PA vape distributor sues the state over killer 40% tax

When your elected legislators won't help, find a lawyer and sue the state

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pennsylvania

Thanks a lot, state government

Remember the Pennsylvania vape tax? Yeah, that one — the 40 percent tax that has already closed more than 70 vape shops and manufacturers in the state.

The tax was promoted as a way for the state to collect $13 million a year in easy income. But, since it levied a floor tax that required every shop to make a lump sum payment for all onhand stock, it simply forced businesses to shut their doors. The tax even attempts to tax consumers who buy from online or out-of-state sellers, and provides criminal penalties for those who don’t pay.

PA received $233 million in Master Settlement Agreement payments in 2014.

In September, we profiled Fat Cat Vapor owner Chris Hughes and described his fight against the tax that killed his business. Later that month, Pennsylvania vape shop owners, employees, and customers rallied at the state capitol in Harrisburg demanding the tax be repealed.

Unfortunately, despite well-organized advocates and some sympathetic lawmakers, the legislative fix did not pass. As of December 30, businesses will be on the hook to the state for 40 percent of the value of all merchandise that was on hand as of October 1, the date the law took effect.

See you in court!

judge-room

When you can’t get elected representatives to act in their constituents’ best interests, the next step is taking the state to court. And that’s exactly what one Pennsylvania business is doing.

Bob Oesterling and his sons Ben and Zack own a shop called Smoke 4 Less LLC in Clarion, Pennsylvania, and Kingdom Vapor, a wholesale distribution business. They’ve been selling vape gear and e-liquid to retail stores since 2013. Since the law went into effect, the Oesterlings have seen 17 businesses they supply close their doors. More than 70 shops in all have shut down, with more certainly to come.

The Oesterling family filed suit against the Pennsylvania Department of Revenue in the Pennsylvania Commonwealth Court on December 20, challenging both the constitutionality of the state’s Tobacco Products Act and the Department of Revenue’s interpretation of that law, which requires e-cigarette wholesalers to pay a tax on individual components of vaping devices like cotton, resistance wire, batteries, and chargers. The state’s tax scheme does not assess a tax on those same items when sold by non-vaping businesses, which violates the uniformity clause in the Pennsylvania constitution.

“They’re trying to tax us out of business"

Ben Oesterling told Vaping360 that the list of taxable items the Department of Revenue published was taken directly from an e-mail his brother Zack sent the state agency, even including an error (he mistakenly typed “185000” instead of “18500 batteries”). So there had been little actual research on the products the state intended to include. According to a press release on the Kingdom Vapor website, the law only benefits the tobacco and pharmaceutical industries, and is destroying small vape businesses.

The Oesterlings are asking the court for a declaratory judgement that the only products that can be taxed are e-cigarettes with all parts included (like cigalikes or all-in-one kits) and e-liquid. Meanwhile, they ask for an injunction preventing the state from forcing them to collect the tax on wholesale transactions.

It's just about the money

Greg Conley Speaking
Greg Conley Speaking

Bob Oesterling knows what prompted the state to implement the tax. He told the Pittsburgh Post-Gazette that vaping is substantially reducing the number of smokers in the state, which impacts Pennsylvania’s income from the Master Settlement Agreement (MSA).

The MSA provides 46 participating states payments from the tobacco companies based on the number of cigarettes sold in the state. According to Propublica, PA received $233 million in MSA payments in 2014.

“They’re trying to tax us out of business,” Oesterling told the paper. “The vaping industry has reduced those numbers of smokers drastically.”

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Jim McDonald
I spend most of my time studying the regulatory, legislative and scientific challenges to vaping, advocating for our right to exist, and talking with others who do the same. Consider me a source for information, and feel free to agree or disagree with anything I say. I love good coffee and sweet Michigan cherries. My childhood hero was Gordie Howe.