Legal Judo: How Vape Retailers Survive and Thrive Despite the PACT Act
When one door closes, another opens.
As government responses to the coronavirus have made shopping at brick-and-mortar retail stores more difficult, consumers have shifted their purchases to the Internet. In 2020, online retail accounted for 21.3% of all retail sales, up from 15.8% in 2019. 2020 also marks the first time ever that online retail accounted for all retail gains. Retailers across all industries should expect to maintain a robust online market even without coronavirus restrictions.
This is the part where vape retailers shake their fists. On March 27, 2021, an amendment to the PACT Act went into effect, tightening regulations on all vape products. Notably, these regulations inhibit online retail sales of vape products to consumers. In this article we will discuss what these regulations mean, and how vape retailers can flip this unfavorable environment into an opportunity for growth.
The PACT Act and New Requirements for the Vape Industry
The PACT Act was passed in 2009 as an amendment to the Jenkins Act of 1949, and was designed to control the sale and taxation of tobacco products. The 2020 amendment to the PACT Act was tucked away in a spending bill largely focused on coronavirus relief, and reflected a growing concern among lawmakers that internet sales granted minors easy access to vape products.
The amendment incorporates Electronic Nicotine Delivery Systems (“ENDS”) into the regulatory framework that already exists under the PACT Act. The definition of ENDS covers virtually everything vape-related: e-cigarettes, e-hookah’s, e-cigars, vape pens, refillable personal vaporizers, electronic pipes, and any component, liquid, part, or accessory of any of these devices. Note that this definition applies to all liquids regardless of their chemical profile, and to individual vape components that are not yet assembled.
All ENDS are now subject to registration, reporting, recordkeeping, labeling, and shipping requirements. Business to consumer (“B2C”) transactions and business to business (“B2B”) transactions share some requirements and differ on others. The below key requirements apply to both B2C and B2B transactions except where noted otherwise.
Registration Requirements
The PACT Act applies to anybody who sells, transfers, or ships ENDS for profit. Therefore, ENDS retailers and delivery services that ship ENDS (collectively “ENDS merchants”) would fall under the Act.
The first step to remaining compliant with the PACT Act is registration. All ENDS merchants doing business in Missouri must register with the Bureau of Alcohol, Tobacco, Firearms, And Explosives (“ATF”) and the Missouri Department of Revenue (“DOR”). Registration forms are available on each agency’s respective websites.
Additionally, selling ENDS out of state requires qualifying as a foreign business and appointing a registered agent in the destination state. B2C merchants must also obtain the appropriate retailer license for each destination state when those states apply their own taxes to ENDS.
Reporting and Recordkeeping Requirements
Each month, ENDS merchants selling in Missouri must report the following information to DOR for the previous month’s transactions: (i) the buyers’ names and addresses, (ii) the brand and quantity of the products sold, and (iii) the names, addresses, and phone numbers of the people who ship the products. Additionally, ENDS merchants must submit copies of these reports to the chief law enforcement officers of local governments that apply their own taxes to ENDS.
Furthermore, delivery services must retain records on any delivery that was interrupted because the deliverer had reason to believe the buyer was violating the PACT Act. Delivery services must provide such information to the ATF upon request.
Shipping and Labeling Requirements
Effective April 27, 2021, the United States Postal Services (“USPS”) cannot ship ENDS directly to consumers. Therefore, B2C transactions will need to make other shipping arrangements. Conversely, B2B transactions can still ship through USPS, but must pre-clear each shipment with the USPS.
Common carriers and other shipping services must obtain a signature from the purchaser or another adult accepting delivery for ENDS. The shipper must also obtain proof of age from the signer in the form of a valid photograph-bearing government identification, and must verify that identification information with a database. No B2C delivery may contain more than 10 pounds of ENDS.
Delivery services must also clearly label packages containing ENDS.
How the Shipping Industry Has Responded to the PACT Act
Common carriers have generally abandoned ENDS shipping because of the new red tape. UPS, FedEx, and DHL will not ship ENDS either to consumers or businesses. Amazon has never shipped ENDS.
However, while some delivery services back away, others step in to fill the void. At least two companies: X (a nationwide newcomer with a one-letter name), and Freight Right, and probably others are ready to take on the ENDS shipment business.
Rolling with the Punch/Kick from PACT
The PACT Act is not the death knell to the online vape industry as is widely believed. We can navigate the new legal landscape by drawing from timeworn and broadly applicable wisdom. Aesop wrote of the flexible willow tree that outlasted a storm, while the rigid oak snapped in two. Judo martial artists redirect their assailants’ momentum to drive them into the ground. And vape retailers can use the boundaries of the PACT Act to refocus their businesses.
Now is the ideal time for vape retailers to crack open the books and solidify a vision for their businesses. Maybe online sales are only a small portion of a certain retailer’s business – in this case, one path forward might be trimming fat to focus entirely on bolstering a strong community presence at the brick-and-mortar store. For these retailers, the PACT Act might be the wakeup call they needed to build their unique brands and become local institutions.
Other retailers might find that online sales should be an integral part of reaching consumers, and so forging a plan to address the new law is essential. Some retailers will likely drop out of the online market, and others will likely flounder to find good solutions – herein lies the opportunity for growth. Retailers that can adapt quickly and efficiently to the PACT Act will serve a large online consumer base, almost certainly with fewer competitors.
Costs for shipping will necessarily increase due to the new PACT Act requirements. B2C transactions in particular will see additional expenses due to the USPS ban on shipping and dwindling commercial options as major common carriers exit the market. One obvious solution is to simply eat the costs, switch common carriers to a service willing to ship ENDS, and make up the difference on volume. Or alternatively, avoid shipping altogether by finding a local supplier so that the retailer can pick up the ENDS directly from the supplier’s place of business. Unfortunately, almost all vapes are currently made in China. With enough capital, and bank loans, which should be available since the ENDS are used for CBD and nicotine, is it time to start manufacturing ENDS in Missouri again? We could not locate any current regional manufacturers since Vuse moved manufacturing to North Carolina.
The vape industry could also borrow from other ATF-regulated industries. Interstate online firearms sellers must transfer their products to a federal firearms license holder – usually a retail store – which then transfers the product to the buyer who picks it up from the store. Similarly, vape sellers could build business networks wherein they ship each other products intended for specific consumer buyers. This arrangement would allow shipment through USPS, and therefore potentially decrease shipping costs. To evaluate whether this solution is commercially viable, online retailers would need to weigh these savings against additional transfer fees charged by brick-and-mortar stores.
Retailers can borrow from other industries too. For example, regional cooperatives of ENDS retailers could collectively negotiate shipping rates with a willing common carrier, much like insurance companies pool policyholder resources to negotiate with hospitals.
No two businesses are the same, and so a myriad of solutions will hopefully emerge. Vape retailers should confer with their consultants and attorneys to choose the plan of attack most suited to their unique situations. The PACT Act is an unexpected left hook; but with the right plan, the vape industry can roll with this punch and counter with the judo needed to keep the supply and sales of safe vapes coming.
This article is not intended to provide legal advice. Always consult with an attorney suited to advise on your unique position.
Joseph D. “Chip” Sheppard, III is Chair of the CECB Cannabis Law Group of 7 attorneys handling all MMJ related issues including compliance, appeals, variances, change requests, real estate issues and transactions and all other business and wealth preservation issues for the MMJ industry.
Kirk Kaczmarek is an Associate at Carnahan, Evans, Cantwell & Brown, P.C. He practices in the areas of business transactions, regulatory compliance, and dispute resolution/litigation, including within the Missouri cannabis industry.
1 See US Ecommerce Grows 44.0% in 2020, DIGITAL COMMERCE 360 (Jan. 29, 2021), http:// www.digitalcommerce360.com/art
2 See id.
3 See COVID-19 Has Changed Online Shopping Forever, Survey Shows, UNCTAD (Oct. 8, 2020), http://
unctad.org/news/covid-19-has-c
4 See Consolidated Appropriations Act of 2021, Pub. L. No.116-220, §§ 601-603, 134 Stat. 3136, 3137 (to be
codified at 15 U.S.C. §§ 375-378) [hereinafter Consolidated Appropriations Act]. 5 See id.
6 See Azim Chowdhury, Congress Amends the PACT Act to Apply to All Vaping products, Placing Huge Burden on Small Manufacturers as Third-Party Common Carriers Refuse to Ship Products, 6 NAT’L L. REV. 35 (2021), http:// www.natlawreview.com/article/c
7 See id.; Isabelle Gustafson, Senate Passes ‘Preventing Online Sales of E-Cigarettes to Children Act’, C STORE DECISIONS (Jul. 7, 2020), http://cstoredecisions.com/20
8 See Consolidated Appropriations Act, supra note 4 at § 602.
9 See id. 10 See id.
11 See id.; BUREAU OF ALCOHOL, TOBACCO, FIREARMS, AND EXPLOSIVES, ATF PREVENT ALL CIGARETTE TRAFFICKING (PACT) ACT INFORMATION GUIDE, [hereinafter ATF Information Guide], http://www.atf.gov/alcohol- tobacco/docs/guide/prevent-all
12 See ATF Information Guide, supra note 11.
13 See id.
14 See Consolidated Appropriations Act, supra note 4 at § 602.
15 See id.
16 See ATF Information Guide, supra note 11 at 2, 3.
17 See id; MISSOURI DEPARTMENT OF REVENUE, STATE TOBACCO PACT ACT PA-2 REPORT FOR MISSOURI (2021).
18 See PACT Act Compliance for the Vaping Industry, THOMPSON HINE, http://www.thompsonhine.com/u
19 See id.
20 See ATF Information Guide, supra note 11 at 3, 4. 21 See id.
22 See id. at 5.
23 See id.
24 See Treatment of E-Cigarettes in the Mail, 86 Fed. Reg. 10218 (Feb. 18, 2021) (to be codified at 39 C.F.R. 113). 25 See Pact Act Compliance for the Vaping Industry, supra note 18.
26 See ATF Information Guide, supra note 11 at 4, 5.
27 See id.
28 See id. at 4
29 See UPS, DHL, and FedEx Join USPS in Vape Mail Ban, FREIGHT RIGHT (Mar. 29, 2021), http:// www.freightright.com/news/vape
30 See Keila Schroedl, How New Regulations from the PACT Act Affects the Shipping of Vaping Products, SUPPLY CHAIN 247 (Mar. 1, 2021) http://www.supplychain247.com
31 See Freight Right, supra note 29; One Shipping Carrier Steps up to Ship Vape and E-Cigarette Products in the United States, CISION (Feb. 23, 2021), http://www.prnewswire.com/new
32 See Sui-Lee Wee, Elsie Chen, China’s Vaping Boom Alarms the Government, THE NEW YORK TIMES (Nov. 22, 2019).
33 See Reynolds Consolidates Vuse Manufacturing, CSP (Oct. 6, 2015), http://www.cspdailynews.com/t
34 See 18 U.S.C. § 922.