Top takeaways:

• The Texas Supreme Court has agreed to review whether nicotine pouches and lozenges made with tobacco-derived nicotine isolate should be taxed as tobacco products under state law.
• A lower court previously ruled in favor of RJR Vapor Co., determining that its VELO brand products are not subject to the state’s Cigars and Tobacco Products Tax because they do not contain tobacco leaf.
• The outcome of this case could have significant implications for state tax revenues and the regulation of nicotine products, particularly concerning youth access and public health policies.

The Texas Supreme Court announced on Friday its decision to hear a case that will determine whether nicotine pouches and lozenges containing tobacco-derived nicotine isolate are taxable as tobacco products under state law.

The case centers on RJR Vapor Co., a subsidiary of R.J. Reynolds, which markets VELO brand nicotine pouches and lozenges. VELO uses a nicotine isolate—a purified form of nicotine extracted from tobacco plants but devoid of tobacco leaf material. RJR Vapor contends that, due to the absence of tobacco leaf, their products should not fall under the taxation parameters set for traditional tobacco products.

In a previous ruling, the Texas Court of Appeals sided with RJR Vapor, stating that the products in question do not meet the state’s definition of taxable tobacco products. The court emphasized that nicotine and tobacco are not synonymous, and the presence of nicotine alone does not classify a product as a tobacco product under existing tax codes.

However, the Texas Comptroller’s office has challenged this interpretation, arguing that the nicotine isolate used in VELO products is derived from tobacco and serves as a substitute for traditional tobacco products. The state asserts that exempting such products from taxation undermines public health efforts and could potentially lead to increased nicotine use among minors.

The Supreme Court’s decision to review the case comes amid growing concerns about the regulation of alternative nicotine products and their impact on public health and state revenues. A ruling in favor of the state could reinforce taxation and regulatory measures on emerging nicotine products, while a decision upholding the lower court’s ruling might prompt legislative action to address potential gaps in the current tax code.