This post looks at the initial impact of the federal vaping tax on the price of vaping liquids popular with young people in Canada and identifies reasons for governments to strengthen tax policies with price regulation.
BACKGROUND
The federal vaping tax was intended to protect youth
The federal government promised a tax on vaping products in the April 2021 budget with the stated purpose of reducing youth vaping: "Young Canadians' use of vaping products, such as e-cigarettes, is on the rise ... In addition to raising revenues, vaping taxation could become an effective means to help curtail harmful consumption of these products."
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| Budget 2021 |
Following a public consultation, legislation to implement the tax was included in the 2022 budget, and adopted in June 2022 before Parliament's summer recess. At the beginning of October 2022 manufacturers were required to start remitting the tax and on January 1, 2023 all vaping liquids sold must display a tax stamp.
The tax is higher for small quantities of nicotine and lower for larger quantities. This design puts a higher tax burden on the products that youth favour -- capsule products and disposables -- and a lower tax burden on bottled liquids. As Revenue Canada explains, the tax on liquids is:
- $1 per 2 millilitres (mL), or fraction thereof, for the first 10 mL of vaping substance in the vaping device or immediate container
- $1 per 10 mL, or fraction thereof, for amounts over the first 10 mL
A coordinated tax system is under discussion with the provinces
In the 2022 budget the federal government made public its invitation to “provincial and territorial counterparts to join a coordinated vaping taxation framework, under which an additional duty equal to the proposed federal rate would be applied. Total resulting revenues would be split between federal and provincial and territorial governments on a 50/50 basis.”
Prior to this, some provincial governments had adopted their own vaping taxes:
- British Columbia and Saskatchewan charge a higher rate sales tax on vaping products (20%) than on other consumer goods.
- Newfoundland and Labrador adds an additional 20% tax on vaping products.
- Nova Scotia applies a tax of $0.50/ml to liquids and a 20% tax on devices.
New Brunswick, Prince Edward Island, Quebec and Alberta have indicated their interest in participating in a matching tax system with the federal government. Other provinces may also join, following the example of their coordinated tax approach to cannabis.
The government has announced its intention to review the public health impact of this tax
The 2022 federal budget also promise that "[T]he overall tax burden on vaping products will be regularly reviewed to ensure that important public health objectives are being met.”
5 REASONS FOR GOVERNMENTS TO REGULATE VAPING PRODUCT PRICES
The federal vaping tax is paid by manufacturers before the products are shipped to retailers. While it is anticipated that they will increase their prices to recoup the tax, there is no obligation on them to do so. For both tobacco and vaping products, manufacturers are allowed to adjust their wholesale prices to blunt the health benefits of tax increases.
The absence of price regulation has been a longstanding concern with tobacco tax policy. Because manufacturers are allowed to adjust their prices, they will do so in ways that maintain low prices to recruit new or price-sensitive users, increase prices to maximize profits from existing or less price-focused users. Price segmentation allows them to cross subsidize from one brand or product to another, which is why tobacco control agencies have recommended that tobacco price controls be included in federal budgets.
2) Without price regulation, the new federal tax did not raise the price of many youth-friendly vaping products
While many vape stores have increased the price of their bottled liquids, not all vaping liquids show any impact of the tax. The price of vaping products sold by major tobacco companies, for example, does not appear to have increased following the application of a federal tax:
* A package of 2 VUSE cartridges sells at the same price in January 2023 as it did a year earlier ($13.99), despite the new $2 per package federal excise tax.
* The VEEV starter bundle (device plus 2 pods) sells for $19.99 in January 2023, the same price as when Philip Morris launched the product in Canada in October 2021, even though $2 in tax is now applied to the bundle.
3) Without price regulation, disposable products remain very affordable to youth.
Canadian website offerings for disposable e-cigarettes demonstrate the continued availability of inexpensive vaping products. Highly affordable products include:
* sale prices on established brands (for example Ghost disposables offered on sale for $7.99)
* major brands reduced offering seasonal discounts (e.g. Vuse 40% Cyber Monday )
4) Without price regulation, manufacturers can use price promotions to pave their 'route to market' to young customers
It is not legal to sell tobacco and vaping products to young people (the minimum age of sale set by the federal government is 18, and by provincial governments ranges from 18 to 21). As a result, manufacturers cannot reliably supply the youth market unless there is alternative distribution systems.
A key source of vaping products to youth is 'social supply'. A recent report by Quorus Consulting for Health Canada on 'Youth and Young Adults' Use of Vaping Products') (POR-136-21) found "The most common way that participants discover and try new products is through their friends and social networks."... "Many also purchased their vaping products from peers at school, or from friends or family members. Those who were not of legal age tended to visit a specific store they know that does not ask for proof of age or purchased their device from a peer."
Manufacturers can encourage and facilitate peer-to-peer sales to youth by creating the opportunity for young entrepreneurs to act as middle-men. Offering bulk sales at discount prices, offering periodic discounts and providing free devices are ways to make reselling a profitable proposition for someone who is old enough to legally purchase product but young enough to have a social group that wants to buy them. There are no effective controls on these activities by any level of government at this stime.
Case study: PMI retails disposables to bulk buyers at wholesale prices
The way Philip Morris (PMI) prices its disposable VEEBA in Canada illustrates how direct-to-consumer sales can function as wholesale accounts for informal retail distribution systems.
PMI did not design and does not manufacture the VEEBA disposable vaping device, but earlier this year it acquired the rights to distribute it in Canada and elsewhere. In the U.S.A., the device is sold by the manufacturer Kaival/Bidi Vapor as Bidi Stick. Other than differences in nicotine concentration, VEEBA and Bidi Stick appear identical. The wholesale price for U.S. retailers is US$5.25 - the same as the price offered to customers who purchase 9 products from PMI's Canadian e-store. (CAD$7 = USD$5.25).
Because the Canadian price includes a CAD$1 tax per unit which is not applied in the U.S.A., the direct-to-consumer price offered north of the border is CAD$ less than the wholesale price in the U.S.A.
Through this system, PMI can facilitate and benefit from the illegal supply of vaping products to young people without directly selling to them.
Supplying illegal markets and failing to "know your customer" echo past industry practices. Recall that in 2019, concerns in the United States about informal retailing of JUUL to young people put that company under pressure to impose quantity restrictions on sales - although this was insufficient to forestall the lawsuits that were the subject of recent settlements in the USA. In earlier periods, PMI's Canadian and European operations supplied untaxed cigarettes to informal retail distributors.
5) Without price regulation, tobacco companies can keep prices artificially low.
Multinational tobacco companies can afford to sell vaping products at a loss in Canada because they currently do not receive profits from their Canadian operations.
Because of their large profits from conventional tobacco sales, multinational tobacco companies can afford to promote and sell vaping products at a loss (and have acknowledged to investors that their new products have a "negative margin" (loss)".
This is even more the case in Canada, because their Canadian subsidiaries are currently operating under the protection of the Canadian Companies' Creditors Arrangement Act. Government and other lawsuits against the companies triggered their seeking bankruptcy shelter. Since March 2019, all of their profits have been retained in Canada and are set aside to be made available for a settlement with the provinces. Spending money to promote vaping during the CCAA protection effectively costs the companies nothing, although it dilutes the money that will be available to government.
IMPLICATIONS FOR PUBLIC HEALTH
Price regulation will benefit public health by:
- increasing the effectiveness of taxes at raising prices and reducing youth vaping.
- preventing companies from using low prices to induce young people to try vaping
- preventing vaping companies from using direct-to-consumer sales as a way to aid the informal distribution of their vaping products to young consumers.
- prevent companies from abusing the CCAA protection to sell below-cost products
