Tax on closed-system vaping products might be reduced

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A new tax on some vaping products could be reduced before it even has a chance to take effect.

Lawmakers in the Indiana House and Senate have approved a measure that would reduce the tax on closed-system vaping products, such as disposable e-cigarettes that can’t be refilled, from 25% of the wholesale price to 15%.

Travis Holdman

Senate Bill 382 is likely headed to a House-Senate conference committee for minor negotiations, but the bill’s author expects the Legislature to send the bill to the governor.

“I don’t anticipate any [significant] change. They approved it in the House; we’ll probably just leave it where it is,” said author Sen. Travis Holdman, R-Markle.

Some lawmakers believe the tax rate for closed-system vaping products was set erroneously high last year; the reduction would match the 15% tax rate on the retail price of open-system products, such as refillable vaping pods. Under SB382, that rate would remain unchanged. Both vaping taxes are set to take effect July 1.

The tax reduction is part of a broader bill filled with minor tax corrections requested by the Indiana Department of Revenue and Gov. Eric Holcomb’s administration.

Indiana’s tax on vaping products was created in the biennial budget near the end of last year’s legislative session. Lawmakers rejected a long-debated 50-cents-per-pack increase in the state’s cigarette tax, and in lieu of that, created the vaping-products tax.

The move this year to lower the tax on closed systems came from behind-the-scenes conversations over the past year between some Senate Republicans and the vaping and tobacco industry, all in an effort to bring parity between the vaping-products tax and the tax on cigarettes, Holdman said.

Health advocates and the Indiana Chamber of Commerce have fought the reduction, saying it encourages unhealthy behavior. Indiana continues to have one of the highest tobacco-use rates in the country.

Holdman, though, sees it as a retroactive fix to last year’s law.

“Plain and simple. It was not necessarily to make any kind of public-policy statement,” he said.

Holdman said he does not know if the governor is on board with the vaping tax reduction’s being added to the Department of Revenue cleanup bill.

A spokesperson for Holcomb said the governor will “review every piece of legislation that comes across his desk and make the best determination for all Hoosiers,” but declined to answer further questions about the tax reduction.

Clerk Brandon Croft waits on a customer at a Vape and Wellness outlet at East 116th Street and Keystone Avenue in Carmel. (IBJ photos/Chad Williams)

Industry influence?

The tobacco and convenience store industries have been lobbying since last year’s law passed to lower the 25% closed-systems tax, saying it needs to be equal with the tax on open vaping systems and on regular cigarettes.

Joe Lackey

Joe Lackey, president of the Indiana Grocery and Convenience Store Association, said lawmakers initially refused to budge but have come to support the move.

Republican Sen. Chris Garten, of Charlestown, was among the group of lawmakers, along with lead budget crafter Sen. Ryan Mishler, R-Bremen, who worked on the plan to lower the tax.

Garten said the primary reason is to bring vaping in line with the cost of traditional cigarettes. Lawmakers determined that taxing 25% of the wholesale price on disposable e-cigarettes could make the products more expensive than cigarettes.

Cigarette smokers commonly switch to e-cigarettes to move toward quitting smoking tobacco altogether, and lawmakers didn’t want to do anything to discourage that transition, he said.

Chris Garten

There is little evidence to suggest e-cigarettes directly help in quitting smoking, according to the Centers for Disease Control and Prevention. Still, Garten said, there was a fear that some people might not even try to quit if alternative e-cigarettes cost significantly more.

He said a 15% tax on the wholesale price of disposable e-cigarettes would make it similar to the state’s 99.5-cents-per-pack tax on cigarettes. Indiana taxes all other tobacco products at 24% of the wholesale price.

E-cigarette retailers are still asking for the tax to be reduced even lower, to 10%, for the sake of competing with other states.

How other states tax vaping products varies widely. Ohio has the lowest tax of Indiana’s neighboring states, at 10 cents per milliliter on all vaping products. Kentucky has one of the highest rates in the nation, with a $1.50 tax per closed-system cartridge. Illinois has a 15% tax on the wholesale price of all vaping products.

A retailer’s perspective

Ian Hull and Alex Ostrovsky own Vape and Wellness, a chain of four vape and CBD shops in Hamilton County. The shops sell a variety of products—from disposable e-cigarettes, to refillable vaping devices and customizable e-liquids to put in them. They also sell CBD and hemp products.

Ian Hull

The two said they are not opposed to a tax on vaping products because tobacco products are already taxed. Hull said they were neutral on the idea of a tax reduction on closed-system products but also said it seems fair to make the tax similar to the open systems’ 15% retail tax.

Disposable e-cigarettes are gaining in popularity because they’re more convenient and cheaper than open-system products, which require buying proper equipment, Ostrovsky said.

He said Vape and Wellness works with a lot of customers who turn to vaping to quit smoking tobacco or using other nicotine products.

“For those that just repeated failures with trying to quit combustible tobacco products … they’ve found a lot of relief” with e-cigarettes, Ostrovsky said.

Hull said how their store might adjust prices on closed systems once the new tax kicks in, whether it’s 15% or 25%, will depend on how their wholesalers react.

“Manufacturers can either bite the bullet and absorb that cost,” he said, “or it gets passed down the line to, like, retail stores, and then it just becomes a financial decision for stores like us.”

Hull added that he could see why convenience store e-cigarette retailers want to continue to lower the tax rate, since most of those stores do not sell open-system products.

The store’s disposable vaping pens will become subject to taxation beginning July 1.

Opposition continues

On the other side, health groups and the chamber argue the vaping tax should not be lowered, because the higher tax discourages youth and teens from using the products.

But these groups, including the American Cancer Society and the Indiana State Medical Association, said that, if lawmakers won’t maintain the 25% rate, it should be reduced only to 20% instead of 15%, in order to maintain parity with cigarette costs.

Vaping products, especially disposable e-cigarettes, became popular with teenagers from 2018 to 2020, mainly for their appealing fruit or candy flavors. That prompted the federal government and the Indiana Legislature to raise the age to buy tobacco products from 18 to 21 in 2020, and the Legislature to create the vaping-products tax last year.

Vaping among teens has dropped dramatically in the last two years, according to a report from the CDC, from 19.6% in 2020 to 11.3% in 2021 among high-schoolers, and from 4.7% to 2.8% of middle schoolers.

Kevin Brinegar

Still, Dr. Stephen Tharp, former president of the Indiana State Medical Association, said lowering the tax on e-cigarettes sends a message that Indiana does not care about the health of its people, particularly children.

“Those are our children and our grandchildren that are being exposed more to toxic, addictive substances,” Tharp said. “We should be stopping that using the tools that we have, and this is one of the better ones.”

Kevin Brinegar, chamber president and CEO, echoed similar concerns about the health impacts of vaping products on Hoosiers and the increased health care costs businesses have to shoulder.•

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2 thoughts on “Tax on closed-system vaping products might be reduced

  1. In the vast wisdom of our legislature, we now want to make it less costly to buy something that will help do in our citizens. I one time thought I heard the term “healthy Indiana” but I guess that is no more. Lets continue to help those buy that which has proven to affect the health of our people. Such wisdom these guys have.