If you live in California, you may have heard the new California tobacco tax that went into effect April 1st. There’s a lot of confusion as to what exactly it is and how it will affect the end consumer, so I wanted to break it down for you. After numerous conversations with fellow industry veterans and contacts, along with countless calls to the Board of Equalization, I wanted all of us to gain some clarity. Or maybe even confuse you more!
The CA tobacco tax to be paid monthly is 27.3% of the manufacturer cost of any ejuice (including TFN juice) that contains nicotine. That means all 3mg, 6mg, 12mg or whatever nicotine fix you vape is taxable. Any 0mg eliquids are exempt and will not have to pay any tax, which is an important distinction to keep in mind if you run an herbal healing shop or supply medical or recreational cannabis dispensaries around the state or produce/distribute CBD and hemp juice around the state.
But that’s a whole other complicated topic, so I digress.
Who pays the vape tax?
Well that depends – in most cases the person responsible will be the distributor/reseller/private label brand. Here is the breakdown:
An ejuice brand can contract out a manufacturer lab to produce its ejuice lines (it’s actually a popular model used around the country). In only a few rare cases are there ejuice companies that own their own facility. These third-party labs invoice the ejuice brands for the finished product. To provide a simple example, say the manufacture cost is $2 per bottle. The lab is not accountable for the CA tax cost. That is if they are not both the manufacturer and ejuice brand.
The ejuice brand can move the product 1 of 3 ways:
#1) Sell the ejuice to a distributor at an agreed upon ‘distributor price.’ In turn, the distributor will now assume the CA tax of 27.3% of what they acquired the product for. The ejuice brand is no longer liable. The distributor creates a ‘wholesale price’ that will be sold to the retailer. This means that the distributor would have to pay the 27.3% tax on whatever price they acquired the product for from the ejuice brand. Let’s just say that distributor price is $4 - that tax amounts to $1.09.
Margins are razor thin on distribution deals, as you’re selling below wholesale price. Generating revenue this way is only possible if you’re selling in bulk, and the tax is going to take a big cut from distributors who will want to lower prices they buy for and raise wholesale rates. This make self-distribution to retailers and/or end consumers the optimal routes.
#2) Sell the ejuice directly to the retailer. The ejuice brand bypasses the distributor and will now be liable for the CA tax. They can charge the 27.3% to the retailer on top of the agreed upon wholesale cost (let’s just say its $8.) The retailer can be charged a price of $8.55 to acquire the goods, or the ejuice brand can eat the costs of .55 cents and still only charge the retailer $8. Remember that the 27.3% is charged based on the manufacturing cost which we stated earlier at $2.
This opens margins wide for both retailers (who no longer have to negotiate with distributors) and ejuice brands (who also cut out distributors to gain valuable shelf space). Know that you’re better off selling to vape and smoke shops, as convenience stores and retailers like Walmart are dominated by Big Tobacco. That doesn’t mean smaller players can’t play, however, as PrimeTime still remains independent to this day, having weathered the legislative storm against flavored tobacco products for decades.
#3) Sell directly to the end consumer via the brand’s own brick and mortar or website. By doing this, it will be automatically assumed that the ejuice brand is the distributor and is liable for the 27.3% tax as stated above in #2. Many vape retailers used to create their own private label brands, but that’s mostly been outsourced to third-party manufacturers since the FDA began putting the squeeze on the vape industry.
Becoming a private label for an existing brick-and-mortar business is much easier (and less expensive) than building it from the ground up yourself. Look into any type of deals where you can cut out as many middlemen as possible to maximize earning potential, and do what you can to push the tax onto the next guy.
Remember. The tax is to be paid by only one party within the supply chain.
How does this affect the end consumer?
For now the customer wins, since they don’t have to pay any inflated cost of their ejuice. All ejuice brands are staying competitive (like us) and are eating the costs of the tobacco tax. Those that are not doing this may see a loss of some of their retail accounts. The government doesn’t play around when collecting taxes, and avoiding the proper paperwork is only asking for trouble.
What can possibly happen in the future?
In July this year that 27.3% is going to be raised to 67%!
You read that correct. 67%.
I don’t see many ejuice brands agreeing to eat this cost as it will put them out of business. However if everyone in the distribution chain shares the cost it can maybe sustain all businesses. Basically wholesale costs may go up, which automatically means that retail costs will as well. So that $19.99 bottle of 30ml may go up to $23 or more.
As an alternative, and is definitely not recommended by us, is the practice of selling 0mg ejuice and having the consumer nic their own juices. Some retail shops may sell nicotine concentrate separately but will not nic it for the customer as it becomes a huge liability for the business. Consumers will have to nic their own juices in their own controlled environment.
There are plenty of other DIY ways to simply buy bulk VG and PG as well, but ain’t nobody got time for all that. It’s much easier to simply roll up your sleeves and find ways to stay alive while the weaker companies fall to the regulators.
In the end, this CA tobacco tax sucks. Businesses may close shop since they don’t want to go through all the hurdles to run their business. Fines and other consequences of not doing it can be just as dire. Those hopeful to survive will continue to tough it out until there is an overrule. For now, go out and support your local shops and maybe stock up before July 1st.
And keep an eye on the VapeChemist website as we continue following these important California vape regulations.
Conrad Alberto is the owner and founder of Vape Chemist.