Regulatory Confusion Causing Steam Problems in Convenience Channel

National Association of Tobacco Dealers (NATO) Executive Director David Spross agrees, saying Convenience Store News that “generally, states with flavor bans have seen an increase in sales of illicit products, such as flavored products purchased from neighboring states, as well as smuggled products, including flavored disposables from China.”

Spross reported that flavor bans continue to be a hot topic in many state legislatures: Utah passed a bill banning flavored (non-menthol) vaping products that goes into effect July 1; Vermont’s flavor ban, which would cover all flavored vaping products except menthol cigarettes and flavored nicotine pouches, is awaiting final review by that state’s governor; and Hawaii, Maine, Minnesota and Michigan are currently considering flavor bans.

(Read more: Federal agents seize more than $1 million worth of unauthorized vaping products)

Herzog’s key concern is that the illegal vaping market is hurting back bars’ bottom lines. According to Goldman Sachs research, illegal e-cigarettes are the second largest source of downsell volume from inflation-stricken nicotine consumers after alternative nicotine products.

Retailers don’t believe the situation will change without more enforcement and are generally pessimistic, given the prevalence of the offering, the difficulty of tracking/enforcing the regulations and the relatively low penalties that reduce deterrence, according to Herzog. One retailer noted that the FDA’s enforcement fines are manageable and that the extent of the police response hasn’t solved the problem. Others noted that retailers selling these products on the black market make high margins on these sales, which helps them offset losses from cigarette sales.

“Some retailers are adding gray market/disposable vaping products for the first time — more as a defensive move — given the rapid growth in specialty vape shops that readily offer these popular, unregulated products,” Herzog noted.

There is confusion

When Goldman Sachs asked retailers about their plans for space allocation changes, some said they were planning backbar resets that include increased dedicated space for both premium and gray-market products. Others said they were taking a wait-and-see approach to disposable vaporizer offerings as the FDA works to tighten regulations.

In March, the FDA launched a searchable tobacco products database, billed as a new, user-friendly list of tobacco products — including vaporizers and e-cigarettes — that the agency has determined can be legally sold in the United States.

“The CTP continues to advance transparency in a way that is useful, timely, and user-friendly,” said Brian King, director of the FDA’s Center for Tobacco Products (CTP). “We hope this database will be an asset to stakeholders—including retailers—that will be used to facilitate compliance.”

Despite this, confusion still prevails.

“It’s unfortunate that (the FDA database) doesn’t include products for which the agency itself has stated it won’t take any enforcement action,” said Agustin Rodriguez, a partner at national law firm Troutman Pepper, who regularly analyzes FDA updates.

It refers to statements made by the FDA on its website that are, at best, “vague.” They include: “For the vast majority of unauthorized e-cigarette products currently on the market, pending review of a marketing authorisation application (PMTA) does not create a legal safe harbor for the sale of that product. There are a few tobacco products that have received a marketing refusal order (MDO) that are under further review by the agency and for which FDA has stated that the agency does not intend to take enforcement action pending review. Additionally, in a very limited number of cases, some courts have granted a stay of MDO pending judicial review in order to maintain the status quo, or FDA has administratively stayed MDOs. In these specific cases, FDA does not intend to take enforcement action.”

(Read more: US Supreme Court to Hear Appeal Over Flavored Vapor Denials)

In addition, Rodriguez said, there are many synthetic products against which the agency has not taken action. “This is another ball of wax that is just as confusing,” he said. “It would be helpful if the agency could provide guidance to retailers on this.”

NATO’s Spross agrees that the FDA lacks sufficient clarity and information, particularly with respect to the pharmaceutical tobacco product marketing authorization (PMTA) application process.

“Specifically, it is difficult to identify products covered by timely-filed, pending PMTAs. These PMTAs may be pending because the FDA has not yet completed its review—even though many of these applications have been with the agency for almost four years—or because the FDA or a court has stayed an adverse decision,” he explained.

“FDA has not clearly communicated its enforcement priorities or provided an accurate and up-to-date list of products subject to timely filed, pending PMTAs,” Spross continued. “As a result, despite the diligence of responsible retailers, including requesting documentation of timely filed PMTAs, it is often impossible to distinguish between products that are clearly in violation of the law—for example, those for which no PMTA has been filed at all or those for which a PMTA has been filed after the applicable deadline for products on the market—and those that are subject to PMTAs that were timely filed but are still awaiting FDA review or appeal completion.”

States step in

State governments across the country are trying to fill the regulatory gap, both with flavor bans and the latest fad among local governments: bills to create statewide vaping product directories.

Troutman Pepper recently explained on his blog that these directories will allow individual states to individually ban the sale of vaping products that have not been approved by the FDA or are not the subject of a pre-market application.

Opponents of such legislation argue that the bills exceed federal authority, harm small businesses and offer fewer alternatives to combustible tobacco products. At the time of going to press, about 20 states were considering some form of catalog legislation.

These catalogs are intended to curb the spread of illegal vaping products, but Spross acknowledges that they may be contributing to the problem — which is ultimately stifling innovation. “Until the FDA starts authorizing more alternative products, regulatory confusion and the spread of the illegal market are likely to continue,” he said.

Rodriguez’s view is a bit more caustic. While warning retailers that catalog regulations “will be a game-changer for many,” he believes today’s FDA is not the same FDA that embraced alternatives when the Tobacco Control Act was initiated more than a decade ago, talking about reduced-harm products to encourage smokers to switch from cigarettes.

“This agency is not doing that,” he said. “They are not approving PMTAs fast enough. They are imposing enormous costs on the industry to meet their standards. They are effectively banning all flavors while encouraging a black market that fills the gap that consumers crave. That is the reality.”