By Timothy S. Donahue

Top Takeaways:

• Tax ruling: Texas Supreme Court says VELO products qualify as taxable tobacco substitutes
• Partial win: Court revives RJR claim alleging inconsistent tax enforcement
• Industry impact: Decision could influence taxation of modern oral nicotine products

The Texas Supreme Court ruled Friday that RJR Vapor Co.’s VELO nicotine isolate products are taxable tobacco products under Texas law, handing the state a significant win in an increasingly important legal battle over the classification and taxation of modern oral nicotine products.

At the same time, the court revived part of the company’s lawsuit challenging whether the tax has been applied uniformly to competing nicotine products.

The dispute centered on whether VELO nicotine pouches and lozenges—products containing synthetic or tobacco-derived nicotine isolate but no leaf tobacco—fall within Texas’ statutory definition of taxable tobacco products.

Texas law imposes taxes on “an article or product made of tobacco or a tobacco substitute that is not a cigarette or an e-cigarette.” RJR had argued that the products should not qualify because they do not contain actual tobacco leaf.

The Texas Supreme Court disagreed.

According to the ruling, the products fit the “plain language definition” of a tobacco substitute under state law, reversing a 2023 appellate court decision that had ruled in favor of RJR Vapor. That lower court ruling had concluded the VELO products were not taxable tobacco items.

The decision marks another major legal development in the evolving tax framework surrounding nicotine pouches and modern oral products, categories that have expanded rapidly across the United States as cigarette consumption continues to decline.

VELO, owned through British American Tobacco’s U.S. operations, competes in a fast-growing nicotine pouch segment led by brands such as ZYN, on!, Rogue and ALP.

The Texas case is particularly significant because many state tax codes were written before nicotine pouches and tobacco-free oral nicotine products became widely available, leaving courts and regulators to interpret older statutory language in light of newer product categories.

While the court sided with the Texas comptroller on product classification, it also reopened RJR’s argument that the tax may not have been enforced equally across the industry. The revived claim focuses on whether state authorities treated similar products inconsistently, potentially violating uniformity requirements under Texas law.

That portion of the case now returns to the lower courts for further proceedings.

The ruling could have implications beyond Texas as states continue to reevaluate how nicotine pouches, synthetic nicotine products, and tobacco-free oral products fit into existing excise tax structures.

Across the U.S., lawmakers and regulators have increasingly sought to expand tobacco definitions to include modern oral nicotine products, often arguing that these products should be taxed similarly to traditional tobacco due to nicotine content and youth-use concerns.