Tax Stamps as an Authentication Feature? A Critical View
In November's issue of Tax Stamp News™, Ian Lancaster (in his opinion piece Tax Stamps: Revenue Collection, Brand Protection or Both?) asked an interesting, challenging and potentially controversial question: ‘Have they (stamps) become a means of product or brand protection as well as a means of tax collection?’
While tax stamps are currently only applied to a few select excise tax goods, such as tobacco and alcoholic beverages, the critical analysis of applicability applies to authentication in general.
Original article here.
Stamps were designed ‘to ensure that the appropriate revenue or excise tax is collected, and to show that it has been paid’. While it is tempting to be attracted to the apparent simplicity of using tax stamps for authentication or brand protection, many issues need to be considered and resolved. Several arguments were made for tax stamps to move beyond their original intended purpose, which require further consideration or response.
This article will take a critical view of the opinion piece to broaden the discussion and act as primer for our panel on this topic at the Tax Stamp Forum™ in Berlin, Germany at the end of January.
Brand owner considerations
The opinion piece states that there is a subset of brand owners who ‘take combatting counterfeiting seriously’, apparently suggesting that there is another group of brand owners who do not take combatting counterfeits seriously.
As a consultant to many Fortune 500 brands, global trademark protection associations and as a former in-house brand protection manager, such a subset of brand owners is unknown to me. I have never met a brand owner who does not take brand protection or counterfeit battles seriously. Brand owners might differ on what tools should be used, how many resources (people, money, organisational focus) should be expended and how public the brand owners want to make their counterfeit issue. Brand protection organisations are business functions which are driven and measured by various business metrics, including consumer protection, quality assurance, ROI, public relation considerations and ability to execute.
One of the reasons why many brands continue to de-emphasise overt security features is their cost and ineffectiveness. Almost all overt anti-counterfeit features can and have been replicated to fool unsuspecting consumers.
However, overt security features continue to be used as an additional authenticity indicator for consumer use, providing a quick visual proxy. This raises the question of whether a quick visual verification is ‘enough’ or better than no public feature. On the other hand, should resources be spent on other potentially more effective features and programmes?
For example, rather than relying on overt features, many brand owners utilise covert or semi-covert features to authenticate their products. Fully covert features require specialised equipment and include taggants, molecular markers and specialised inks. Semi-covert features are either hidden out of plain sight or are too small to be recognised by the untrained eye. As a result, counterfeiters miss and therefore don’t replicate those features.
Many commonly used semi-covert features are decidedly low-tech and therefore inexpensive, and include microprints, micro-fibre inclusions, micro-stamping, micro-engraving, hidden embossing and specialised glue patterns, to name a few.
Such features are integrated into the product material itself during the regular production process. They are only known to a few people within each company and guarded as trade secrets. They are confidentially shared with law enforcement and allow quick authentication of products without specialised equipment.
An equally important consideration is one of cost. While the opinion piece claims (in regard to using tax stamps for product authentication) that ‘there would be a considerable saving for brand owners’, this is not always true. The ‘most effective’ tax stamps Ian describes (‘highly protected pieces of paper or plastic, supported by sophisticated computer systems accessed over a telecoms network, which combine the best in physical protection against fraud with serialisation systems that allow monitoring at each stage of the supply chain’), sometimes carry a hefty price tag (although there are also many tax stamps that cost under a penny a piece).
In contrast, the covert and semi-covert anti-counterfeit features that brand owners often use, cost sometimes fractions of pennies per product applied. For brands selling millions or billions of products annually, any cost difference would quickly add up. It will be hard for brand owners to justify any significant cost differences to their management. Additionally, any increased costs for stamps would not offset other costs incurred by brand owners, but would rather be incremental.
The majority of costs for brand protection organisations normally come from personnel costs to monitor, secure the supply and distribution chain and enforce against actors committing illegal acts or infringing on brand owners’ rights. These personnel costs come from employees or vendors who monitor selling/buying patterns, analyse volume trends, conduct investigations, train and collaborate with law enforcement, execute online monitoring and take-down procedures and engage with stakeholders, lawmakers and elected officials to improve enforcement conditions.
Finally, brand owners who take counterfeits seriously spend significant resources on legal actions against actors infringing the brand owners’ trademark rights, through lawsuits, injunctions and other legal actions.
None of these costs would be offset and none of these efforts could be discontinued, since tax stamps do not enforce themselves.
Law enforcement considerations
While I can see the attractiveness of the argument made in the opinion piece to only have one feature for protection officers in a country to be familiar with, this also increases the vulnerability of the system. Criminal organisations would then only need to defeat one feature instead of dozens or hundreds.
More importantly, law enforcement in most countries is only authorised to conduct counterfeit detection and detention, but requires brand owners to authenticate product or to declare a product counterfeit.
For example, in the United States, Customs and Border Protection (CBP) only has the authority to detain suspect counterfeit goods. Before the agency can seize or destroy the goods, they are required to reach out to brand owners for authentication and sometimes to the importers for further documentation (ie. a product could be considered a violation of trademark, but was actually intended for another legal market in which it would not be). Many US states regularly collaborate with brand owners to authenticate products.
Internationally, most countries will also reach out to brand owners before declaring an item counterfeit, seizing and destroying it. And in many countries, this is actually a legal requirement.
Therefore, tax stamps at best could only act as a proxy for counterfeit detection or as a proxy for authenticity. In other words, the presence of a genuine tax stamp serves as an indicator that the product might be legal.
Product liability responsibility considerations
As the saying goes, 'you can’t have your cake and eat it too.' Ian rightfully points out that by claiming tax stamps as authentication features, legal responsibilities and liabilities would likely fall upon governments and tax stamp providers. If tax stamps all of a sudden become the determining feature for product authentication and therefore consumer protection, one can easily envision new legal obligations falling upon governments and tax stamp providers.
Could governments and tax stamp providers be held legally liable for the adverse effects on consumer health and safety of counterfeit goods? If counterfeit goods continue to exist in the country in which tax stamps are considered an anti-counterfeit tool, could brand owners suddenly have legal rights to pursue governments and tax stamp providers for lost profits, damages to brand perception and decrease of brand value?
For authentication features brand owners currently use, such legal provisions are pretty standard operating procedure and often part of the contracts brand owners have with their technology providers.
So, would brand owners become the legal clients of tax stamp providers with all legal rights and powers? If brand owners should, as was claimed, ‘feel more enthusiastic about contributing to the costs of the tax stamp and the examination staff and tools required,’ it is reasonable to envision that the brand owners would want to be part of the legal contract to purchase such features.
In short, brand owners would become the client of tax stamp providers who, in turn would become the brand owners’ vendor. As contract party, brand owners would likely get very involved in feature design and pricing negotiations, as well as demand full transparency on pricing, process, features, technologies and effectiveness.
Finally, brand owners are more then unlikely to accept ‘the removal’ or transfer of ‘their responsibility to protect their intellectual property rights, their customers, their brand integrity and their products’ to any third party or government. Brand owners’ biggest assets in many cases are their brands. This author is unaware of any organisation or brand owner who would be willing to entrust, transfer or abdicate the protection of their largest asset to a third party or government.
Better collaboration needed
All this shows that better collaboration between the tax stamp industry, governments and brand owners is needed. It is unlikely brand owners would be willing to absorb the extraordinary costs for authentication features, which might not be the most effective. It is especially unlikely for brand owners to absorb such costs without demanding legal protection and increased rights in return. Otherwise, it would seem rather undemocratic to force a private party to accept an anti-counterfeiting feature which they did not agree with and then force them to absorb the costs for it.
The tax stamp industry, governments and brand owners need to work together to identify how tax stamps and other tools and technologies offered by tax stamp providers can fit into anti-counterfeit detection.
Brand owners will need to be treated as a relevant and important stakeholder and even be seen as a potential customer.This author believes that such an open dialogue with true transparency can produce tremendous opportunities. While tax stamps are probably not the ideal anti-counterfeiting feature Ian’s opinion piece makes them out to be, they could become an integral part of the toolset of anti-counterfeit features – or selected features of tax stamp technology or infrastructure could become an interesting tool.
But all of this will require open and transparent dialogue between the tax stamp industry, governments and brand owners to identify which tools and features could be accretive and effective.
Sven Bergmann is a Managing Partner at Venture Global and advises brand owners, technology providers and governments on anti-counterfeit strategies, programmes and technologies.
Send your comments to SBergmann@VentureGlobalCo.com.