Combating the Illicit Trade in Tobacco Products in California and at the National Level through Track and Trace (T&T) Mechanisms

Abstract

Track and trace (T&T) of tobacco products concerns recording and monitoring the physical locations through which the goods travel in the distribution channel. T&T systems for tobacco are intended mainly to combat tax evasion and illicit diversion of goods. This study examines current T&T systems in use, particularly in California, and compares the capabilities of state and federally administered T&T systems. State T&T systems can help fight some forms of illicit trade, depending on how extensive the tracking is, but are of little apparent use against several common forms of ITTP such as interstate trafficking. A federal T&T system would have some advantages over state systems, but might be less efficient and cost effective than a system of distributed record keeping by industry entities coupled with audit and enforcement access by federal authorities. We conclude that T&T for the U.S. tobacco market does not appear to be justified to increase federal excise revenues, and its potential value in combating interstate smuggling would depend on creating the capacity to put its capabilities to practical use at the state level.

Keywords: ITTP, tobacco, enforcement, excise taxes, track and trace, tax stamp

JEL Classification: K42, I18, H26, H71