The Prevent All Cigarette Trafficking (PACT) Act, 15 U.S.C. § 375 et seq., is a federal law with two main goals: (a) to prevent federal and state tax evasion on tobacco products, and (b) to prevent sales of tobacco products to minors. This federal law amends the Jenkins Act, 15 U.S.C. Chapter 10A, which governs the collection of taxes on, and trafficking in, cigarettes and smokeless tobacco. The PACT Act revised definitions in the Jenkins Act, provided new requirements for registration, reporting, recordkeeping, and increased penalties for criminal violations. The PACT Act also generally prohibits mailing cigarettes and smokeless tobacco through the U.S. Postal Service. The PACT Act provides the federal government agencies with enforcement measures to crack down on noncompliant companies and help prevent cheap untaxed products from getting into the hands of underage consumers.
Any distributor involved in the sale and/or shipping of tobacco and nicotine derived products, needs to be in compliance with this federal law. The PACT Act was amended in 2021 to include Electronic Nicotine Delivery Systems (aka ENDS or better known as Vape). There are some provisions in this federal law that do not pertain to distributors as long as the appropriate business licenses are in place ( such as exclusions in mailability, maximum shippable weights allowed, etc.). Please read further to understand how this law impacts distributors (i.e. B2B sellers).
Products Covered by the PACT ACT
The PACT Act covers cigarettes, roll-your-own tobacco, cigarette and cigar wrappers, little cigars, ENDS and ENDS components (whether used with nicotine or other substances like cannabis derivatives), and smokeless tobacco. These categories of products come with specific definitions in the PACT Act that sometimes can be confusing, therefore it’s important to have a good understanding of their scope. Large cigars and pipe tobacco are excluded from the PACT Act.
Who needs to comply with the PACT ACT?
The PACT Act covers three categories of persons:
Interstate sellers and shippers. The PACT Act covers any person who sells, transfers, or ships cigarettes, roll-your-own tobacco, electronic nicotine delivery systems (aka ENDS), or smokeless tobacco in interstate commerce, whereby such products are shipped into a state, locality, or US territory taxing the sale or use of such products, or who advertises or offers such products for such sale, transfer, or shipment. In other words, if you are in the business of selling or shipping covered products into a jurisdiction that taxes the products, you may be subject to the PACT Act.
Delivery sellers. The PACT Act covers “delivery sellers,” which refers to persons who make a delivery sale, or a remote sale of covered products to a consumer. This is meant for B2C sellers only, but note that the term “consumer” is defined in such a way that it can include businesses that are not “lawfully operating.” Accordingly, any business that makes remote sales of covered products should conduct due diligence on its customers to ensure they are operating lawfully.
Common carriers and delivery services. The PACT Act covers common carriers and other delivery services in the context of delivery sales, such as DHL, UPS, and FedEx.
PACT ACT Registration Requirements
The PACT Act mandates sellers of cigarettes or smokeless tobacco to register with the Bureau of Alcohol, Tobacco, Firearms and Explosives (aka ATF). State tobacco tax administrators must also be notified. Note that some states require registration with the state attorney general’s (AG) office, and, although it is not expressly contemplated in the PACT Act, some states take the position that you need a tobacco license in order to submit PACT Act reports.
PACT ACT Reporting Requirements
The PACT Act requires tobacco sellers to file monthly PACT Act reports to the tobacco tax administrators of each state. Note that the specific forms used by each state vary. Some use standardized forms prepared by the Federation of Tax Administrators, other states use their own forms, and others incorporate the PACT Act reporting requirements into other tax reporting forms.
PACT ACT Shipping Restrictions
The PACT Act makes a distinction between B2C and B2B selling of tobacco products. B2C sellers have more stringent restrictions, such as a ban on mailing ENDS and other tobacco products through the U.S. Postal Service (USPS), age verification requirements and even weight limits when shipping tobacco products. However, wholesale distributors or manufacturers are exempt from the USPS shipping ban and other B2C imposed regulations, as long as they have the necessary licenses to operate.
What are the penalties for noncompliance?
For knowing violations of the PACT Act, violators can be subject to criminal penalties of up to three years imprisonment, or criminal fines, or both, as well as injunctive relief to restrain violations.
For delivery sellers, including those who sell to businesses that are not “lawfully operating,” such violators can be subject to civil penalties of the greater of: $5,000 for the first violation and $10,000 for any other violation; or, for any violation, 2% of the gross sales of covered products of the delivery seller during the one-year period ending on the date of the violation.
In addition to the federal government, state AGs, local government, or Native American tribes who levy an excise tax on covered products, and TTB-permitted tobacco manufacturers, importers, and export warehouse proprietors can also seek injunctive relief and civil penalties for violations.
ATF can also place noncompliant persons on the PACT Act Noncompliant List, which is distributed to the AGs and tax administrators of each state, as well as common carriers and other delivery services, including USPS.
Best Practices
Understanding the PACT Act is critical for anyone involved in the sale or shipment of tobacco products. Noncompliance can result in serious legal and financial consequences, including criminal penalties. Therefore, it is essential to ensure your business practices align with the requirements of the PACT Act. Here are some best practices:
- Designate personnel to oversee compliance with key PACT Act processes.
- Register and report where required.
- Calendar recurring monthly reporting deadlines, including reminders.
- Consider conducting an internal audit to see if you comply.
- If you conduct delivery sales, ensure you comply with all delivery sale requirements and ensure that your business customers are “lawfully operating” through due diligence.
- Maintain proof of compliance, including copies of as-submitted registration and reporting forms, invoices, bills of lading, and, if applicable, business customer licenses.
Please note that this blog post is intended to provide a general overview of the PACT Act and does not constitute legal advice. For specific questions or concerns about the PACT Act and how it may impact your business, please consult with a legal professional.
