A small change in the tax code a few years ago about how Virginia defines cigarettes threatened to undo the tens of millions of dollars that have been pouring into the commonwealth after a nationwide settlement with tobacco companies in the 1990s.
On Wednesday, the General Assembly passed legislation that would restore the original law, making Virginia once again uniform with federal law. The proposal would count “heated tobacco products” sold in Virginia as cigarettes, as they are classified in every other state.
Carried by Del. Terry Kilgore, R-Scott County, HB 1099 was introduced on behalf of the Office of the Attorney General. It would once again classify these products as cigarettes to ensure Virginia’s continued compliance with the Master Settlement Agreement, under which the state receives about $140 million each year from tobacco companies to fund economic development projects and public health initiatives.
The proposal advanced in the state Senate on a unanimous vote just hours before it cleared the House of Delegates by a vote of 89-9. It is now headed to Gov. Glenn Youngkin’s desk.
“We have to satisfy the Master Settlement Agreement. If we are in violation, then we’ll lose hundreds of millions of dollars,” Kilgore said in an interview. “We’ll keep a lower tax rate for heated tobacco as in the regular code, but we still have to classify them as cigarettes, there’s no way around it.”
Heated tobacco products are new types of cigarettes inserted into electronic devices that heat tobacco leaves to produce an inhalable aerosol, instead of burning tobacco like traditional cigarettes. Under federal law, a cigarette is any roll of tobacco wrapped in paper or in any substance not containing tobacco, regardless of whether the roll is heated or burned.
Currently there are no heated tobacco products on the market approved for sale in the United States. A product called iQOS, developed by the tobacco manufacturer Philip Morris International, was approved by the U.S. Food and Drug Administration in April 2019, and officials from the Office of the Attorney General have received indications that the company may intend to introduce such a product in Virginia within the next 24 months.
Virginia law had defined cigarettes similarly to the federal definition as any nicotine product intended to be burned or heated and rolled in paper or in any substance not containing tobacco. But legislation passed by the General Assembly in 2019 redefined cigarettes in Virginia’s tax code, creating a “contradictory definition” of cigarettes between the tax code and the MSA. Prior to the change the two definitions had been identical for 20 years.
Under the post-2019 tax code, heated tobacco products are no longer classified as cigarettes. Instead, they are a separate tobacco product that is not regulated under the same code provisions and, therefore, is no longer subject to the state requirement for excise tax stamps that applies to all cigarettes.
Despite the change in tax code, the new heated-tobacco type of cigarette still must be treated as a cigarette under the law governing Virginia’s Master Settlement Agreement. When Virginia agreed to the MSA, it was required to codify the agreement into state law.
The MSA was signed in 1998 between the attorneys general of 52 states and territories and the nation’s four largest tobacco companies to settle dozens of state lawsuits brought to recover billions of dollars in health care costs associated with treating smoking-related illnesses. Those signatory companies are known as participating manufacturers, or PMs.
Another 45 tobacco companies have since settled with the participating states, agreeing to curtail or stop certain tobacco marketing campaigns in addition to making annual payments in perpetuity.
These payments are the lifeblood of state public health efforts such as the Virginia Foundation for Healthy Youth, and of economic development initiatives including the Virginia Tobacco Region Revitalization Commission, a 28-member body created by the 1999 General Assembly. Its mission is to promote economic growth and development in formerly tobacco-dependent communities, and to date it has created tens of thousands of jobs and hundreds of millions of dollars of investment in Southwest Virginia and Southside.
“That’s why the experts within this office sounded alarm bells in 2019 and have been working since then to try to fix the definition before it results in us forfeiting our future settlement payments,” Victoria LaCivita, a spokeswoman for Attorney General Jason Miyares, said in an email Tuesday. “Virginia cannot afford to ignore the risks and let MSA funding expire.”
Sean Thornton, chief of the Office of the Attorney General’s Tobacco Enforcement Section, who serves a key role in Virginia protecting the state’s MSA compliance and ensuring continued payments to the commonwealth, said, “We have been working on this for a number of years, but it is complicated and can be confusing.”
At least one tobacco manufacturer, however, called Kilgore’s legislation unnecessarily complicated.
“The bill unnecessarily creates the new tax stamp requirement for a heated tobacco stick, and in order to develop that stamp the state needs to allocate funds, which they haven’t done,” Corey Henry, a spokesman for Philip Morris International, said in an interview.
Under the current definition, the state doesn’t have to spend any new money on technology to implement the new tax stamp requirement. But if Kilgore’s proposal becomes law, that would no longer be true, Henry said. “If the state was worried about collecting revenue, now they need to find new revenue in order to implement that requirement. That seems like an odd way to go about that approach.”
While Kilgore initially believed that his bill would provide an easy fix to the problem, the legislation got caught up between competing tobacco manufacturers — Philip Morris International and the Henrico County-based Altria Group Inc. — with different views about the proposal, and it went through several incarnations before it reached the Senate floor.
Altria, one of the world’s largest producers and marketers of tobacco, cigarettes and related products, is a participant in the MSA, while Philip Morris International is not. Both companies previously collaborated on a tobacco heating device, but that plan faltered in 2022.
Henry, the Philip Morris spokesman, said that Kilgore’s measure would create different tax structures for what is essentially the same product.
“A heated tobacco stick would be taxed at 2.25 cents as opposed to 3 cents, but that doesn’t prevent localities from imposing their own tax on top of that, whereas under the previous classification you couldn’t do that,” Henry said. “This means someone who is a smoker in Newport News could pay a different price for a pack of heated tobacco than someone in Arlington.”
The bill also creates a new heated tobacco product classification that “bizarrely excludes” heated tobacco sticks like iQOS, Henry said. “This is unnecessarily complicated. This bill maintains that there is a cigarette and a heated cigarette, and it would classify the heat sticks like iQOS a heated cigarette, but apply a slightly less level of taxation per heat stick versus a cigarette. Then it also creates a separate category for heated tobacco products, but excludes anything that is classified as a heated cigarette.”
Covered under this new category would be a product like Swic, developed by the Altria Group, in which tobacco-filled capsules are heated to a precise temperature to deliver an inhale similar to a cigarette.
Thornton, the OAG’s tobacco expert, said that iQOS is essentially “a stick of tobacco rolled in paper and heated, but the new Swic product does not have the key elements of a ‘cigarette’ under the MSA and federal definition because it is not tobacco rolled in paper.”
“This is essentially a simple matter of ensuring all cigarette products are MSA-compliant,” Thornton further noted. “It leaves other new tobacco products for the Virginia legislature to regulate and tax separately. If tobacco is rolled in paper — whether it is heated or burned — it is still a cigarette under the MSA. If a tobacco product isn’t, then it is not a cigarette.”
David Sutton, an Altria spokesman, said that the company did not ask for HB 1099 to be introduced, but still backed the proposal.
“Altria supports the attorney general’s bill for the commonwealth’s diligent enforcement of the Master Settlement Agreement, so as not to put at risk Virginia’s MSA payments which were approximately $140 million in 2023,” Sutton said in an email.