Manufacturers of smoke-free cigarette alternatives have little to celebrate these days. After the German Bundestag already decided in 2021 to amend the German Tobacco Tax Act and tax tobacco heaters and electronic cigarettes almost as heavily as conventional cigarettes, the European Court of Justice recently ruled in its judgment of March 14, 2024 (C 336/22) that such a tax increase is compatible with EU law.
But what exactly is the tobacco tax? And what does the European Court of Justice have to do with it?
A tobacco tax has been levied in Germany since 1906 on all types of tobacco products, such as cigarettes, cigars, or pipe tobacco.
Tobacco tax is an excise duty and a so-called indirect tax. Excise duties are taxes levied on the consumption or use of certain goods or the use of services. Apart from tobacco, alcohol and coffee, for example, are also subject to excise duty. Anyone who purchases these goods therefore pays an excise duty on the corresponding products.
Tobacco tax is also a so-called special excise duty, which is regulated by federal law, with legislative competence falling to the federal government. The legal basis for the tobacco tax is the German Tobacco Tax Act (TabStG).
Since January 1, 1993, tobacco tax has been harmonized within the European Union. The German Tobacco Tax Act is now largely based on common EU directives. For this reason, the European Court of Justice has decision-making authority when it comes to questions regarding the German tobacco tax.
Until the end of 2021, tobacco sticks inserted into tobacco heaters were only taxed at the rate for pipe tobacco.
In 2021, however, the Bundestag decided to tax e-cigarettes and tobacco heaters more heavily starting in 2022, alongside conventional cigarettes, cigars, and cigarillos.
For the first time, the law subjects nicotine-containing substances for use in e-cigarettes to tobacco tax – previously, only VAT applied to them.
An additional tax was introduced for heated tobacco. Section 2 (1) No. 5 TabStG now stipulates that an excise duty and a new additional tax must be paid for heated tobacco.
f6 Cigarettenfabrik GmbH Co. KG pursued a legal dispute against the Main Customs Office in Braunschweig and filed a lawsuit with the Düsseldorf Finance Court because it considered the additional tax to be unlawful.. In its view, the new German additional tax was not compatible with Union law, in particular with Art. 1 (2) of the Excise Duty Directive (Council Directive 2008/118/EC of 16.12.2008). According to this regulation, additional taxes for specific purposes may be levied on goods subject to excise duty.
The Finance Court was unable to answer the disputed legal questions in the tax court proceedings with certainty and made use of the possibility to stay the court proceedings in accordance with Art. 267 of the Treaty on the Functioning of the European Union (TFEU) and refer them to the European Court of Justice.
The European Court of Justice found that the requirements of the EU Directive were met by the provisions of the national Tobacco Tax Act.
Firstly, heated tobacco falls under the term “smoking tobacco” within the meaning of EU law and is therefore subject to excise duty in accordance with Art. 1 (2) of the cited EU Directive.
Secondly, a specific purpose was fulfilled that justified the imposition of an additional tax. The additional tax is intended to bring the taxation of heated tobacco closer to the taxation of cigarettes – with the aim of deterring nicotine-dependent people from replacing cigarettes with tobacco, which is also harmful to health.
The competent Finance Court must now reconsider the lawsuit, taking into account the case law of the European Court of Justice, and reach a decision on the matter.