In October of 2016, Pennsylvania’s Act 84 of 2016 (“Tobacco Tax Act”) became effective. By institutinga new tax on tobacco the Tobacco Tax Act also mandated vaping wholesalers impose a 40% tax on e-cigarettes that are first sold to a retailer in Pennsylvania. The Tobacco Tax Act also makes it illegal for anyone to possess an e-cigarette without having paid the required tax. Months later, on December 30, 2016, the Tobacco Tax Act also effectuated a 40% tax on vaping inventory located in retail shops.Kingdom Vapor, a wholesaler, and Smoke 4 Less, L.L.C., a retailer, are bringing the Pennsylvania Department of Revenue (“Department”) to court over the Department’s interpretation of the newly-enacted 40% tax on vaping products.

In short, the lawsuit challeneges the seemingly endless reach of the new PA tax on vapes. Specifically, it is the Department’s position that any item sold for use in an e-cigarette is taxable. According to the plaintiffs, the overly-broad interpretation cannot be supported based on reading the law as a whole. Rather, and after a plain-reading of the law, one can conclude the items subject to tax are only those chemicals that can be vaporized and not the component parts, such as batteries.

The lawsuit also asserts the Department’s overly-broad position is a direct result of the owner’s emailed inquiry. Previously, the owner emailed the Department questions about what types of products were subject to the 40% tax. Days after the Department sent a response to the owner’s email inquiry, the Department issued a tax bulletin. Even typos in the email from the owner to the Department somehow ended up in a tax bulletin issued by the Department. It was as if the Department merely copied and pasted, without even proofing, the content of the email in order to incorporate the email into a Department publication.

Additionally, the vape companies contend the Department is engaging in the improper expansion of the statute. This statement is relevant because of the separation of powers necessitated between the Executive Branch, which the Department is characterize as being within, and the Legislature. As a result of the Tobacco Tax Act’s imposition of tax on the inventory, dozens of retail vape shops have been forced to close their stores, simply because they cannot afford to pay the tax due on the inventory located in their shops.

On its face, the case seems similar to a recent challenge I was involved with in Florida, in which the taxpayer succesfully challenged the taxability of a blunt wrap in Florida. It would not be unusual for a state to enage in such a broad interpretation and it seems the taxpayer is on the right track to victory. More importantly, as state statutes try and evolve to capture new products, such as vape, they are often subject to succesful taxpayer challenges to invalidate asssessments and obtain refunds. It will be interesting to see how this plays out.

For updates on the status of the case, please go here.

About the author: Mr. Donnini is the president and founder of Tobacco Tax Refunds, Inc. He is also multi-state sales and use tax attorney and an associate in the law firm Moffa, Sutton & Donnini, PA, based in Fort Lauderdale, Florida. Mr. Donnini has extensive knowledge handling wholesale tax controversy and refunds.

In his law practice Mr. Donnini's primary practice is multi-state sales and use tax as well as state corporate income tax controversy. Mr. Donnini also practices in the areas of federal tax controversy, federal estate planning, Florida probate, and all other state taxes including communication service tax, cigarette & tobacco tax, motor fuel tax, and Native American taxation. Mr. Donnini obtained his LL.M. in Taxation at NYU. Mr. Donnini is licensed to practice law in Florida. If you have any questions please do not hesitate to contact him via email [email protected] or phone at 954-639-4496.