This 2nd Tax Stamp Forum proved a successful follow up to the 1st TSF held in 2009 in Budapest, Hungary. The Forum consisted of two days of presentations related to all aspects of tax stamps issued with the purpose of collecting excise tax on alcohol and tobacco products. An exhibition accompanied the formal presentations and provided a relaxed atmosphere in which attendees could partake of refreshments while conversing with exhibitors and each other.

The number of delegates increased by 50+ to 220 and the number of exhibitors to 17. The EDAPS Consortium of Ukraine acted as platinum sponsors with De La Rue and Madras Security Printers providing Gold sponsorship. See the full list of organisations that participated.    

The event covered the subject of tax stamps in the broadest sense so the two days of presentations were divided into four sessions, each covering a different aspect.

In Session 1, the wider tax stamp environment was considered from a global perspective.  Glenn Wood of Reconnaissance International briefly reviewed the coverage of the previous Tax Stamp Forum and indicated some major events leading up to the 2nd TSF. These were expanded by speakers who addressed such topics as the Framework Convention on Tobacco Control and legislation changes in the USA affecting tobacco. 

Session 2 addressed practical solutions such as types of tax stamps and methods of applying them. Policing and enforcement were also covered.

Session 3 focused on technologies with a particular emphasis on products and systems that combine security with track and trace functionality to provide product authentication and fiscal verification in a single solution.

Session 4 featured case studies on end-to-end tax stamp systems from tax authorities in various countries as diverse as Ireland and Kazakhstan.

The Papers

Session 1 – THE TAX STAMP ENVIRONMENT

Paper 1: The Forum was formally opened with a welcome address by Mike Norgrove, CBE of Her Majesty’s Revenue and Customs (HMRC). He indicated that the newly-elected British government is committed to reducing the budget deficit and is therefore keen that all taxes due should be collected. In the UK, £8 billion per year in tax revenues is collected on tobacco and £8.4 billion on alcohol. The losses due to illicit trade, meanwhile,  are considerable and rising - although good metrics are hard to establish. 

HMRC works in conjunction with Trading Standards and the Department of Health. A Fiscal Crime Liaison Officer is responsible for networking between the various authorities and these should be extended to include OLAF (Office Européen de Lutte Anti-Fraud i.e.European Anti-Fraud Office) and the Tax Stamp Forum. 

Paper 2:  FCTC Protocol on Illicit Tobacco and Plans for a Global Tracking System

John Colledge III, Consultant.

It was pointed out that the US has not ratified the FCTC Protocol but has enacted most of it.  Full adoption of the FTCT has been complicated by misunderstandings amongst the delegate negotiators. For example, illegal manufacture may or may not involve counterfeiting and even where counterfeiting is involved, it is the trademark that is counterfeited NOT the cigarettes.  There are 50 illegal manufacturers in Canada but none is counterfeiting.  They are, however, making and selling cigarettes without any tax being paid to revenue authorities. 

At the 4th Intergovernmental Negotiating Body meeting held in March 2010, it was agreed that every country would retain its own system. However, NIets- the International Justice and Public Safety Information Sharing Network - is an example of a tried and tested system of facilitating millions of data exchanges between legal jurisdictions.

Paper 3: Key Drivers Influencing the Evolution of Illicit Trade in Tobacco

Elaine Dezenski, Georgia Tech.

Illicit trade is defined as ‘That which causes direct human, social, political or environmental harm’. Ms Dezenski indicated how illicit trade touches many social phenomena such as corruption, food security, free trade, fragile states and terrorism.  Her presentation focused on recent initiatives through the World Economic Forum’s Global Council on Illicit Trade to address these global risks.

Paper 4: Tax Stamps - Delivering Supply Chain Visibility for Customs Compliance and Facilitation

Allen Bruford, World Customs Organization.

Mr Bruford noted that the Doha round of Trade negotiations is in stalemate and yet trans-border shipment of illicit goods increases as world trade increases.  For WCO, track and trace takes on global significance (tracking means following goods as they progress through the supply chain and tracing means tracing goods back to their source via bills of lading, etc).  A significant achievement of WCO has been the development of the SAFE Framework, a global supply chain security initiative devised by the international trade community and WCO member customs administrations.

Paper 5:  US Efforts to Curtail Illicit Trade in Tobacco Products - the PACT Act, the STOP Act, FDA and the CCTA

Farrell Delman, Tobacco Manufacturers Association

The Obama administration has overseen large changes in the way in which tobacco products are regulated in the US.  Various pieces of legislation have been introduced to try and reduce smuggling and maximize tax revenues.  Excise taxes on tobacco have risen substantially and so new powers are being sought to define a new track & trace system. This is called the ‘Smuggled Tobacco Prevention Act’ (STOP) introduced in April 2010 and calling for a new, high tech cigarette tax stamping system. Now that the FDA has been given jurisdiction over tobacco because of health implications, it now has some authority over government tax collection although some mystery still remains as to the extent of this authority compared with the Dept of Justice, the General Accounting Office, the Tax and Trade Bureau and other government bodies.

Paper 6: Tax Markings on Alcohol and Tobacco Products – Perspectives of DG TAXUD

Stephen Kent, European Commission (TAXUD).

Through this presentation, it became apparent that many of the problems of tax marking within the EU mirror those between the states in the USA. Issues arise from the wide disparity in excise duties between states/countries. For example, the price of a pack of 20 cigarettes in Ireland is €8.10 but in Greece €1.80 and yet the free movement of goods is supposed to be unfettered.  (NB In 2008 €70 billion was collected on cigarettes but €11 billion was not collected.).

Of the 27 member states, 23 use a tax stamp on tobacco products and 16 use a tax stamp on alcohol products. These stamps are extremely useful to customs authorities working to ensure that only small quantities for personal consumption cross borders and are definitely here to stay in spite of the arguments presented by the alcohol lobby in particular for their termination.

Paper 7:  Monitoring Counterfeit Cigarettes in the USA

Michael J. Thorne-Begland, Altria Client Services on behalf of Philip Morris USA.

In the USA, there are 50 state taxes levied on tobacco products and 493 local taxes although these are often combined into a single tax stamp along with the state tax.

Judging from observing discarded packets, Los Angeles and New York appear to have the highest incidence of counterfeit cigarettes.  These cities are the major ports of entry for Asian/Chinese knock-off cigarettes and a convenient way of distinguishing between genuine and counterfeit is to look for the UV dull cardboard of the genuine product. Even the sophisticated California stamp has been counterfeited and rogue stamps have been seized in both roll and sheet format. 

It was pointed out that although native American tribes have come in for a lot of criticism for counterfeiting and tax evasion, most are law abiding and only 3-4 tribes are problematic.

Session 2 -  PRACTICAL SOLUTIONS, ISSUES AND ALTERNATIVES

Paper 8: Stamp Application Systems – Making Life Easy for Distributors

Bruce DeBoers, R.E.D. Stamp.

Mr DeBoers described in detail the complex and varied requirements imposed on tax stamp application equipment in the USA.  Whether the stamps are fusion thermal tax stamps applied onto the cellophane wrapper of a cigarette pack using a heated stamp die, or a preprinted, pressure sensitive label, there is a common need for high yield, high speed application coupled with accurate accounting methods which track all stamps applied in real time. 

In the case of digital print-and-apply tax stamps, a pressure sensitive, preprinted label is applied immediately followed by printing a unique barcode followed by scanning to validate the application.  In this method, distribution of the stamps prior to application is easier as the value added and secure information is added only at the point of application.

R.E.D. Stamp application machinery is designed and made with all of these options integrated using as many print heads as the particular application requires.

Paper 9: Learning From Other Industries

Laurent Vieille, GS1 France

Mr Vieille introduced GS1 as the leading global organization dedicated to global standards relating to supply and demand chains across sectors.  ‘Is That Genuine’ is a French initiative involving several French companies who are working together to develop a system to facilitate remote product verification through the use of serial numbers, product key and brand owner company references. 

The rationale behind the system can be applied equally well to branded goods, pharmaceutical products and excise tax stamps.

Paper 10: Investigation and Prosecution: What’s Going Wrong in Canada?

Lorne Lipkus, Kestenberg Siegal Lipkus LLP

Canada’s federal and provincial tax revenues from tobacco products have historically ranged from almost $4 billion to $7 billion per year but losses due to the illegal tobacco trade run to almost $2.5 billion per year. In an effort to recoup these losses, Canada awarded a contract for a high tech tax stamp system in 2008 together with some legislation relating to the production, distribution and possession of these stamps. 

Notwithstanding, full legislative reform has still not been enacted and, even worse, no resources have been granted to the Royal Canadian Mounted Police to allow enforcement of this or any other trade related to counterfeiting.  Meanwhile, the new stamps remain in storage.

Paper 11: EDAPS - Success-Based Tax Collection

Alexander Vassiliev, EDAPS Consortium

Mr Alexander Vassiliev, Chairman of the Board of Directors of the EDAPS Consortium, described the comprehensive support offered by EDAPS to clients seeking to increase revenue from tobacco and alcohol products. EDAPS provides secure tax stamps that can be verified by eye or tracked and traced using internet or SMS.  As further components of the total package, EDAPS supplies application technology and even investigative resources.

Most innovative of all is the creative business model operated by EDAPS whereby the cost to a client government is nothing.  The compensation for the turnkey system offered is a percentage of the increased revenues thus removing investment risk.

Paper 12: Solution Proposed by the Commonwealth of Massachusetts

Audrey Rushton, Massachusetts Department of Revenue

Massachusetts, in common with most of the other 50 US states, has, until recently, used a system of cigarette tax stamps based on traditional, heat-applied stamps. In 2009, proposals were solicited for encrypted tax stamps and related machinery akin to that adopted a few years ago by California.

A driving force in this technological upgrade to the stamping system, was the need to better account for legitimate tobacco sales. The USA has a unique system whereby the tobacco companies agreed a so-called Master Settlement Agreement in 1998 whereby compensatory funds are paid to states who exercise ‘diligent enforcement’. A superior accounting system is seen as necessary in order to qualify for this additional revenue stream which can be equal to, or greater than the revenue derived from the tax collection.

In the case of Massachusetts, the annual receipts from tobacco excise duty are around $600 million per year.

Paper 13: Moves Towards Tax Indicia in the United States

Don Jones, Federation of Tax Administrators.

As Chair of the Federation of Tax Administrators (Tobacco Section) and Chair of its Technology Committee, Mr Jones was ideally suited to discuss the challenges of collecting tax on other tobacco products (OTP) in the USA. Majority interest lies in the tax on cigarettes because these represent the greatest proportion of sales.  Tax on OTP is usually levied at source, leaving considerable opportunities for abuse.  OTP come in non standard packaging such as round cans for chewing tobacco making it difficult to employ any system other than cumbersome hand application. None-the-less, The FTA Tobacco Section believes that OTP should be treated like cigarettes and treated accordingly. A request for information will soon be issued soliciting a technical solution to this problem.

Session 3 –TECHNOLOGY SOLUTIONS

Paper 14: The Anatomy of a Tax Stamp

Paul Miller, De La Rue.

Historically, tax stamps have generally been applied to goods to indicate ‘Tax Paid’ status and the US Secret Service continues to be a strong supporter of paper as a security substrate for such stamps.

A powerful reason for retaining such stamps is the assistance they afford in bringing successful prosecutions against traders in unauthorized or counterfeit tobacco products.  Moreover, DLR has observed 10-40% average increases in tax revenues after introducing paper-based tax stamp systems.

In general, it was noted that tax stamps loaded with higher security features are not usually more successful in bringing higher revenues. For that to happen, more sophisticated/expensive stamps need to be coupled with more stringent compliance monitoring.

The World Customs Organization (WCO) could be interested in some for of standardization of tax stamps along the lines of those corresponding to currency or passports.

Paper 15:  2D or Not 2D? That is the Question

Philip Berrie, ITW Covid

In this presentation, Mr Berrie analysed the value of item level serialization in tax stamp applications. He noted that serialization used to double the cost of a label but digital printing has reduced that upcharge considerably. Systems developed by eg Covectra allow serial numbers on item packs to be linked to carton and pallet labels through nesting arrangements and all data to be stored in database vaults accessible by pre-authorised system users.

Paper 16: Nanoscale Electronics –Printed RFID for Tax Stamps

Philip Hudson and Scott White, Nano ePrint

Nano ePrint is a new concept in printed micro-circuitry using optical manipulation by microstructures. Instead of building up electronic devices by vertical stacking arrangements (as transistors are manufactured today) nano ePrint allows them to be printed on flexible substrates such as paper.  Although still at the development stage in Manchester University, UK, it is hoped that a working device should be available by the time of the next Tax Stamp Forum and it will take the form of an RFID element on a tax stamp.

Using holographic embossing technology, it is planned to make touch sensitive labels for brand protection applications. The business model involves licensing existing holographic manufacturers already equipped to undertake the exacting production processes.

Paper 17: Digital Systems are not Limited to Track and Trace

Justin Picard, Advanced Track & Trace

Dr Picard noted that ideal tobacco supply chain security regimes have three goals:

1. Track & trace to monitor the movement of cigarettes
2. Verification that tax has been paid
3. Authentication of the product to prove it is not counterfeit.

He then described the STAMPS process (Secure Tracking & Authentication through Matrix Printing and Scanning). The system is as ingenious as its acronym and uses very high density 2D barcodes which lose information if any attempt is made to reprint or copy them.

Advanced Track & Trace generates the codes, sends them to the factory to be printed and stores the data on a server.

Chateaux wines are an early adopter of the technology.

Paper 18: Overt and Covert Security Solutions for Tax Stamps

Hugues Souparis, Hologram Industries S.A.

A new concept was presented in which visual authentication is combined with a unique random array to create a chaotic and encrypted code useful for tax stamps. 

Through a series of recent acquisitions, Hologram Industries has been able to bring together holographic security together with randomly printed colored dots in a way that can be read by a mobile phone and authenticated over a secured network.  This allows the visual authentication of a hologram (sensorial inspection) to be combined with digital track and trace using an iPhone.

Mr Souparis regretted that he was unable to add Apple to his portfolio of company acquisitions given that the iPhone is fast becoming the hand held reader of choice for inspection involving authentication of goods and documents.

Paper 19: CODENTIFY a New Approach to Fiscal Marking in the Digital Age

Jeannie Cameron, British American Tobacco.

Codentify is a pack level, digital marking system developed by Philip Morris. Ms Cameron noted that it was extremely unusual for a large corporation to endorse a technology developed by a competitor but that is exactly what is happening with Codentify. 

The system began to gain traction when track and trace (which involves tracking goods across national and international borders) was decoupled from tax verification which is only of interest within the taxing country. Thus, other systems could be used to enable customs officials to track shipments across border while Codentify fulfills the role of a tax stamp.

Ms Cameron felt that in view of the fact that only (!) 80 countries use paper tax stamps and they can have an adverse environmental effect, this method of digital tax marking will make physical tax stamps redundant in future.

Paper 20: The Role of Taggants and Covert Authentication Technologies in Security Tax Stamps

Jim Rittenburg, International Authentication Association

Dr Rittenburg, as current chairman of the IAA, reminded delegates that covert technologies have a critical role in securing the next generation of digital tax stamps because they provide a definitive means of authenticating the unique IDs printed either onto a product or a tax stamp. This is important to bear in mind as serialization has become an important addition to the conventional authentication technologies namely overt, covert, forensic and tamper evident.

Session 4  - END-TO-END SYSTEMS (CASE STUDIES)

Paper 21: The Effects of Issuing New Stamps in A High Duty Regime

Jimmy Pierce, Revenue Commissioners of Ireland.

Mr Pierce indicated that, in Ireland, revenue collection is completely divorced from enforcement and has no control over it.  If tax is not paid, then VAT at 21% is lost also and given that Ireland has the highest rate of tobacco excise duty in the EU, this loss can be considerable.

At €8.55 per pack in Ireland and only €2.15 in Estonia, there is inevitably an active trade in smuggling estimated at 20% of total sales. Tobacco tax stamps were introduced in Ireland in 1996 and upgraded in 2006 and in 2009.  Mr Pierce is a strong advocate for the use of physical stamps which currently have about 12 security features including UVv fluorescers and IR dots which can be read with hand held readers.

Paper 22: The Republic of Belarus’ Experience in Anti-Counterfeit Activities for Budget Revenues

Liudmila Vitkevich, Goznak of Belarus

Belarus suffers from an open customs border with Russia, making it a target for counterfeit and adulterated goods injurious to the wellbeing of the population and depriving the government of much needed tax revenue.  Therefore Belarus has introduced a system of ‘control marks’ which look like tax stamps but are applied to 23 product lines.  These ‘marks’ are paper labels printed with identifying indicia and security information that can only be visualized using a decoder. This decoder is widely available for the price of $1 and enables the public to see if what they are buying is authentic or not.  This marking system has increased tax receipts by a factor of 2.2 since it has been in place adding $US 800 million to state revenues over a 4 year period.

Paper 23: Mauritius – Implementation of Excise Stamps on Tobacco Products to Combat Smuggling and Counterfeiting of Cigarettes

Mooneswar Sookoo, Mauritius Revenue Authority.

Mauritius is an island in the Indian Ocean with a population of 1.2 million.  One billion sticks are consumed annually and MRA introduced a tax stamp system in December, 2008.  This has increased revenue by nearly 20% and this increase is attributed to the reduction in consumption of illicit cigarettes. This positive result is encouraging the Revenue Authority to consider applying tax stamps to alcoholic products.

Paper 24: California’s Comprehensive Tobacco Tax Evasion Programme: Lessons Learned and Ideas for the Future

Dennis Loper, California Distributors Association

Since 2005, California has had the most advanced tobacco tax stamp program in the USA. Over 100 stamping machines are deployed amongst distributors costing $150,000 each.  In addition to beefing up licensing arrangements and fines for trading in unauthorized tobacco, the old heat transfer stamps were replaced with serialized, counterfeit resistant, pressure sensitive stamps. A video was shown indicating the labor intensive method of applying stamps to cans of tobacco products not classified as cigarettes.

Paper 25: Digital Stamps for Beverages

Carlos Roberto de Oliveira, Brazilian Mint and Printing Works.

At the 1st Tax Stamp Forum held in Budapest, Hungary, Carlos Roberto announced the intention to launch in Brazil a system (SICOBE) of tax marking for beer, sodas and bottled water.  In this presentation, details were given of how the system work and the results obtained. Unlike alcohol and cigarettes whose price justifies a paper stamp, these products are marked with a code applied directly using high speed ink jet printers.

In 2009, 14 billion digital stamps were applied but this number is expected to increase to 40 billion in 2010 as more production lines are fitted with the printers.

Paper 26: New Controls for Domestically-Produced and Imported Alcohol in Kazakhstan

Zhomart Kazhmuratov, Banknote Factory of the National Bank of the Republic of Kazakhstan

A control mark for alcoholic products was put in place as recently as April, 2010.  A joint venture with Arjo, KBA Giori and SICPA resulted in a high tech stamp using a special paper and a hologram with three metal foil giving distinct color effects.  Copper, aluminium and a color changing ink provide the different colors in this OVD.

It is hoped that the fiscal results will be reported in the next Tax Stamp Forum expected to be held in USA in September 2011.