E-cigarettes in the spotlight: before takeoff, you need to answer these three questions

In fact, this is not the first time that e-cigarettes have been removed from e-commerce platforms due to controversy. In mid-September, American e-cigarette giant JUUL announced its entry into the Chinese market, only to suspend sales in China a week later. Currently, there is no official store information available on Tmall and JD.

For emerging products like e-cigarettes, people are often confused about whether nicotine-containing e-cigarettes are considered tobacco or consumer electronics. Should e-cigarettes be subject to value-added tax like regular consumer goods or tobacco tax? Should e-cigarettes invite celebrities as product endorsers in compliance with advertising laws?

It is understandable that the general term "e-cigarette" also refers to electronic vaporizers. It is a device powered by a rechargeable lithium polymer battery that heats the liquid in the tank to produce "vapor" without combustion, thus mimicking the taste of cigarettes without producing tar and carbon monoxide. Notably, the most important component of e-cigarettes, the "e-liquid," contains 3% or 5% nicotine, along with propylene glycol, vegetable glycerin, and food flavorings.

At a convenience store in Shenzhen, CITIC Jinwei (WeChat: jwview) noticed that e-cigarettes and candies were prominently placed at the checkout counter, while traditional cigarettes were located behind a dedicated shelf at the cash register. The staff mentioned, "E-cigarette sales are quite good, mainly among young people. They can sell three to five e-cigarettes a day. Older smokers do not seem to like them."

Just like the placement of e-cigarettes in convenience stores, there are currently no relevant management policies for e-cigarettes. It is understood that in China, e-cigarettes are neither classified as drugs, health products, medical devices, nor tobacco. Therefore, domestic e-cigarettes still fall into a "three no" state, meaning there are no product standards, quality supervision, or safety assessments.

An anonymous e-cigarette industry insider believes that e-cigarettes are consumer electronics since they do not involve the production and distribution of tobacco. "Our e-liquid is purchased through the supply chain based on adjusted ingredient compositions and tobacco leaf assembly," the insider told CITIC Jinwei.

According to Article 44 of Shenzhen's new smoking regulations, "Smoking refers to the use of e-cigarettes and other ignited or heated tobacco products that are not combusted." The new smoking regulations also clearly define tobacco products as "all or part of products made from tobacco, used for smoking, sucking, chewing, or as raw materials for snuff, including e-cigarettes."

In July, Mao Qun'an, director of the Planning Department of the National Health Commission, stated that the harmfulness of e-cigarettes should be taken seriously. Current domestic and international research has found that the aerosol produced by e-cigarettes contains many toxic and harmful substances, and various additives in e-cigarettes also pose health risks. Furthermore, the nicotine concentration marked on many e-cigarette products is often unclear, leading to the risk of excessive consumption. There are also safety hazards such as battery explosions, e-liquid leakage, and high-temperature burns.

Currently, the only regulations issued by the State Administration for Market Regulation and the State Tobacco Monopoly Administration regarding e-cigarettes are some provisions prohibiting the sale of e-cigarettes to minors. National standards for e-cigarettes have not yet been introduced. Whether e-cigarettes are classified as tobacco products remains unclear, and a series of regulations are still ambiguous. Lawyer Zhao Zhizhan from Beijing Zhiling Law Firm stated in an interview with CITIC Jinwei.

Data from Tianyue shows that over 1,000 new e-cigarette companies were registered in 2016, 2017, and 2018. Since the beginning of 2019, the number of new e-cigarette companies has exceeded 2,000. The high taxes on the tobacco industry have always been an important source of national revenue and an effective means of controlling the development of the tobacco industry. So, should the booming e-cigarette industry be taxed under value-added tax or tobacco tax?

A staff member from the Shenzhen Taxation Bureau told CITIC Jinwei that currently, e-cigarettes are taxed as goods sold under the value-added tax category, with a tax rate of 13%.

Value-added tax is a turnover tax levied on the value added at various stages of production, circulation, and labor services. From the principle of tax calculation, value-added tax is levied on the added value of goods or services at multiple stages.

It is understood that the taxes that tobacco companies in China need to pay include seven types of taxes and two special revenues. The main taxes include leaf tax, consumption tax, and value-added tax. Special revenues include state capital income and special profits after tax.

The Tobacco Leaf Tax Law of the People's Republic of China, which came into effect on July 1 last year, stipulates a uniform tax rate of 20% on tobacco leaves nationwide. Additionally, according to relevant cigarette consumption tax policies, cigarette consumption tax includes two stages: production and sales (or import) and wholesale stages. In the production and sales stage, the consumption tax rates for Class A and Class B cigarettes are 56% and 36%, respectively, while the consumption tax for cigars is 36%, with a fixed tax rate of 0.003. The ad valorem tax rate for each cigarette is 11%, with a tax of 0.005 yuan per piece. Currently, the overall tax burden on cigarettes in China has reached about 65%.

How should e-cigarettes be taxed under consumption tax categories? A consultant from the State Administration of Taxation told China News that "there are fifteen types of consumption taxes. Among them, only cigarettes, cigars, and tobacco leaves fall under the cigarette tax category, which means e-cigarettes do not need to pay consumption tax."

Recently, major media companies in the U.S., including CNN, have removed e-cigarette advertisements from their respective media platforms. On e-commerce platforms, e-cigarette advertisements are only displayed as physical products.

In China, CITIC Jinwei has focused on e-commerce platforms like Tmall and JD. The e-cigarette sales pages show that celebrity Edison Chen is the spokesperson for an e-cigarette brand. In August of this year, celebrity Zheng Zheng made his own e-cigarette, "Soft Kuo"; actor Huang Jue publicly stated that he liked to incorporate e-cigarettes into stocks; singer Pu Shu once "played" with e-cigarettes on a program.

Additionally, some e-cigarette brands hope to promote e-cigarettes among young people by sponsoring "music festivals" or "street dance competitions."

Wei Yu (a pseudonym), a junior at a university in Beijing, first encountered e-cigarettes at an outdoor music festival. He told CITIC Jinwei that he saw various flavored e-cigarettes and experienced the devices, with friends around him trying them out, leading him to experience his first "smoke" to "fit in."

"I used to hate the taste of tar, but after trying it, I found that e-cigarettes actually have a cool, refreshing mung bean flavor, and I wasn't put off. Later, I learned that it also contains nicotine, but now I have come to like this fresh-flavored e-cigarette," Wei Yu said. He mentioned that he almost needs a "smoke bomb" every week.

In fact, smoking has become a social consensus due to its health hazards. China's advertising laws impose strict restrictions on tobacco advertising. On September 1, 2015, the new Advertising Law's Article 22 prohibited the publication of tobacco advertisements in mass media or public places, public transport, and outdoors. It also prohibits sending any form of tobacco advertisements to minors.

The previous "Interim Measures for Tobacco Advertising" provided more detailed rules regarding advertising locations and forms. The measures indicated that tobacco advertisements are prohibited from being published in movies, television, newspapers, and journals. It is also prohibited to post tobacco advertisements in public places such as waiting rooms, theaters, conference halls, and sports venues. Furthermore, tobacco advertisements must include the statement "Smoking is harmful to health," which must occupy at least 10% of the total advertisement area.

"From a legal perspective, I personally believe that e-cigarette companies inviting celebrities as product endorsers does not violate advertising laws, but from a policy perspective, the state does not advocate smoking," said lawyer Zhang Yuhao from CITIC Jinwei.

Strategic positioning expert Xu Xingjun, founder of Jiude Positioning Consulting, told CITIC Jinwei that e-cigarettes are currently in an unregulated state in the domestic market. The marketing activities of e-cigarette companies inviting celebrities to endorse their products will stimulate some young people to smoke e-cigarettes, which contradicts the country's tobacco control policies.

"Although there are no unified policy regulations regarding e-cigarette advertising, from a long-term development perspective, limiting the development of e-cigarettes and protecting people's health is an inevitable trend," Xu Xingjun said.

According to the National Standard Information Public Service Platform, on September 23, the project cycle for the national standard "E-cigarettes" will end on October 11, 2019, with the current status being "under approval." It is reported that the national standard for e-cigarettes will be released in October.

"For the entire industry, the policies related to e-cigarettes to be launched in October will definitely eliminate unqualified and inferior small enterprises, which will help regulate the e-cigarette market," Xu Xingjun said.