The FDA’s deeming regulations have predictably set off a chain-reaction on the local and state levels; by classifying vapor technology as “tobacco products,” the FDA invited other regulatory bodies to likewise regulate vapor devices and e-liquids in much the same way as cigarettes and many vapor businesses are overwhelmed by completely new protocols for conducting business. From proposed bans on e-liquid flavors in various localities around the country to the enforcement of state taxes à la cigarettes, vape businesses are being inundated with compliance obligations and threats to our very capacity to meet the needs of consumers in the vape community. California, often characterized as the capital of the vape industry, has recently become regulated by the BOE and, aside from a tax rate that will increase to 65% as of July 1, the regulatory framework governing the vape industry in California has quickly and drastically changed.
After attending a seminar hosted by the BOE on the responsibilities of vape retailers in California, and because it is clear that there is ample confusion on the part of both newly-regulated businesses and the BOE itself, we decided to offer a basic overview of some of the new requirements vape businesses face.*
The BOE began enforcement of permit and license requirements of vapor businesses in California as of April 2017 (for retailers as of January 2017). The different types of licenses available are: Retailer, Wholesaler, Manufacturer/Importer, and Distributor. Whether your business structure requires you to secure one or more of these licenses, it is necessary to also obtain a Seller’s Permit and some licenses additionally require the establishment of corresponding accounts with the BOE. If you have not yet done so already, please make it an urgent priority to register with the BOE here. While the BOE does not seem to have a policy of retroactively penalizing now-compliant companies, if your business is unregistered and the BOE becomes aware that you are manufacturing or selling vapor products, there can be serious consequences, including fines and seizure of inventory.
Please note that registered manufacturers are only permitted to sell untaxed vapor products to registered distributors (not to registered retailers) in California and it is at the first point of sale in California that the tax must be applied. The distributor can then sell tax-paid tobacco products to retailers or other distributors. It is now forbidden for vapor businesses to purchase or sell or vapor products on which the tobacco products tax has not been paid and, yes, this is completely separate from standard California sales tax.
2. Remission of Taxes
As mentioned, the tax rate on vapor and tobacco products will more than double as of July 1 of this year, from 27.30% to 65.08% of the wholesale or production cost. Currently, only nicotine-containing e-liquids and devices sold in combination with nicotine-containing e-liquids are defined as tobacco products and subject to the tobacco products tax, however retail licensing requirements apply to electronic cigarettes whether or not devices are sold in combination with nicotine.
Please note that an online retailer based outside of California but selling to consumers in California is also required to both pay taxes on the products sold and to hold a valid Tobacco Product Distributor’s License issued by the BOE.
The BOE is conducting routine inspections of vapor businesses and there are a few important points to note.
- If the BOE comes to your place of business, they must show valid ID demonstrating their legitimacy and will also request ID.
- The BOE agents will only deal with their first point of contact upon entering your establishment, so it’s incredibly important that all of your employees are aware of correct procedures and the location of required documents.
- Most notably, the BOE will request to see 12 months of invoices as well as verification that taxes have been paid. They recommend that all of these files are stored in an easily accessible folder, the location of which all employees are aware. Although only 12 months of invoices are required, the BOE recommends storing four years of records on file. Your business may be issued a citation if upon arrival the requisite files are not available for viewing.
- The BOE is authorized to inspect storage and secured areas.
- The BOE will look to ensure that all licenses/permits are posted and current (mandatory).
- BOE representatives at the seminar advised that they always try to issue a warning citation first, before taking more severe disciplinary action for non-compliance.
4. Invoice and Reporting
There are specific invoice and corresponding reporting requirements for each type of license which you can find more information about here, although the exact details are disbursed with the acquisition of the licenses.
Manufacturers and distributors have monthly reporting requirements, while the seller’s permit (mandatory in conjunction with all other licenses) entails quarterly reporting requirements.
Invoices between vapor businesses should include the following information:
- Date of purchase
- Itemized list of purchased items (for e-liquids for example, the e flavor name, nicotine level and bottle size must be included) and sales price
- Distributor and Retailer’s name, address, and license numbers. Relevant only for CA customers
- Amount of excise tax paid; a distributor may use the statement “All California cigarette and tobacco product taxes are included in total amount of invoice.”
- Especially for retailers, it is advised to keep segregated folders of invoices purchased before and after the law went into effect. Verbally and not in writing, one of the representatives advised that vape retailers which still have inventory on which taxes were not paid due to being acquired prior to the implementation deadline of the BOE, may continue to sell that inventory, and this is where the segregated records come into play.
Please review a correct sample invoice, part of the online seminar, on page 31.
Wholesalers and distributors may participate in an online seminar on responsibilities here, while in-person seminars are available for retailers around the state. Please check the seminar sites and register here.
*Note: None of the information in this post qualifies as legal advice. Please consult with a qualified lawyer when making business decisions related to BOE compliance.