RALEIGH, N.C. - North Carolina, the nation's longtime leader in tobacco production, is now considering a new tax on its tobacco-free relative — the electronic cigarette — after a state committee approved draft legislation Tuesday.
The proposal will now head to the Republican-led North Carolina General Assembly to consider during its upcoming session, which begins Wednesday. A House-Senate study committee unanimously approved draft legislation for the new excise tax and support was widespread across the aisle, even coming from some unlikely groups.
The typically anti-tax Republicans are on board and Winston-Salem based tobacco giant Reynolds America essentially asked for it.
The tax rate would be applied by volume, at 5 cents per milliliter of the liquid used in e-cigarette cartridges; significantly less than current tax rates on traditional tobacco products.
Reynolds America, based in Winston-Salem, is the nation's second-largest cigarette producer and has historically opposed higher state cigarette taxes.
"I promise you, you've never heard me or anyone in any other industry stand up and ask for their products to be taxed, but yes, ma'am, we are (asking to be taxed,)" said company Vice President David Powers.
A Reynolds electronic cigarette carries a 0.5 milliliter cartridge and is equivalent in puff counts to a pack of tobacco cigarettes. Other brands can carry a cartridge of 1 milliliter or more. The new tax would add about 2.5 cents to the cost of lighting up one e-cigarette compared to the 45 cents currently added to a pack of regular cigarettes. All other tobacco products, such as snuff or pipes, are taxed at 12.8 percent of their price, according to documents produced by the state Revenue Laws Study Committee.
Powers said because the federal government has already classified e-cigarettes as a tobacco product, the company asked legislators to create the tax to ensure it would be applied fairly, and reflective of the lower health risk e-cigarettes pose.
"It's eventually going to get taxed. We want it to be done the right way," he said. By taxing the liquid volume of the e-cigarette, the proposal covers all the e-cigarette products on the market in the same way at a fair rate, he said.
Electronic cigarettes neither have tobacco nor emit smoke, but create a vapor from a nicotine liquid that is heated up with a battery.
Powers said it is hard to predict how many cigarette users will eventually move from traditional tobacco to e-cigarettes because the Reynolds company currently only sells its brand of e-cigarettes in Colorado and Utah. It plans to launch the product nationwide later this month.
Sen. Floyd McKissick, D-Durham, noted that the low rate could cause significant state revenue losses down the road.
"That will have an impact upon us when we do our budget projections for lost revenues ... moving from 45 cents to 5 cents," he said.
If the tax passes, it is expected to generate about $5 million in revenue by 2015, according to the state Revenue Laws Study Committee.
The new tax proposal also includes a provision to ban e-cigarettes from state jails and prisons and prohibits them from being distributed to minors.
Only one other state has passed an excise tax on e-cigarettes, though several others are considering similar taxes. South Carolina is proposing the same 5 cent volume rate. Minnesota adopted a plan to tax e-cigarettes at 95 percent of their wholesale rate and Washington state is considering a 75 percent tax, according to research conducted by committee staff.
The e-cigarette industry generated $1.8 billion in sales in 2013, according to Nielsen data. The state estimates that 87-102 milliliters of e-cigarette liquid is sold in North Carolina each year.