Nicotine Products Tax

Table of Contents

Background

Voters approved a state excise tax on nicotine products with the passage of Proposition EE in 2020.¹  The tax applies to any product that contains nicotine derived from tobacco or created synthetically that is intended for human consumption, such as electronic cigarettes and other types of vaping products, at the time when they are manufactured, brought into the state, or shipped to retailers. The tax does not apply to cigarettes and tobacco products subject to Colorado’s cigarette or tobacco products tax or smoking cessation products approved by the federal Food and Drug Administration such as nicotine patches, gum, lozenges, and inhalers used for smoking cessation.

The tax is based on the invoice price of nicotine products sold from a manufacturer or supplier, including out-of-state retailers selling cigarettes online, to a distributor, prior to discounts or other price reductions. The revenue from the nicotine tax is exempt from TABOR limitations on state revenue and spending as a voter approved revenue change.

The Department of Revenue is responsible for administering the tax. Nicotine product distributors must file a quarterly nicotine products tax return by the twentieth day of the first month of the quarter following collections. Nicotine product distributors are entitled to retain 1.1 percent of the taxes they collect to cover expenses related to tax collection.

Tax Rate

The tax rate on nicotine products is 50 percent of the invoice price paid by distributors to manufacturers or suppliers as of January 2024. The tax rate will increase to 56 percent in July 2024 and again to 62 percent in July 2027. In addition, all nicotine products are subject to the 2.9 percent state sales tax as well as any applicable local and special district sales taxes.

Distribution

Through the Old Age Pension Fund, revenue from the tax is credited to the General Fund, then transferred to the 2020 Tax Holding Fund.²  Proposition EE revenue is distributed from the 2020 Tax Holding Fund to K-12 education, housing, rural schools, and tobacco prevention programs. Starting in 2023, revenue will go primarily to preschool programs, in addition to tobacco prevention and health care programs.³

Federal Taxes

The federal government does not currently assess an excise tax on nicotine products.

State Comparisons

As of 2024, 32 U.S. states and Washington D.C. have a tax on nicotine products, along with some cities and counties. Some states tax nicotine products like Colorado, with an ad valorem (percentage of the value) tax on wholesale or manufacturers’ prices.  Some states employ a volume-based tax similar to Colorado’s cigarette tax. Others have a two-tier design, with different rates depending on the type of product (closed system versus open system devices). Among those states with ad valorem taxes, Minnesota and Vermont have the highest rates, at 95 percent and 92 percent, respectively.⁴