Italy’s Crumbling E-Cigarette Industry or How Excessive Taxation Can Ruin a Booming Business

Only a year ago, Italy’s electronic cigarette industry was booming. According to official statistics it had a three-figure growth rate at the end of 2012, but now, less than a year ago, both small and large businesses are dying out as a result of an imposed 58.5% tax rate imposed by the Government.

e-cigarette-useNot too long ago, we reported the Italian Government had backed off on its plans to increase taxes on electronic cigarettes and use the extra income to save thousands of jobs in the country’s already understaffed prison sector, following a series of large scale protests. But the vapers’ victory celebrations were short-lived, as apparently authorities decided to go through with the tax increase starting next year. That means electronic cigarettes will be subject to a consumption tax of 58.5%, almost as high as that of tobacco cigarettes. Although the measure will only come into effect in 2014, it has already caused a massive shock in the e-cigarette market, with Italy’s National Association for Electronic Smoking (ANAFE) reporting a 99% drop in requests for new business licenses in the sector, and 123 closed shops in the months of May and June alone. And it’s not just the small businesses that are feeling the devastating effects of the upcoming tax increase. Ovale, one of the world’s largest e-cigarette makers and distributors in the world, has announced a 50% drop in sales for 2013 compared to the same period of last year, and expects things to get even worse, with an estimated sales deficit of 80% in January 2014.

The Italian Government admits that the growing popularity of electronic cigarettes has had a negative effect on the national budget. According to the Ministry of Economy, in the last eight months, income from tobacco taxes has dropped by 6.1% (-455 million euros) in part due to 15% of Italy’s smoking population switching to electronic cigarettes. Legislators and Government officials decided a tax increase on vaping devices and e-liquids was the only way to cut budget losses, but Ovale representatives claim the excessive taxation will do more harm than good. Instead of getting between 60 and 70 million euros a year in VAT and other taxes from this company alone, the income will be reduced to just a few millions. Following the announcement of the increased tax rate on electronic cigarettes, most businesses have put a stop to their expansion efforts, with some even closing shops in anticipation of huge losses. In Genoa, around 25% of e-cigarettes businesses have closed down, while in Torino, the growth rate of the market had gone from 71.9% in 2012 to -2.4% in June of this year.

Massimiliano Mancini, the head of ANAFE, says the repercussions of the announced tax increase is also taking its toll on Italy’s job market. Small businesses are already closing, and even though larger companies are hanging in there, the projected drop in sales will force most of them to move their operations abroad. The head of an electronic cigarette business, Mancini says he has been thinking about relocating to another country, as the electronic cigarette industry is still growing on an international level, it’s only Italy that is in a steep decline. He already made the first step, opening new stores in France and Eastern Europe. There are currently around 6,800 jobs in the Italian electronic cigarette industry today, but that number is expected to decline rapidly in the coming months.

The excessive taxing will also have serious repercussions on consumers, who will have to bare the increased cost of hardware and e-liquid, which will eventually lead to the creation of a flourishing black market. Although the new tax is mainly to blame for the current state of the e-cig business in Italy, producers and distributors also blame the negative publicity in the media. Reports of harmful effects of electronic cigarettes on users, although unsubstantiated and sometimes logic-defying, often have a psychological effect on consumers.

Sources: Corriere della Sera, AT News, La Republica

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