Will a tax bill kill the booming local e-cigarette industry?

Electronic cigarettes went from obscurity to a $2.5 billion industry in the U.S. in the last five years, and Mount Baker Vapor has followed a similar trajectory. The Bellingham company’s website went live in August 2011, hit 100 orders three months later, and reached 1,000 orders the next spring. Now, Mount Baker Vapor has more than 130 employees and ships nicotine-infused liquid and other products as far as Australia, Europe and Japan.

The industry is mostly unregulated, but more than 20 states are currently considering bills regarding e-cigarettes or “vaping” products.

Washington legislators are considering several bills, including one proposed by Gov. Jay Inslee aimed at curbing the increase in teenagers using e-cigarettes. The bill would tax the products at a rate that Mount Baker Vapor and other local companies say would kill the local industry and have the unintended effect of making vapor products harder to get for adults who use them as an alternative to cigarettes.

Inslee’s bill, HB 1645, originally proposed a 95 percent tax on all vapor products — the same rate applied to tobacco products. In late March, a new bill proposed a 60 percent tax on the products.

Mount Baker Vapor representatives said even a 60 percent tax would force them to move out of state, since they compete with businesses across the U.S., and currently only Minnesota and North Carolina impose an excise tax on vapor products.

Michael Sullivan, Mount Baker Vapor’s marketing director, started smoking when he was 15 years old. He kicked the habit at 25 by switching to e-cigarettes, he said, before taking a drag from his e-cigarette.

As he inhales from the rectangular black personal device, a heating coil heats nicotine-infused liquid to its boiling point, vaporizing the liquid drawn into Sullivan’s lungs.

Sullivan is sitting on a couch at Mount Baker Vapor’s retail location on the Guide Meridian in Lynden. The staff said the store helps the company be part of the community, and they enjoy interacting with customers. But the main part of the business is manufacturing and distributing nicotine juice, which users load into their refillable e-cigarette, or personal vaporizer. Mount Baker Vapor is one of the larger online distributors of nicotine juice in the state.

The company’s employees are all paid more than minimum wage, and full-time workers get benefits including health insurance and 401(k) options, Sullivan said.

He blows out a cloud of vapor, which smells faintly of his favorite flavor — Vanishing Oatmeal Treats — before it dissipates. For Sullivan, vaping mimics the feel of smoking. It delivers nicotine to the bloodstream without the harmful effects of tobacco smoke.

By vaporizing nicotine infused liquid, Sullivan doesn’t inhale arsenic, tar, benzene or other products of tobacco combustion. He’s tapering off the amount of nicotine he’s ingesting. When he started vaping, he used nicotine juice with 24 milligrams of nicotine per milliliter of liquid. Now he’s down to 9 milligrams per milliliter.

Though he agrees that e-cigarettes could be a safer alternative to traditional cigarettes for adults, Jason McGill, one of Inslee’s health policy advisors, is alarmed by how many kids who have never smoked cigarettes are trying e-cigarettes, he said.

Nicotine is both addictive and toxic, and Inslee’s health policy team thinks the products, which come in flavors including zebra stripe gum and cotton candy, are too attractive to kids.

“We will have this whole new generation of people who will be addicted to nicotine,” McGill said “We’re doing this is to prevent youth access to this innovative, sexy product marketed to kids.”

Washington state’s 2014 Healthy Youth Survey found that 18 percent of 10th graders had tried e-cigarettes in the past 30 days. That’s up 14 percent from 2012, when 4 percent had tried e-cigarettes in the past 30 days. The survey didn’t collect data on whether teens who used e-cigarettes had previously used cigarettes, but a 2014 report by the Centers for Disease Control and Prevention found that more than a quarter-million youth who had previously never smoked tried e-cigarettes in 2013.

Traditional cigarette use is dropping, even in teenagers. Between 2012 and 2014, the percentage of 10th graders who smoked cigarettes in the past 30 days fell from 9.5 percent to 7.9 percent, a drop that McGill doesn’t think corresponds to the increase in 10th graders using e-cigarettes.

“I don’t think that is related at all,” he said. “For e-cigs you have an immense jump. It is not a one-to-one correlation.”

Bottles of liquid nicotine on the shelves at Mount Baker Vapor’s Lynden retail store. Mount Baker Vapor manufactures liquid nicotine, or “e-juice” and ships it all over the world. [Oliver Lazenby Photo | The BBJ]

Health risks

Research conclusions on the dangers of e-cigarettes vary. A  puff of e-cigarette vapor contains 1 percent of the cancer-causing free radicals found in a puff of cigarette smoke, a study by the John Hopkins Bloomberg School of Public Health found. A study in the New England Journal of Medicine found that e-cigarette vapor can contain more formaldehyde — a known carcinogen — than cigarettes when vaporized at high temperature.

Professor Michael Siegel at the Boston University School of Public Health, did his own analysis and wrote in the Wall Street Journal that formaldehyde could only be produced when the nicotine was overheated, and he couldn’t detect formaldehyde under normal use.

A University of Washington report titled “E-cigarettes: evidence and policy options for Washington State,” summarizes the research this way: “E-cigarettes, then, exist on a continuum of risk; relative to conventional cigarettes, they are almost undoubtedly safer because there is no combustion that occurs. However, it is too soon to declare them safe, and we do not yet know enough about whether their use will produce widespread population-health effects, either positive or negative.”

The report goes on to say that “In medicine and public health, risk from pharmaceuticals and related products can be viewed in absolute terms, or as relative to other, more harmful products.”

Or, as Kenny Davis of Mount Baker Vapor said, Inslee and his health policy advisors want to compare the use of e-cigarettes to breathing air, but he compares e-cigarettes to traditional cigarettes.

Mount Baker Vapor gives new customers a free electronic cigarette starter kit and bottle of liquid nicotine if they bring in and throw away a package of cigarettes. [Oliver Lazenby Photo | The BBJ]

Unintended consequences

Davis and Inslee have one shared goal—They both want to get people, especially teenagers, off cigarettes. But they disagree on the role e-cigarettes can play in reaching that goal.

Davis, the chief of government affairs at Mount Baker Vapor, thinks Inslee’s bill will have the unintended consequence of driving adults away from vaping and back to traditional cigarettes.

As a child, Davis watched his grandfather die from emphysema. His mom also smoked, quit for 14 years, and then started again. Davis has a 5-year-old daughter, and he told his mom that he wouldn’t bring her over to her house and risk exposing her to second hand smoke. So he helped his mom find an e-cigarette alternative that she liked, and now she no longer smokes cigarettes.

“She wanted to quit forever, but cigarettes just have that hold on you that doesn’t let go,” Davis said. “I believe in the industry and that’s why I’m in it. I believe that we are trying everything in our power to make a difference.”

Mount Baker Vapor and other vape shops run promotions where smokers can get free or discounted products by throwing away a pack of cigarettes.

Davis thinks e-cigarettes and vaporized nicotine products are a healthy alternative to cigarettes and have been more effective at getting smokers to quit cigarettes than nicotine patches or other stop-smoking aids.

“The problem is if you make us cost the same, what’s to deter people from cigarettes?” Davis said. “Your highest smoking population in the U.S. is the under $20,000 a year income bracket. They’re making a switch because its cheaper.”

The governor’s economic analysis shows that even if vaping products are taxed they’ll still be a bargain compared to cigarettes, McGill, the health policy advisor said.

Comparing the cost of e-cigarettes to traditional cigarettes is difficult. When not on sale, 15 milliliter bottles of liquid nicotinr, or e-juice cost between $6.99 and $24.99 at Mount Baker Vapor, and last most users one-and-a-half to two weeks, Davis said. E-juice comes in strengths ranging from 24 milligrams of nicotine per milliliter to 0 milligrams per liter. One cigarette contains about 1 milligram of absorbable nicotine.

At that rate, vaping is much cheaper than cigarettes, which cost nearly $10 per pack of 20. But there are other variables, Davis said. For example, studies suggest that other chemicals in cigarettes can enhance the effects of nicotine.

“It’s so hard to compare because it depends on who you are,” Davis said. “Some people spend more on ecigs than they ever did on cigarettes because for some people it turns into a hobby and you want all the newest gear.”

Mount Baker Vapor’s owners are already looking into moving the business, Davis said.

“We’ve had a backup plan since last year,” Davis said. “I think most businesses in the state of Washington have a backup plan.”

The tax rate in the proposed legislation already changed from 95 percent to 60 percent, and it could could change further.

“We’re obviously open to that discussion,” McGill said. “I hate to put anyone out of business; that’s not our goal here. We’re at a stage in the legislative process where we’re sitting around and hammering it out.”

What would be an appropriate tax? Davis and Sullivan half-jokingly said Mount Baker Vapor’s products should get a subsidy for helping people quit smoking.

Austin Masters, right, owner of Master of Vapours, talks with a customer in his retail vape shop at 206 W. Magnolia St. in Bellingham. Masters opened his shop in June 2014. [Oliver Lazenby Photo | The BBJ]

The little guy

Mount Baker Vapor is the biggest local e-cigarette company, but Whatcom County is home to a handful of smaller vape shops.

Austin Masters, a 23-year-old recent Western Washington University graduate, opened Master of Vapours at 206 W. Magnolia St. in downtown Bellingham in June 2014. The shop carries similar products to Mount Baker Vapor’s retail store — liquid nicotine and personal vaporizers ranging from cheap starter kits to $300 collectible devices.

Like most vape shops, he doesn’t sell disposable e-cigarettes, or “cigalikes,” which are mostly made by big tobacco corporations and are sold at gas stations, Wal-Marts, Targets and other chain stores.

Masters is worried about two parts of the proposed legislation, the excise tax and a measure that would prohibit some flavors.

Masters’ customers tell him if vaping products double in price, they’ll go back to smoking cigarettes or buying nicotine liquid on the black market, he said. Some of his customers are already experimenting with making their own nicotine liquid, he said.

After learning that the proposed tax changed from 95 percent to 60 percent, Masters said it wouldn’t be enough to keep him in business.

“The effect is the same,” he said. “That is still by far beyond what would keep us open.”

Oliver Lazenby, associate editor of The Bellingham Business Journal, can be reached at 360-647-8805, Ext. 5052, or olazenby@bbjtoday.com


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