pay this tax, so all shops will be out of business.”

In one fell swoop, Pennsylvania just eliminated the vaping industry extant within its state borders. Not only that, but in doing so, it turns its vaping populace into de facto tax evaders, never mind that detection and enforcement of such tax evasion is problematic.

An even bigger problem is that by instituting this tax, Pennsylvania will actually lose revenue, as closed businesses stop paying for business licenses, property tax, payroll tax, or any of the myriad public-sector revenue streams, while former vapers may return to smoking and current smokers will continue to smoke, which continues to add public health costs which could have been avoided by simply… not strangling the vaping industry and its consumers.

But the worst part of this is that other states have already tried to implement similar industry-destroying policies. And after this, they will almost certainly try again. If you don’t yet participate in an advocacy organization such as CASAA, there may literally be no better time than right now to join and take action.