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Excise 2024: New definition of e-cigarette liquid

Extensive amendments to excise tax regulations. Another package of excise changes has emerged. Legislative work is underway – the draft law on amendments to the Excise Tax Law and certain other laws (UD428) is about to enter into force. It’s worth taking a look at the Finance Ministry’s proposals, especially since the range of issues that will be affected by the changes is as wide and varied as the excise products themselves. The changes will not bypass one of the youngest categories of excise products, which is e-cigarette liquid – the so-called liquid.

Pursuant to Article 1(1) of the Excise Tax Act of 6.12.2008 (Journal of Laws of 2022, item 143; hereinafter: AkcyzU), the Act specifies the excise taxation of excise goods and passenger cars. Excise goods are, according to Article 2, paragraph 1, item. 1 of the ExciseU, energy products, electricity, alcoholic beverages, tobacco products, dried tobacco, electronic cigarette liquid and novelty products. The latter two categories have been included in the catalog of excise goods relatively recently. And it is to them that the far-reaching amendment of the regulations is to apply.

 

Liquid for electronic cigarettes – a broader definition

According to Article 2, paragraph 1, item. 34 of the Excise Tax Act, electronic cigarettes are either disposable or reusable devices used to consume by means of a mouthpiece the vapor produced from electronic cigarette liquid, equipped in particular with cartridges or tanks. Electronic cigarettes are devices, so they are not subject to excise taxes per se. Indeed, excise taxes are levied on (standard-defined) events involving electronic cigarette liquid, including, among other things, the production of electronic cigarette liquid, and thus its manufacture, processing, and bottling (Article 99b(1) of the Excise Tax Act).

According to the current definition expressed in Article 2, paragraph 1, item. 35 of the ExciseU, electronic cigarette liquid is a solution intended for use in electronic cigarettes, both with and without nicotine, including a base for this solution containing glycol or glycerin.

The definition is to be expanded far-reachingly. According to the proposal of the Ministry of Finance, any solution intended for use in electronic cigarettes is to be considered any solution that is not only used – but due to its essential nature, composition and physicochemical properties – may be used in electronic cigarettes, particularly when offered for sale or sold in specialized stores or outlets with tobacco products, electronic cigarette liquids, novelty products and their substitutes, and devices and accessories for the use of these excise products, and on the Internet.

The Ministry of Finance justifies the change with a number of experiences from fiscal inspections, in which cases of evasion of excise taxes on the liquid for electronic cigarettes were identified. This probably refers primarily to products that, due to their raw material composition or the form of packaging, or finally the place of sale in specialized outlets, could be used directly as liquid for electronic cigarettes or as a base for the preparation of this solution, so various types of aromas and oils, which were declared by vendors as products absolutely not intended for electronic cigarettes (for example, as an aroma for fireplaces, an insert for scented candles or an air freshener).

 

Comment

The Finance Ministry’s goal, therefore, is to eradicate the gray market and allow inspection and tax authorities to demonstrate that the seller of e-cigarette liquids was only indicating the intended use of these products for untaxed purposes for the sake of appearances. The Finance Ministry thus claims that the amendment merely clarifies the definition of e-cigarette liquid. This is not quite the right claim. Indeed, the essence of the definition will change.
It will not be based on “intended use,” but on “ability to use.” This is an obvious extension of the concept and bases its construction on a hypothetical condition. This is not a construction that finds recognition in tax law. After all, why sanction (tax) hypothetical states? If, for example, the seller of a fireplace cartridge sells a solution with such a purpose in the best faith, he will bear a significant administrative burden from the mere fact that the buyer “may (hypothetically) use” the solution for electronic cigarettes.
Recall that it is not just the mere need to pay excise taxes. Far more challenging is the fulfillment of other excise obligations, led by the operation of a tax warehouse and the use of the excise duty suspension procedure. For small solution producers, this can be an impossible obligation to fulfill. There is a fear that tax authorities will interpret the aforementioned provision (if it enters into force in this form) broadly.
So, should every manufacturer of liquids potentially suitable for use in electronic cigarettes prepare to meet excise obligations? Not necessarily – first of all, a “solution,” that is, a mixture of at least two substances, will still be an essential element of the definition of liquid for electronic cigarettes.
The solution base should still contain glycol or glycerin. Even solutions at an early stage of manufacture may “fall outside” the expanded definition if it is only at later stages of processing that they gain the ability to be used in electronic cigarettes.
There is a good chance that at least some CBD oils will not be included (and subject to excise taxes). The conclusions of, among others, the individual interpretation of the Director of the KIS of 4.3.2021, 0111-KDIB3-3.4013.2.2021.2.JS, Legalis, will remain valid.
Manufacturers of flavors, for example, will find themselves in a more difficult situation, despite this, the individual interpretations obtained by them by the Director of the KIS (e.g., dated 20.1.2021, 0111-KDIB3-3.4013.222.2020.1.JS, Legalis) already gave illusory protection. Entities that manufacture products that are substitutes for cigarettes or smoking tobacco face a similar challenge. If they meet the criteria for cigarettes or tobacco, they are treated as such even if they do not contain tobacco. (Interpretation of the Director of the Tax Chamber in Poznań of 8.7.2014, ILPP3/443-63/14-2/TK, Legalis, regarding excise tax on mayonnaise).
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