In June, we reported on the Texas Supreme Court’s decision holding that RJR Vapor’s VELO oral nicotine pouches are subject to the “tobacco products” tax under Texas law. The Texas Comptroller has now relied on the Court’s reasoning in that case to extend the applicability of the Texas tobacco products tax beyond oral nicotine products. In a September private letter ruling (PLR), the Texas Comptroller considered a request from a taxpayer seeking guidance as to whether its smokeable “ersatz cigarettes” or “ercigs,” containing non-tobacco plant matter and a synthetic nicotine analog, are taxable as “cigarettes” or “tobacco products” under the Texas Tax Code. The Comptroller found that the ercigs are not taxable “cigarettes,” but they are taxable “tobacco products” under Texas Tax Code § 155.001(15)(E), even though the ercigs contain no tobacco or quantifiable nicotine. The PLR is the Texas Comptroller’s written determination of how relevant tax laws, rules, and guidance apply to the taxpayer’s specific set of facts. It is binding on the Comptroller, and the taxpayer may rely on it. The PLR is also the first public document of which we are aware that illustrates how the Texas Comptroller can interpret the Court’s recent decision to expand the applicability of the Texas tobacco products tax to novel products. As discussed below, the PLR also reaches a question the Court expressly left open.
Background: Hancock v. RJR Vapor Co.
In Hancock v. RJR Vapor Co., LLC, (RJR Vapor), the Texas Supreme Court held that RJR’s VELO pouches are taxable tobacco products because they are “made of . . . a tobacco substitute” under Texas Tax Code § 155.001(15)(E), even though they do not contain tobacco leaf. The Court resolved the case on the “tobacco substitute” prong alone. It did not decide whether the pouches are “made of tobacco” on the theory that their nicotine is extracted from tobacco leaves, which was the basis of the Comptroller’s original determination. The Court expressly held that “nicotine alone is not a ‘tobacco substitute,’” and it rejected the Comptroller’s argument that nicotine consumed recreationally is a substitute for tobacco. The Court noted that neither “recreational” nor “nicotine” appears anywhere in the tobacco products tax statute, and that the exclusion of e-cigarettes “cuts against the idea that the Legislature wanted to tax the sale of recreational nicotine products.” Rather, it held that a product is “made of . . . a tobacco substitute” when its primary ingredients or components “take the place or function of tobacco plant matter” as it is used in cigars, smoking tobacco, chewing tobacco, pulverized tobacco, or other similar taxed tobacco products. Applying that test, the Court found that VELO pouches’ primary ingredient, a blend of powdered microcrystalline cellulose (plant matter) and nicotine isolate, is a “one-for-one replacement” for the pulverized tobacco in snus and moist snuff. The Court described a VELO pouch as “essentially a type of snus.”
Several limits in the Court’s reasoning matter for novel products. First, “made of” means “composed of,” so the tobacco substitute must be the product’s primary ingredient or component. Second, relying on the ejusdem generis canon and the weight-based structure of the Tax, the Court reasoned that a tobacco substitute should be “an ingredient with properties similar to those of tobacco plant matter,” and it observed that the Tax is “a poor fit for nicotine products that lack plant matter with properties similar to tobacco.” Third, the Court expressly reserved whether cellulose without nicotine would count as a tobacco substitute, because VELO pouches contain both.
While the VELO pouches contained tobacco-derived nicotine, we noted in our prior blog post that the Court’s reasoning could allow the Texas Comptroller to take the position that non-tobacco-derived nicotine pouches are similarly classified as tobacco products.
The Texas Comptroller’s PLR
The taxpayer who submitted the PLR request manufactures ercigs, which are marketed as a smokeable alternative to traditional cigarettes. The ercigs are composed of organic, plant-based, 100% U.S.-grown biomass with a nicotine substitute. While ercigs contain no nicotine, they contain a nicotine substitute known as 6-Methylnicotine (6-MN), a synthetic nicotine analog. 6-MN differs from nicotine at the molecular level, but the taxpayer described it as a nicotinic receptor agonist with activity comparable to nicotine.
The taxpayer sought guidance from the Texas Comptroller as to whether its ercigs are “cigarettes” or “tobacco products” subject to Texas’ cigarette or tobacco products tax. The Texas Comptroller concluded that ercigs are not “cigarettes” under Texas Tax Code § 154.001(2) because they are not made of tobacco or tobacco mixed with another ingredient and are not “cigars” under § 155.001(2) because they contain no tobacco leaf. That left “tobacco product” as the only remaining category under which ercigs could be taxed. Applying RJR Vapor, the Texas Comptroller found that the plant matter in ercigs provides an equivalent structure, aroma, flavor, and burning function as smoking tobacco. It also found that 6-MN acts on the same receptors and produces the same physiological responses as nicotine. Together, the plant matter and 6-MN serve as a “one-for-one replacement” for tobacco plant matter in products subject to the tobacco products tax. Thus, the Texas Comptroller concluded that ercigs are subject to the tobacco products tax (and are subject to applicable permits and reporting) because they are made of a tobacco substitute and therefore qualify as tobacco products under the statute.
Consistent With RJR Vapor, But Goes Further
The PLR relies on the Texas Supreme Court’s reasoning in RJR Vapor. It applies the Court’s “takes the place or function” description. It treats “substitute” as a flexible category that can change with technology. It also uses the Court’s comparison to traditional tobacco products. The difference is the comparison product. RJR Vapor compared pouches to snus and moist snuff (“preparations of pulverized tobacco”), while the PLR compares ercigs to smoking tobacco. On the plant-matter side, the PLR’s comparison arguably fits the opinion well: the industry usage of “tobacco substitute” discussed by the Court, such as lettuce, hemp, cloves, and mugwort replacing tobacco leaf, arose mostly in smoked products like cigarettes.
The PLR also goes further than the Court in two ways. It shifts the analysis from oral to combustible products. It also goes past the question we raised in June about non-tobacco nicotine and extends the Court’s reasoning to encompass a product with no nicotine at all. The Court explained that nicotine isolate ensures the pouch “produces the same chemical response as the tobacco plant matter would in a traditional tobacco pouch.” The PLR reasons that 6-MN, as a nicotinic receptor agonist, “fulfills the same function as nicotine in smoking tobacco,” a rationale that would seemingly extend to any compound with a comparable effect on the body. That reading is plausible, but no court has tested it. It also creates some tension with RJR Vapor. The Court rejected the Comptroller’s effort to define taxability by reference to recreational nicotine use, stressing that “the statute does not rely on the purpose for which a substitute is used to determine its taxability” and that the word “nicotine” appears nowhere in the Tax. And the Court expressly declined to decide whether plant matter without nicotine is a tobacco substitute because the products at issue in that case contained both. The PLR effectively answers that reserved question by treating a pharmacological substitute for nicotine as equivalent to nicotine itself, without acknowledging either the Court’s holding that nicotine alone is not a tobacco substitute or the Court’s reservation in footnote 8 of the opinion. It also depends heavily on the taxpayer’s own description of 6-MN’s pharmacology.
The PLR is consistent with the Texas Comptroller’s broader post-RJR Vapor position on the applicability of tobacco product taxes to novel products. The agency’s website now states that “all oral nicotine pouches are taxable as Class W tobacco products,” and that tobacco products have been taxable in Texas since January 1, 1982.
Open Questions
Several questions remain unresolved. The PLR does not say where its functional-equivalence test stops. For example, it is unclear how the Texas Comptroller would treat herbal products with no receptor-active compound, or analogs that act differently from nicotine. Because the Court reserved whether plant matter without nicotine qualifies, that question remains open as a matter of law, not just agency practice. Vapor products are carved out of § 155.001(15)(E) through the e-cigarette exclusion, an exclusion the Court itself relied on in rejecting a nicotine-based reading of the statute, so 6-MN vapes may be treated differently.
Taxpayers also retain arguments the Court left available. RJR Vapor held only that the statute “unambiguously applies to VELO pouches,” and the Court found it “unnecessary to consider whether the Tax might be ambiguous in other applications.” For products further removed from traditional tobacco, taxpayers may invoke the longstanding presumption that ambiguous tax statutes are construed strictly against the taxing authority. The pending equal-and-uniform challenge on remand, which rests on the Comptroller taxing VELO pouches but not nicotine replacement therapies, could also affect how broadly the Comptroller may apply its functional test.
The agency’s website also states that tobacco products have been taxable since 1982, which raises the risk of claims for back taxes.
The PLR signals, however, that manufacturers of tobacco-free products containing plant-based material and nicotine or nicotine analogs should assume the Texas Comptroller will seek to treat them as taxable tobacco products, whether oral or smokeable.
Why It Matters
The PLR shows that the Texas Comptroller reads RJR Vapor as a broad functional test rather than a narrow ruling on nicotine pouches. Under that test, a product may be taxed if its plant matter and active ingredients take the place and function of the tobacco plant matter in traditional tobacco products, even without tobacco leaf or nicotine. Whether courts will agree is uncertain: RJR Vapor grounded its holding in the composition of VELO pouches, held that nicotine alone is not a tobacco substitute, and left open whether a product without nicotine qualifies. Companies selling next-generation nicotine or nicotine-analog products in Texas should review their product classifications, permits, and reporting now. Importantly, similar “tobacco substitute” language in other states’ statutes, such as Alaska and Oklahoma, could be interpreted in a similar manner. If you have questions about these developments, our team is happy to help.
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