Texas’ Supreme Court has determined VELO nicotine pouches were properly classified by the comptroller as a taxable tobacco product. The decision reverses a lower court ruling.
The dispute, which arose from a 2020 lawsuit by VELO’s manufacturer, concerned whether the product was made of—or merely from—tobacco or a tobacco substitute.
Background
As previously reported, former Texas Comptroller Glenn Hegar announced in 2019 that he views VELO as a taxable tobacco product because it “contains nicotine, which is an extract of the tobacco leaf.”
RJR Vapor Co., the manufacturer of VELO, disagreed. In August 2020, the company filed a lawsuit against the comptroller—now assumed by acting Comptroller Kelly Hancock—and Attorney General Ken Paxton. RJR Vapor reportedly paid the tax under protest and sued to recover the payments.
Texas’ Cigars and Tobacco Products Tax defines a “tobacco product” as “an article or product that is made of tobacco or a tobacco substitute.”
RJR Vapor argued that while VELO is made from tobacco, it is not made of tobacco.
“VELO products are not ‘made of tobacco’ because they contain no tobacco leaf,” contended RJR Vapor in court filings. Instead, it argued that “these products contain pure nicotine chemically extracted from tobacco.”
The State asserted that the court must tether itself “to the fair meaning of the text, not the hyperliteral meaning of each word in the text.”
The 250th District Court of Travis County—the trial court—ruled that VELO is not a “tobacco product” under the Tax Code, granting RJR Vapor a refund of $16,071.68. However, the court denied injunctive relief, which would have protected VELO from being taxed until the case is settled. The State appealed.
In 2023, the Third Court of Appeals in Austin agreed. It concluded that VELO is not “made of tobacco” because nicotine isolate is “a chemically pure substance” that contains “no part or traces of the tobacco leaf.” It also found that VELO is not made of a tobacco substitute.
The State appealed to the Supreme Court of Texas on March 14, 2024. The Court granted review in May 2025, and oral arguments were heard in October.
Specific issues presented to the Court were whether VELO products are tobacco products, and, if so, whether the contested definition of “tobacco products” and its application by the comptroller are constitutional.
The Ruling
On Friday, Texas’ Supreme Court ruled that VELO nicotine pouches are made of a tobacco substitute, thereby constituting a taxable tobacco product. The decision reversed the court of appeals’ judgment to the contrary.
“We conclude such pouches are ‘made of … a tobacco substitute’ because they are products in which non-tobacco plant matter and nicotine take the place and function of tobacco as it is used in expressly taxed tobacco products,” reads the opinion.
The Court explained that in order to determine a statute’s meaning, “we look first and foremost to the plain and common meaning of the statute’s words and to the definitions it provides, ‘unless a different meaning is apparent from the context.’”
“We remand for the court of appeals to address RJR’s equal-and-uniform [constitutional] challenge to the Tax,” the opinion concluded.
What Remains
RJR Vapor’s remaining constitutional challenge concerns Texas’ alleged unequal application of the tax code understanding.
The company alleges the comptroller applied his understanding selectively, “taxing some—but not all—products within the class of tobacco-free oral nicotine products,” meaning the comptroller’s enforcement decisions violated the constitutional right to uniform taxation.
“Like VELO, e-cigarettes do not contain tobacco leaf but typically contain nicotine isolate extracted from tobacco. Yet the Comptroller has stated that e-cigarettes are not ‘made of tobacco’ because—even ‘though nicotine is a component of tobacco’—they ‘do not contain tobacco,’” contends RJR Vapor.
The State argues that “statutory context makes clear that the Tax does not apply to NRTs [Nicotine Replacement Therapies, such as e-cigarettes],” adding that “VELO products are not NRTs, and RJR Vapor has not argued otherwise.”
While the trial court ruled in favor of RJR Vapor on this claim, the court of appeals declined to address it after ruling that VELO was not taxable—finding the claim moot.
The court of appeals must now address the issue.
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