An Italian court has ruled that e-cigarette products cannot be taxed as if they were tobacco products, because tobacco’s harmful effects are not obvious in them. The decision by the Constitutional Court, which was ruling after e-cigarette trade and consumer groups challenged a government decree on tax, will doubtless be seen as a victory by the e-cig industry – and may be followed by a further Constitutional Court review of a more recent tax measure. The threat of the tax had stifled investment in innovation and marketing as well as leading to closures of vape stores, according to Massimiliano Mancini, president of the Italian e-cig trade group ANAFE Confindustria, which was among those mounting the challenge.
But the practical implications for the Italian market are not yet entirely clear.
The path to the Constitutional Court decision began in April 2014 when the Administrative Court of the Italian region of Lazio (TAR Lazio) suspended a 58.5% tax that the national government intended to impose on the price of all e-cig products.
This suspension was based on the grounds of “unreasonableness” – and that is essentially the position that the Constitutional Court has now upheld by rejecting the government’s original proposal to apply tobacco’s level of taxation to e-liquid (with or without nicotine) and hardware, under the same tax regime.
However, since the original suspension of the 58.5% tax by the Lazio court, a new tax has been introduced by the Italian government. Based on taxing e-cigarettes at 50% of the level that is applied to an “equivalent” quantity of combustible tobacco – established through a complex formula – this was not under consideration in the court case, and remains in force. That tax could also be reviewed by the Constitutional Court if, as expected, it is sent there by the Administrative Court in Lazio when it hears a similar case against the new tax on 1st July. If so, it is likely that the new tax will also be suspended.
The Constitutional Court revoked the original 58.5% regulation on two grounds:
- Taxes on tobacco products are justified by their “seriously harmful effect on health”. However, “this assumption is not apparent in e-cigarettes products, even less when it comes to hardware and liquid that does not contain nicotine”, and therefore they “cannot be considered as tobacco substitutes”.
- Additionally, the tax was deemed to be illegal because of the vagueness of the tax base, and the excess of administrative discretion allowed in implementation of the primary legislation. In particular, the administrative authority (the Italian Tobacco Monopoly) was given too much authority to set the rate and the tax base. This was regarded as unconstitutional because the Italian constitution specifically allocates this competence to the Italian parliament.
The decision was welcomed by Imperial Tobacco’s Fontem Ventures, which recently launched its JAI e-cigarette in Italy. “Every matching between e-cig and tobacco appears absolutely unsuitable and inadequate,” said spokesperson Valerio Forconi.
The more recent tax, too, “would seem to be in conflict with the principle set out by the court”, according to Forconi, whose company backs instead the principle of a tax model based on nicotine levels, the same also proposed since 2014 by ANAFE Confindustria to the Government and Parliament, and now the only available option after the Court’s decision and indications.
What This Means: The e-cig trade and consumer associations that have successfully challenged the tax decree believe that this decision also undermines the tax regime currently applied in Italy; for example, the current tax is also applied to e-liquid that does not contain nicotine.
Consequently, they expect Italian institutions to modify the tax.
The critical and as yet unanswered questions, however, are whether the current regime could be considered as close to tobacco taxation as the one that has been rejected by the court, and therefore could suffer the same fate; and if so, what modifications might be needed for it to escape that. Exemption of hardware and zero-nicotine products would seem a likely step.