State Licensing Considerations for Tobacco & Nicotine Products

In this post, we take a closer look at state tobacco and nicotine product licensing considerations. When approaching state licensing issues, it may be helpful to establish a checklist to help manufacturers, importers, distributors, and retailers determine the impact of these laws on their products and distribution models. State licensing requirements can be complicated but, with a basic understanding of the key issues described below and good practices, manufacturers, importers, distributors, and retailers can ensure they remain compliant.  

Who Issues Tobacco and Nicotine Product Licenses?

A variety of state agencies issue tobacco and nicotine product licenses for a few key reasons, including: collection of taxes and to establish an audit trail for liability; public health regulation; and to track tobacco and nicotine products sold, bought, stored, and/or transported by persons within the state.

These agencies go by different names depending on the state and can include, among others, departments of revenue, treasury departments, alcoholic beverage control boards, state tax commissions, tobacco control, departments of consumer protection, and departments of health.

What Types of Products Are Subject to Licensing Requirements?

There are a wide variety of state licensing regimes for tobacco and nicotine products. These laws cover the full gamut of product types, including traditional tobacco products like cigarettes, cigars, roll-your-own tobacco, pipe tobacco, smokeless tobacco, hookah tobacco, and newer types of nicotine products, such as vapor products (or electronic nicotine delivery systems (ENDS)) and modern oral nicotine pouches. When determining whether state licensing requirements apply, companies must closely consider product definitions in the laws and regulations in the states in which their products will be sold or shipped. Companies should consider whether their products are expressly listed in state statutes or regulations; whether their products could be covered by a catch-all phrase such as a product made from tobacco, containing nicotine, or containing a tobacco substitute; for vapor products, whether the state licensing requirements apply to both the sale or possession of devices and any consumable materials within the devices or just the consumable materials; and whether a state licensing requirement for vapor products includes those that use non-tobacco derived nicotine. The need to perform careful analysis is particularly important when dealing with novel products. Consider, for example, nicotine pouches. Might some states’ laws treat them as smokeless tobacco or a tobacco substitute? 

In some cases, state laws, regulations, or case law clearly express whether a company’s products are covered. In other cases, companies may need to make a judgment call or may find it advisable to contact state tax authorities to obtain the regulators’ position as to whether and to what extent their products are subject to licensing requirements.

What Types of Licenses Do States Issue?

States issue several different types of licenses that go by different names, but generally, the categories include:

Distributors

• Typically, a distributor is a person that manufactures, produces, ships, transports, brings, or causes to be brought, tobacco products into a state for sale.
• Some states specify that a distributor only deals with tax-not-paid product.

Wholesalers

• Generally, wholesalers purchase tobacco or nicotine products from distributors and resell them to other wholesalers or retailers, but some states define them broadly to include any person that regularly sells tobacco or nicotine products within a state.
• Some states specify that a wholesaler only deals with tax-paid product.

Subjobbers

• Subjobbers are generally those individuals that purchase tobacco or nicotine products from a wholesaler or distributor and resell them to retailers.
• Some states specify that a subjobber only deals with tax-paid product.
• This category exists in a minority of states and most states would include a person functioning as a subjobber in their definition of wholesaler.

Manufacturers

• Manufacturers are typically the person that actually fabricates tobacco or nicotine products or the person that causes the tobacco or nicotine products to be made, such as through a contract manufacturing agreement.
• Some states treat first importers the same as manufacturers for licensing purposes.

Importers

• Generally, importers are those persons that import tobacco or nicotine products into a state for resale, but some states provide a much broader definition, which would include any person that imports tobacco or nicotine products into the U.S. for resale.

Salesperson/Manufacturer Representatives

• These persons are typically agents or employees of other licensees, like manufacturers, distributors, or wholesalers, that promote, solicit orders for, or sell tobacco or nicotine products on behalf of those licensees.

Retailers

• Retailers are generally companies that sell tobacco or nicotine products to consumers for consumption rather than resale.

What Are Some Common Licensing Issues?

• Complicated company organizational structures can cause issues when applying for licenses because some states require the applicant to provide detailed information about all officers, directors, and managers, including spousal information. This type of information can be burdensome to obtain and provide for large, national companies.

• Some states allow companies to obtain any type of license required for a particular activity in a manner that would, for example, allow a manufacturer or importer to also be licensed as a retailer. But other states’ laws require more separation between the various tiers, similar to alcohol, in which a manufacturer or importer, for example, cannot also be a distributor and/or a retailer.

• Some states require a retail applicant to have an in-state presence or that a retail license be issued by a locality in which the applicant is located. This could present issues for companies that want to operate as online sellers without a physical presence in a destination state.

• Some companies choose to use third parties for storage and order fulfillment services and many states do not directly address whether such third parties must be licensed on their own or on behalf of the company for whom they provide services.

• Companies may change locations, or officers, directors, and managers, and forget to update the states in which they maintain licenses. Some states require licensees to update them whenever any information originally submitted in an application changes. Other states require a licensee to submit an entirely new application to obtain a new license for certain changes, like a change in licensed location.

When Does it Make Sense to Consult Legal Counsel?

Legal counsel can help you navigate this maze. It particularly is worth consulting legal counsel to obtain advice on licensing and excise tax requirements (for more on excise taxes see our previous blogpost here) related to novel products and complex distribution models that involve multiple affiliated or third-party entities in multiple states. Experienced legal counsel will have a strong understanding of the applicable statutes, regulations, guidance, and case law relevant to these requirements. And this experience is key to providing companies a clear understanding of the requirements, ambiguities, risks, and options for proceeding in any given state. Finally, it is always prudent to immediately consult legal counsel if a company receives any communication from a state agency alleging noncompliance with such requirements. 

This analysis is intended for informational purposes only and is not tax advice.  For tax advice, consult your tax adviser. See the full disclaimer here.

Written by: Agustin Rodriguez & Nick Ramos