Taxing eCigarette Products First Step to Regulating Industry

Sacramento – With the passage of Proposition 56, Cigarette tax to fund healthcare, tobacco use prevention, research, and law enforcement initiative, California voters have taken the necessary step to protect our children by taxing electronic cigarettes (eCigarettes). The passage of Proposition 56 joins other recently enacted laws to better regulate the sale of these products.

“Devices like eCigarettes are dangerous, undermining three decades of progress in curbing smoking in California. There were virtually no regulations on selling, advertising, or marketing them. Passage of Proposition 56 and Senate Bill x2 5 enables us to better regulate the industry by applying an excise tax and tobacco retailer license to businesses that sell these products,” said California State Board of Equalization Chairwoman Fiona Ma, CPA.

Retailers selling eCigarettes have always needed to have a California seller’s permit and collect the correct amount of sales tax. However, consumers did not have to pay the excise tax that applies to cigarettes or tobacco products since eCigarettes do not contain tobacco. Therefore, eCigarettes were not subject to California's excise tax. Starting January 1, 2017, state law requires sellers of eCigarettes, vaping devices, and other related products to obtain a Cigarette and Tobacco Products Retailer's License from theCalifornia State Board of Equalization (BOE). This license must be obtained prior to making retail sales of these products to consumers. It will cost $265, and must be renewed annually at a cost of $265.

This is a big moment for Californians since a cigarette tax increase has been on ballot twice and was defeated both times. With the passing of this measure, California will be only one of less than ten states that tax eCigarettes. According to the campaign for tobacco-free kids, since 2002, the District of Columbia and 47 states have increased their cigarette tax rates 126 times. But California hasn’t increased their rate for nearly twenty years (not since Proposition 10 in 1998). The average state cigarette tax rate is $1.65 per pack, making California’s previous rate of $0.87 near the middle of the pack.

With the passage of Proposition 56, state excise tax on cigarettes will increase by $2 per pack—from 87 cents to $2.87 and eCigarettes will be taxed as a tobacco product. Both these items will become effective April 1, 2017. Revenue from these higher taxes would be used to augment spending on health care for low–income Californians.

A new cigarette tax stamp will be developed and available for distributors to purchase when the tax rate increases. In the meantime, retailers will be able to sell existing stock; however retailers, distributors, and wholesalers will be required to pay a floor stock tax on any existing inventory held prior to the tax increase, and remit additional tax to the BOE. The BOE will inform retailers, wholesalers, and distributors of the changes required by the laws and will be busy working on regulations that will help distributors understand how to apply the excise tax to the wholesale cost of eCigarettes. More information about the excise tax rate will be available on the BOE’s online cigarette and tobacco products tax guide

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Board Member Fiona Ma, CPA, was elected to the Board of Equalization in November 2014, to represent the Second Equalization District. She represents 9.5 million residents in many of California's coastal counties, from Del Norte to Santa Barbara, including the entire San Francisco Bay Area. Ms. Ma served in the California State Assembly from 2006 to 2012, serving as the first Asian woman Assembly Speaker pro Tempore since 1850. While in the Assembly, Ms. Ma focused on improving California, authoring legislation to create jobs and grow the state's economy. As an Executive Board Member of the National Conference of State Legislators, she worked to keep California's economy competitive with other states. Ms. Ma has been a Certified Public Accountant (CPA) in California since 1992. For more information, visit Board Member Ma's website.

 The five-member California State Board of Equalization (BOE) is a publicly elected tax board. The BOE collects $60.5 billion annually in taxes and fees supporting state and local government services. It hears business tax appeals, acts as the appellate body for franchise and personal income tax appeals, and serves a significant role in the assessment and administration of property taxes. For more information on other taxes and fees in California, visit the California Tax Service Center.

 

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