PACT Act 101: Vapor Products Regulation & Tax

Here’s our overview of The Preventing Online Sales of E-Cigarettes to Children Act. From the basics requirements of the recent vape law to next steps online sellers can take towards compliance with quick how-to instructions.

What Is the new vape law?

The Preventing Online Sales of E-Cigarettes to Children Act was passed on December 21, 2020 as part of the Omnibus Spending Bill.

The bipartisan legislation includes emergency economic relief, government funding and tax cuts. It comes in at 5,593 pages. Don’t worry, we won’t ask you to read the whole thing! The Preventing Online Sales of E-Cigarettes to Children Act, also known as the vape mail ban or vape control act, can be found on page 5136 of the bill.

See the full Omnibus Spending Bill here.

What does the vape control act do?

It’s actually fairly straightforward. Here’s a breakdown of what The Preventing Online Sales of E-Cigarettes to Children Act does:

1. It requires the U.S. Post Service to create its own regulations within 120 days banning the U.S. Mail delivery of vaping products. Here vaping products means any “electronic nicotine delivery system” which includes any electronic device that, through an aerosolized solution, deliver nicotine, flavor, or any other substance to the user. For example: e-cigarettes, e-hookahs, e-cigars, vape pens, advanced refillable personal vaporizer, electronic pipes. It also includes any component, liquid, part of accessory of an electronic device.
2. It requires that shippers of nicotine and cannabis vaping products (as defined above) comply with the Prevent All Cigarette Trafficking Act (aka. The PACT Act).

When did it go into effect?

The Preventing Online Sales of E-Cigarettes to Children Act went into effect 90 days after it was signed into law which is March 27, 2021.

What do online sellers need to do to comply?

Here’s an overview of what online sellers of vaping products can do to comply with the new e-cig regulations:

• Register with ATF and with tax administrators of the locations you’re shipping vaping products and any locations your vaping products are advertised/offered.
• Verify the age of your customers before checkout.
• Guarantee in-person age verification on physical delivery of your vaping products.
• Collect all applicable local and state taxes.
• Label shipping packages to show they contain tobacco products.
• Send each taxing state’s tax administrator a list of all transactions with customers in their state, including the names and addresses of each customer sold to, and the quantities and type of each product sold.
• Maintain records for five years of any “delivery interrupted because the carrier or service determines or has reason to believe that the person ordering the delivery is in violation of the [PACT Act]”

Business impacts of non-compliance

Let’s start with penalties under the PACT Act.

PACT Act Penalties

Under the PACT Act, anyone found to be in non-compliance could face civil and criminal penalties. Civil penalties include fines to be the greater of $5,000 or 2% of the gross sales during the 1-year period ending on the date of the violation. That $5,000 is just for the first violation. After that it’s $10,000 for any other violation.

Criminal penalties could be up to 3 years in prison.

State Vape Tax Penalties

If you violate state tax requirements there are separate penalties. Each jurisdiction has its own penalties. Failure to collect or pay jurisdiction taxes can be met with massive penalties. In some cases where the failure was due to fraud, penalties can be as high as 50% of the tax owed.

How to register with ATF

This is the easiest way to register with the federal authorities and make sure you include all the proper information.

1. Download the PACT Act Registration Form here.
2. Submit the registration. You can do so via email or via mail. The details on where to send registration form can be found in the ATF PACT Act Information Guide.

How to register with state and local tax administrators

1. Identify applicable jurisdictions. List all the jurisdictions you ship or advertise your vape products. Quick tip: they could be state and local entities including counties and cities.
2. Visit the tax administrator websites for each jurisdiction on your list. Visit our tobacco tax filer resource guide to find the websites for each state jurisdiction. Note: for most state jurisdictions, the tobacco tax section is where will be registering as vape seller. They’ll receive your reports, returns and payments.
3. Find the jurisdiction specific registration requirements. Some jurisdictions have online registration available. Keep in mind, there may be license fees attached to your registration.

You should register with any states that tax vaping products. Quick Tip: That includes sales tax and excise taxes.

Read up on vape tax by state here.

How to verify the age of your online vape customers

1. Research age verification databases. You can do this super easily by just typing “verify customer age” into Google. You’ll find several providers with a variety of solutions that could fit your business.
2. Make a list of requirements for your age verification provider. Of course, they must verify your customers’ age before the checkout process is complete. Next, consider requirements that are important to you like integrating seamlessly with your e-commerce platform or customizable verification rules.
3. Implement the age verification database. Quick tip: keep the implementation timeline and process in mind when choosing a provider. It may be something you can add to your website on your own. Or it might be a more sophisticated process that requires collaboration with the software provider’s team.
4. Start verifying customers. You aren’t required to verify customers until March 27, 2021 but you may want to start verifying customers right away to work out the kinks before the deadline.

How to guarantee in-person age verification upon delivery

Use shipping services that collect an adult signature at the point of delivery. There are likely smaller private shippers that ship vaping products and collect adult signatures.

UPS will not ship vaping products as of April 5, 2021. FedEx has announced that they will no longer be shipping vaping products as of March 1, 2021. And of course, USPS will no longer be shipping vape products 120 days from the enactment of The Preventing Online Sales of E-Cigarettes to Children Act.

This significantly impacts vape sellers ability to ship vaping products direct to the consumer.

How online sellers can collect and report state and local taxes

1. Determine what is taxed. You need to know which products and e-cig components are taxable and what those tax rates are by jurisdiction.
2. Collect tax from customers. Your manner of collection will depend on how your business runs. For many online sellers, your e-commerce platform will need be able to add tax at checkout. However, you’ll still have to “tell” the e-commerce platform what amount of taxes to collect based on the delivery location which goes back to tax determination.
3. File Taxes. You’ll need to report and pay taxes to appropriate entities. Each jurisdiction will have it’s own forms, filing processes, and deadlines. Excise tax compliance can be extraordinarily time consuming without the right tools in place.

Read up on excise taxes in our complete excise tax guide.

Sources:

https://www.washingtonpost.com/us-policy/2020/12/21/stimulus-congress

https://rules.house.gov/sites/democrats.rules.house.gov/files/BILLS-116HR133SA-RCP-116-68.pdf

https://www.govinfo.gov/content/pkg/PLAW-111publ154/pdf/PLAW-111publ154.pdf

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.