BILL ANALYSIS

C.S.H.B. 4772

By: Thierry

Ways & Means

Committee Report (Substituted)

BACKGROUND AND PURPOSE

In the last few years, new nicotine-based products have become more common. E-vapor products, also called e-cigarettes, are devices that heat a solution that contains nicotine, which creates an aerosol or vapor that is inhaled by the user. Alternative nicotine products, also called nicotine pouches, are smoke-free nicotine products that do not contain tobacco leaf. Often referred to as "vaping," the liquids used to create the vapor in e‑cigarettes contain a number of harmful chemicals that can lead to lung injuries. The Department of State Health Services recently determined that e-cigarette use has reached epidemic status among teens. Despite the high level of nicotine contained in vapor products, e-cigarettes have managed to avoid the scrutiny that tobacco cigarettes receive, and these products are not taxed the way similarly situated products are currently taxed in Texas.

C.S.H.B. 4772 seeks to address these issues by allowing for a state excise tax to be levied on the first sale of an e-cigarette or alternative nicotine product and requiring records to be maintained on such products. Establishing a low and specific tax rate could allow the state to account for new market participants, better track sales of nontobacco nicotine products, and provide a stable source of state revenue.

CRIMINAL JUSTICE IMPACT

It is the committee's opinion that this bill does not expressly create a criminal offense, increase the punishment for an existing criminal offense or category of offenses, or change the eligibility of a person for community supervision, parole, or mandatory supervision.

RULEMAKING AUTHORITY

It is the committee's opinion that rulemaking authority is expressly granted to the comptroller of public accounts in SECTION 1 of this bill.

ANALYSIS

C.S.H.B. 4772 amends the Tax Code to impose an excise tax on nontobacco nicotine products and to establish that the tax becomes due and payable when a person receives an e-cigarette or alternative nicotine product for the purpose of making a first sale in Texas. The tax rate is, as follows:

· for a closed-system e-cigarette, seven cents for each milliliter of nicotine solution and a proportionate rate on all fractional parts of a milliliter of nicotine solution;

· for an open-system e-cigarette, three percent of the wholesale cost price of the open-system e-cigarette; and

· for an alternative nicotine product, $1.22 per ounce of net weight of the alternative nicotine product, as listed by the manufacturer.

The bill requires the ultimate consumer of an e-cigarette or alternative nicotine product in Texas to pay the tax and establishes that, if another person pays the tax, the amount of the tax is added to the price charged to the ultimate consumer.

C.S.H.B. 4772 requires a person who receives an e-cigarette or alternative nicotine product for the purpose of making a first sale to file a report for the preceding month on or before the 25th day of each month. The report must include the following information:

· the applicable month covered by the report;

· the name and address of the person submitting the report and the date it was submitted;

· the number of units or amount, as applicable, of e-cigarettes and alternative nicotine products the person purchased, received, and acquired during the month covered by the report, with separately stated amounts for milliliters of nicotine solution for use in a closed-system e-cigarette, the wholesale price of all open-system e-cigarettes, and the net weight as listed by the manufacturer of all alternative nicotine products, measured in ounces;

· the number of units or amount, as applicable, of e-cigarettes and alternative nicotine products the person sold, distributed, used, lost, or otherwise disposed of during the month covered by the report, with separately stated amounts for milliliters of nicotine solution for use in a closed-system e-cigarette, the wholesale price of all open-system e‑cigarettes, and the net weight as listed by the manufacturer of all alternative nicotine products, measured in ounces;

· the amount of e-cigarettes and alternative nicotine products the person had in stock at the beginning and at the end of the month covered by the report; and

· any other information required by the comptroller of public accounts.

The bill authorizes the person, if more than 50 percent of all untaxed e-cigarettes or alternative nicotine products received by the person in Texas are actually sold outside of Texas, to include in the report only the e-cigarettes or alternative nicotine products, as applicable, that are sold in Texas. The bill requires the comptroller to prescribe the form and method for submitting the report.

C.S.H.B. 4772 requires a person to pay the tax on an e-cigarette or alternative nicotine product received for the purpose of making a first sale at the time the person files the report in the manner prescribed by the comptroller. Moreover, the bill, as follows:

· places the burden on the person in possession of an e-cigarette or alternative nicotine product to prove payment of the tax on that product;

· requires a person who fails to pay the tax when due to pay a penalty of an additional five percent of the amount of the tax due; and

· requires a person who fails to pay the tax and that penalty, as applicable, before the 31st day after the date that the tax is due to pay, in addition to that penalty, a penalty of an additional five percent of the amount of the tax due.

The bill sets the minimum penalty at $50. The bill establishes that the dishonor of a check delivered to the treasury or other form of payment for payment of taxes constitutes a failure to pay the tax when due. The bill requires the attorney general to bring a suit to collect a penalty for late payment of the excise tax on nontobacco nicotine products and authorizes a suit to collect a penalty to be brought in a court of competent jurisdiction in Travis County.

C.S.H.B. 4772 requires a retailer to designate one commercial business location as the retailer's principal place of business and establishes that a commercial business location where e‑cigarettes or alternative nicotine products are stored cannot be a residence or a unit in a public storage facility. However, a manufacturer's representative may use a residence or storage facility as a commercial business location. The bill requires a person who receives an e-cigarette or an alternative nicotine product for the purpose of making a first sale to maintain at each place of business the records of all e-cigarettes or alternative nicotine products purchased or received. The bill requires a retailer to maintain all such records at the commercial business location designated by the retailer and specifies the information that must be included in the records, as follows:

· the name and address of the shipper or carrier and the mode of transportation;

· all shipping records or copies of records, including invoices, bills of lading, waybills, freight bills, and express receipts;

· the date and the name of the place of origin of the e-cigarette or alternative nicotine product shipment;

· the date and the name of the place of arrival of the e-cigarette or alternative nicotine product shipment;

· a statement of the number, kind, and price paid for the e-cigarettes or alternative nicotine products;

· the number of milliliters of nicotine solution for use in a closed-system e-cigarette;

· the name, address, and tax identification number of the seller;

· the manufacturer's wholesale price for the e-cigarette or alternative nicotine product;

· the net weight as listed by the manufacturer of each unit of alternative nicotine product, measured in ounces; and

· any other information required by the comptroller.

C.S.H.B. 4772 requires a person who receives an e-cigarette or alternative nicotine product for the purpose of making a first sale to maintain at each place of business in Texas records of each sale, distribution, exchange, or use of an e-cigarette or an alternative nicotine product, regardless of whether subject to the excise tax on nontobacco nicotine products, and specifies the information that must be included in the records, as follows:

· the purchaser's name and address, permit number, or tax identification number;

· the method of delivery and the name of the common carrier or other person delivering the e-cigarettes or alternative nicotine products;

· the date, amount, and kind of e-cigarettes or alternative nicotine products sold, distributed, exchanged, or used;

· the number of milliliters of nicotine solution for use in a closed-system e-cigarette sold, distributed, exchanged, or used;

· the wholesale price of all open-system e-cigarettes sold, distributed, exchanged, or used;

· the price received for the e-cigarettes or alternative nicotine products;

· the number and kind of e-cigarettes or alternative nicotine products on which the tax has been paid;

· the net weight as listed by the manufacturer for each unit of alternative nicotine product, measured in ounces; and

· any other information required by the comptroller.

The bill requires that person to additionally take the following actions:

· prepare and retain an original invoice for each transaction involving an e-cigarette or an alternative nicotine product and prepare and retain any supporting documentation relevant to each transaction showing shipment and receipt used in preparing the invoices at the place of business, including all bills of lading;

· deliver a duplicate invoice to the purchaser;

· maintain all applicable records for at least four years after the date of the transaction; and

· provide the records to the comptroller on the comptroller's request in a manner prescribed by the comptroller.

The bill establishes that a person's failure to produce a record of purchases and receipts or of sale and use, as applicable, on the comptroller's request is prima facie evidence that e-cigarettes and alternative nicotine products not accounted for in a requested report were received for the purpose of making a first sale without payment of the excise tax on nontobacco nicotine products. This bill provision expressly does not apply to a person's failure to produce a record that results from an occurrence beyond the person's reasonable control.

C.S.H.B. 4772 authorizes the comptroller, for purposes of determining the tax liability of a person under, or compliance by a person with, the bill's provisions, to take the following actions:

· inspect any premises where e-cigarettes or alternative nicotine products are manufactured, produced, stored, transported, sold, or offered for sale or exchange;

· remain on the premises as long as necessary to determine the tax liability under or compliance with the bill's provisions;

· examine the records required by the bill or other records, books, documents, papers, accounts, and objects that the comptroller determines are necessary for conducting a complete examination; and

· examine stocks of e-cigarettes or alternative nicotine products.

The bill requires a person, on the comptroller's request, to produce the records required by the bill and prohibits the person from hindering or preventing the comptroller's inspection of records or examination of the premises.

C.S.H.B. 4772 authorizes the comptroller with or without process to seize the following items:

· e-cigarettes and alternative nicotine products that are possessed or controlled by a person for the purpose of selling or removing the e-cigarettes or alternative nicotine products in violation of the bill;

· e-cigarettes and alternative nicotine products that are removed, deposited, or concealed by a person intending to avoid payment of taxes imposed by the bill;

· an automobile, truck, boat, conveyance, or other type of vehicle used to remove or transport e-cigarettes or alternative nicotine products by a person intending to avoid payment of taxes imposed by the bill; and

· equipment, paraphernalia, or other tangible personal property used by a person intending to avoid payment of taxes imposed by the bill found in the place where the e-cigarettes or alternative nicotine products are found.

A seized item is forfeited to the state and remains in the comptroller's custody for disposition as provided by the bill, and that item is not subject to replevin.

C.S.H.B. 4772 establishes that a person violates the bill's provisions if the person does not keep the required records, does not make a required report to the comptroller or makes a false or incomplete required report to the comptroller, or does not abide by, or violates, any other of the bill's provisions or a rule adopted by the comptroller under the bill's provisions. The bill requires a person who violates the bill's provisions to pay the state a penalty capped at $2,000 for each violation. A person is liable for a separate penalty for each day on which a violation occurs. The bill requires the attorney general to bring suit to recover such a penalty, which may be brought in a court of competent jurisdiction in Travis County. The bill requires the comptroller to adopt rules as necessary to implement, administer, and enforce the bill's provisions.

C.S.H.B. 4772 requires the comptroller to deposit the proceeds from taxes imposed under the bill's provisions, as follows:

· 50 percent to the credit of an account in the general revenue fund administered by the Department of State Health Services (DSHS), which may be appropriated to DSHS only for the purpose of administering youth vaping prevention and awareness programs;

· 20 percent to the credit of an account in the general revenue fund administered by the comptroller, which may be appropriated to the comptroller only for the purpose of administering and enforcing the bill's provisions; and

· the remainder to the credit of the general revenue fund.

C.S.H.B. 4772 defines the following terms for purposes of its provisions:

· "alternative nicotine product" as any noncombustible product containing nicotine that is intended for human consumption, whether chewed, absorbed, dissolved, ingested, inhaled, or consumed by any other means, and the term does not include an e-cigarette, a cigarette, a tobacco product, or a product regulated as a drug or device by the FDA;

· "closed-system e-cigarette" as an e-cigarette that utilizes a nicotine solution in a sealed and prefilled container that makes the nicotine solution inaccessible to the consumer through customary or reasonably foreseeable handling or use, other than use by inhaling vapor or aerosol produced from the nicotine solution, and the term includes a disposable e-cigarette and a sealed, prefilled, and disposable container of nicotine solution for use in an e‑cigarette;

· "commercial business location" as the entire premises occupied by a retailer;

· "e-cigarette" as a noncombustible product that:

o produces vapor or aerosol for inhalation from the application of a heating element to a solution that contains nicotine; and

o includes a solution that contains nicotine intended for use in an e-cigarette, whether sold with the e-cigarette or separately;

· "first sale," except as otherwise provided by the bill's provisions:

o as the first use or consumption of an e-cigarette or an alternative nicotine product in Texas;

o the loss of an e-cigarette or an alternative nicotine product in Texas whether through negligence, theft, or other unaccountable loss; or

o the first transfer of possession in connection with a purchase, sale, or any exchange for value of an e-cigarette or an alternative nicotine product in or into Texas, which:

§ includes the sale of an e-cigarette or an alternative nicotine product by a distributor in or outside Texas to a distributor, wholesaler, or retailer in Texas and by a manufacturer in Texas who transfers the e-cigarette or alternative nicotine product in Texas; and

§ does not include the sale of an e-cigarette or an alternative nicotine product by a manufacturer outside Texas to a distributor in Texas, the transfer of an e-cigarette or an alternative nicotine product from a manufacturer outside Texas to a bonded agent in Texas, or the sale of an e-cigarette or an alternative nicotine product by a manufacturer, bonded agent, distributor, or importer to an interstate warehouse in Texas;

· "manufacturer's representative" as a person employed by a manufacturer to sell or distribute the manufacturer's e-cigarettes or alternative nicotine products for which the excise tax on nontobacco nicotine products has been paid;

· "open-system e-cigarette" as an e-cigarette that utilizes a nicotine solution in a container that is refillable or otherwise makes the nicotine solution accessible to the consumer through customary or reasonably foreseeable handling or use; and

· "retailer" as a person who is required to hold an e-cigarette retailer permit or who sells alternative nicotine products to consumers.

C.S.H.B. 4772 does not affect tax liability accruing before the bill's effective date.

EFFECTIVE DATE

September 1, 2023.

COMPARISON OF INTRODUCED AND SUBSTITUTE

While C.S.H.B. 4772 may differ from the introduced in minor or nonsubstantive ways, the following summarizes the substantial differences between the introduced and committee substitute versions of the bill.

The substitute and introduced both contain applicable definitions but the substitute changes the definitions in the following manner:

· the substitute replaces the introduced version's definition of "closed-system e-cigarette" as an e-cigarette that utilizes a single-use, disposable delivery system that is prefilled with vapor product and sealed by the manufacturer and that is not intended to be refilled with the substitute version's definition of that term as an e-cigarette that utilizes a nicotine solution in a sealed and prefilled container that makes the nicotine solution inaccessible to the consumer through customary or reasonably foreseeable handling or use, other than use by inhaling vapor or aerosol produced from the nicotine solution, including a disposable e-cigarette and a sealed, prefilled, and disposable container of nicotine solution for use in an e-cigarette;

· the substitute omits the terms "e-cigarette pod" and "vapor product" that were in the introduced;

· the substitute replaces the introduced version's definition of "e-cigarette" as a noncombustible product that produces vapor or aerosol for inhalation from the application of a heating element to a vapor product and includes an e-cigarette pod or vapor product, whether sold with the product or separately, with the substitute version's definition of that term as a noncombustible product that produces vapor or aerosol for inhalation from the application of a heating element to a solution that contains nicotine and includes a solution that contains nicotine intended for use in an e-cigarette, whether sold with the e-cigarette or separately;

· the substitute changes the introduced version's definition of "first sale" relating to the first transfer of possession in connection with a purchase, sale, or any exchange for value of an e-cigarette or an alternative nicotine product in or into Texas by specifying the sales that are included in that term and the sales and transfers that are not included in that term; and

· the substitute replaces the introduced version's definition of "open-system e-cigarette" as an e-cigarette that utilizes a vapor product delivery system that is intended to be refillable with the substitute version's definition of that term as an e-cigarette that utilizes a nicotine solution in a container that is refillable or otherwise makes the nicotine solution accessible to the consumer through customary or reasonably foreseeable handling or use.

The substitute changes the rate of the tax imposed, as provided for in both the substitute and introduced, on first sale by the bill. The introduced set the tax rate at five cents for each milliliter or fractional part of a milliliter of vapor product sold for use in an open-system e-cigarette and for each e-cigarette pod sold for use in a closed-system e-cigarette, five percent of the wholesale cost price—exclusive of any discount, promotion, or allowance—on each closed-system e‑cigarette that does not use an e-cigarette pod, and $1.23 per ounce of net volume of the alternative nicotine product, as listed by the manufacturer, on each alternative nicotine product sold. The substitute instead sets the tax rate at seven cents for each milliliter of nicotine solution and a proportionate rate on all fractional parts of a milliliter of nicotine solution for a closed-loop system e-cigarette, three percent of the wholesale cost price of an open-system e-cigarette, and $1.22 per ounce of net weight of an alternative nicotine product, as listed by the manufacturer.

The substitute and the introduced both specify the required contents of purchases and receipts records but the substitute changes the provisions as follows:

· the substitute replaces the number of e-cigarette pods, as in the introduced, with the number of milliliters of nicotine solution for use in a closed-system e-cigarette;

· the substitute omits the number of milliliters of vapor products for use in an open-system e-cigarette, as in the introduced; and

· the substitute replaces the measurement for each unit of alternative nicotine product from the net volume in ounces, as in the introduced, with the net weight in ounces.

The substitute and the introduced both specify the required contents of sales and use records but the substitute changes the provisions as follows:

· the substitute replaces the number of use-cigarette pods sold, distributed, exchanged, or used, as in the introduced, with the number of milliliters of nicotine solution for use in a closed-system e-cigarette sold, distributed, exchanged, or used;

· the substitute replaces the number of milliliters of vapor products for use in an open-system e-cigarette sold, distributed, exchanged, or used, as in the introduced with the wholesale price of all open-system e-cigarettes sold, distributed, exchanged, or used;

· the substitute omits the manufacturer's wholesale list price for the e-cigarettes or alternative nicotine products, as in the introduced; and

· the substitute replaces the measurement for each unit of alternative nicotine product from the net volume in ounces, as in the introduced, with the net weight in ounces.

The substitute and the introduced both specify the required contents of the monthly report but the substitute changes the provisions as follows:

· the substitute includes the number of units or amount, as applicable, of e-cigarettes and alternative nicotine products the person purchased, received, and acquired during the month and the person sold, distributed, used, lost, or otherwise disposed of during the month whereas the introduced only included the amount of such e‑cigarettes and alternative nicotine products;

· the substitute revises the requirements for separately stated amounts regarding such e-cigarettes and alternative nicotine products the person purchased, received, and acquired during the month by:

o changing from a separately stated amount for e-cigarette pods, as in the introduced, to a separately stated amount for milliliters of nicotine solution for use in a closed-system e-cigarette;

o changing from a separately stated amount for milliliters of vapor products for use in an open-system e-cigarette, as in the introduced, to a separately stated amount for the wholesale price of all open-system e-cigarettes;

o changing the applicable measurement for a separately stated amount for alternative nicotine products from net volume in ounces, as in the introduced, to net weight in ounces; and

o omitting a duplicative provision included in the introduced regarding the net volume, as listed by the manufacturer, for alternative nicotine products, measured in ounces;

· the substitute revises the requirements for separately stated amounts regarding such e‑cigarettes and alternative nicotine products the person sold, distributed, used, lost, or otherwise disposed of during the month by:

o changing from a separately stated amount for e-cigarette pods, as in the introduced, to a separately stated amount for milliliters of nicotine solution for use in a closed-system e-cigarette;

o changing from a separately stated amount for milliliters of vapor products for use in an open-system e-cigarette, as in the introduced, to a separately stated amount for the wholesale price of all open-system e-cigarettes; and

o including the requirement for a separately stated amount for the net weight as listed by the manufacturer of all alternative nicotine products, measured in ounces, which was not in the introduced; and

· the substitute omits the manufacturer's wholesale list price of any e-cigarettes and alternative nicotine products purchased, received, and acquired by the person during the month, as in the introduced.

While both the introduced and the substitute provide for penalties for a person who violates the bill, the substitute makes a person liable for a separate penalty for each day on which a violation occurs, whereas the introduced established that a separate offense is committed each day on which a violation occurs.

The substitute includes provisions that were not in the introduced requiring the comptroller to deposit, with respect to the proceeds from taxes imposed by the bill, 50 percent to the credit of an account in the general revenue fund administered by DSHS only for the purpose of administering youth vaping prevention and awareness programs, 20 percent to the credit of an account in the general revenue fund administered by the comptroller that is appropriated only for the purpose of administering and enforcing the bill, and the remainder to the credit of the general revenue fund.