Needed: Secure system to track electronic nicotine products

Both in the context of the current economic crisis precipitated by COVID-19 – which is stretching state budgets beyond the breaking point – and as part of ongoing efforts to prevent the sale of electronic nicotine delivery systems (ENDS) products to minors, the debate in the California Legislature over the sale of ENDS products represents an opportunity for lawmakers to ensure that the state capitalizes on the opportunity to meaningfully addresses public health concerns.

Since the beginning of the legislative session in January, numerous news reports have covered the important decisions facing policymakers in California: how to set up a tax structure to deliver critically important revenue from the sale of ENDS products, and how policymakers can control which ENDS products are sold in California, with a specific emphasis on preventing the sale of products that intentionally target minors.

Secure stamping and comprehensive track-and-trace solutions play a critical role in preventing the distribution and sale of illicit products.

In both cases, effective implementation of the requirements created by statute rests on the simultaneous stand-up of a robust regulatory framework that allows officials to accurately track both the sale of ENDS products and the collection of associated taxes.

A useful guide can be found in the longstanding regulatory system governing the sale of cigarettes in California.

As of July 1, 2020, California applies a tax of $2.87 to each pack of cigarettes. Distributors are required to affix cigarette tax stamps — purchased from the California Department of Tax and Fee Administration (CDTFA) — to each package of cigarettes prior to distribution, in order to demonstrate that applicable tax has been paid.

The tax stamps themselves integrate “high-security inks and forensic security features that provide ready authentication for CDTFA enforcement activities,” according to the agency. “These security features provide multiple hurdles that counterfeiters must overcome–enabling the CDTFA to prevent tax stamp counterfeiting, as well as tax evasion and illicit cigarette trade.”

Secure stamping and comprehensive track-and-trace solutions play a critical role in preventing the distribution and sale of illicit products. In the context of both cigarettes and ENDS products, greater supply chain visibility can help identify and eliminate the importation and illicit sale of products from lower-tax states surrounding California.

California’s secure cigarette tax stamping program also houses the state’s Tobacco Product Directory (TPD) which is used by CDTFA and the Office of the State Attorney General to identify and manage the cigarette products authorized for sale in California. With the TPD, the state has discreet information on what types and quantities of products are being distributed and sold.

The ready authentication and clear visibility enabled by California’s existing cigarette tax stamp structure is essential to both protecting public health and securing critical state revenue.

First and foremost, the sale of illicit or illegal products poses an inordinate risk to public health. Specifically in the context of ENDS products, several states – including New York, Massachusetts, and Rhode Island – have enacted complete or partial bans on the sale of flavored products, which have been linked to higher rates of usage among young people.

As lawmakers in California seek to keep pace with their peers in other states, technology enabled, counterfeit-resistant stamps – like those already applied to cigarettes in the state –combined with a directory of authorized ENDS products provide a ready-made solution to differentiate legitimate ENDS products from illicit ones and help prevent the intrusion of products that pose an even greater risk to public health.

In addition to safeguarding public health, secure stamping and track and trace solutions are fundamental to ensuring the accurate collection of state revenue. The revenue value of California’s secure cigarette tax stamping program is made clear in reports from California State Auditor Elaine Howle.

Utilizing counterfeit resistant tax stamps applied to individual packs of cigarettes, officials in California track and trace approximately 600+ million packs of cigarettes annually, representing more than $2.1 billion in excise tax collections and tobacco settlement revenue.

According to Howle, since the adoption of secure tax stamps, nearly $100 million annually – previously lost to illicit activity – has been retained to state coffers.

Successfully standing up an ENDS regulatory structure that enables both the accurate collection of important tax revenue and creates effective safeguards against the sale of illegal or illicit ENDS products requires a robust, secure track-and-trace solution.

California’s existing tax stamp system for cigarettes provides a strong framework for the enforcement of ENDS regulations, and lawmakers would be well served to adopt the most effective elements of the cigarette tax stamp solution in order to protect vital revenue and prevent illicit activity in the ENDS marketplace.
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Editor’s Note: Alex Spelman is vic e president of  SICPA Product Security, an industry leader in the development of secure product track-and-trace solutions in North America.