On December 9, 2020, the Tennessee Department of Revenue issued its Notice #20-21, on the subject of the State of Tennessee’s excise tax on other tobacco products or “OTP”. The Notice notes that OTP is defined as “cigars … manufactured tobacco and snuff of all descriptions whether made of tobacco or any substitute for tobacco.”

In the Notice the Department states: “A wide variety of new products that do not contain tobacco are being introduced in Tennessee. Some of these products contain nicotine, while others do not. Some of these products are packaged to look like tobacco products, while others are packaged in new and unique ways. In light of these various new products, it is unclear what constitutes a tobacco substitute for purposes of the tobacco tax. The Department will not apply the tobacco tax to these non-tobacco products without statutory clarification on what is considered a tobacco substitute.”

The Notice then goes on to clarify the Department’s analysis with respect to several specific tobacco and non-tobacco segments:

  • With respect to “e-cigarettes and vape devices,” which the Notice defines as products that “transform a liquid into its gaseous form, allowing the user to inhale and ingest the vapor,” and where “the liquid that is vaporized does not contain tobacco,” such products are not subject to the tobacco tax because these products do not contain tobacco.
  • Other nicotine products such as smokeless oral nicotine pouches and nicotine gum that also do not contain tobacco are not subject to the tobacco tax.
  • With respect to what the Department refers to as “hemp cigarettes” and “herbal cigarettes,” which it indicates “are cigarettes that contain either smokable hemp or other smokable herb material and are wrapped in paper or a paper substitute,” such products will not be subject to the OTP tax unless such products contain tobacco. Should such products contain any tobacco, they will be found subject to the tobacco tax.

The Department’s action strikes us as an example of good governance, where an agency correctly acknowledges the limitations of its enforcement authority and provides the business community with clear and actionable guidance.