TESTIMONY OF GREGORY CONLEY, J.D. / M.B.A.
LEGISLATIVE DIRECTOR, CONSUMER ADVOCATES FOR SMOKE-FREE ALTERNATIVES ASSOCIATION
BEFORE THE OKLAHOMA HOUSE PUBLIC HEALTH AND SOCIAL SERVICES COMMITTEE
HEARING ON SB 802
APRIL 9, 2013
Chairman Derby, Vice Chairman Mulready and members of the Committee:
Prohibiting minors from purchasing electronic cigarettes makes sense, and thus the Consumer Advocates for Smoke-free Alternatives Association (CASAA) [1] urges the Senate to enact the portions of SB 802 that would prohibit such sales. However, due to a multitude of issues with the bill and the proposed committee substitute, CASAA urges to vote
NO on SB 802 unless and until it is amended so that its passage will not harm public health.
(1) SB 802 is a RJ Reynolds-Sponsored Bill That Is Not Supported by Oklahoma Consumers or Vendors
As recently exposed by the
Daily Caller, tobacco company RJ Reynolds (RJR) has began lobbying state legislatures to ban sales of vapor products (commonly referred to as electronic cigarettes or e-cigarettes) to minors. While RJRs goal of banning e-cigarette sales to minors is shared by CASAA, RJRs bills -- whether purposefully or inadvertently -- almost universally contain provisions that would hurt small businesses and consumers in Oklahoma.
RJRs cigarette sales fell by 5.6% in the United States in 2012 and a
recent report by Morgan Stanley suggests why -- more and more adult smokers are quitting smoking and switching to using smoke-free e-cigarettes. During the past five years, e-cigarette use has exploded among smokers looking for an alternative, all while RJR has sat on the sidelines and watched its cigarette sales experience significant declines. And yet here in 2013, despite not selling e-cigarettes in Oklahoma, RJR has expended a significant amount of money hiring several lobbyists to sing the benefits of SB 802.
SB 802 was introduced by Senator Rob Johnson and passed through the Senate without appearing to seek any input from a single e-cigarette company or consumer in Oklahoma. Indeed, absent the hiring of a day-to-day lobbyist, there was no way for Oklahoma businesses or consumers to know about the existence of SB 802. As introduced, SB 802 was four pages and had nothing to do with e-cigarettes. It was only after the news media reported on SB 802 passing the Senate that Oklahoma e-cigarette users and vendors realized that this 34-page bill even existed.
Lastly, it is also notable that the only active e-cigarette company that CASAA knows has come out in support of SB 802 is blu cigs, which is owned by Lorillard, the third largest manufacturer of cigarettes in the United States. [See Attached Image]
(2) SB 802 Substitute Bill Handles the Sales Tax Issue Inartfully
When opposition to SB 802 first began, lobbyists for RJR began touting that SB 802 would actually be a tax cut because no state sales tax would have to be paid. A letter from
Americans for Tax Reform described the veracity of this claim as unclear.
Indeed, SB 802 as originally written would have resulted in e-cigarette consumers paying both the state sales tax and the "vapor product unit" excise tax. In 2004, Ballot Initiative #713 amended 68 O.S. 2001, §1355 to clarify that sales tax did not have to be paid on cigarettes and tobacco products as defined by Oklahoma law. However, because the original version of SB 802 would have specifically defined e-cigarettes to NOT be a tobacco product, this means that e-cigarettes would have continued to be subject to the state sales tax.
CASAA disagrees with the approach taken by SB 802s sponsors in the substitute bill to rectify this problem. In contrast to the original bill, the substitute bill would specifically define vapor products and tobacco-derived products to each be a tobacco product. Such a provision renders much of the bill superfluous. Indeed, if SB 802 defines e-cigarettes to be a tobacco product, every single page of the bill could be stricken out -- except for the tax provisions -- and SB 802 would still ban sales to minors, requiring licensing, and ban consumers from buying online (all of which are laws that currently apply to any product classified as a tobacco product by the Oklahoma Legislature).
If the Oklahoma Legislature is to pass a bill that imposes excise taxes on e-cigarette consumers, the Oklahoma Legislature should at least return to the approach taken by the original SB 802, which separately classified e-cigarettes as vapor products rather them sticking them into the general general category of tobacco products. The change implemented in the substitute bill potentially opens a can of worms regarding how current and future laws governing tobacco products apply to e-cigarettes.
For example, last year Oklahoma Governor Mary Fallin signed
an executive order banning the use of tobacco products on all properties owned or leased by the State of Oklahoma. If the SB 802 substitute bill is passed as written, it would almost certainly ban the use of vapor products in hundreds of indoor and outdoor locations in the State of Oklahoma. Such an approach would be arbitrary and constitute legislative overreach.
Thus, CASAA urges you to reject the committee substitutes problem-laden solution to this problem, and instead
amend 68 O.S. 2001, §1355 to add the terms vapor products and tobacco-derived products to the list of products not subject to the state sales tax.
(3) SB 802 Would Result in a Tax Increase for Thousands or Tens of Thousands of Oklahoma E-Cigarette Consumers
Even assuming that the sales tax problem is remedied, RJRs description of SB 802 as a tax cut is potentially misleading.
The basic tax structure of SB 802 as it relates to vapor products is as follows: The substitute bill for SB 802 would tax a vapor product unit at 5¢ per .05 oz (or 1.48 ml) of consumable material. This tax would be proportional to the amount of consumable material in a vapor product.
SB 802 would only serve to cut taxes on large tobacco companies who sell what are known as disposable e-cigarettes. These products are manufactured and sold by out-of-state companies and are available in convenience stores. As the name indicates, disposable e-cigarettes are used one time before being disposed. They typically contain less than one vapor product unit per disposable. Thus, if a disposable e-cigarette is sold for $8 in Oklahoma with a state sales tax of 36¢ (4.5% of $8), SB 802 would represent a tax cut for these consumers if sales of vapor products are exempted from the state sales tax.
However, SB 802 would constitute a
tax increase for the consumers who buy from the approximately 39 small businesses in Oklahoma who sell premium e-cigarettes. Premium e-cigarettes are rechargeable devices that are typically used by ex-smokers who have fully switched to e-cigarettes. These devices use a liquid solution (commonly referred to as a e-liquid) that is chemically identical to the consumable material found in disposable e-cigarettes. Using premium e-cigarettes offers cost-savings in the long-term and allows users the opportunity to customize their vaping experience.
Moreover, premium e-cigarettes create far less litter, as they are used for several weeks or months before being disposed or recycled.
A typical price for a 30 ml bottle of e-liquid is $17. Currently, the sales tax on such a product is 77¢. If SB 802 is passed, the excise tax on such a bottle would be between $1.00 and $1.05.
This is a tax increase on Oklahoma citizens of approximately 30%!
It is unknown whether the authors of the forthcoming fiscal note were aware that thousands or tens of thousands of e-cigarette consumers in Oklahoma buy e-liquid multiple times every year (a number that will only continue to grow over the next decade). Therefore, it is not certain whether SB 802 would truly result in a net tax cut to Oklahoma citizens, and it appears that its passage will at least result in a tax increase for the thousands or tens of thousands of Oklahoma citizens who use premium e-cigarettes.
If SB 802 is to be passed, the size of a vapor product unit should be increased to .20 oz to ensure that no Oklahoma citizen suffers a tax hike.
(4) Licensing is Unnecessary, and Oklahomas Current Licensing Scheme is Inappropriate for E-Cigarette Sales
CASAA is a consumer organization and, as such, does not represent the interests of vendors. However, CASAA does recognize that competitive pricing and the availability of a variety of products best serves the interests of consumers. CASAA firmly believes that by requiring e-cigarette sellers in Oklahoma to have a tobacco license, SB 802 will only serve to increase prices, decrease availability of premium e-cigarette liquid, and harm consumer choice.
Currently, e-cigarette stores in Oklahoma sell a variety of products that are imported from states across the U.S. and countries around the world. However, SB 802 would unduly restrict such imports by criminalizing a vendor (or a consumer) who purchases e-cigarette products from out-of-state vendors who do not hold an Oklahoma tobacco wholesalers license. Such a requirement is wholly unnecessary, and in fact may violate the Interstate Commerce Clause of the U.S. Constitution.
Additionally, because many e-cigarette stores import nicotine-containing liquid into Oklahoma and mix and label their own e-liquid in Oklahoma, it is possible that SB 802 would require them to obtain: (1) a wholesalers license, which requires a $25,000 bond be put up with the Tax Commission; (2) a manufacturers license; and (3) a retailers license.
If SB 802 must pass out of this committee, the licensing provisions should be stripped in their entirety. However, as noted in
Section 2, there is a potential peril in the language in the committee substitute bill that defines a vapor product as a tobacco product. If the licensing provisions are removed but vapor products are defined as tobacco products, the bill could still be read to require licensing.
(5) Stripping the Licensing Provision Would Also Remove the Online Sales Ban
If the Oklahoma Legislature approves SB 802 with the licensing provisions intact, it would criminalize what has become a common practice of thousands of Oklahoma citizens who will never hear about the prohibitions in SB 802 -- purchasing their e-cigarette supplies online from vendors both in the State of Oklahoma and across the U.S. Many of these Oklahomans live in rural areas of the State where e-cigarette stores are inaccessible. Others just appreciate the convenience of being able to order their e-cigarette products through the mail, especially when a particular product is not readily available locally.
This criminalization stems from the licensing requirement. If enacted, a dealer would be defined as someone who imports a vapor product into Oklahoma for distribution, sale, use, OR
consumption. Such a dealer would be required to have a tobacco license to be in compliance with the law.
While the Oklahoma Attorney General is unlikely to seek cases against consumers for violating this law, it is not in the best interests of Oklahoma citizens for such actions to even be possible. This committee should foreclose this possibility by removing the licensing provisions altogether from the bill. If e-cigarette are not subject to a tobacco license requirement, importing these products without a license would not constitute a crime.
For the foregoing reasons, CASAA urges you to report unfavorably on SB 802.
Sincerely,
Gregory Conley, J.D. / M.B.A.
(609) 947 - 8059
Legislative Director -- Consumer Advocates for Smoke-free Alternatives Association (CASAA)
Footnote
[1] CASAA is a non-profit, all-volunteer organization with a grassroots membership of approximately 3,000 individuals from all walks of life. CASAA is dedicated to ensuring the availability of reduced harm alternatives to smoking and to providing smokers and non-smokers alike with honest information about those alternatives. Since its founding in 2009, CASAA has educated the public and increased awareness about the benefits of reduced harm alternatives to smoking. CASAA also encourages responsible legislative policy designed to improve public health by recognizing that smoke-free tobacco- and nicotine-containing products are inherently far less dangerous than smoking.
