Up in smoke? New Iowa law regulating e-cigarettes raises constitutional issues

In March, I wrote about the constitutional limitations placed on a state’s ability to impose sales tax on sales made into the state by out-of-state seller. The Cliffs Notes version is that, currently, a state can only tax sales in its state if the seller making the sale has physical presence, such as people or property, within the state (known as nexus). As my previous blog notes, many states are challenging this long-standing nexus standard and imposing new “economic nexus” standards. Although Iowa has not jumped on the economic nexus bandwagon, it enacted a law, effective July 1, 2017, that appears to run afoul of the aforementioned long-standing nexus standards, thereby violating the by the Commerce Clause of the United States Constitution.

Iowa’s new law requires out-of-state sellers of “alternative nicotine products or vapor products” to, among other things, register for an Iowa sales tax permit and collect sales tax on sales of such products in the state of Iowa. The new law applies to telephone, mail, or internet sales of alternative nicotine products or vapor products in Iowa “regardless of whether the seller is located in” Iowa. 

By targeting telephone, mail, or internet sales one could reasonably assume the law is targeting sellers without a physical presence in Iowa. Further, if the law only applies to sellers with Iowa nexus, there would be no need to clarify that the law applies to sellers regardless of where the seller is located. Thus, for example, the law would appear to apply to sales of e-cigarettes to Iowa by an online seller that is located in North Dakota and that does not have people or property in Iowa, something the United States Supreme Court ruled in Quill violates the Commerce Clause.

The legislation was put in a catch-all spending bill last legislative session, so it is possible the Iowa Legislature did not have time to consider the issues associated with the new law. Right now, by requiring out-of-state sellers to collect and remit sales tax even when the sellers do not have a physical presence in Iowa, the State of Iowa is violating the Commerce Clause of the United States Constitution. We will wait to see whether Iowa’s new law regulating e-cigarettes goes up in smoke.

If you have any questions regarding Iowa sales tax or other taxation law, please contact Cody Edwards. 

The material in this blog is not intended, nor should it be construed or relied upon, as legal advice. Please consult with an attorney if specific legal information is needed. 

- Cody Edwards