Understanding the U.S. Illicit Tobacco Market Characteristics, Policy Context, and Lessons from International Experiences (2015) / Chapter Skim
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1 Introduction
1 Introduction
Pages 13-30
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CONTEXT AND COMMITTEE CHARGE The illicit trade refers to "any practice or conduct prohibited by law and which relates to production, shipment, receipt, possession, distribution, sale or purchase, including any practice or conduct intended to facilitate such activity" (World Health Organization, 2013a, p. 6; see also Family Smoking Prevention and Tobacco Control Act of 2009 [P.L.
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Food and Drug Administration (FDA) does not have the authority to levy taxes or enforce tax compliance, but it does have the authority to regulate tobacco products so as to improve public health.
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As illustrated by Figure 1-2 and Table 1-1, the diversion of tobacco products into the illicit market can take place in various ways, and the d ifferent pathways of diversion can vary in the taxes and fees that are avoided. 2 Becausethe illicit tobacco trade largely coincides with the illicit trade in cigarettes, the committee report uses the terms "tobacco" and "cigarettes" interchangeably.
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SOURCE: U.S. Government Accountability Office (2011, p.
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commerce Manufacture § Manufacturing cigarettes in the n/a √ √ √ United States without a license § Underreporting cigarette production to federal government Wholesale/ § Purchasing tobacco products n/a Paid √ √ Distribution from wholesaler in one state for illegal transportation and resale in another state § Underreporting tobacco product sales to state governments 17 continued
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aSee Box 1-3 for a discussion of the Master Settlement Agreement. bn/a = not applicable.
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. In addition to the Tobacco Control Act, the key federal laws that address the illegal tobacco trade and product diversion are the Jenkins Act, the Contraband Cigarette Trafficking Act, the Prevent All Cigarette Trafficking Act of 2009 (PACT Act)
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Department of the Treasury. In additional, states and localities can enact and enforce laws that govern the illicit tobacco trade.
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It applies reporting requirements for tobacco taxes to sales, advertising of sales, and the shipping and transporting of cigarettes and smokeless tobacco; regulates (and imposes record-keeping requirements regarding) the mailing of tobacco products from sellers to customers, including requiring Internet and mail order sellers to pay all applicable federal, state, local, or tribal tobacco taxes, affix tax stamps before delivery, and check the age and identification of customers at purchase and delivery; authorizes the Bureau of Alcohol, Tobacco, Firearms and Explosives to enter the business premises of delivery sellers and inspect their records and any cigarettes or smokeless tobacco stored at such premises; and expands the powers of state, local, and tribal governments, giving any of these entities that charge a tobacco tax broad enforcement powers and making preemp tion issues less likely.
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The U.S. cigarette sale levels used to calculate settlement pay ments from participating manufacturers to the states are based on the quantity of tobacco products for which federal excise taxes were paid.
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From a purely economic standpoint, taxes that raise the price of cigarettes are socially desirable in that they discourage smoking while at the same time generating government revenues. However, this can also create incentives for tax avoidance and tax evasion.
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In the European Union (EU) , for example, there are fairly generous allowances on how much someone can buy in a lower-tax jurisdiction for consumption at home.8 The illicit trade that is of more concern to policy makers involves larger-scale and longer-distance smuggling of tobacco products across tax jurisdictions in order to evade paying taxes; the net social returns from reducing large-scale smuggling are almost certainly higher than from reducing individual tax evasion.
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that have out-of-state tax stamps cannot distinguish among tax avoidance, tax evasion, tourism, and commuting patterns. Recent estimates indicate that about 11.6 percent of global cigarette consumption is illicit -- or 657 billion illicit cigarettes annually (Joossens et al., 2010)
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. The illicit tobacco trade undermines these tobacco control policies by increasing the affordability and accessibility of tobacco products (see, e.g., Chaloupka and Warner, 2000; Joossens et al., 2000; Carpenter and Cook, 2008; West et al., 2008; Joossens et al., 2010)
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illicit tobacco market and terrorism appears to be minor, and there is no systematic evidence of the ties that may exist between the global illicit tobacco trade and terrorism: see Chapter 3.
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Opportunities exist for governments to reduce the size of the illicit tobacco market by targeting particular points of diversion and, more generally, by undermining the conditions that make the 12 Forexample, an examination of industry-funded studies on the potential impact of regulatory changes on the illicit trade, conducted by Transcrime of the Università Cattolica del Sacro Cuore in Milan, raised questions of neglecting contradictory evidence and making assertions not supportable by available evidence (Fooks et al., 2013)
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Chapter 2 explores some of the market's key features: the cigarette supply chain (with overlapping legal and illegal components) , the major illicit procurement schemes, the role of price and nonprice factors in driving illicit trade, and the profitability associated with the illicit market.
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Those include product design, menthol and other constituents of cigarettes, nicotine levels, health warnings, and packaging. The chapter also considers the role of e-cigarettes as an emerging alternative to traditional tobacco products.
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