Alcohol and Tobacco Tax and Trade Bureau Illicit Tobacco Trade Amy Greenberg Assistant Director, Regulations and Rulings Division July 12, 2012

TTB Authority Collect Federal excise taxes on tobacco products. Regulate, for purposes of collecting the tax, the operations of manufacturers and importers of tobacco products and processed tobacco and of export warehouse proprietors. 2

3 TTB Responsibilities Permits — Required for manufacturers, importers, and export warehouse proprietors Bonds – Required for manufacturers and export warehouse proprietors Records and Reports – Submission of monthly operational and other reports and maintenance of certain records required for manufacturers, importers, and export warehouse proprietors Audits and Inspections — Periodic audits and inspections by field personnel Certain Package, Mark, Label, and Notice Requirements

Federal Permits Manufacturer of Tobacco Products193 Manufacturer of Processed Tobacco30 Importers of Tobacco Products486 Importers of Processed Tobacco22 (161) Export Warehouse Proprietors80 TOTAL811 4

Federal Excise Taxes 5 Cigarettes - small$ / 1,000 Cigarettes - large$ / 1,000 Cigars – small$ / 1,000 Cigars – large52.75 % of sale price $ max / cigar Chewing tobacco$ / pound Snuff$ 1.51 / pound Pipe tobacco$ / pound Roll-your-own tobacco $ / pound

Public Reports April 2012 – Government Accountability Office Report Tobacco Taxes: Large Disparities in Rates for Smoking Products Trigger Significant Market Shifts to Avoid High Taxes March 2011 – Government Accountability Office Report Illicit Tobacco: Various Schemes Are Used to Evade Taxes and Fees February 2010 – Department of the Treasury Report to Congress on Federal Tobacco Receipts Lost Due to Illicit Trade and Recommendations for Increased Enforcement 6

2010 Department of Treasury Report Traceability of products Penalties Resources “Closed system” Access to machinery Internet sales Tribal lands 7

See GAO Report, March GAO Report Typical Illicit Trade Schemes ImportSmuggling genuine or counterfeit products Purchasing products from foreign Internet Websites w/o payment of tax ExportDiverting export-only products into the U.S. market ManufactureManufacturing without a permit Underreporting production Wholesale/DistributionPurchasing products from wholesaler in one state for transport to and sale in lower-tax state RetailPurchasing products from retailer in one state for transport to and resale in lower-tax state Purchasing products from domestic Internet Websites w/o payment of tax 8

2012 GAO Report Shifts in Market Due to Taxes Shift from small cigars to large cigars Tax on small cigars - $50.33 per 1,000 Tax on large cigars – % of sale price with maximum of $ per 1,000 Shift from roll-your-own tobacco to pipe tobacco Tax on RYO - $24.78 per pound Tax on pipe tobacco - $2.83 per pound 9

Pipe Tobacco and Roll-Your-Own Tobacco Removals (in pounds) 10

Processed tobacco 27 CFR Processed tobacco. “ …the processing of tobacco does not include the farming or growing of tobacco or the handling of tobacco solely for sale, shipment, or delivery to a manufacturer of tobacco products or processed tobacco, nor does the processing of tobacco include curing, baling, or packaging activities. For purposes of this definition, the processing of tobacco includes, but is not limited to, stemming (that is, removing the stem from the tobacco leaf), fermenting, threshing, cutting, or flavoring the tobacco, or otherwise combining the tobacco with non-tobacco ingredients. 11

Processed Tobacco Requirements and Reports A permit A monthly report of operations A “removal report” A manufacturer who removes processed tobacco for shipment to someone other than a person holding a TTB permit as a manufacturer of processed tobacco, a manufacturer of tobacco products, or an export warehouse proprietor must report such removal on TTB F by the close of the business day on the day following the removal. An importer who transfers or sells processed tobacco to someone other than a person holding a TTB permit as an importer or manufacturer of processed tobacco or tobacco products or as an export warehouse proprietor must report such sale or transfer on TTB F by the close of the business day on the day following the transfer or sale 12

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Current themes New and non-traditional products RYO Machines (Map-21) Processed tobacco Interagency Cooperation/Collaboration 14

CONTACT: AMY GREENBERG ASSISTANT DIRECTOR, REGULATIONS AND RULINGS DIVISION ALCOHOL AND TOBACCO TAX AND TRADE BUREAU (TTB) U.S. DEPARTMENT OF TREASURY 1310 G ST. NW, SUITE 200E WASHINGTON, DC PHONE: (202) FAX: (202)