Pot Industry Vexed to Be Pulled Into Congress’ Vaping Rules

Cannabis businesses are fearful a congressional mandate lumping them in with tax and shipping restrictions meant for nicotine vaping devices could change their legal treatment forever, resulting in more headaches, and bigger bills.

The Prevent All Cigarette Trafficking Act imposes arduous registration requirements, strict noncompliance fines, and shipping bans. The law’s definition of liquid vaporizers is ambiguous, calling them electronic devices that deliver nicotine, flavor, or “any other substance” via an aerosolized solution. This categorization likely ropes the e-liquids made by the cannabis industry into the law, industry watchers say; even worse, they worry, it could set a legal precedent for governments to apply tobacco taxes and restrictions to cannabis.

Cannabis producers are struggling to understand whether and how recent amendments to the law—which cite concerns over youth nicotine vaping—will impact the consumer market for non-nicotine vaping, said Douglas Fischer, general counsel at Greenlane Holdings Inc., a cannabis product distributor based in Florida. More than a dozen cannabis producers and retailers have since submitted comments and letters to lawmakers and U.S. Postal Service administrators asking for a specific exemption, but their pleas remain unanswered.

“We don’t want regulatory burdens placed on our consumers and costs raised when the law was never intended to address cannabis products,” Fischer said.

Extra Taxes?

Companies selling cannabis-based products like cannabidiol or CBD, and tetrahydrocannabinol or THC oil for vaping devices may have to register with the Bureau of Alcohol, Tobacco, Firearms and Explosives to meet the new requirements, said Tram Le, a Texas-based CPA and attorney. She specializes in state and local tax issues.

The PACT Act would require sellers of vaping devices to report compliance with state tobacco and nicotine taxes, but those licensure agreements and taxes may not be applicable to sellers of non-nicotine vaping products.

In certain states, cannabis retailers and producers may have to pay taxes that apply to both tobacco and cannabis businesses or face fines of $5,000 to $10,000 per month if they fail to comply.

Recreational cannabis use is legal in Washington, D.C. and 18 states, according to consultancy DISA Global Solutions. Cannabis businesses that might have just been approved for a license to distribute or manufacture in a given state are already struggling to navigate their complex tax obligations, which now includes the PACT Act, Le said.

“It really depends on how each state’s laws are written,” Le said. “I think it will be challenging to really follow and meet the law because it’s such a new, emerging industry.”

Conflicting Definitions

The PACT Act facilitates the statewide regulation and taxation of tobacco products, but some states have already defined vaping devices in a way that separates cannabis from nicotine products.

California’s Department of Tax and Fee Administration explicitly excludes legal cannabis products and devices for their use from its state tobacco tax laws. New Mexico defines e-liquids as substances intended for use in e-cigarettes, not including those containing cannabis or oil derived from cannabis.

Similarly, Oregon’s Department of Revenue subjects vaping devices to the state’s tobacco tax scheme, excluding those sold or used solely for the purpose of consuming cannabis products.

Interpreting the act to apply to non-nicotine devices would “create a confusing and unnecessary conflict with state law through its amendments to PACT,” reads a letter from more than a dozen cannabis producers and manufacturers to the USPS from earlier this year.

Can’t Reach Customers

The postal service has delayed its implementation of the mandate after receiving over 15,000 comments on its proposal, awaiting a final rule that will determine shipping exceptions for business-to-business transactions. But commercial shippers like FedEx, UPS, and DHL have already stopped shipping vaping products altogether to avoid the PACT Act’s complex reporting requirements.

The shipping ban has already made waves on cannabis companies that used those carriers, said Nick Kovacevich, co-founder, chairman, and CEO of KushCo Holdings Inc., which provides ancillary products and services to the legal cannabis industry.

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KushCo previously relied on FedEx but has since switched to freight carriers for its main products, he said. That required an increase in the average minimum order size that precludes doing business with customers who can’t afford high-volume orders.

This type of regulation creates an opportunity for bad actors to thrive, Kovacevich added. While publicly-traded companies must abide by the PACT Act restrictions, unregulated businesses continue to skirt around compliance requirements, he said.

Small-scale cannabis retailers and manufacturers may be faced with a grim choice, he said: Pay punishing shipping rates or refuse to comply with the PACT Act.

“You might have the intention of creating regulation, but it’s going to be circumvented by the wrong people,” Kovacevich said.

Distancing From Tobacco

Conflating cannabis products with tobacco and nicotine has implications that go beyond compliance with the PACT Act, the industry says.

Big Tobacco has a problematic history of marketing practices to sell products to young people, which has evolved more recently with nicotine vaping devices, Fischer said. Many leaders in the legal cannabis industry, which only emerged over the last decade, have intentionally isolated their products from being associated with tobacco, he said.

“To be painted in the same corner with tobacco is not something we want,” Fischer said. “Particularly when it’s only the result of, perhaps, just some imprecise drafting rather than a conscious policy decision.”

—With assistance from Sam McQuillan.