Texas court says nicotine pouches are tobacco products

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Nicotine pouches are tobacco goods, the Texas Supreme Court has ruled in a challenge to state taxes paid by the maker of VELO products.

Though VELOs, which are similar to ZYNs, do not contain tobacco, RJR Vapor must still pay taxes because the nicotine in them is derived from tobacco leaves, the May 8 ruling says, and packaged with a substitute material. The company filed suit after the state comptroller told it VELOs are “tobacco products” under state Tax Code.

A lower court must now determine if the tax violates RJR’s right to equal and uniform taxation. The company complains that nicotine-replacement therapies aren’t subject to the Cigars and Tobacco Products Tax, but its pouches are.

“The primary ingredient in a VELO pouch is a blend of powdered microcrystalline cellulose (plant matter) and nicotine isolate,” Justice J. Brett Busby wrote.

“This plant-matter-and-nicotine blend is a one-for-one replacement for the tobacco plant matter in the pulverized tobacco products taxed under subsection (D).”

RJR’s lawsuit seeks a refund on taxes it has already paid. VELO pouches feature 99% pure nicotine extracted from tobacco leaves and combined with water, flavoring and preservatives, leading lower courts to determine they are not tobacco products.

The Court of Appeals found they are not “made of tobacco” because no part of the plant remains in the products, and nicotine isolate can’t take the place of tobacco leaves.

But the Supreme Court overruled, finding they are a tobacco substitute because “non-tobacco plant matter and nicotine take the pace and function of tobacco in taxed products.” The law imposes a weight-based tax on products that are made of a tobacco substitute.

“A VELO pouch is essentially a type of snus—a porous pouch that is filled with cellulose and nicotine isolate instead of pulverized tobacco,” Busby wrote. “In VELO pouches, the cellulose provides the filling for the pouch, ensuring it has a similar weight and feel as finely ground tobacco plant matter (which is especially important given that the Tax is weight-based).

“And the nicotine isolate provides the experience of consuming nicotine, ensuring the pouch produces the same chemical response as the tobacco plant matter would in a traditional tobacco pouch.”