Tag: Bryan Haynes

Taxation Situation
Credit: enterlinedesign
Excise taxes on vapor and OTPs can present considerable administrative burdens on businesses.
By Bryan Haynes, Christina Sava and Robert Claiborne
Excise taxes on vapor products and tobacco products other than cigarettes, also referred to as “other tobacco products” (OTPs), present considerable administrative burdens on businesses dealing in these products. All 50 states impose excise taxes on most traditional OTPs, and have for a long time, but operators in the vapor category have been subject to rapidly shifting regulatory conditions as states update their OTP laws and other laws to account for vapor products.
Many of these laws are framed on traditional distribution models, and businesses’ innovations in routing taxable products to market can raise unique compliance questions. Recent legal changes have also raised new issues over the permissibility of state taxation of products coming in from another state. Where excise taxes are imposed on a product, the sale of such products requires licensure at various points in the supply chain, accurate bookkeeping, regular reporting, and tax remittance practices.
Typically, distributors and wholesalers of these highly regulated products may be the subject of audits by state revenue departments, and manufacturers and retailers may similarly be subject to audit depending on the auditing state. In our experience, it is a rare audit that does not result in an alleged deficiency. Some deficiency determinations are minor and easily paid while others can add up to hundreds of thousands—and even millions—of dollars due, plus interest and penalties. In such cases, it is imperative to engage the assistance of experienced counsel who can assist you in addressing the assessment.
A final deficiency determination can be crippling to a business. The audit process itself can be time-consuming and disruptive to normal operations, and any ensuing disputes will be even more so. It’s never a bad time to either establish an audit-readiness plan or clean up existing operating procedures to make sure a future audit and possible dispute go as smoothly as possible. We have drawn on our experience representing clients in such disputes to compile this list of best practices for avoiding or contesting OTP and vapor tax assessments.
Best Practices for Avoiding a Dispute

Understand your state’s licensure requirements. This tip should go without saying, but it is worth repeating given the rapid evolution of vapor products laws and innovations in businesses’ routing of taxable vapor or OTP products to market. If you do any business in traditional forms of tobacco, and begin selling vapor products, it would be prudent to confirm whether your state requires additional licenses, taxes or reporting for these products.

Know your regulator. For any highly regulated business, it’s important to be familiar with your primary regulatory agency and its agents and maintain a good relationship with them. Any time you are communicating with your regulator is a chance to make a good impression, so remain courteous and professional in your dealings with them, whether via email, by phone or in person. If there are occasions where you disagree with the regulator, you can do so respectfully and without being disagreeable.

Keep and organize accurate books and records. This tip is important for all business owners but especially for businesses that deal in excise-taxed products. Being able to produce accurate documentation of your activities can make all the difference in a dispute as well as prevent disputes. State laws typically establish the minimum record-keeping requirements. A good record-keeping system will include:

copies of invoices and receipts;

copies of bills of lading and other shipping documentation;

copies of all communications with state regulators; and

copies of documentation for any tax payments, tax reports and tax returns.
Make your records readily accessible as you will be asked to produce them during an audit. You will also want to promptly transmit records to your attorneys if you involve them in any phase of the matter. Verify whether your state requires you to maintain physical copies on-site or whether you can organize your records digitally.

Understand the applicable laws. This one is, again, obvious for all businesses but crucial for those dealing in highly regulated products. Keep track of the tax rate applicable to all of your product classes. If there is a question about whether your products qualify as taxable tobacco or vapor products, you should seek clarification and probably involve your attorney. Some laws, for instance, tax liquid nicotine but not certain other forms of nicotine while other laws tax products, such as vape products, that do not contain nicotine at all. Make sure you are signed up for alerts from your regulatory agency. If you don’t understand a change in law or policy, follow up with the regulator or experienced counsel for clarification. If you are going to seek a formal advisory opinion or even informal guidance from a state department of revenue, you will likely want to involve your attorney to ensure that you inform the department of all material facts and legal grounds that may distinguish your product or activities from coverage under the state’s excise tax laws.

File timely returns. Set up a system for making tax reporting easy and automatic. There are third-party providers that can assist if necessary. Filing thorough, well-prepared returns on time each month generates goodwill and can help prevent audits.

Periodically audit yourself. Set up periodic self-audits to ensure your reporting is accurate. Self-audits can help businesses mitigate issues that, if not discovered sooner, may result in large assessments. If you discover an issue, many state excise tax laws require that returns be corrected proactively. If you discover a major issue, it may be prudent to have a discussion with relevant taxing authorities but involve counsel early if you think you’ve discovered deficiencies. Some states have voluntary disclosure programs that may mitigate potential consequences from noncompliance.

If you are audited, make timely and thorough responses. If you are audited, it is critical to be responsive to auditors’ legitimate requests. Initial interactions with auditors can set the tone for the rest of the audit. Review requests for production thoroughly, note the deadlines and begin working on the responses early. Auditors appreciate well-organized productions, which are easier to provide if they are already organized and you’ve given yourself time to put together a thorough response.
Best Practices for Dealing with a Potential or Actual Dispute

Engage experienced counsel early. Consider contacting counsel the moment a request for records arrives. Counsel does not always have to respond on your behalf, but they can help you evaluate the legitimacy of requests and help you respond. You should contact counsel immediately upon receipt of a deficiency determination.

Be aware of deadlines. This one bears repeating because, in tax matters, missing a deadline can mean you have conceded to the assessment. Review the assessment carefully and note all deadlines. Review statutes, regulations and agency guidance to familiarize yourself with the appeal process, including any additional deadlines that might not have been identified in your notice.

Provide relevant information to your counsel as soon as possible and throughout the dispute. Is the disputed issue one that your business has previously discussed with the tax department? Has the tax department’s position changed at any point? Does the disputed issue concern products that had taxes paid on them in another state? Have there been any changes in the manner in which you conduct your business? What individuals or documents can address the facts in issue? These are just some of the questions your counsel may have, and there will be others depending on the nature of your dispute. It is important to make sure that you fully inform counsel of the relevant facts and documents early on and throughout the matter.

Keep perspective. Running a business is hard work, and a tax dispute will not make it easier. While you will naturally be eager for the dispute’s resolution, it is important to bear in mind that the dispute process can be lengthy. Most states route tax disputes through a maze of administrative processes before the taxpayer can have its day in court. Either party can have multiple stages for appeal. Also bear in mind that most disputes eventually settle. Keep a cool head, maintain professionalism and know that you’ll eventually be on the other side of this.
Proactive measures can help you streamline audits and mitigate the risk of tax assessments. If a dispute arises, early engagement with counsel is critical to developing and executing an effective strategy. Troutman Pepper’s tobacco team has substantial experience advising clients in vape and OTP tax matters and, when necessary, assisting them in disputing assessments. In 2022, we assisted clients in successfully disputing more than $45 million in claimed tobacco tax deficiencies.
When the taxman asserts a deficiency, you don’t have to resign yourself to “be[ing] thankful [he] don’t take it all.”[1] There is more that you can do before and after that point. Please let us know if we can help.
Bryan Haynes, Christina Sava and Robert Claiborne are attorneys for the law firm Troutman Pepper Tobacco Practice.
^[1] The Beatles, “Taxman,” on Revolver (1966).
February 22, 2023
Troutman Lawyers Detail MDO Lawsuits, FDA Action

By Bryan Haynes, Agustin Rodriguez and Matt Fay
Special to Vapor Voice
Since the U.S. Food and Drug Administration issued the first marketing denial order (MDO) in September 2021 as part of the premarket tobacco product application (PMTA) process for electronic nicotine-delivery systems (ENDS), vapor companies filed 49 appeals in 10 federal courts of appeal around the country. This update on the status of the cases is intended to provide a snapshot of the pending litigation.
As of April 2, 2022, 41 cases remain active and six have been withdrawn, one has been dismissed, and the Wages and White Lion Investments LLC d/b/a Triton Distribution v. FDA case has been merged with the Vapetasia LLC v. FDA case. The Wages and White Lion/Triton case is the furthest case along. The Fifth Circuit granted a stay of the enforcement of the MDO on Oct. 26, 2021, and heard oral argument on the merits of the appeal on Jan. 31, 2022. There is no expected date of the announcement on the ruling on the appeal, and the Fifth Circuit may not be feeling pressure to expedite its decision as the court has stayed the FDA’s enforcement of the MDO.
Fifth Circuit Court of Appeals
Breeze Smoke v. FDA, in the Sixth Circuit, was the next case scheduled for oral argument, with the argument docketed to be heard on Feb. 22, 2022. Breeze Smoke’s motion for a stay was denied by the Sixth Circuit in November 2021, however, and the company’s appeal of that denial was rejected by the U.S. Supreme Court in December 2021. Breeze Smoke then voluntarily withdrew its appeal of the MDO on Feb. 10, 2022, less than two weeks before the date of argument on the merits before the Sixth Circuit.
The other cases that have been withdrawn are American Vapor v. FDA in the Fifth Circuit, Turning Point Brands Inc., et al. v. FDA and Simple Vapor Company LLC v. FDA in the Sixth Circuit, and Humble Juice Co. LLC v. FDA and Al Khalifa Group LLC v. FDA in the Ninth Circuit. Of these cases, Turning Point Brands withdrew its appeal on Oct. 8, 2021, after the FDA rescinded its MDO. All the other withdrawn cases involved active MDOs. Fumizer LLC v. FDA in the Ninth Circuit also had the MDO withdrawn by the FDA in October 2021, and the case was dismissed by the court on Feb. 3, 2022, for failure to prosecute.
Three sets of cases in three different circuits are scheduled for oral argument within the next two months. Gripum LLC v. FDA is scheduled for argument in the Seventh Circuit on April 20, 2022 (no decision timeline). Enforcement of the MDO was stayed by the court on Nov. 4, 2021. Prohibition Juice Co. v. FDA in the D.C. Circuit (which has been consolidated with ECig Charleston LLC v. FDA, Cool Breeze Vapor LLC v. FDA, and Jay Shore Liquids LLC v. FDA) is next up, with argument scheduled on April 22, 2022 (court will resume April 28).
Seventh Circuit Court of Appeals
The D.C. Circuit has not stayed the enforcement of any MDO. The following month, the Eleventh Circuit will hear oral argument on two cases and one set of consolidated cases. These are Bidi Vapor LLC v. FDA, Pop Vapor Co. LLC v. FDA and the consolidated cases of Diamond Vapor LLC v. FDA, Johnny Copper LLC v. FDA, Vapor Unlimited LLC v. FDA and Union Street Brands LLC v. FDA. Of these, the Eleventh Circuit granted a stay of enforcement of the MDO to the Diamond Vapor set of consolidated cases on Feb. 1, 2022, and on March 14, 2022, the FDA did not oppose a motion for a stay filed by Pop Vapor, noting that while the FDA believed the MDO should not be stayed, the agency would not object since the court had already granted a stay in the other set of cases based on what were substantially similar facts.
Of the four sets of cases that have either already had oral argument on the merits or will do so before the unofficial start of summer in late May 2021, three involve courts (Fifth, Seventh and Eleventh Circuits) that have granted a stay of enforcement of the MDO. The fourth will be heard by the D.C. Circuit, which has not granted a stay.
The issues that either have, or will be, argued on the merits are substantially the same. For example, the appellant’s briefings in the cases consolidated along with Wages and White Lion/Triton, Prohibition Juice and Diamond Vapor all have the same four main arguments:
1) the FDA pulled a “surprise switcheroo” on each appellant by not stating in its guidance that the FDA’s determination would hinge on proof that flavored products facilitate smoking cessation in adults in a manner that significantly outweighed their alleged appeal to youth;
2) the FDA engaged in a superficial and cursory review of the respective appellant’s PMTA based on the sheer number of PMTAs filed industry-wide and based on the MDO’s limited discussion of merits or deficiencies of the PMTA’s content, which the appellants have described as “check-the-box” responses;
Credit: FDA
3) the FDA’s requirement to show that flavored ENDS will be more effective at promoting smoking cessation versus tobacco-flavored ENDS created a de facto comparative smoking cessation efficacy requirement that is prohibited under Section 910 of the Tobacco Control Act; or, in the alternative, that
4) if the FDA wants to require long-term studies, it should not be permitted to issue MDOs for at least an additional 18 months to give the appellant sufficient time to conduct these studies.
As the majority of the appellants discussed above have made substantially similar arguments but only three of the four circuits mentioned above have currently stayed the FDA’s enforcement of the MDOs, this increases the likelihood that at least one of these four circuits will rule on the merits in a way that differs from one of their fellow circuits. This would create the “circuit split” necessary for the U.S. Supreme Court to make a decisive ruling on the legality of the FDA’s decision-making process.
Of the remaining active cases not discussed above, it is also possible that these cases will move through the appeals process more slowly as the plaintiffs, the government and the courts wait to see how the pending cases are decided and how quickly the U.S. Supreme Court may act on any split outcome in the other courts. For example, in the Fifth Circuit, there are two cases that have been held in abeyance pending the court’s ruling in Wages and White Lion/Triton, and other circuits have also held cases in abeyance pending their action in related cases.
Bryan M. Haynes is a partner with Troutman Pepper who specializes in tobacco industry regulatory compliance and enforcement matters. He efficiently assists clients in complying with regulatory obligations and managing risk, consistent with clients’ business objectives.
Agustin E. Rodriguez is a partner with Troutman Pepper and has almost two decades of experience counseling tobacco companies in-house and in private practice on tobacco product regulation, taxation and multi-jurisdictional state and local enforcement issues.
Matthew J. Fay is an associate attorney with Troutman Pepper who offers representation in complicated matters, with a focus on complex criminal and internal investigations, government contracting, as well as evolving laws, regulations, and international treaties.

April 22, 2022
Biden Signs Budget, Gives All Nicotine Authority to FDA
Credit: White House
President Joe Biden on Tuesday signed a bill that gives the U.S. Food and Drug Administration powers over over any nicotine, not just tobacco-derived nicotine. Part of a $1.5 trillion government spending measure, the rider was slipped into the bill with no debate or notification to the vaping industry.
The language of the Tobacco Control Act will now change to define a tobacco product as “any product made or derived from tobacco, or containing nicotine from any source, that is intended for human consumption.”
“You know, in a moment, I’m going to sign this bipartisan government funding bill,” Biden said. “But with this bill, we’re going to send a message to the American people – a strong message – that Democrats and Republicans can actually come together and get something done.”
Bryan Haynes, a partner with Troutman Pepper, said that the amendment has an effective date 30 days after the bill is enacted (April 14) and gives a manufacturer of a tobacco product with synthetic nicotine (or nicotine derived from a source other than tobacco) 30 days after the effective date to file a premarket tobacco product application (PMTA) with FDA.
“If FDA has not authorized the product within 90 days after the effective date, the product must be removed from the market. This is likely to amount to an effective ban on synthetic nicotine products,” he wrote in the firm’s Tobacco Law Blog. “FDA is highly unlikely to authorize a PMTA in 90 days when other PMTAs for electronic nicotine delivery systems have been pending for more than two years.”
April Meyers, board president for the Smoke-Free Alternatives Trade Association (SFATA), told Vapor Voice that the bill will have little effect on youth vaping, which is already down significantly since highs in 2015. “Although the sponsors of the bill claim the intent was to close the loophole on synthetic nicotine-derived products from large companies now popular among youth, the reality is that this bill – and others like it – aren’t likely to have the intended effect,” she said. “Instead, consumers using these products as a harm reduction option will suffer, as will licensed small businesses in full compliance with federal, state, and local laws.
“The FDA created a problem by overregulating a product used by millions of adults who find vaping a safer alternative to smoking. When a market in high demand is overregulated, grey and black markets emerge where there are no regulations requiring safe products or ID checks.”
March 15, 2022
Congress May Allow FDA to Regulate Synthetic Nicotine
New Jersey Congresswoman Mikie Sherrill, on Dec. 15, introduced the Clarifying Authority Over Nicotine Act of 2021 — a bipartisan bill designed to give the U.S. Food and Drug Administration (FDA) the authority to regulate synthetic nicotine products just as it regulates nicotine products made or derived from tobacco. In a press release, Rep. Sherrill stated, “This bill will ensure all tobacco products, including products made with synthetic nicotine, are regulated by the FDA in order to protect kids in our communities and those who may seek to use these products.”
Credit: DedMityay
In a blog post, Bryan Haynes and Michael Jordan, attorneys with Troutman Pepper, state that, as it stands, the Federal Food, Drug, and Cosmetic Act (FDCA) defines “tobacco product” as “any product made or derived from tobacco that is intended for human consumption, including any component, part, or accessory of a tobacco product.” 21 U.S.C. § 321(rr)(1) (emphasis added). As the FDA concedes on its website, “it’s possible that a disposable, closed system device that contains an e-liquid with truly zero nicotine (or synthetic nicotine) would not be regulated by the FDA as a tobacco product.”
That said, there are other ways FDA might try to regulate synthetic nicotine, whether under its authority to regulate a “component” of a tobacco product or as a “drug.” In November, FDA Center for Tobacco Products Director Mitch Zeller discussed the “component” aspect of the FDCA’s definition of “tobacco product” and suggested “that components and parts could include everything from coils and batteries to all the ingredients comprised in producing e-liquids (such as flavorings and vegetable glycerin) even if the product does not contain nicotine.” He added, “That’s an assessment that we need to make on a case-by-case basis based upon the totality of all the information that we have.”
FDA could also seek to regulate synthetic nicotine as a drug. The FDCA defines drug, among other things, as “articles (other than food) intended to affect the structure or any function of the body.” 21 U.S.C. § 321(g)(1). To the extent synthetic nicotine is intended to affect a consumer’s body, FDA could attempt to assert jurisdiction. Indeed, in the 1990s, FDA tried to regulate nicotine as a “drug” and cigarettes and smokeless tobacco as “drug delivery devices.” The Supreme Court in FDA v. Brown & Williamson Tobacco Corp. found FDA lacked such authority, but one of the Court’s key findings was that Congress had passed “tobacco-specific legislation [that] effectively ratified the FDA’s previous position that it lacks jurisdiction to regulate tobacco.” Today, things are different. The 2009 Family Smoking Prevention and Tobacco Control Act gave FDA the authority to regulate tobacco products. Should FDA regulate synthetic nicotine as a drug today, it could point to recent legislation from Congress giving FDA a role in this space more broadly. So far, however, FDA has not taken this approach.
With FDA having ordered more than five million tobacco-derived, e-cigarette products off the market, several manufacturers appear to have turned to synthetic nicotine to avoid FDA’s rigorous (and costly) premarket review process. In general, that process requires those who seek to market new tobacco products to demonstrate that their sale is “appropriate for the protection of public health” with the support of scientific evidence. 21 U.S.C. §387j(c)(4), (5). After receiving a denial from FDA of his premarket review applications, one vaping company owner took to Facebook to announce the company’s switch to synthetic nicotine, adding: “We never wanted to switch to [synthetic nicotine], but the FDA forced us to make that decision as we have so many adults relying on us [for alternatives to cigarettes].”
Lawmakers have taken notice. In November, a flurry of investigations and calls to regulate synthetic nicotine products reached a new high. On November 16, nine senators sent a letter to the FDA imploring the agency to regulate synthetic nicotine products. The authors expressed concerns that e-cigarette manufacturers like Puff Bar are switching to synthetic nicotine to skirt FDA oversight and pre-market review requirements to continue selling their products — including flavored products — that they assert appeal to youth. That same day, the North Carolina attorney general launched an investigation into Puff Bar for similar reasons. And, on November 8, the House Oversight Committer’s Subcommittee on Economic and Consumer Policy sent letters to e-cigarette manufacturers Puff Bar and Next Generation Labs LLC, requesting extensive records pertaining to the production and marketing of the companies’ synthetic nicotine products.
Time will tell if Congress will pass Rep. Sherrill’s Clarifying Authority Over Nicotine Act of 2021. Given the uptick in scrutiny of synthetic nicotine products, however, there is a strong chance Congress could give FDA a clear mandate to regulate synthetic nicotine in 2022.
January 4, 2022