We report in this issue of Tax Stamp News the 84th annual meeting of the US Federation of Tax Administrators (Tobacco Section), held this year in Louisville, Kentucky. Perhaps more than ever before, the uniqueness of the situation in the US was thrown into sharp relief when the tax stamping system being proposed by the tobacco industry was presented for the scrutiny of 36 of the 50 states present at the meeting.

Jeannie Cameron of BAT presented her highly illustrated talk on Codentify™ following a similar presentation at the Tax Stamp Forum in London earlier this summer. Her presentation and subsequent visit to the Department of Treasury in Washington DC (TTB) was timely as there seems to be a mood for change in the approach to tobacco taxation in the US. That there needs to be a more aggressive approach to counteracting the illicit trade in counterfeits, smuggling and tax evasion is not in doubt, but how to achieve all three in the US is still unclear.

The Codentify model of unique, encrypted codes printed by the manufacturers at pack level has been proposed by Philip Morris and endorsed by BAT, JTI and Imperial Tobacco. It is even being deployed in parts of Europe. Its ability to simplify aggregation is unquestioned; that means that a code on the pallet encompasses all the codes on the cases which encompass all the codes on the cartons etc all the way down to the individual packs. Hence a single scan of a case or pallet reveals all the item numbers without the need to unpack.

Basis for Tax Collection

As Ms Cameron pointed out, this is good for a track and trace capability up to the first point of delivery from the manufacturing plant and this, in turn, gives a good basis for government tax collection.

But, as was pointed out by her audience in Kentucky, it isn’t only the US federal government that collects a tobacco tax; most states (47 of them) levy a state tax and even cities and counties take a piece of the action.

As talk of a federal tax stamp grows (at present there is no stamp - tax is based on declarations from the tobacco manufacturers), and as the FDA becomes increasingly involved in tobacco affairs, the stage is set for an open debate on how best to satisfy all the demands of a modern tax stamping system.

The STOP (Smuggled Tobacco Prevention) Act requires new, readily-available high-tech tax stamps or other tax-payment markings that will clearly establish the legality of a stamped or marked tobacco product and which cannot be effectively counterfeited.  It also provides for encrypted information on the high-tech tax stamp markings to identify not only the entities applying the tax stamp but also subsequent recipients.

The acquisition of the status quo supplier, Meyercord, by the entrepreneurial, and global, SICPA is a further indication of change in the offing. SICPA, which has already created a paradigm shift in California, Massachusetts and soon in Canada, would not have spent $100 million on this acquisition unless they had plans for further developments.

Convenient Platform

It is with these changes in mind that Reconnaissance has made the decision to hold the next Tax Stamp Forum in Washington DC on September 13-14 next year. By that time the arguments about how track and trace relate to tax paid status and counterfeits should be better rehearsed and, if not, this will be a convenient platform on which to practice them.

And it isn’t just the US that needs to understand that tracking a number or tracing it back to point of origin does not do the same job as an anti-counterfeit stamp. Ask any investigator or customs officer. Neither is an encrypted random number much use if the batteries fail, the connection rate is slow or the location is remote with no connectivity.

Similarly, nor will taxing jurisdictions readily see the advantage of relinquishing their physical control over the stamps they sell to prove tax has been paid. Right now, it seems that the need for an international platform for all stakeholders to debate the issues has never been greater. The urgency comes from recessive economies keen to collect their rightful due coupled with increasing realization that ramping up taxes does NOT deter smoking, it merely causes the smoker to find a cheaper source and the illicit trader to provide him with it.

And let’s not forget the other products which are not cigarettes. It is estimated that more tax revenue is lost on other tobacco products (OTP) than is collected. And  how is it that electronic cigarettes are freely available in the shopping malls of Minnesota but outlawed elsewhere? It seems that the smokeless tobacco products is still a significant grey area.

This subject will not be exhausted any time soon but the possible entry of new players into the discussion will make for interesting developments in the year ahead.