Big tobacco stubs out e-cigarette competitors

Matthew Bandyk Contributor
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Coming soon to a convenience store near you: Vuse, an electronic cigarette that delivers nicotine without the use of tobacco and is benefiting from the combined marketing power of  R.J. Reynolds and state government regulators.

Reynolds is testing the Vuse brand e-cigarette in limited distribution and is expected to roll it out nationwide.

In anticipation of Reynolds’ first effort in the e-cigarette market, the company’s lobbyists are pushing laws at the state level that could add costs, paperwork and headaches onto smaller competitors that have largely served the e-cigarette market so far.

More worrisome is that the online activities of thousands of e-cigarette consumers, who are looking for a tar-free alternative to smoking, could be effectively outlawed.

In particular, a bill passed by the Oklahoma state Senate on March 6 could boost the price of e-cigarettes by restricting online sales and preventing retailers from selling to consumers without going through a wholesale middleman first.

“We really feel this is a push by Big Tobacco to gain some more control over the market,” said Rob Ragan, owner of VaporKings, a store with four locations in and around Tulsa selling e-cigarette kits and related accessories, also called vapor products. Ragan estimates that there are about 45 such stores throughout the state that would be affected by this legislation, SB 802.

“Transform Tobacco,” a website sponsored by R.J. Reynolds, alerts visitors to “tell your state legislators to SUPPORT SB 802!”

It’s not hard to see why Reynolds wants to break into e-cigarettes, which allow smokers to get nicotine without the chemicals and tar in regular cigarettes.

In February the Centers for Disease Control and Prevention reported that the number of American smokers who have tried e-cigarettes doubled from 10 percent in 2010 to about 21 percent in 2011.

E-cigarettes’ gain appears to be at traditional cigarettes’ loss. According to a March research report from Morgan Stanley, the “most logical” explanation for the weaker-than-expected cigarette volume for large tobacco companies is that a growing number of smokers made New Year’s resolutions to switch to e-cigarettes.

Despite evidence that e-cigarettes can help smokers to turn away from more harmful products, the devices have met with skepticism from regulators. Several states have explored heavy restrictions on e-cigarettes, such as a recent proposal in California that would outlaw the use of the devices anywhere smoking is banned. And the Food and Drug Administration is expected to issue national regulations that could limit e-cigarettes.

Against this backdrop of regulatory scrutiny, in February Reynolds met in Washington, D.C. with a number of nonprofit groups and e-cigarette proponents. According to people who attended the meeting, Reynolds unveiled its strategy to avoid the worst restrictions: direct its in-state lobbyists to support taxing e-cigarettes, but at a lower rate than other tobacco products.

“They said, ‘We are going to advocate for a very low tax on e-cigarettes, because if you tax e-cigarettes, then they are legitimate legal products,'” said one meeting attendee, Bill Godshall, the executive director of Smokeless Pennsylvania and a longtime activist for less harmful alternatives to cigarettes.

The strategy carried over to SB 802, which would ban e-cigarette sales to minors and also tax e-cigarettes at a rate 90 percent lower than the tax on conventional cigarettes, coming out to five cents per vapor product unit.

The tax itself is not what bothers the e-cigarette activists. “It’s insignificant monetarily,” Godshall said. But through the tax, the bill would group e-cigarettes in with other tobacco products, which are heavily regulated at the wholesale and retail levels. As a result, a host of new license restrictions would come down on anyone trying to sell or buy e-cigarettes and related products in Oklahoma.

Under the bill, any dealer of vapor products must obtain a license, carrying an annual fee of $250, and agree to purchase only from suppliers who hold wholesale tobacco licenses.

The wholesale license has its own fee but, more significantly,requires applicants to put up a $25,000 bond, according to Ragan. Because his VaporKings stores import their products from China, the legislation would require him to establish his own wholesale business just to legally supply his own retail businesses.

Since VaporKings has been around for four years and has expanded to multiple locations, Ragan says he has the capital to put up his own $25,000 to get the wholesale license if he needs to. But anyone less well capitalized or trying to enter the market fresh would face a high barrier.

Small e-cigarette businesses in the state that can’t put up the cash for a wholesale license would be forced to buy from existing wholesalers, because the bill reclassifies vapor products as tobacco. As a result, the types of products they can put on their shelves could be severely limited.

“If wholesalers don’t cough up reselling the type of product that we carry at the smaller shops … the only thing that would be available at the wholesale level would be [Reynolds’] product,” Ragan said.

Vuse, however, would likely not face the same disadvantages.

“When Reynolds enters the market with e-cigarettes, they already have established relationships” with wholesalers in the state, said Greg Conley, legislative director at Consumer Advocates for Smoke-Free Alternatives Association (CASAA), a nonprofit group that promotes e-cigarettes and attended the meeting with Reynolds.

Conley said that while CASAA told Reynolds they would oppose any taxes on e-cigarettes, he does not believe that the tobacco company has bad intentions in pushing for the legislation.

“I think Reynolds is just kind of in their bubble,” he said. “Reynolds doesn’t live in a world where, for example, bars don’t allow cigarettes … but they want to allow e-cigarettes.”

But the complicated licensing system set up by the bill would make it unlikely that a bar would take all those steps necessary to sell e-cigarettes, limiting access for many potential users.

The most significant burden on consumers, however could come from the bill’s provisions affecting sales of vapor products over the Internet. About half of all e-cigarette products are sold online, Godshall estimated.

Online community has been critical to the growth in popularity of vapor products.

In message boards and YouTube videos, e-cigarette aficionados, or vapers as they call themselves, trade techniques on modding their devices with larger batteries for longer life, particular nicotine liquid blends for better taste and larger tanks for less frequent refilling. Many of these customizable accessories either can only be obtained online or can be obtained online at a much lower cost compared to other options.

The bill, while declaring that only a licensed dealer can sell vapor products for consumption in Oklahoma, defines “dealer” to mean anyone who imports vapor products into the state. According to Godshall, tax enforcement authorities in the state could interpret this part of the law to mean that anyone who buys their e-cigarettes online from an Internet retailer outside of the state has broken the law.

“Why are they trying to turn thousands of e-cigarette consumers in their state into criminals?” Godshall said.

E-cigarette proponents also worry that the Oklahoma legislation could be exported to other states. A bill already introduced in Rhode Island would “strangle online sales,” according to CASAA, by mandating licenses for vapor product dealers, putting in place a wholesale distributor restriction similar to that in the Oklahoma bill and mandating a number of identification checks anytime a consumer places an online order.

According to Conley, CASAA is preparing for many more tax and licensing bills to show up when new state legislative sessions begin in early 2014.

If that happens, the debate over what it takes to sell e-cigarettes could become as important as the debate over whether or not they can help end smoking addictions.

“With Reynolds coming in, we’re going to have these battles in a lot of states, and we’re going to increasingly have tax battles,” Godshall said.