Despite not containing true tobacco, the Texas Supreme Court ruled Friday a line of oral nicotine pouches and lozenges are tobacco products, and the state can tax them as such.
VELO products are made of a blend of plant matter and nicotine. The combination makes the products tobacco substitutes, subjecting them to state tax laws that the Texas Comptroller enforces, Justice Brett Busby wrote in an opinion for the court.
“A VELO pouch is essentially a type of snus—a porous pouch that is filled with cellulose and nicotine isolate instead of pulverized tobacco,” Busby wrote. “In short, the primary ingredient in VELO pouches—a blend of powdered cellulose and nicotine isolate—takes the place and function of the tobacco plant matter in snus, a 'preparation of pulverized tobacco' that is taxable under (the Texas Tax Code)."
In a concurring opinion, Justice James Sullivan said he considers the presence of plant matter in VELO pouches irrelevant to the court's interpretation of tobacco tax law.
"Respectfully, I’m doubtful that the presence of 'microcrystalline cellulose, a naturally occurring organic compound found in the cell walls of plants,' is essential to a VELO pouch’s having been 'made of . . . a tobacco substitute,'" Sullivan wrote, citing Busby's opinion and state law.
In a statement, a spokesperson said the Texas Comptroller’s Office is “pleased” with the high court’s ruling. KERA News has reached out to RJR Vapor Co. and will update this story with any response.
RJR Vapor Co. sells oral nicotine products throughout Texas, including VELO, a competitor of ZYN nicotine pouches. The distributor was seeking a $16,000 refund on taxes it paid in 2020 after the comptroller determined VELO pouches and lozenges were taxable as tobacco.
RJR Vapor sued, arguing the products contain nicotine isolate extracted from tobacco so they are “made from” tobacco, not “made of tobacco or a tobacco substitute,” which is in part how the state tax code defines a tobacco product.
“Tree sap extracted from a tree is not a tree,” Christian Vergonis, an attorney for RJR Vapor, told justices during oral arguments in October. “Vitamin C extracted from an orange is not an orange. Calcium extracted from milk is not milk. So, these extracts are not the product itself.”
Vergonis said distributors pay tobacco taxes, not consumers — but the cost may trickle down to consumers. Taxes are usually built into the final retail price for cigarettes and other tobacco products.
The comptroller appealed, arguing the VELO products are in fact made of a tobacco substitute because nicotine consumed recreationally is a replacement for tobacco.
VELO products are different from non-taxable nicotine replacement therapy products, or NRTs, because the U.S. Food and Drug Administration hasn’t approved VELO pouches as a method of curbing nicotine addiction.
The comptroller also argued not considering VELO pouches and lozenges as tobacco products would allow distributors to sell to minors. People in correctional facilities could also legally access the products.
“The reason, stepping back, people are using these pouches is because they get nicotine from them,” Deputy Solicitor General William Cole said during oral arguments. “It's not for — as some of my friends on the other side have said — like, the taste or something. If it was because they wanted mint flavor, they may well just be chewing spearmint gum or Lifesavers.”
Both a Travis County district court and the Third Court of Appeals sided with RJR Vapor. They ruled the pouches and lozenges don’t fall under the “made of tobacco or a tobacco substitute” category.
The district court also agreed with RJR Vapor that the comptroller’s interpretation of state law was unconstitutionally vague and that the tax violated the company's right to equal and uniform taxation, because the comptroller applies the tax to VELO pouches but not nicotine replacement therapies. The appeals court didn’t address the issue, considering it moot.
The Texas Supreme Court revived RJR Vapor’s claims that the tobacco tax is unfairly applied to VELO pouches, an issue the Third Court of Appeals will reconsider.
While the high court sided with the comptroller, it rejected the comptroller’s argument that nicotine alone is a tobacco substitute.
“You cannot roll a cigar with just nicotine isolate,” Busby wrote. “You cannot smoke a pipe filled with just nicotine isolate. You cannot chew just nicotine isolate. You cannot dip or sniff just nicotine isolate, and you cannot fill a pouch with just nicotine isolate.”
Justices also pointed out that the comptroller’s office under former Comptroller Glenn Hegar previously determined e-cigarettes don't contain tobacco and therefore aren’t taxable as tobacco products. That “cuts against the idea that the Legislature wanted to tax the sale of recreational nicotine products,” Busby said.
Toluwani Osibamowo is KERA’s law and justice reporter. Got a tip? Email Toluwani at tosibamowo@kera.org.
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