Elf Bar and other e-cigarette makers dodged US customs and taxes after China's ban on vaping flavors

Until recently, the Chinese manufacturer behind Elf Bar e-cigarettes was able to slip its products passed U.S. customs officials

E Cigarettes Smuggling China (Copyright 2023 The Associated Press. All rights reserved)

In only two years, a small, colorful vaping device called Elf Bar has become the most popular disposable e-cigarette in the world, generating billions in sales and quickly emerging as the overwhelming favorite of underage U.S. teens who vape.

Last week, U.S. authorities publicly announced the first seizure of some of the company’s products, part of an operation confiscating 1.4 million illegal, flavored e-cigarettes from China. Officials pegged the value of the items at $18 million, including brands other than Elf Bar.

But the makers of Elf Bar and other Chinese e-cigarettes have imported products worth hundreds of millions of dollars while repeatedly dodging customs and avoiding taxes and import fees, according to public records and court documents reviewed by The Associated Press.

Records show the makers of disposable vapes routinely mislabel their shipments as “battery chargers,” “flashlights” and other items, hampering efforts to block products that are driving teen vaping in the U.S.

“The steps toward regulating disposables have been very weak and that has enabled this problem to get bigger and bigger,” said Eric Lindblom, a former Food and Drug Administration official.

Fruit-and-candy-flavored disposables began pouring into the U.S. shortly before Chinese regulators banned vaping flavors last year. Officials there said they were acting to protect children’s health, but vaping executives and health experts note the ban came only after e-cigarettes began threatening sales of traditional cigarettes, which generate $200 billion annually for China’s state-run tobacco monopoly.

Disposable e-cigarettes may soon become the victim of their own success. From Australia to England, governments are moving toward banning the single-use products, citing underage use and environmental impact.

The global backlash could lead vaping entrepreneurs to focus even more on the U.S., where loopholes and lax enforcement make it easy to disguise e-cigarettes among the thousands of daily shipments arriving by sea and air.

‘DISCREET’ SHIPPING

Elf Bar is the lead product of Shenzhen iMiracle, a privately held company based in Shenzhen, the sprawling Chinese manufacturing hub that produces more than 95% of the world’s e-cigarettes.

Elf Bar, Lost Mary and several other iMiracle brands are expected to generate $3.5 billion to $4 billion globally this year, according to industry analyst ECigIntelligence.

In the U.S., iMiracle recently abandoned the Elf Bar name due to a trademark dispute and efforts by regulators to seize its imports. Instead, its products are sold as EB Create in flavors like watermelon ice and frozen creamsicle.

A spokesman for iMiracle said the company stopped shipping Elf Bar to U.S. earlier this year and is trying to comply with regulators.

“All the Elf Bar-branded products you see in the U.S. are counterfeit, I’m pretty sure about this,” said Jacques Xiang Li, who added that he’d only worked for iMiracle for three months and was still learning about its business.

When asked about EB Create e-cigarettes he said: “I can’t tell you anything about that.”

Details on the company’s U.S. sales and activities are beginning to emerge in court documents.

Earlier this year, iMiracle was forced to drop the Elf Bar name after losing a trademark case to a smaller company that already sold its own products as Elf vapes.

At a 2022 court hearing in the case, U.S. distributors described skyrocketing sales.

Jon Glauser, of Demand Vape in Buffalo, N.Y., told a federal judge his company had sold more than $132 million worth of Elf Bar products, accounting for a third of its yearly profits.

“We were selling it faster than we could get it in,” Glauser said, according to the court transcript.

Glauser attributed Elf Bar’s quick rise to its profit margin. Sellers make about a 30% profit, double that of other disposable e-cigarettes, he said.

IMiracle’s parent company, Heaven Gifts, previously described how it could help customers evade import fees and taxes. Heaven Gifts’ website advertised “discreet” shipping methods to buyers, including not mentioning e-cigarettes or its company name “anywhere on the package.” Instead, the company said contents would be labeled as “atomizer, coil, tube, etc.”

“We also mark a lower value to avoid tax,” the website stated, adding that customers could suggest their own value for the shipment.

In June, Heaven Gifts announced on it would “go offline,” shortly after the FDA directed customs officials to begin seizing shipments from the company.

Despite the update, the company’s spokesman indicated Heaven Gifts remains in business and staffers continue using email accounts bearing its name. The spokesman did not respond to numerous follow-up questions about the company's business.

Neither Heaven Gifts nor iMiracle appear in customs data reviewed by the AP and compiled by ImportGenius, a global trade analytics company.

The seizure announced last week suggests part of the answer: The shipments arrived at Los Angeles International Airport, and air carriers are not required to disclose the same details about their cargo as ocean vessels. The e-cigarettes were mislabeled as toys, shoes and other items.

Ships docking in the U.S., which account for most Chinese imports, must provide information on suppliers, recipients and types of cargo they are carrying. But importers can obscure their identities and products.

For example, U.S. recipient information is listed as “not available” for roughly 45 of over 100 shipments of e-cigarettes from China this year, according ImportGenius data. U.S. companies can avoid disclosure by using third-party shippers, called freight forwarders, who handle foreign goods on behalf of importers.

“All of this suggests that these companies are incredibly sophisticated, they know how to game this system and they are intentionally doing so,” said William George, research director for ImportGenius.

It’s likely most disposable e-cigarettes coming into the U.S. aren’t even declared as vaping products.

Esco Bars, one of Elf Bar’s chief U.S. rivals, imported 30 shipments from China this year labeled “atomizers,” a generic type of hardware that turns a liquid into a spray. The Texas-based company received the shipments, weighing about 25,000 pounds each, under its shipping arm, Affiliated Imports LLC. The shipments stopped in May, after the FDA placed Esco Bars on a list of banned imports.

Another disposable maker, Magellan Technology, routinely labeled its imports as “battery chargers,” records show.

Neither company responded to AP’s inquiries.

U.S. Customs and Border Protection did not make officials available for interviews, but pointed to the agency’s recent operation in Los Angeles with the FDA.

“The rise in illicit e-commerce demands that our agencies remain vigilant in intercepting shipments that could pose serious health risks to the public,” Troy Miller, a senior official with the border agency, said in a release.

FDA Commissioner Robert Califf said that agency is “committed to continuing to stem the flow of illegal e-cigarettes into the United States.”

U.S. tobacco companies say their e-cigarettes — which undergo FDA review and don’t come in fruity flavors — can’t compete with lower-priced disposables. In recent weeks both Reynolds American and Altria filed separate legal actions against iMiracle, Esco Bars and other disposable makers.

Documents filed by Reynolds with the U.S. International Trade Commission describe elaborate techniques for smuggling disposables into the country.

In a sworn affidavit, a former FDA investigator now working for Reynolds describes vape exhibitors at a recent conference removing hidden e-cigarettes from flashlights, “which is consistent with the fraudulent practice of Chinese manufacturers declaring the product as flashlights."

Last week, the commission announced it would open an investigation into the matter.

‘NO FUTURE’ FOR VAPING IN CHINA

The rise of disposable e-cigarettes in the U.S. can be traced to actions by Chinese regulators.

China’s vaping sector is estimated to be worth $28 billion, and the U.S. accounts for nearly 60% of the country’s vape exports, according to the China Electronics Chamber of Commerce.

Chinese authorities have encouraged those exports while at the same time drastically curtailing the country’s domestic vaping business, which is controlled by several hundred private companies.

The government brought vaping companies under control of its state-run tobacco administration, beginning with a prohibition on online sales in 2019 and culminating in a sweeping ban on all flavors except tobacco.

The flavor ban sent domestic sales for large Chinese manufacturers like RLX Technology plummeting over 50%. Many vape shops and smaller producers also closed, unable to obtain government-issued licenses needed to operate.

Authorities cited concerns over “unsafe additives, leaky e-juice and shoddy batteries.” But experts who have spent years in the country point to another cause: vaping’s encroachment on government tobacco sales.

The China National Tobacco Corp., the state-run monopoly, is the largest tobacco company in the world. In cooperation with its regulatory arm, the Tobacco Monopoly Administration, the pair controls the manufacture, marketing and pricing of all cigarettes made in China.

Between 2017 and 2020, e-cigarette sales increased more than 254%, according to data firm EuroMonitor. Those sales accrued exclusively to vaping entrepreneurs, not the government.

“The tobacco administration says, ‘Well, every e-cigarette sold means one less cigarette smoked,’ so they are going to regulate the hell out of them now,” said Dr. Ray Yip, a public health consultant and former director of the Gates Foundation’s China program.

Euromonitor expects e-cigarette sales of $822 million this year inside China, down more than 70% from a nearly $3 billion peak.

“Everyone in the industry has suffered from the government’s ban because people like flavored vapes,” said Lin Jian, who owns a vape shop in Shenzhen. Jian said he can no longer afford to hire employees to help at the shop, which barely covers his expenses.

Hu Leng, manager of a contract vape manufacturer in Shenzhen said: “There is no future in the domestic market. All of our products are sold to Europe and we’re doing well for the time being.”

EXPLOITING LOOPHOLES

Elf Bar-maker Shenzhen iMiracle is among the companies that have built their entire business on exports.

In late 2021, the company began shipping to the U.S. to exploit a regulatory loophole: The FDA had prohibited kid-appealing flavors from reusable vapes, such as Juul, but not disposable ones.

An entrepreneur, Zhang Shengwei, founded Heaven Gifts in 2004 as an e-commerce platform for e-cigarettes. Over the years he invested in companies up and down the supply chain — makers of batteries, nicotine solutions and other components. Around 2018 the company began manufacturing its own vapes, according to iMiracle’s spokesman. (Heaven Gifts and iMiracle share the same building address in Shenzhen.)

Shengwei’s holdings now include more than a half-dozen companies, including a Hong Kong subsidiary, iMiracle HK Limited and VapeOnly Technology, which is listed as Elf Bar’s manufacturer on some products. The company spokesman declined to make Shengwei available for an interview.

Vaping analysts are quick to separate companies like iMiracle from more established Chinese manufacturers like Smoore International, which have longstanding relationships with regulators and vaping brands around the world.

“This is much more of an opportunistic attempt to generate revenue quickly using the capacity that’s there in Shenzhen,” said Shane MacGuill, head of nicotine research for Euromonitor. “I would guess that a long-term view is not part of the strategic play here.”

A spokesperson for China’s tobacco administration did not respond to repeated requests for comment, but the country’s tobacco regulations state that exported vapes “should comply with the laws, regulations and standards of the destination country.” Since the FDA has declared Elf Bar illegal, iMiracle would seem to be violating Chinese law by shipping to the U.S.

But experts say such rules go unenforced.

“China basically couldn’t care what happens to the products if they’re selling for export,” said Patricia Kovacevic, an attorney specializing in tobacco regulation. “If it’s something for export, you are not held to any standard.”

GLOBAL BACKLASH

As brands like Elf Bar have traveled around the world, more governments are introducing measures to block their use, often citing the environmental toll of electronic waste.

Australia announced a ban on disposables over the summer. This month, French lawmakers unanimously approved a bill to prohibit disposables.

Perhaps nowhere has the backlash been more drastic than in the U.K., where health authorities have long promoted vaping as a less harmful alternative for adult smokers.

In October, the country’s conservative government called for legislation aimed at reducing underage vaping, including a potential ban on disposable products.

Vaping advocates say disposables have “massively” damaged the industry’s reputation.

“Six months ago, I had a government that was very pro-vaping. Now I have a prime minister spending his time railing against vaping,” said John Dunne, of U.K. Vaping Industry Association. “That to me is a tsunami of change and the only thing that’s changed is disposables.”

Dunne blamed some of the missteps on “very small, inexperienced teams of employees.” He sees an improving picture, noting that iMiracle recently hired regulatory staffers to oversee compliance in Europe and the U.K. The company also recently said it would drop some of its dessert and soft drink-based flavors.

But even as iMiracle appears to be pulling back on disposables in the U.K., the company is already pushing new products.

Last month, vape shops began promoting a new offering from iMiracle’s U.K. subsidiary: TACJA nicotine pouches.

The pouches are similar to nicotine gum and less messy than traditional chewing tobacco. They come in colorful, plastic containers displaying their flavor, strength and the tagline: “powered by Elf Bar.”

One Instagram post is typical of the new advertising pitch: “Enjoy next level of satisfaction and unrivalled convenience, all with the same great Elf Bar taste you know and love.”

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Associated Press researcher Yu Bing in Beijing contributed to this report. Follow Matthew Perrone on X: @AP_FDAwriter

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The Associated Press Health and Science Department receives support from the Howard Hughes Medical Institute’s Science and Educational Media Group. The AP is solely responsible for all content.