Future of Wisconsin Vapor Tax Uncertain after Decision by State Supreme Court

July 13, 2020

Last Friday, the Wisconsin Supreme Court struck down several of Gov. Tony Evers’ (D) partial vetoes to the state’s biennial budget for fiscal years 2020 and 2021. Of the 78 partial vetoes issued by the governor in July 2019, four were challenged and the court struck down three.

In Wisconsin, per the constitution, the governor has exceptionally broad partial-veto authority; specifically, such authority extends to any bill that contains an appropriation. The governor may strike whole sections, words, letters, and numeric digits, and may replace appropriations amounts with lower amounts, but must do so without altering the subject matter of the underlying bill.

One of the vetoes the state court struck down seemed intended to extend the reach of the vapor tax by adding liquid heated by vaping devices into the definition of “vapor products.”

In the budget as enacted, a “vapor product” is defined as a “a noncombustible product that produces vapor or aerosol for inhalation from the application of a heating element to a liquid or other substance that is depleted as the product is used, regardless of whether the liquid or other substance contains nicotine.” Gov. Evers, presumably concerned that the definition as drafted might result in the tax falling on vaping equipment but not on the liquid, partially vetoed the definition to instead read: “‘Vapor product’ means a noncombustible product that produces vapor or aerosol for inhalation from the application of a heating element, regardless of whether the liquid or other substance contains nicotine.”

The veto removed the part of the legislature’s vapor products definition that describes a vapor product as one in which liquid is consumed rather than as liquid itself. Thus, the governor effectively expanded the taxable objects from just vaping equipment to include vaping liquids. As a result, when the tax took effect on October 1, 2019 roughly three months after the governor issued his partial vetoes, the tax was imposed on milliliters of vaping liquid. The tax has been levied on liquid sold separately, in cartridges or bottles, or bundled in prefilled electronic cigarettes. The court’s decision, in determining that the governor’s partial veto was unconstitutional, leaves the vapor tax in a state of uncertainty, as it restores the definition of vapor products as written by the legislature.

Since lawmakers chose to levy the tax on volume of liquid at a rate of 5 cents per milliliter, their original intent was presumably to tax liquid, even though their definition of vapor products as written appears to fall short of that objective by dint of the court’s ruling. The Wisconsin Supreme Court’s interpretation is that, by altering the definition, Gov. Evers created a new tax, which is beyond the governor’s partial veto authority. If the governor’s partial veto created a new tax, that presumably means that, as drafted by the legislature, Wisconsin’s vapor tax does not apply to vapor fluid.

The immediate implications of the court’s decision depend on the Wisconsin Department of Revenue’s interpretation. Until now, the tax was levied on vapor products and liquid regardless of whether they were sold separately or bundled. One possible outcome may be that, for the time being, liquid sold separately will not be taxed in Wisconsin, whereas liquid sold in prefilled vape equipment may be taxed. Another possible outcome is that no vapor products will be taxed.

Either way, the impact on tobacco tax revenue will be minimal. According to the Wisconsin Legislative Fiscal Bureau, the tax on vapor products was estimated to raise $2.3 million in FY 2020 and $3.2 million in FY 2021. Tax revenue from cigarettes in the same fiscal years is projected to generate $512 million and $497 million, respectively.

If the legislature did, in fact, intend to tax all liquids, and still intends to do so, legislators will likely have to introduce a new bill in the upcoming session that includes a clearer definition of the taxable object. Good definitions are crucial to sound tax policy.

Other Tax-Related Decisions

Among the other vetoes struck down by the court, one sought to replace the legislature’s intended School Bus Modernization Fund with an alternative fuel fund. Another lifted the bill’s restrictions on the use of $75 million in local road improvement appropriations, instead allowing the funds to be used for general local purposes.

Another veto that was challenged but upheld negated the bill’s registration fee reduction for certain heavy trucks. Under prior law, registration fees varied based on vehicle class, with fees of either $75, $84, $106, or $155, depending on vehicle weight. The underlying legislation would have created parity among the four weight classes, imposing a uniform fee of $100.

The governor retained the bill’s two proposed fee increases but struck the two reductions, and the court upheld this veto 5-2. Among the justices voting to uphold the veto, two concluded the veto was permissible on the basis that it merely negates one of the legislature’s policy proposals in the underlying bill (as opposed to directly increasing a tax or fee), and others concluded the veto was permissible because it did not alter the subject matter at hand or because it resulted in a complete and workable law. As such, the two lower-weight vehicle classes will face a $100 fee, while the two higher-weight vehicle classes will face fees of $106 and $155, respectively.

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