Attack of the PACT Act

An amendment to the PACT Act to include vapor products has caused major disruption throughout the vapor industry.

By Timothy S. Donahue

When a 5,000-plus page omnibus bill, the Consolidated Appropriations Act of 2021, was signed into law on Dec. 28, 2020, the vapor industry knew its impact would be bad. It was impossible to know at the time how crushing a blow it would be. Buried deep within the bill (page 5,136) was the Preventing Online Sales of E-cigarettes to Children Act. It was a provision that effectively bans the United States Postal Service (USPS) from shipping electronic nicotine-delivery systems (ENDS).

The updated provision redefines the word “cigarette” under the 2009 Prevent All Cigarette Trafficking (PACT) Act to include ENDS products. ENDS would now be subject to the same shipping laws as combustible tobacco. The ensuing shipping problems for vapor retailers forced many companies to end all U.S. online sales and many others have been forced out of business. Chris Innes, owner of Elevated Vaping in Houston, Texas, announced that he would be closing his shop due to the PACT Act and the U.S. Food and Drug Administration’s stringent premarket tobacco product application (PMTA) requirements.

The Vape Spot in Los Angeles also announced it would be closing its store due to the PACT Act after eight years of helping smokers make the switch. Securience, parent to DuraSmoke, announced a merger with VapinDirect to stay in business. Logic ended all online sales on March 16. White Cloud Electronic Cigarettes ended all online U.S. sales on March 26. Vapewild and Vistavape went out of business entirely. The list goes on.

“If the increase in shipping costs wasn’t enough, the bill also imposes huge paperwork burdens on small retailers and backs it up with threats of imprisonment for even innocent mistakes,” said Gregory Conley, president of the American Vaping Association. “This is not a law designed to regulate the mail-order sale of vaping products to adults; it’s an attempt to eliminate it.”

According to Karen Goss of Chemular, a business improvement solutions and compliance systems provider, the PACT Act affects the entire vaping industry from the manufacturers shipping to the distributor, the distributor shipping to the retailer, and businesses taking orders from consumers online regardless of whether the product is even mailed.

While the legislation was geared toward nicotine vaping products, the law is so broadly defined that cannabis businesses must also comply. This means marijuana and CBD companies selling, manufacturing or shipping vaporizers or associated parts across state lines are required to comply with the provisions of the PACT Act.

“It affects literally everyone in the distribution chain, regardless of whether you are actively shipping your product into a state. If you are advertising your product for sale in that state, you should be registered with that state for PACT Act purposes. This is for any electronic device that, through an aerosolized solution, delivers nicotine, flavor or any other substance to the user by inhaling from a device,” said Goss during a recent webinar. “This covers liquid and any component, part or accessory, whether sold with the device or separate. It coves liquids with 0 mg of nicotine. It covers synthetic nicotine. It essentially covers the gamut of vaping products.”

The PACT Act has turned out to be an even greater hurdle to the vaping business than the FDA’s onerous PMTA applications, which had to be submitted to the regulatory agency in September of last year, according to James Xu, chairman and CEO of Avail Vapor, a major chain of brick-and-mortar vape shops. He said FDA regulations took time; the PACT Act was implemented in less than four months.

“It was just like, wow, this is happening. The PACT Act can take away the majority of online vapor businesses. Smaller companies aren’t going to be able to comply, especially these companies that are selling e-liquids for $10 a bottle that are now going to have to go up to $50, $60 a bottle,” he said. “They’re not going to survive; there’s no way they can survive. They were already cutting their profit margins just to be able to push product out.”

Rules of the road

PACT Act regulations are so stringent for online merchants that leading private shipping companies will also stop delivering vapor products. “Effective April 5, 2021, UPS will not transport vaping products to, from or within the United States due to the increased complexity to ship those products,” said UPS spokesperson Matthew O’Connor in a statement. FedEx began no longer accepting vapor products for delivery on March 1, 2021. DHL had already previously banned all shipments of nicotine-containing products and has now also ended all cannabis vapor product shipments.

The only shipping option that remains is Austin, Texas-based X Delivery, a private B2C shipping company. “The shipping carrier X Delivery isn’t afraid of a little red tape,” the company’s website states. “X will verify the age of the purchaser and obtain the required signature of the adult, as outlined in the PACT Act, with every vape-related delivery.” Another company, Vapefreight, was preparing to ship B2B vapor products but was still conducting trial runs as of this writing.

Many businesses were unsure if B2B mailing would be allowed. According to Azim Chowdhury, a partner at Keller and Heckman, the PACT Act has historically exempted business-to-business deliveries from the USPS ban. Specifically, the USPS ban does not extend to tobacco products mailed only for business purposes between legally operating businesses that have all applicable state and federal government licenses or permits and are engaged in tobacco product manufacturing, distribution, wholesale, export, import, testing, investigation or research.

“Companies seeking to use USPS for business-to-business deliveries must first submit an application to the USPS Pricing and Classification Service Center and comply with several other shipping, labeling and delivery requirements,” said Chowdhury. Under the B2B exception for the USPS, all transactions must be done in-person, face-to-face, according to the USPS.

“This was not a requirement set by Congress, and it imposes time and money burdens on both businesses and the USPS infrastructure,” said Conley. “USPS should accept the approved business purposes exception documentation, verify that a recipient is a covered and approved authorized business recipient of ENDS products, and allow mailings through both the USPS pickup and drop-off system in place for other USPS-handled packages.”

The USPS mail ban on vaping products will go into effect on or before April 27, 2021. After this date, retail customers will no longer be able to receive vaping products by way of USPS delivery, according to the USPS. However, the USPS rule states that the agency will mail vapor products under narrowly defined circumstances:

• Noncontiguous states: intrastate shipments within Alaska or Hawaii;
• Business/regulatory purposes: shipments transmitted between verified and authorized tobacco industry businesses for business purposes, or between such businesses and federal or state agencies for regulatory purposes;
• Certain individuals: lightweight shipments mailed between adult individuals, limited to 10 per 30-day period;
• Consumer testing: limited shipments of cigarettes sent by verified and authorized manufacturers to adult smokers for consumer testing purposes; and
• Public health: limited shipments by federal agencies for public health purposes under similar rules applied to manufacturers conducting consumer testing.

The USPS rules also state that the listed exceptions cannot feasibly be applied to inbound or outbound international mail, mail to or from the Freely Associated States, or mail presented at overseas Army Post Office, Fleet Post Office, or Diplomatic Post Office locations and destined to addresses in the United States. Because of this inability, all ENDS products “in such mail are nonmailable, without exception.”

One way USPS could simplify the exception process would be digitizing not only the specific business requirements but also the exception application itself, suggested Conley. He says that by uploading the necessary permits and business filing documents online, USPS would have access to verified businesses anywhere in the nation, ensuring that there are not unnecessary delays in the shipping process for ENDS businesses. “This online portal could also be used by applicant businesses to verify the status of an approval for utilizing USPS as a shipping provider of ENDS in a timely manner,” he said.

Excluded from the statutory definition are products approved by the FDA for sale as “tobacco cessation products or for other therapeutic purposes and marketed and sold solely for such purposes.” The USPS also proposes to treat ENDS as a standalone category, “albeit one generally subject to the same restrictions and exceptions as cigarettes, consistent with the statute.”

According to the PACT Act legislation, anyone selling vaping products must:

• Register with the U.S. Attorney General;
• Verify age of customers using a commercially available database;
• Use private shipping services that collect an adult signature at the point of delivery;
• Register with the federal government and with the tobacco tax administrators of the states if selling in states that tax vaping products;
• Collect all applicable local and state taxes, and affix any required tax stamps to the products sold;
• 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; and
• 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].”

Retailers can be cited by states for not following their individual requirements for tax payments and filings, and they may have to purchase tobacco and other licenses or hire a registered agent in the state. The cost for being PACT Act compliant can range anywhere from $40 to $250 or more per year per state, according to Goss. “There are a variety of companies that perform PACT Act compliance,” she said. “I put those numbers out there so that you have some sort of ballpark figure and you know you’re not getting overcharged. At the same time, it gives you a view of what to expect for this process on an ongoing basis.”

Registered for mail

In addition to the nonmailing provisions, the PACT Act requires anyone who sells ENDS products to register with the Bureau of Alcohol, Tobacco and Firearms and Explosives (ATF) and the tobacco tax administrators of the states into which a shipment is made or into which an advertisement or offer is disseminated, according to Chowdhury. Retailers who ship ENDS, cigarettes or smokeless tobacco to consumers are further required to label packages as containing tobacco and maintain records of all delivery sales for a period of four years after the date of sale, among other things.

Registering with the ATF online requires visiting the agency’s website (www.atf.gov) and filling out a single-page form. Goss said that companies should notice that in the first section under “Person,” the company would enter its name; person is defined as the business. “Another item to note is that you should list all of your business locations that are receiving product,” she said. “For example, if you have multiple distribution hubs, list all of them on this form. Save yourself the trouble of filling out multiple forms and lump all your business locations into one form.”

Companies will also have to tell the ATF where to send service of process in each state the company operates in case of any potential lawsuits. This is another area where hiring an agency to serve as a registered agent can make things easier. “There are a number of registered agent organizations that have offices in every state across the U.S. When you find a company that you like, they can most likely be your agent in all states that you require their services in,” said Goss. “Basically, they’re your mailbox in that state.” There’s not any further interaction required with the ATF after filling out the form unless a company changes agents or any information such as addresses change.

Completing the requirements to register with the states is more complicated. Each state has its own rules for companies doing business in the state. Retailers can be cited by states for not following their individual requirements for tax payments and filings. Some will have special forms while others will accept the same letter copy of the federal registration (addressed to the state). “Go to each state’s tobacco tax office website, if there is one,” said Goss. “Typically, that’s where the state will have information on how to register.”

The state and ATF registration requirements only apply when the destination state taxes ENDS products, according to JDSupra.com, a business news source. This is important for cannabis companies since some states, Oregon for example, have exemptions for ENDS shipments of cannabis (THC and CBD) devices.

The most arduous requirement of the PACT Act is monthly reporting. Similar to the ATF and state registration requirements, the state reporting requirements only apply when the destination state taxes ENDS, according to JDSupra. Just like with the registration process, states have different ways to submit information, and states also want varying amounts of information, according to Goss.

Some states want a form and hard copies sent in, while others have an online portal with templates. Typically, for each delivery sale and each person who has delivered product in connection with a delivery sale, it is required to file a delivery sales report with the comptroller’s office.

“The same product may get reported to the state multiple times. A bottle of e-liquid will get reported when it’s shipped from the manufacturer to the distributor, and then the distributor is going to report it when it ships it to the retailer,” says Goss. In most states, the reports must also include a memorandum or a copy of an invoice that provides:

• the name, address and phone number of the person delivering the shipment to the recipient on behalf of the delivery seller;
• the name, address, telephone number and email address of the individual to whom the delivery sale was made;
• the brand or brands of the ENDS products sold; and
• the quantity of ENDS products sold.

California, however, requires brand names and wants registrants to identify and distinguish between various types of ENDS products (a coil and an e-liquid, for example) with all invoice information relating to specific customers to be organized by city or town and by zip code. Texas wants only the brand name and the quantity sold. Every state requires the reports to be submitted on or before the 10th of the month for the previous month. For many states, the first reports were due April 10 for sales from March 27 to March 31.

Back to the basics

Many believe that including ENDS products in the PACT Act requirements is going to be a detriment to the overall public health of the country. If ENDS products cost more than combustible cigarettes and are harder to acquire, smokers who quit cigarettes with vaping will likely return to smoking combustibles. States are going to know where all the ENDS shipments are going now and how much was purchased. Alongside all the other requirements that vary by state, each state also has varying rules and regulations for when and who should apply and collect any excise taxes.

Xu says that many online companies do not charge either state or local sales tax or excise taxes. Now, the consumer will be responsible for all the taxes and the additional shipping costs. This could mean the end of online vapor sales entirely in some states. For example, numerous vapers from California order online due to their state’s complex tax regime, explains Xu.

According to the California Dept. of Tax and Fee Administration (CDTFA), the state’s statewide sales tax rate is 7.25 percent. The excise tax rate on vapor products is 59.27 percent of wholesale value. In most areas of California, local jurisdictions have added district taxes that increase the tax owed by a seller. Those district tax rates range from 0.10 percent to 1 percent. Some areas may also have more than one district tax in effect.

“That will be a huge cost increase to the consumer when they add up the sales tax, local tax and the vaping excise tax. People order online, one for convenience, but mostly it’s for the cost. That cost advantage is going to go away,” said Xu. “Add an adult signature fee with the shipping-related cost and suddenly the online purchase is just as costly as from the brick-and-mortar stores … possibly even more. [In some states], it’s immediately become a level play[ing] field with brick-and-mortar stores.”

There is no arguing that the PACT Act will change the vapor market. There are going to be supply chain issues, and companies may receive warning letters, felony charges and fines as they navigate the new process. As numerous online retailers close or move to a distributor, those customers will most likely move to brick-and-mortar vape shops.

There are some positives, according to Xu. “The online market is going to suffer, and sadly, it’s going to push some back to traditional cigarettes. However, the local brick-and-mortar vape shop can do a better job at educating consumers about vapor products and helping people transition away from deadly combustibles,” he says. “Most shop owners and employees take pride in their customer service and their knowledge of the product. It’s too early to tell what type of impact the PACT Act will have on our retail stores or the industry as a whole. Right now, it’s still wait and see.”