Bill would impose 80% tax on sales of e-cigarettes as ‘disincentive’

A state Senate committee Monday unanimously approved an overhauled bill that would levy an 80 percent sales tax on snuff, chewing tobacco, small cigars, loose tobacco and electronic cigarettes, with one company saying it would cripple Hawaii’s young e-cigarette industry.

The Senate version of House Bill 145, approved Monday by the Senate Committee on Commerce and Consumer Protection, would expand the definition of tobacco products to include anything that contains nicotine and would impose an 80 percent tax on the wholesale price starting Jan. 1.

The new revenue on chewing tobacco and e-cigarettes and other products would go to the financially troubled University of Hawaii Cancer Research Center, which relies on tobacco tax revenues.

But state Sen. Rosa­lyn Baker (D, West Maui-South Maui), who chairs the Committee on Commerce and Consumer Protection, said she would still push for the tax increase if the revenue ended up somewhere else, such as the state general fund.

"We have raised the cigarette tax several times, and people are moving from cigarettes, which now have a hefty price tag, to less expensive products that can kill them just as easily," Baker said. "We’re trying to provide a disincentive for the other tobacco products."

Since 2009 the state has levied a 70 percent tax on the wholesale price of tobacco products, which currently do not include items such as chewing tobacco or e-cigarettes. "Large" cigars are currently taxed at a rate of 50 percent on their wholesale price.

"The reason you raise a tax on any of these products is to deter people from using them," Baker said. "Where we put the tax is a different conversation."

Cory Smith, CEO and co-founder of Hawaii-based VOLCANO Fine Electronic Cigarettes, testified against the bill Monday and said it puts his chain of 12 locations at an economic disadvantage compared with competitors outside of Hawaii.

"This proposed tax would basically decimate the vapor industry here locally," Smith told the Hono­lulu Star-Advertiser after the hearing. "I would have to move a significant size of our operations out of state.

"A tax on a 10-cent cigarette doesn’t mean a whole lot," he said, "but a tax on a $20 bottle of e-liquid is a drastic price change. Tobacco revenue is falling, so it feels like the state is going after former smokers to find new ways to suck money out of them. These two products are not the same thing."

Smith estimates that 60 vapor shops are operating in Hawaii and that they all would lose current customers to the Internet.

"One-third of my revenue is local," Smith said, "but I also sell to Japan, Korea and the U.K. and the mainland. Subjecting my company to a tax just because I’m located in the state of Hawaii would put me at an extreme disadvantage because customers would just go online. Then how are you going to generate (80 percent tax) revenues if no one in Hawaii can compete?"

Smith said 21 bills affecting e-cigarettes, which took off in popularity in Hawaii in 2010, were introduced this legislative session.

"We were open to sensible regulations improving safety and quality," he said. "But the only thing that comes up is money. Ultimately, what is our goal here?"

Baker said the goal is simple: "If we can raise the price comparable to the tax on cigarettes, we have a fighting tax to keep people from getting addicted to tobacco and nicotine. And young people are particularly price-sensitive."