Buyers guide to tax stamps – a car analogy

The recent introduction of the Tobacco Tax and Enforcement Reform Act (SB 1129) in the U.S. Senate, which was discussed by John Colledge in the May issue of Tax Stamp News, sparked an interesting conversation amongst some colleagues and me:

  • How much should a tax authority spend on security features?

  • What is the environment needed for tax stamps to be successful, e.g. licensing, penalties?

  • How much of an enforcement budget should be spent on stamps vs. civil and criminal enforcement personnel (also known as “boots on the ground”)?

Article originally published in Reconnaissance's Tax Stamp News™.

Our discussion was healthy to say the least, but left us with one conclusion: One size does never fit all! Comprehensive solutions to combat the illicit trade in tobacco need to be custom-tailored, comprehensive, cost-effective, measured and impactful. Unfortunately, SB 1129 is an example on how exactly it should not be done.

The Act takes a “one-size-fits-all” approach by requiring an expensive technology solution, which does not match the illicit trade in the United States, does not account for implementation costs by government and industry and does not improve other factors, such as penalties, licensing requirements, equipment destruction, raw materials and dedicated enforcement staff and funding.

Do we all need armored Sport Utility Vehicles (SUVs)? Let me illustrate the issues this approach has, through an analogy with a different high-tech, multi-factor, high-investment purchasing decision – buying a car.

If one would take the same approach to car procurement, one would probably end up with an armored, fully loaded, supercharged high-end SUV. But, not all of us live in places where a fully-armored SUV is needed, not all of us could afford the car’s gas consumption, some of us might not be able to fit it into our garage and some of us really just needed a Mini-Van. I’m sure many readers out there have their stories of that salesman, who tried to convince them that the German Luxury SUV is exactly what they needed, while neglecting to mention the costs of upkeep, gas, the stunning lease payments and the fact that it doesn’t fit in the driveway.

Good procurement decisions follow the consultative approach rather then the sales approach. It starts with a discussion of what the main purpose is, or what issues it is helping to solve (cheap commuting, kids soccer games car pooling, work car for construction jobs, dangerous living conditions, etc.). From there the buyer will explore what applicable systems and features exist (SUVs, vs. Trucks vs. Station Wagons, Navigation Systems vs. On-Star, Armored options, Hybrid vs. V8). Buyers will then look at existing equipment and other options (already a minivan/SUV in the family, car pooling options available, public transport), start to have informed discussions with lots of stakeholders (family, friends, car dealers) and gather additional research. This creates a short list or comparative set of potential vehicles with desired features. Now the buyer has the power to test drive and negotiate the prices. This approach will also help find solutions, technologies and features the consumer was unaware of, but now wants.

A Paradigm shift is needed I previously discussed the need for a paradigm shift away from the current technology first, provider-government-only model towards a multi-stakeholder process in the January 2015 issue of Tax Stamp News. To develop successful comprehensive strategies to combat the illicit tobacco trade governments should: 1. Precisely identify, quantify and define the illicit trade issues they are facing (Counterfeit, Counterfeit tax stamps, grey market, illicit manufacturing etc.), 2. understand what regulation, technology, systems and data already exists, 3. research, study and evaluate all available options to combat the illicit trade (licensing, penalties, raw material control, tax stamps, law enforcement resources), 4. and then design custom solutions combing policy and technology.

For example, if a government faces low levels of counterfeit product or counterfeit tax stamps, why would they need to spend a lot on overt and covert authentication features? If a country’s biggest issue is illicit, unlicensed manufacturing, could the issue be resolved with a stringent licensing, inspection and penalty regime?

Most importantly, this process needs to be transparent and inclusive, enabling open and healthy discussions on what combination of policy and technology fits the illicit trade issue at hand, yield the best results and provides a positive return on investment.

The world is starting to shift beneath our feet To answer the questions of the beginning of the article – there is not a single answer, no silver bullet, no ”one-size- fits-all” solution and therefore no set ratios of spending. But there are encouraging signs that the paradigm shift towards the development of comprehensive, custom tailored solutions, based on detailed study with cost/benefit analysis, is starting to occur.

The European Commission in its recent technical feasibility study, 2 echoed the need for a customized approach by concluding that “there is no ‘one size fits all’ solution” and that “(g)lobal standards for communication, product and supplier identification (…) will enable traceability”. The Commission analyzed available options in detail with advantages, obstacles and cost implications and found that low-cost options, including industry systems might be viable for some markets, while other markets require more complex systems.

Another good example is a 2013 report by the Commonwealth of Massachusetts detailing twelve recommendations to improve enforcement, which included a combination of policy, technology and resource allocation. 3 Other Governments, including the Indiana Department of Revenue 4 and the Virginia State Crime Commission 5 have done similar studies.

While these studies are difficult and resource intensive, governments need to work with all involved parties to develop better research on the most impactful and comprehensive solutions combining policy and technology to address the illicit trade in tobacco.

Because only one thing is certain, not everybody needs an armored SUV.

Sven Bergmann is a Managing Partner at Venture Global Consulting and advises brand owners, technology providers and governments on anti-counterfeit strategies, programmes and technologies.

Send your comments to SBergmann@VentureGlobalCo.com.


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