Flat-Rate Tax on E-Cigarette Nicotine Solutions... Constitutional Court Unanimously Upholds Constitutionality

[Financial News] The Constitutional Court of Korea has ruled that imposing a flat-rate tax based on the volume of an e-cigarette nicotine solution, rather than its actual nicotine content, does not violate the Constitution.
On the 17th, the Constitutional Court of Korea unanimously upheld the constitutionality of a provision of the Local Tax Act imposing a tobacco consumption tax of 628 won per milliliter on e-cigarettes that use nicotine solutions.
The case began after an e-cigarette importer and the tax authorities reached different conclusions about the source of the imported nicotine. From June 2019 to June 2020, an importer brought smoking devices and e-cigarette solutions manufactured with nicotine concentrate from Chinese companies, reporting that the nicotine had been extracted from tobacco stems.
At the time, the Tobacco Business Act defined tobacco as a product manufactured using all or part of tobacco leaves as an ingredient. The company determined that its imported products did not fall under that definition and therefore did not report or pay the tobacco consumption tax.
The tax authorities, however, determined that the products contained nicotine solutions extracted from tobacco leaves and therefore qualified as tobacco under the Tobacco Business Act. They consequently imposed tobacco consumption tax, additional taxes and other charges on the company.
Objecting to the tax authorities' determination, the company filed a lawsuit seeking confirmation that the tax assessment was invalid and its cancellation. It argued that the nicotine had been extracted from tobacco stems, not tobacco leaves.
The court hearing the case referred the relevant provision of the Local Tax Act to the Constitutional Court of Korea for constitutional review on its own authority in January. The main issue before the Constitutional Court of Korea was whether uniformly imposing a tobacco consumption tax of 628 won per milliliter on taxable e-cigarettes infringed the property rights of importers and sellers.
The Constitutional Court of Korea determined that this flat-rate taxation method was a reasonable legislative choice. It explained, "Imposing a tobacco consumption tax on e-cigarettes is intended to secure stable local government revenues while curbing harmful tobacco consumption and protecting public health."
The court also held, "Applying a fixed tax rate per milliliter of nicotine solution makes the calculation of the tax clear, thereby ensuring stable tax revenues and the efficiency of tax administration." It rejected the argument that whether importers and sellers had actually passed the tax on to consumers, or the reasons they had been unable to do so, should be reflected individually in the tax assessment criteria.
The Constitutional Court of Korea determined that these circumstances were subjective and uncertain. If they were used as tax assessment criteria, the uniformity and predictability of taxation could be undermined, leading to continuing disputes between taxpayers and the tax authorities.
It further held, "The legislature's decision to exclude whether the tax was passed on and the reasons for any failure to do so from the tax requirements, and to uniformly apply a fixed rate under a specific-rate tax system, was a reasonable choice made within the scope of legislative discretion to prevent tax avoidance and ensure the effectiveness of taxation."
The court acknowledged that applying a fixed tax rate could impose a considerable financial burden on importers and sellers. However, the Constitutional Court of Korea ruled, "It is the responsibility of importers and sellers to determine whether imported goods are taxable and to report them accurately. The resulting disadvantage cannot be considered greater than the public interest in securing stable tax revenues, curbing tobacco consumption and protecting public health."
A ruling based on the same reasoning was issued that day in a separate individual consumption tax case.
The claimants in that case had also imported e-cigarette solutions from China and other countries, reporting that the nicotine had been extracted from tobacco stalks and failing to pay the relevant taxes. The tax authorities determined that the products contained nicotine solutions extracted from tobacco leaves and imposed individual consumption tax, additional taxes and other charges. The claimants filed lawsuits seeking cancellation of the tax assessments and later applied for a constitutional review of the relevant statutes during the proceedings. After their applications were rejected, they filed constitutional complaints.
The Constitutional Court of Korea ruled, "Because the volume of a nicotine solution can be objectively verified and is easy to measure, using it as the basis for taxation is a reasonable choice to ensure the efficiency of tax administration and legal stability."
The court explained that, given the physical characteristic of liquid e-cigarettes—nicotine exists in a diluted state in the solution when these products are distributed and sold to consumers—taxing them based on volume cannot be considered arbitrary or unreasonable compared with the taxation systems for other types of tobacco.
It therefore concluded that imposing an individual consumption tax of 370 won per milliliter of nicotine solution, without separately considering the actual nicotine content or the reasons the tax was not passed on to consumers, did not infringe the property rights of importers and sellers.
[email protected] Yoo Seon-jun Reporter