164 South Korean Local Governments Respond to 'E-Liquid Tax' Lawsuits Involving KRW 43 Billion

164 local governments in South Korea have jointly formed a legal team to fight back against tax lawsuits filed by e-cigarette manufacturers.

According to a brief report from ihalla, Jeju Special Self-Governing Province recently joined 164 local governments in appointing a law firm to respond to lawsuits filed with the Seoul Administrative Court by some e-liquid vaping manufacturers seeking to revoke cigarette tax assessments.

According to Jeju, the lawsuit originated in January this year, when local governments nationwide imposed unpaid cigarette taxes on 17 e-liquid vaping manufacturers.

It is understood that unpaid taxes owed by e-liquid vaping manufacturers from 2016 to 2020 reached KRW 110 billion. Of this amount, Jeju collected KRW 3.3 billion.

Cigarette tax consists of tobacco consumption tax, local education tax, and individual consumption tax. Among these, tobacco consumption tax and local education tax are local taxes and are included in local government revenues.

Under tobacco industry regulations, tobacco has generally been defined as being made from 'tobacco leaves' from the tobacco plant, rather than nicotine raw materials extracted from major parts of the tobacco plant such as stems or roots. With the implementation of the revised Local Tax Act in 2021, e-liquid made from stems or roots also became taxable.

However, with the implementation of the newly revised Local Tax Act in 2021, tobacco products made using tobacco stems and roots were also brought into the tax scope.

Local governments across the country, including Jeju Province, are now reimposing taxes on e-liquid vaping manufacturers for the 2016-2020 period because audits by the Board of Audit and Inspection and findings from the Korea Customs Service showed that these companies used tobacco leaves in their products rather than other non-taxable parts.

Of the 17 companies that received tobacco tax notices from Jeju and other regions, 9 filed administrative appeals against the new local tax law. Of these, 8 proceeded to file lawsuits. The total amount involved in these lawsuits is reportedly as high as KRW 43 billion. They do not accept the audit findings of the Board of Audit and Inspection and claim that the taxation is unreasonable.

The remaining companies either filed separate actions or did not file administrative lawsuits, but to date they still have not paid the taxes owed.