CHICAGO — Ask any tobacco retailer or manufacturer what keeps them up at night, and nine times out of 10, the answer will be regulations.
No matter the year, regulations play a huge role in how retailers can sell and merchandise nicotine products, what they must charge for nicotine products (impacting their profit on nicotine products) and even if they can sell some nicotine products.
This year is no exception, with several major tobacco and nicotine-related measures proposed at the federal level. Here’s a breakdown of the four most pressing tobacco regulations facing retailers this year.
The FDA’s Potential Menthol Ban
For years, menthol cigarettes have been a target of local, state and federal regulators. To date, five states—Massachusetts, New York, New Jersey, Rhode Island and California—have passed statewide menthol bans (although California’s has not yet been implemented), as have more than 100 localities.
On April 21, the U.S. Food and Drug Administration (FDA) moved forward with the country’s most drastic menthol action to date, with the Office of Management and Budget (OMB) approving two proposed rules by the agency to ban all menthol cigarettes and all characterizing flavors in cigars (including menthol).
The proposals are a concern for retailers, as Statista estimates 37% of cigarette sales in the United States are menthol. But Bryan Haynes, a partner specializing in tobacco industry regulatory compliance and enforcement matters at Richmond, Va.-based Troutman Pepper, says there’s time before these rules would go into effect.
First, the FDA must allow time for public comments—at least 60 days, but for an issue of this size, it will likely be longer—and then it must review all comments.
“There will surely be quite a bit of input, so it will take the agency time,” he says. “I would think at least two years from the issuance of the proposed rule to seeing a final rule.”
Even if approved, the rule will not immediately go into effect.
“There’s a difference between the issuance of a final rule and the effective date,” Haynes says, adding that the Tobacco Control Act mandates no standard take effect earlier than one year from the final rule issuance. “We’re talking three years. … Then there’s the likelihood of litigation.”
Haynes anticipates litigation will likely focus on two areas: the FDA’s justification for banning menthol and the potential for black-market trade.
“Putting aside the science of whether a menthol ban is justified, they also have to address the very real potential for contraband trade,” Haynes says, noting that the Tobacco Control Act specifically requires the FDA to consider black-market trade that may arise from any potential regulations—something that’s certain to happen if menthol is banned.
Because of the importance of menthol, Haynes says all interested parties should submit comments to the FDA once the public comment period opens. “Anybody that has a vested interest in the process should participate; that’s really the best way to influence it,” he says.
Haynes offered a few suggestions on how retailers can best frame their argument to the FDA:
- Remember, it’s not a vote: Haynes says a lot of people will simply put “for” or “against” in their comments. “Comments that just articulate a position without a justification get no weight whatsoever,” he says.
- Focus on your area of knowledge: While there will be many who cite scientific data, retailers should focus on other areas the FDA must also consider. “The area where the retail trade has the most powerful voice regards the economic impacts and the impact of contraband trade,” Haynes says.
- Look at the FDA’s justification and obligations: Haynes reminds retailers that the FDA is required to consider both contraband trade and economic impacts as a result of any rule. “The key is really the justification,” he says.
The PMTA Backlog
On paper, it looks as though the FDA has done a commendable job of reviewing and ruling on the nearly 6.7 million electronic cigarette products that have submitted premarket tobacco product applications (PMTAs) on or before the Sept. 9, 2020, deadline to remain on the market. The agency says it acted on 99% of those applications.
Per FDA, more than 1 million PMTAswere not accepted by the agency, the agency refused to file millions more, and 1 million or more PMTAs received marketing denial orders (MDOs).
As of April, the agency issued marketing granted orders (MGOs) to just 15 electronic cigarette products: three tobacco-flavored products from Reynolds American, eight tobacco-flavored products from Logic Technology Development, and four tobacco-flavored products from NJOY.
The FDA estimates it has about 55,000 PMTAs pending decision. Haynes says the numbers, while accurate, are deceiving.
“In percentage terms, the FDA has ruled on a very high percentage of the applications that were submitted,” he says. “But they have not ruled on a very high percentage of the products that are actually sold.”
Logic, for example, accounts for about 1% of e-cigarette dollar sales in the U.S., according to NielsenIQ data. The FDA has yet to rule on a single product from Juul, whose products account for nearly 40% of the market.
It’s not just the tobacco industry critiquing FDA on the lack of progress. Matt Myers, president of the Campaign for Tobacco-Free Kids, told CNN in March the products the FDA has ruled on only account for 25%-30% of the e-cigarette market.
“The most important decisions are still sitting in front of the FDA,” he said.
In the meantime, more than 30 vaping companies who received MDOs have filed appeals. Most have argued that the agency acted “arbitrarily and capriciously,” and that the FDA changed its PMTA standard after the September 2020 deadline but did not provide clear information to companies on how to meet those standards.
“There’s been a lot of rejections,” said Nik Modi, managing director for New York-based RBC Capital Markets, during a recent CSP Tobacco Update webinar. “There’s a lot of appeals happening right now, so it’s a pretty messy situation.”
These appeals are making their way through the court system, with some already conducting oral arguments. Haynes says the courts will likely start issuing decisions “within a reasonable time thereafter.”
The thousand of products sitting on the FDA’s docket have no such timetable. The agency already missed the fall 2021 deadline set to rule on all PMTAs. “There is no timeline,” Haynes says.
Continued Confusion on Flavors
Another regulatory issue compounding concerns about the vaping market is a discrepancy on flavors. As of Jan. 2, 2020, the FDA prohibited flavored vaping cartridges and pods until the agency approved said flavored products via PMTA (which it has not, to date, done for any flavored product). Disposable e-cigarettes and cartridges, pods or e-liquids made from synthetic nicotine were allowed to remain on the market.
This led to an increase in the sale and availability of disposable and synthetic products.
While the FDA had authority in 2020 to ban disposable flavored products (but chose not to), synthetic nicotine products operated under something of a loophole: Manufacturers argued that because synthetic nicotine is not derived from tobacco, these products were not under the FDA’s purview.
Congress took action to close that loophole in early 2022. The Consolidated Appropriations Act of 2022, passed by Congress on March 10, updated the definition of “tobacco product” under the Family Smoking Prevention and Tobacco Control Act to include any product containing nicotine from any source. The FDA can now choose to extend the flavor ban to synthetic products and require synthetics companies to submit a PMTA for all products to remain on the market.
As for disposables, Haynes says whether the agency bans flavors, these products need a stricter level of scrutiny.
“There are two things the FDA could easily determine,” he says of disposables. “One, did these companies submit a PMTA at all? I would guess a lot of them have not. And two, if they do have a PMTA on file, (did) they actually (have) their product on the market before Aug. 8, 2016, the latest date eligible for the PMTA pathway?”
Haynes adds that FDA action on “flagrant violators” of the PMTA requirement is “long overdue,” noting that to date, the agency has only sent warning letters.
“That’s really unacceptable when you have companies spending tens of millions—if not hundreds of millions—of dollars invested in the premarket review process, then having their competitors getting a free pass,” he says.
“There’s no point in having rules if they’re not going to be enforced.”
State and Federal Excise Taxes
Taxes on tobacco and nicotine products have long plagued the category. In recent years, most tax increases have happened at the state and local level. But last year Democrats sought to pass the first federal excise tax increase in over a decade, funding the Build Back Better reconciliation package by doubling the excise tax on cigarettes and applying tax parity across all other tobacco products, including vapor.
Even before Build Back Better stalled, Democrats quietly dropped the nicotine excise tax from the proposal. Sen. Joe Manchin (D-W.Va.) commented: “A tax on nicotine? That doesn’t make any sense to me whatsoever.”
“Federal taxes haven’t been raised since 2009,” Modi said. “We dodged a big bullet. This was doubling the excise tax for cigarettes, and more importantly would have been a massive increase for the other categories.”
Democrats like Manchin voiced what those in the industry have known for some time: Tobacco taxes are incredibly regressive.
“The proponents said it wouldn’t raise taxes on people making less than $400,000 a year,” Haynes says. “Then they inserted a tax where the burden is primarily borne by lower-income folks.”
“Tobacco taxes have been deemed regressive by both parties,” Modi agreed. “That’s a positive. No one wants to put higher taxes on lower-income consumers.”
Which isn’t to say another increase to the federal excise tax won’t be attempted.
“All it takes are budget gaps, more enemies in Congress than friends, to change the dynamic,” Haynes says. “It’s always going to be a risk.”
Meanwhile at the state and local level, tobacco tax news though 2021 was pretty positive. According to the National Association of Tobacco Outlets (NATO), of the 23 states that proposed tobacco tax increases, only Maryland succeeded in doing so. Of the 28 states to propose taxes on electronic cigarettes and vaping products, only three—California, Indiana and Maryland—passed.
“In 2021, many states did not pass bills due to budget deficits that were not as large as predicted because of all the federal stimulus funds that flooded state coffers,” Modi said.
Still, 12 of the 23 tobacco tax bills and 11 of the 28 electronic cigarette or vaping tax bills carried over into 2022. Then there are the other usual suspects of state and local tobacco regulations, such as flavor bans, minimum pack sizes, licensing requirements and more.
All of which is to say, the regulatory action of 2021 may have been more in favor of tobacco retailers than years past. That’s not a reason for industry watchers to let their guard down, Haynes says.
“Particularly retailers, be cognizant of particularly local measures,” he says. “This is the first page of the anti-tobacco playbook: Start with the localities and move from there.”
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