South Korea's Constitutional Court has ruled that current tax provisions applying a fixed rate based on the volume of e-cigarette liquid do not violate the Constitution.
The court said on the 17th that it reached a unanimous decision by all justices upholding provisions of the Individual Consumption Tax Act and the Local Tax Act that set the relevant rates, in a constitutional petition filed by five importers and sellers of e-cigarette liquid and two individual operators. It reached the same conclusion in a case referred by the Seoul Administrative Court, which had requested a review of the laws' constitutionality during one company's tax appeal.
The companies imported e-cigarette liquid manufactured in China and elsewhere using raw nicotine and did not pay taxes, arguing that the nicotine had been extracted from tobacco stems rather than leaves and therefore did not qualify as tobacco under the Tobacco Business Act. At the time, the law defined tobacco as a product made from "tobacco leaves."
Tax authorities, however, imposed individual consumption tax or tobacco consumption tax, saying the goods imported by the companies and operators contained "nicotine solution extracted from tobacco leaves" and thus constituted tobacco.
The companies filed suit in response. As the constitutionality of the tax law on nicotine solution became an issue during the proceedings, the court referred the matter to the Constitutional Court on its own authority. One company also filed a constitutional petition directly after a court rejected its request for such a referral.
The Constitutional Court dismissed the referral concerning the "tobacco leaves" provision of the former Tobacco Business Act. It found that the requirement of relevance to the underlying case was not met, because a ruling on constitutionality would not change the outcome of the case or the legal meaning of its content and effect. "Even if remedial legislation were enacted following a decision of nonconformity with the Constitution to include 'stem-extracted nicotine' and 'synthetic nicotine' as subject to tobacco consumption tax, if the goods are confirmed to have been manufactured from 'tobacco leaves,' they would still qualify as tobacco under the Tobacco Business Act and remain taxable," the court said.
The lower court had made the referral on the grounds that the former Tobacco Business Act's failure to include products made from "stem-extracted nicotine" or "synthetic nicotine" in its definition of tobacco was unconstitutional.
The companies also challenged the method of taxation, but the Constitutional Court rejected that argument. The companies had noted that tobacco consumption tax, a local tax, is levied at 628 won per milliliter of nicotine solution and individual consumption tax at 370 won per milliliter, and argued it was unreasonable to impose a flat levy based on volume regardless of the price at which the solution was sold.
The court found no problem with the current approach. "The volume of nicotine solution can be objectively verified and is easy to measure," it said, adding that the method "can be seen as a reasonable choice to secure both the efficiency of tax administration and legal stability."
The court also said the approach "conforms to the legislature's consistent taxation principle of applying tax standards that correspond to the final distribution and sales form of each type of tobacco product," adding that it "clarifies the calculation of tax amounts, enabling stable revenue collection and ensuring efficient tax administration, while curbing harmful consumption through higher cigarette prices and contributing substantially to improving public health."
