The Texas Supreme Court is contemplating whether the state’s comptroller can tax as tobacco products the nicotine pouches increasingly occupying the space between the lips and gums of those interested in a smoke-free product.
Whether the tax can be levied on the pouches — which contain nicotine chemically extracted from tobacco — depends on how the court interprets a state tax statute that defines tobacco products as “made of tobacco or a tobacco substitute.” The Centers for Disease Control and Prevention published data that shows between January 2023 and April 2025 nicotine pouch sales nationwide increased 207 percent, from $145.5 million to $446.8 million, illustrating the tax implications of the court’s decision in this case.
During oral arguments Wednesday morning, counsel for RJR Vapor, which makes a nicotine pouch product under the name VELO, used several examples to drill down on the distinction underpinning his argument that his client’s pouches are not made of tobacco and are not a tobacco substitute.
Christian G. Vergonis of Jones Day told the court tree sap extracted from a tree is not a tree, vitamin C extracted from an orange is not an orange and calcium extracted from milk isn’t milk.
“Is olive oil made of olives?” Chief Justice Jimmy Blacklock asked in response.
Vergonis said olive oil is made “from olives, not made of olives,” and that based on dictionaries and English grammar and usage guides, that difference matters.
“‘Made of’ requires the source to be in the end product in a fundamentally unaltered form,” he said. In VELO pouches, the nicotine extract is “fundamentally unrecognizable and changed.”
Placing his hand on the podium where he stood to address the court, Vergonis said it is clearly made of wood, but books and paper are not “made of wood” because they’re not “fundamentally recognizable as wood.”
Justice Rebeca Aizpuru Huddle asked whether banana bread is made of banana, and Vergonis conceded that is a “closer case.” Justice Jane Bland asked whether wine is made of grapes.
“Again, a closer case,” Vergonis said. “We would probably say wine is made from grapes but not made of grapes because you can’t physically recognize the grapes in the wine.”
Chief Justice Blacklock redirected to the podium example. While some might say the podium is made of wood, others may say it’s made of a tree, he said.
“That’s not a false statement, it seems to me,” he said. “Someone asks what nicotine is made of, the answer is the tobacco from which it came. And that just sounds basically right to me and injecting this distinction of ‘made from’ or ‘made of’ I don’t think is answering the questions.”
Vergonis said he would direct the court back to the dictionaries and usage guides.
“We presume the legislature legislates according to the rules of grammar and usage,” he said.
He wrapped his arguments with one final example: If his spouse asked him to go to the grocery store to buy hamburgers made of a meat substitute, the logical choice would be to purchase veggie burgers or tofu burgers.
“If you came home with a protein powder made of beef protein isolate, I think your spouse would be very unhappy that you didn’t follow the instructions,” he said.
According to court records, RJR Vapor asked the comptroller whether its VELO products qualified as tobacco products under the tax law, and the comptroller replied yes, because they contain “nicotine that was previously extracted from a tobacco leaf.”
RJR Vapor paid the tax but submitted protest letters with each payment, and in August 2020 filed a tax-protest suit against the comptroller.
After a hearing where Travis County District Judge Amy Clark-Meachum heard arguments on cross-motions for partial summary judgment, in July 2021 she sided with RJR Vapor, agreeing its pouches were not “tobacco products” as defined under the state’s tax code.
The judge held a bench trial in January and February 2022 on whether the company was entitled to a refund. She determined in an April 2022 final judgment that RJR Vapor was entitled to a $16,071.68 refund and that the language in the tax statute “made of tobacco or a tobacco substitute” was unconstitutionally overbroad and vague.
“The language … is not reasonably clear on its face and invites discriminatory and arbitrary government enforcement,” she wrote.
The Third Court of Appeals in December 2023 largely upheld that ruling, but reversed Judge Clark-Meachum on her finding that the phrase was unconstitutionally vague.
William F. Cole, the principal deputy solicitor general who argued on behalf of the state, argued that the language of the tax statute is not unconstitutionally vague and that the nicotine pouches in this dispute are clearly made of tobacco because the nicotine is derived from chemically processed tobacco leaves.
Justice Brett Busby asked why, if that’s true, the comptroller doesn’t tax as tobacco products nicotine replacement therapies, like nicotine gum or patches, which also contain nicotine chemically processed and derived from tobacco.
Cole said those products are distinct because they have a therapeutic use, and not a recreational use.
“The distinction that the comptroller is resting upon is not found in the statutory text,” Justice Bland responded.
Cole admitted while that’s true, the comptroller arrived at that decision by looking at Texas Tax Code section 155.001(15)(A)-(D) “to decide what did the legislature mean.”
“Did they want to tax Nicorette gum?” he asked. “No, it’s distinct.”
Justice Busby asked Cole how it would be rational for the comptroller to draw a distinction between nicotine replacement therapies and nicotine pouches if the court disagrees that the statute draws such a distinction.
“If there isn’t a distinction between these things, then it’s probably hard to say it’s rational,” Cole said. “But again, this case is not about Nicorette.”
Cole said the VELO pouches are delivering users “nicotine in a highly concentrated form.”
“The reason people are using these is because they get nicotine from them,” he said. “If it was because they wanted mint flavor, they may well just be chewing spearmint gum or Live Savers. They’re using these products because it delivers nicotine to a user who ingests it recreationally. That’s why it’s a substitute.”
The case number is 24-0052.