Understanding the U.S. Illicit Tobacco Market Characteristics, Policy Context, and Lessons from International Experiences (2015) / Chapter Skim
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5 Interventions in the Illicit Tobacco Market: Policy and Regulatory Options
5 Interventions in the Illicit Tobacco Market: Policy and Regulatory Options
Pages 111-138
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From page 111... ...
These chapters address a specific charge in the committee's statement of task. This chapter covers control of the supply chain, tax harmonization, and public education campaigns; Chapter 6 covers law enforcement; and Chapter 7 presents case studies of comprehensive intervention efforts in three countries and the European Union (EU)
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From page 112... ...
Interventions to control and monitor the participants at each stage in the supply chain -- such as licensing, digital tax stamps, and track-andtrace systems -- and have, when coupled with enhanced enforcement of such requirements, have been shown to be useful in reducing these diversions and limiting the supply of tobacco products in the illicit market.
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From page 113... ...
Thus, though the protocol has yet to be adopted on a wide scale, it can be viewed as an aspirational document, codifying principles of tobacco control and outlining a future path for international health cooperation. Licensing Governments can require participants throughout the supply chain -- including tobacco growers, manufacturers, distributors, wholesalers, and retailers -- to be licensed, imposing obligations or restrictions on them.1 Governments can mandate that failure to comply with such obligations or 1 Article 6 of the FCTC Protocol calls for parties to require licensing of any person who produces tobacco manufacturing equipment and of persons who commercially transport tobacco manufacturing equipment, potentially affecting the ease with which such equipment is currently acquired.
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From page 114... ...
This absence of this problem in the United States may be due in part to the licensing requirements at the production and taxation/in-transit stages of the supply chain. Manufacturers, importers, and export warehouse proprietors of tobacco products or cigarette papers or tubes are required to obtain a license from the Alcohol and Tobacco Tax and Trade Bureau of the U.S.
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From page 115... ...
. a license are subject to forfeiture.4 Anyone who sells, re-imports, or receives tobacco products or cigarette papers and tubes designated for export, and anyone who aids or abets such activities, must pay the liable taxes due and be fined the greater of $1,000 or five times the imposed tax.
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From page 116... ...
Cases of illegal production of cigarettes by unlicensed manufacturers have not come to the attention of the committee, nor does the production of counterfeit cigarettes appear to be prevalent in the United States. The licensing requirements and penalties for violations at the production and taxation/in-transit phases of the supply chain, when enforced, may significantly impede such procurement schemes.
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From page 117... ...
For example, the California Cigarette and Tobacco Products Licensing Act of 2003 (Licensing Act) requires retailers to obtain a license from the Board of Equalization (Tang et al., 2009)
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From page 118... ...
In the United States, nearly all states require tax stamps on cigarettes; the only states that do not require cigarette tax stamps are North Carolina, North Dakota, and South Carolina. Similarly, local governments with significant cigarette excise taxes, including Chicago and
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From page 119... ...
Internationally, some countries require tax stamps on all tobacco products sold in that country; others forgo tax stamps entirely; and others require stamps on some, but not all, tobacco products. For example, in Vietnam, tax stamps are required on all cigarettes domestically manufactured by legally established companies.6 Some jurisdictions require different stamps on the same tobacco products.
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From page 120... ...
Jurisdictions that use enhanced tax stamps typically adopt related systems that allow them to easily monitor the application of the stamps and the distribution of the stamped products. Similarly, many also adopt licensing requirements for all involved in the production, distribution, or sale of tobacco products, further facilitating the ability of authorities to enforce tax laws.
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From page 121... ...
to determine the authenticity of cigarette tax stamps, and it conducts large-scale sweeps of wholesale distributors (Al-Delaimy et al., 2008, pp.
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From page 122... ...
he application of lost or stolen hybrid tax stamps with unique identification features to unmarked tobacco products could be detected through revenue and customs inspections, or criminal investigations" (Colledge, 2012, p.
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From page 123... ...
could strengthen the understanding of the risks to retailers of selling illicit products and could help produce estimates of the extent to which retailer compliance responds to particular regulator and enforcement actions. Track-and-Trace Systems Encrypted tax stamps and other pack markings are an integral component of more comprehensive tracking-and-tracing systems that both "prospectively" track9 tobacco products through each stage of the supply chain, from production until sale to tobacco users, and that can be used to "retrospectively" trace10 products back through the supply chain so that those involved in production, distribution, and sale can be identified.
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From page 124... ...
The main objective of tracking and tracing is to facilitate investigations into tobacco smuggling and to identify the points at which tobacco products are diverted into illicit markets (Joossens, 2011)
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From page 125... ...
For example, they will make it easier for the states to determine how much escrow is owed by each nonparticipating manufacturer under the Master Settlement Agreement.11 Moreover, they can provide a check on retailers' sales tax reports, since state revenue agents can better identify possibly fraudulent sales tax returns if the state tax department knows exactly how many cigarettes are sent to each retailer each month. Digital tax stamps and coded information are more effective when implemented in combination with other measures, such as the licensing legislation in California (Framework Convention Alliance, 2008, p.
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From page 126... ...
A national system -- one that is implemented across state borders -- would be better able to track and trace cigarettes through the licit distribution system and identify points of diversion into illicit markets than would systems that are implemented at the state level.13 It is also important to note that low-tax states, such as Virginia, that are the source of many bootlegged cigarettes have limited incentive to adopt digital tax stamps or a track-and-trace system. As the Virginia State Crime Commission (2013a, p.
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From page 127... ...
With respect to Native American tribes, some states have already entered into agreements with them in order to reduce the price disparities that make illegal sales profitable: see Box 5-4. Although tax harmonization agreements could, in principle, be negotiated to enact excise tax ceilings (i.e., requiring high-tax jurisdictions to reduce taxes in order to align with low-tax jurisdictions)
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From page 128... ...
When a tribe sells cigarettes on a Native American reservation, Wisconsin tax stamps valorem excise tax (Mansour and Rota-Graziosi, 2013; Blecher and Drope, 2014)
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From page 129... ...
Under such an agreement, the tribal council may receive a refund of 70 percent of the cigarette taxes paid by authorized cigarette retailers or the tribal council on cigarettes purchased for sale on the tribal land. The tribe may also qualify for a refund of 30 percent of the cigarette taxes collected by authorized retailers to tribal members living on tribal land.
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From page 130... ...
also recommended a federal program to allocate funds in such a way as to give low-tax states an incentive to raise cigarette taxes. Although the enactment of a tax harmonization program in the United States would be politically challenging, it would also address one key "root cause" of the domestic illicit tobacco trade.
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From page 131... ...
These public education campaigns were implemented as part of broader strategies to combat the illicit tobacco trade, and each was for a limited time period. For example, the United Kingdom launched a campaign in 2009, the North of England Tackling Illicit Tobacco for Better Health Programme.
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From page 132... ...
Raise public awareness of the health dangers of buying illegal cigarettes and change perceptions that cigarette smuggling is a victimless crime. Communication strategies § press launch § mobile outdoor advertising § advertising through social media, posters, and beer mats § newspaper advertisements and subsequent media coverage § in-store posters through its 3,000 members § local meetings among retailers, politicians, and law enforcement
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From page 133... ...
Educate retailers and the public about the penalties of buying and selling illicit cigarettes (supplementing increased enforcement efforts to seize illegal cigarettes and administer fines to retailers found facilitating illegal sales)
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From page 134... ...
Persuade the public to get more information on illicit tobacco trade by alerting them to the criminality of the illicit trade as well as increased availability to children. (This campaign purposefully avoided the "greater harms message" to limit the perception that legal tobacco would be seen as healthier.)
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From page 135... ...
. In an effort to address the illicit trade problem while not promoting legal cigarettes as being less harmful, the "Get Some Answers" campaign in the United Kingdom specifically avoided the "greater harms message" and focused on the illegality of counterfeits and their increased availability to children in an effort to address the illicit trade problem while not pro
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From page 136... ...
External evaluations have a number of limitations, most notably, that campaigns are often part of broader strategies to combat illicit trade, and the effects of public education campaigns are difficult to separate from those of other strategies. Nonetheless, most assessments and formal evaluations of campaigns find survey respondents who are able to identify or recall elements of the campaigns and report increased public awareness of the illicit trade and its consequences, as well as positive attitudes toward the campaigns.
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From page 137... ...
Other interventions that have been shown to be effective include those that seek to undermine the conditions that make illegal trade possible by, for instance, harmonizing taxes to eliminate the financial incentive to engage in bootlegging or conducting public education campaigns to reduce consumers' willingness to buy illicitly traded cigarettes. Although the enactment of a tax harmonization program in the United States would be politically challenging, it would also address one key root cause of the domestic illicit trade: very different cigarette tax rates across states.
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From page 138... ...
138 UNDERSTANDING THE U.S. ILLICIT TOBACCO MARKET Regulations and technologies to control and monitor the supply chain of tobacco products, as well as other interventions to address the conditions that facilitate the illicit tobacco trade, would have limited impact without the effective enforcement of laws prohibiting the illicit trade, which is discussed in the next chapter.
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