Securing Revenue in a Changing Tobacco Regulatory Environment
In 1998, 46 states, 5 territories, and the District of Columbia signed the Master Settlement Agreement (MSA) with the four largest cigarette manufacturers in the US as compensation for “taxpayer money that had been spent in connection with tobacco-related diseases and the loss to local economies.” The MSA required the cigarette manufacturers to pay the settling states a certain amount annually in perpetuity - based primarily on the sale of cigarettes - and placed significant restrictions on the advertising and marketing of tobacco products. In 2018, payments to states stemming from the Master Settlement Agreement (MSA) totaled more than $8 billion dollars.
The inception of MSA payments increased costs associated with retail cigarettes (Participant Manufacturers or PMs) and roll your own (RYO) tobacco (Non-participant manufacturers or NPMs). Product manufacturers have made several attempts to circumvent the MSA’s requirements – from labeling products as “pipe” tobacco to calling flavored cigarettes “little cigars.” Increasingly, as regulators have closed existing loopholes, more and more consumers – especially young people – have moved to e-cigarettes, “vapes,” and other new nicotine-delivery products.
As the market share of traditional cigarettes declines – and annual MSA payments decline along with it – it is increasingly incumbent on states to establish consistent regulatory frameworks for the identification and taxation of more diversified tobacco products, said Kara Parga, SICPA Subject Matter Expert, at the Federation of Tax Administrators’ annual Tobacco Section Tax meeting held in late August.
“Over the past 10 years, the market has not shifted from a premium cigarette – like a Marlboro or a Camel or some of the other major manufacturers – to smaller cigarette brands. Instead, the market has shifted to other products,” said Parga. “As young people come back into the market, they aren’t coming back to cigarettes, but are coming back to vapes and other new products. The MSA doesn’t currently address the new products that the market is shifting to.”
As new products rapidly expand market share, Parga says, the first task for states is to accurately track and record products that enter and are sold in the state. Previously, companies involved in the import and sale of tobacco products in a state might simply have reported the total volume of tobacco products sold and the resulting tax, but now – given the different definitions, regulatory and taxation frameworks covering different products – it’s critical for state officials and regulators to have a clear picture of what products comprise the tax base. Increased transparency on the type and volume of tobacco products sold within state lines is essential to both establishing regulations and legislative frameworks that accurately capture tax revenue owed to the state, and to meet any state responsibilities as the MSA is adapted to reflect the increasingly diversified market, according to Parga.
In the context of this rapidly changing marketplace, SICPA’s track and trace solutions, like SICPATRACE®, are a valuable tool because they allow for reliable count and breakdown of sticks per manufacturer and brand. Track and trace tools automatically match to the state’s tobacco product directory (TPD) of stamped products and help with reconciliation for auditing purposes. This generates a complete picture of the tobacco marketplace and an accurate readout of expected state revenue. This new reality is the reason why the FTA is working so diligently on uniform reporting requirements, so that state-level data on the imports and sale of multiple tobacco products can be easily integrated and compared – to ensure revenue collection and identify any potential illicit activity.
