September 2016

The Black Market of Vaping: An Unintended Consequence?

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By Norm Bour

He’s called the $5 Man and he is not an urban legend, but is very real. Those in the tobacco industry have heard of him and are fearful since he steals money. Their money. State politicians don’t like him either since he takes money from their coffers, too.

Excessive Taxation Creates Illegal Responses

In 2002 New York state and New York City pulled a double whammy on cigarette smokers. The state increased cigarette prices from $1.11 to $1.50 per pack. The city also increased their local excise tax from $.08 per pack to $1.50.

NYC Department of Health and Mental Hygiene’s Community Health Survey reported that smoking rates in the city dropped by 11 percent, an unprecedented decline. Most of those that quit confessed that it was due to the financial burden of the added taxes, which pushed retail prices of cigarettes to over $8.00 per pack.

That victory was short lived.

Within months of the new taxes taking effect a huge flood of illegal cigarettes started hitting the streets. These cigarettes came from various sources, but 29 percent, the majority, were bought outside New York City, but within the state. That was followed by out of state sales at 22 percent and 18 percent through the internet.

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The Centers for Disease Control and Prevention and the American Legacy Foundation reported these findings and found the culprit. They were usually illegal bootleggers that were selling name brands for $5.00 per pack.

Thus began the black market and the beginning of an illegal cigarette industry.

It was estimated that as much as 90 percent of cigarette sales in 2003 were illegal sales and therefor, not taxed or collected by the state or city of New York.

Our Early Vaping Roots

The vision of selling “from the truck of your car” is not limited to cigarettes and many that got into the vaping game early did the same thing. They were not circumventing taxes or the law, but were trying to create a business that had no structure and no foundation.

In 2013 when I started VapeMentors there were an estimated 1,500 vape shops in the United States. Three years later that number exponentially increased six-fold to 9,000 shops. No one really knows for sure since the opening and closure rate is so high and because there are many definitions of “vape shops.”

Many of todays’ top companies started with an aggressive “Vapreneur” buying products from overseas- usually China- and pawning them off to friends and associates that were curious about this new vaping thing. Many of those products were so inferior that they were motivated to create or find better ones. This was the foundation of one of the largest vaping companies in the nation, Madvapes.

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Others went on to open shops, online stores or other vape related businesses. But they started somewhere.

Prohibition does not work

It is said that “those that do not study the past are doomed to repeat it.” Almost a century ago Congress passed the 18th amendment which banned the sale of alcoholic beverages with an alcohol content of greater than 2.75 percent.

We know how well that worked.

During the 13 years of Prohibition, which finally ended in 1933, the United States went through challenging times. Among the ripples that were created was the Great Depression, disrespect for the law that many thought was unfair, and organized crime.

At a recent vape show in Chicago a panel of advocates and experts were asked about the potential of black markets in the vaping industry. They all agreed it was a real possibility and a likely outcome.

Why is that?

Many vapers are radical and do not like regulation. But even so, the biggest driver to black markets would be the eventual elimination of 80-97 percent of all vaping products on the market. With a PMTA price tag that could run “more than one million dollars,” there will be few winners in the “millionaire lottery” as American Vaping Association president Gregory Conley calls it.

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This unintended consequence of heavy handed FDA regulations could be the formation and growth of this new illegal market. That could have worse outcomes than anything that the government instigates.

The E-Cigarette Forum (ECF) surveyed 10,000 of its users in 2014 and found 79 percent would turn to the black market due to product bans.

Mitch Zeller, director of the FDA’s Center for Tobacco Products, was asked about this potential issue and he responded with this comment:

“We have a very effective office of compliance and enforcement that will be monitoring and conducting surveillance to detect any kind of illegal activity in the marketplace. I have no idea what the likelihood is for a black market, but if that happens we’ll find it and those products, if they haven’t received marketing authorization from FDA, would be in violation of the law.”

What are your thoughts? Do you see a potential black market?

Norm Bour is the founder of VapeMentors and creator of the VAPE U online programs. They offer services & resources for anyone in the vape space, including vape shops, online stores and e-liquid brands. He’s also the host of Vape Radio, the largest vaping radio show in the world with more than 1.3 M downloads. Norm interviews the masters of vape and thought leaders in the vape space. Contact him at norm@VapeMentors.com.