Preventing and Reducing 

Illicit Tobacco Trade 

in the United States

National Center for Chronic Disease Prevention and Health Promotion 

Office on Smoking and Health

3

Executive Summary ..............................................................................................................5

Overview ...............................................................................................................................................................................5

Background ...........................................................................................................................................................................5

How this Report Was Developed ...........................................................................................................................................5

Key Findings..........................................................................................................................................................................6

Key Conclusions....................................................................................................................................................................6

Introduction and Background ...................................................................................................7

Terminology .........................................................................................................................................................................7

Measuring Tax Avoidance and Evasion..................................................................................................................................7

Extent of Tax Avoidance and Evasion.....................................................................................................................................8

Determinants of Tax Avoidance and 

Evasion in the United States................................................................................................................................................10

Tax Harmonization...............................................................................................................................................................14

Potential Impact of Tax Harmonization......................................................................................................................15

Measures to Prevent and Reduce Illicit Trade ............................................................................. 17

Identifying Relevant Measures ...........................................................................................................................................17

Overarching Elements of Comprehensive Approach to Eliminate Illicit Trade ......................................................................19

Comprehensive Federal Approach ............................................................................................................................19

Comprehensive State/Local Approach ......................................................................................................................21

Potential Impact of Comprehensive Approaches to Eliminate Illicit Trade .................................................................22

Individual Elements of a Comprehensive Approach to Reduce Illicit Trade ........................................... 25

Federal Track-and-Trace System..........................................................................................................................................25

Potential Impact of Track and Trace...........................................................................................................................28

State Measure: Three-Legged Stool (Licensing, Product Markings, and Enforcement).......................................................28

Licensing ..................................................................................................................................................................28

Tax Stamps and Other Product Markings ..................................................................................................................29

Federal and State Public Education Efforts ..........................................................................................................................33

Potential Impact of Public Education.........................................................................................................................34

Tribal Tobacco Policies ........................................................................................................................................................34

Potential Impact of Policies Addressing Tribal Sales .................................................................................................38

Enhancing Surveillance and Evaluation ...............................................................................................................................39

Conclusions...................................................................................................................... 41

References....................................................................................................................... 43

Table of Conten
4

Preventing and Reducing Illicit Tobacco Trade in the United States 

Centers for Disease Control and Prevention
5

Overview

This executive summary abridges the Centers for Disease Control and Prevention (CDC) report, Preventing 

and Reducing Illicit Tobacco Trade. The purpose of the report is to provide a brief assessment of illicit tobacco 

trade in the United States and options at different levels of government for preventing and reducing these tax 

avoidance and evasion activities. 

Background

Tobacco use is the leading cause of preventable disease and death in the United States, and results in more than 

480,000 premature deaths and nearly $300 billion in direct health care expenditures and productivity losses 

annually (US Department of Health and Human Services, 2014). Comprehensive tobacco control strategies 

include higher pricing, smoke-free policies, mass media campaigns, barrier-free access to cessation tools, and 

state and community programs to reduce the prevalence of tobacco use. 

Increasing the price of tobacco products is one of the most effective means of preventing tobacco use, 

particularly among price-sensitive populations, such as youth (Chaloupka et al., 2012). Illicit tobacco trade 

(illicit trade) can undermine the effectiveness of raising tobacco prices by increasing the accessibility and 

affordability of tobacco products (Joossens and Raw, 2012). An estimated 8% to 21% of the approximately 264 

billion (in 2014) (Maxwell, 2015) cigarettes consumed in the United States avoid or evade taxes, which equates 

to $2.95 billion to $6.92 billion in lost local and state revenues annually (National Research Council [NRC] and 

Institute of Medicine [IOM], 2015). 

Globally, the illicit tobacco market is dominated by smuggling across international borders. However, in the 

United States, illicit trade primarily occurs when cigarettes are bought in jurisdictions with lower or no excise 

taxes for individual consumption (tax avoidance) or bought in low-tax jurisdictions and resold in high-tax 

jurisdictions, often through larger, organized crime efforts (tax evasion). 

How this Report Was Developed

This report was compiled by a team of subject matter experts and researchers working together with the 

Tobacconomics program at the University of Illinois at Chicago. To avoid duplication of effort with the recent 

NRC/IOM report, Understanding the U.S. Illicit Tobacco Market: Characteristics, Policy Context, and Lessons 

from International Experiences, this report summarizes key literature, but refers the reader to the NRC/IOM 

report for additional detail. 

Lead Author

Frank J. Chaloupka, PhD, Department of 

Economics and Institute for Health 

Research and Policy, School of Public 

Health, University of Illinois at Chicago

Co-Authors

Sarah Matthes Edwards, MSPH, Centers for 

Disease Control and Prevention, Office on 

Smoking and Health

Hana Ross, PhD, University of Cape Town, 

Cape Town, South Africa

Megan Diaz, MA, Institute for Health 

Research and Policy, School of Public 

Health, University of Illinois at Chicago

Marin Kurti, MA, Rutgers University School 

of Criminal Justice

Xin Xu, PhD, Centers for Disease Control and 

Prevention, Office on Smoking and Health

Mike Pesko, PhD, Weill Cornell Medical 

College

David Merriman, PhD, Institute of 

Government and Public Affairs and 

Department of Public Administration, 

University of Illinois, Chicago

Hillary DeLong, JD, Institute for Health 

Research and Policy, School of Public 

Health, University of Illinois at Chicago

Executive Sum
6

Preventing and Reducing Illicit Tobacco Trade in the United States 

Centers for Disease Control and Prevention

Key Findings

• Significant increases in state and local tobacco taxes generate reductions in tobacco use and raise tobacco

tax revenues for the jurisdiction, despite the tax avoidance and evasion that results from significant tax and 

price differentials in the United States. 

• Preventing and reducing illicit tobacco trade may increase the health and economic benefits of raising unit

prices of tobacco products, including further decreasing tobacco use, decreasing health costs, decreasing

economic costs, and decreasing federal spending.

• A number of countries around the world, ranging from developing to developed countries, have

implemented measures to combat illicit tobacco trade.

• A comprehensive approach at the national level to curb illicit trade includes

» Enhancing coordination and enforcement efforts and strengthening penalties for those engaged in 

illicit tobacco trade.

» Implementing a track-and-trace system. 

» Conducting public education.

• Countries successful in curbing illicit trade have prioritized this issue across government and used a

comprehensive approach comprising all measures that are relevant to their situation.

• A number of state, local, and tribal jurisdictions have implemented measures to prevent and reduce illicit

tobacco trade; these measures could be implemented in other states, municipalities, and tribes.

• A comprehensive approach at state and local levels to curb tax evasion includes

» Enhancing coordination and enforcement efforts and strengthening penalties for those engaged in 

illicit tobacco trade. 

» Adopting a “three-legged stool” strategy comprising licensing and enforcement (and associated 

penalties) of tobacco supply and distribution chain, tax stamps, and other product markings. 

» Conducting public education.

» Implementing policies for sale of tobacco products on tribal lands. 

• Tax harmonization, an intervention to lessen disparities in interstate tax rates across US states, would lead

to increased revenues, increased cessation and reduced tobacco consumption, lower uptake among youth,

and reduced federal spending on tobacco-related conditions and diseases through Medicaid, Medicare, and

other public health insurance programs if it raised taxes in low-tax states.

• Comprehensive tobacco prevention and control practices, including regulation, are effective in reducing

death and disease caused by tobacco. Implementing measures to reduce illicit trade should not impede

continued efforts to put effective, evidence-based tobacco control and regulatory interventions in place in

the United States.

Key Conclusions

Governments that have adopted and implemented some combination of enhanced coordination, enforcement, 

and penalties; track-and-trace systems; licensing; high-tech tax stamps; tribal tobacco sales policies; public 

education efforts; and tax harmonization have been successful in curbing illicit tobacco trade. The more 

comprehensive and coordinated approaches have been more effective in addressing this problem. A 

collaborative, comprehensive approach at the federal, state, local, and tribal levels could similarly reduce the US 

illicit tobacco trade problem and strengthen existing and future comprehensive tobacco prevention and control 

work. 
7

Introduction and Back

Extensive research demonstrates the effectiveness of tax and price policies in reducing tobacco use and its 

health and economic consequences (International Agency for Research on Cancer [IARC], 2011; Chaloupka 

et al., 2012). IARC and the World Bank have concluded that illicit tobacco trade limits the effectiveness of 

increased tobacco product taxes in reducing tobacco use and its consequences, and costs governments 

millions of dollars in lost revenue (IARC, 2011; World Bank, 1999). Sizable illicit tobacco markets can 

undermine the effectiveness of other tobacco control policies, including limits on youth access to tobacco 

products, packaging and labeling policies, and strong product regulations, while fostering crime and adversely 

affecting compliant retailers (NRC and IOM, 2015). 

Terminology 

Different entities are involved in addressing illicit 

tobacco, and the language used in the public health 

field may differ from that used in regulatory, law 

enforcement, or revenue fields. 

In its 2010 report on this topic, the US Department 

of Treasury Tobacco Tax Bureau (TTB) noted that, 

“The terms ‘smuggling,’ ‘tax evasion,’ ‘diversion,’ ‘illicit 

trade,’ and ‘trafficking’ are often used interchangeably 

although these terms may also have very specific 

and distinct meanings in certain circumstances” (US 

Department of the Treasury, 2010). The Treasury used 

all five terms in its report to describe activities where 

tobacco products are manufactured and/or distributed 

outside of legal channels and therefore result in tax 

evasion; for consistency and clarity, this report takes a 

similar approach. 

Because of public health’s interest in monitoring 

tobacco purchasing patterns via various surveillance 

and research tools, the term “tax avoidance” is used 

to distinguish between individual behavior and 

larger-scale criminal activity such as purchasing 

large quantities of tobacco products in lower-tax 

jurisdictions for resale in higher-tax jurisdictions 

(tax evasion, also referred to as “bootlegging”). 

Tax avoidance refers to individuals buying cheaper 

tobacco products in a neighboring jurisdiction, for 

example tribal sales or a nearby state with lower 

taxes, and bringing them to their home jurisdiction 

for personal consumption—a legal activity unless 

statutory limits on purchases are exceeded. 

Measuring Tax Avoidance and Evasion

Given their largely illicit nature, tobacco tax avoidance 

and evasion are difficult to measure, and the mix 

of activities they comprise changes over time in 

response to tobacco control policies, enforcement 

efforts, tobacco industry behavior, and other factors. 

Researchers have developed multiple approaches 

to assessing the extent of and trends in tobacco tax 

avoidance and evasion. These different approaches 

fall into three broad categories (IARC, 2011; NRC and 

IOM, 2015; Ross, 2015): 

•	 Gap analyses: comparisons of survey data on 

self-reported consumption estimates to data from 

official tax-paid sales measures; econometric and 

other modeling that compares predictions of total 

consumption to tax-paid sales after accounting for 

factors that affect the demand for tobacco products; 

and comparisons of reported tobacco product 

exports to reported imports.

•	 Pack inspection measures: assessment of packs for 

markings indicating that taxes have been paid and/or 

that appropriate warning labels, other pack markings, 

and other features reflecting compliance with relevant 

tax and tobacco control policies are present. These 

are conducted through empty pack collections, 

pack swap or pack return surveys, and interviewer 

assessment of packs during face-to-face interviews. 

•	 Survey methods: data collection from tobacco users 

about where they purchase tobacco products, what 

types of products they purchase, prices paid, and 

other factors that may reflect tax avoidance and 

evasion, as well as surveys of customs and law 

enforcement officials, public health authorities, 

tobacco industry representatives, tobacco control 

researchers, and other experts who can provide 

informed opinions about the extent of tax avoidance 

and evasion in a given market.

Definition of Illicit Trade

In the Protocol to Eliminate Illicit Trade in Tobacco 

Products, the World Health Organization (WHO) defines 

illicit trade as

“any practice or conduct prohibited by law and which 

relates to production, shipment, receipt, possession, 

distribution, sale or purchase, including any practice 

or conduct intended to facilitate such activity.” (Article 

1.6; WHO, 2012)
8

Preventing and Reducing Illicit Tobacco Trade in the United States 

Centers for Disease Control and Prevention

It is important to note that each approach is subject 

to a variety of limitations and potential biases, and 

that a combination of several approaches is needed 

to understand the magnitude of the problem and the 

activities involved (Ross, 2015; NRC and IOM, 2015; 

IARC, 2011). Finally, nearly all evidence on tobacco 

tax avoidance and evasion is for cigarettes; very few 

estimates are available for other tobacco products.

Extent of Tax Avoidance and Evasion

Globally, recent estimates suggest that 10% to 12% 

of cigarette consumption is illicit. The extent of the 

problem varies widely across countries (Joossens et 

al., 2009; Euromonitor International, 2015). Contrary 

to tobacco industry arguments (Joossens et al., 2009), 

the market share for illicit cigarettes at the country 

level appears to have little relationship to tax and price 

levels (Figure 1). Illicit cigarettes account for a greater 

share of consumption in countries with relatively low 

taxes and prices and account for a smaller share of 

consumption in markets with relatively high cigarette 

taxes and prices. 

Illicit Trade Misperceptions

Market share for illicit cigarettes at the country level 

appears to have little relationship to tax and price 

levels. Illicit cigarettes account for a greater share of 

consumption in countries with relatively low taxes and 

prices and a smaller share of consumption in markets 

with relatively high cigarette taxes and prices.

No credible evidence supports the contention that the 

implementation of other tobacco control measures 

(e.g., smoke-free policies, media campaigns, cessation 

support, state and community programs) causes 

an increase in illicit tobacco trade (NRC and IOM, 

2015). Instead, non-price factors, such as strength of 

governance, extent of corruption, and the availability 

of informal distribution networks appear to be more 

important determinants of the size of the illicit tobacco 

market; Figure 2 shows the clear association between 

the illicit cigarette market share and Transparency 

International’s “corruption perceptions index.”

Estimates of the extent of tax avoidance and evasion 

in the United States vary substantially depending 

on the source and the approach used. In 2013, 

Euromonitor International estimated that illicit 

Figure 1. Illicit Cigarette Market Share and Cigarette Prices, by Country

Algeria 

Argentina 

Australia 

Austria 

Azerbaijan 

Belarus 

Begium 

Bolivia 

Bosnia 

Brazil 

Bulgaria 

Cameroon Canada 

Chile 

China 

Colombia 

Costa Rica 

Croatia 

Denmark 

Dominican Republic 

Ecuador 

Egypt 

Estonia 

Finland 

France 

Georgia 

Germany 

Greece 

Guatemala 

Hungary 

India 

Indonesia 

Iran 

Ireland 

Israel 

Italy 

Japan 

Kazakhstan 

Kenya 

Latvia 

Lithuania 

Malaysia 

Mexico 

Morocco Netherlands 

New Zealand 

Nigeria 

Norway 

Pakistan 

Peru 

Philippines 

Poland 

Portugal 

South Korea 

Turkey 

Russia 

Saudi Arabia 

Serbia 

Singapore 

Slovakia 

Slovenia 

South Africa 

Spain 

Sweden 

Switzerland 

Thailand 

Macedonia 

Tunisia 

Romania 

Ukraine 

UAE 

United Kingdom 

USA 

Uruguay 

Uzbekistan 

Venezuela 

Vietnam 

y = -0.0076x + 0.1752 

R 2 = 0.04959 

0 

5 

10 

15 

20 

25 

30 

35 

40 

45 

50 

0 2 4 6 8 10 12 14 

Illicit Trade Share as % of Legal Cigarette Consumption 

Price per Pack, USD 

Sources: Created from data in Euromonitor International, 2015 (illicit trade percentage), and WHO, 2010 (price).
9

Preventing and Reducing Illicit Tobacco Trade in the United States 

Centers for Disease Control and Prevention

cigarettes accounted for 7.3% of US consumption and 

that the share had been rising over time, from as low 

as 2.1% in 1997 (Figure 3) (Euromonitor International, 

2015). Likewise, in its recent report on the US illicit 

tobacco market, the National Research Council (NRC 

and IOM) estimated that the tax avoidance and 

evasion accounted for 8.5% of cigarette consumption 

in 2010-2011 using data from the Tobacco Use 

Supplement to the Current Population Survey [TUSCPS] (NRC and IOM, 2015). NRC similarly concluded 

that the extent of tax avoidance and evasion had been 

rising slowly over time (Figure 4). These estimates 

are consistent with those from surveys of US cigarette 

smokers that collect information on tax avoidance 

and evasion behaviors (e.g., purchasing cigarettes 

in lower-tax jurisdictions or purchasing smuggled or 

other illegal cigarettes for personal consumption). For 

example, the International Tobacco Control Policy 

Evaluation Project’s US (ITC-US) survey that found 

that 7.3% of smokers reported purchasing behaviors 

that likely reflected tax avoidance or evasion in 2010-

2011, up somewhat from earlier survey waves (Figure 

5) (Guindon et al., 2014). 

Figure 3. Illicit Cigarette Market Share Trends, United 

States (Euromonitor International)

7.3% 

2.1% 

0 

1 

2 

3 

4 

5 

6 

7 

8 

9 

10 

97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 

Illicit Cigarette Market Share, % 

Year

Source: Created from data in Euromonitor International, 2015.

Figure 2. Illicit Cigarette Market Share and Corruption, by Country

Algeria 

Argentina 

Australia 

Austria 

Azerbaijan 

Belarus 

Belgium 

Bolivia 

Bosnia 

Bulgaria Brazil 

0.16 

Canada 

Chile 

China 

Colombia 

Costa Rica 

Croatia 

Denmark 

Dominican Republic 

Ecuador 

Egypt 

Estonia 

Finland 

France 

Georgia 

Germany Greece 

Guatemala 

Hungary 

India 

Indonesia 

Iran 

Ireland 

Italy Israel 

Kazkhstan Japan 

Kenya 

Latvia 

Malaysia Lithuania 

Mexico 

Morocco Netherlands 

New Zealand 

Nigeria 

Norway 

Pakistan 

Peru 

Philippines 

Poland 

Portugal 

South Korea 

Romania 

Russia 

Saudi Arabia 

Serbia Singapore 

Slovakia 

Slovenia 

South Africa 

Spain 

Sweden 

Switzerland 

Thailand 

Macedonia 

Tunisia 

Turkey 

Ukraine 

United Arab Emirates 

United Kingdom 

United States 

Uruguay 

Uzbekistan 

Venezuela 

Vietnam 

y = -0.0131x + 0.2028 

R2 = 0.08146 

0 

5 

10 

15 

20 

25 

30 

35 

40 

45 

50 

1 2 3 4 5 6 7 8 9 10 

Illicit Trade Share as a % of Total Cigarette Volume

Transparency Indexa

a

 The Transparency Index indicates a country’s level of corruption, with lower numbers equaling more corruption.

Source: Created from data in Euromonitor International, 2015 (illicit trade volume), and Transparency International, 2011. 
10

Preventing and Reducing Illicit Tobacco Trade in the United States 

Centers for Disease Control and Prevention

Figure 4. Illicit Cigarette Market Share Trends, United States 

(National Research Council and Institute of Medicine)

8.5%

3.2%

0

1

2

3

4

5

6

7

8

9

10

92-93 95-96 98-99 01-02 03 06-07 10-11

Illicit Cigarette Market Share, %

Year

Source: Adapted from National Research Council and Institute of Medicine, 2015.

Figure 5. Illicit Cigarette Market Share Trends, United 

States (International Trade Commission)

7.3%

5.3%

0

1

2

3

4

5

6

7

8

9

10

02 03 04 05-06 06-07 07-08 08-09 10-11

Illicit Cigarette Market Share, %

Year

Source: Guindon et al., 2014.

Illicit Trade Estimate

An estimated 7%-21% of cigarettes consumed in the 

United States are purchased illicitly; this costs state 

governments billions in lost tax revenues.

The National Research Council estimated that tax 

avoidance and evasion account for 1.24 to 2.91 billion 

packs of cigarettes annually (NRC and IOM, 2015).

Recent estimates based on pack inspection 

approaches, however, seem to suggest that the 

extent of cigarette tax avoidance and evasion in the 

United States could be much larger, accounting for 

as much as one in five packs consumed. Fix and 

colleagues (2014) estimated that 20% of cigarette 

packs purchased in 2009 and 21% of packs purchased 

in 2010 did not generate state taxes in respondents’ 

states of residence, based on their collection of 

packs from ITC survey respondents. Similarly, Barker 

and colleagues (in progress) estimated that 21% of 

cigarette packs reflected tax avoidance or evasion, 

based on over 2,100 discarded packs collected in the 

Bridging the Gap project’s 2012 nationwide litteredpack collection. 

The reality is likely somewhere in between, given the 

likelihood that the low-end estimates understate the 

extent of the problem, while the high-end estimates 

are likely to overstate it.

Either way, the problem is significant. NRC estimates 

that tax avoidance and evasion account for 1.24 to 

2.91 billion packs of cigarettes annually in the United 

States (NRC and IOM, 2015), which lessens the full 

impact of increased tobacco prices as a tobacco 

prevention intervention.

Determinants of Tax Avoidance and 

Evasion in the United States

At the international level, smuggling, including 

counterfeiting, is the main form of illicit trade, 

and weak governance (e.g., corruption, poor tax 

administration, weak border controls) is the primary 

driver of this problem. In contrast, in the United States, 

cross-border activity is the main form of illicit trade 

(both individual avoidance and larger-scale evasion) 

and the differences in taxes across state and local 

jurisdictions is the main driver of this activity (NRC and 

IOM, 2015). Significant differences in taxes and prices 

across proximate jurisdictions have been shown to 

lead tobacco users in higher-tax jurisdictions to avoid 

these higher taxes by purchasing tobacco products 

in lower-tax jurisdictions; these differences also make 

bootlegging of tobacco products from lower-tax to 

higher-tax jurisdictions a highly profitable activity 

(Figure 6). State cigarette taxes vary from a low of 17 

cents per pack in Missouri to a high of $4.35 per pack 

in New York, with an average excise tax of $1.60 and 

retail pack price of $5.98 (as of June 2015); significant 

local cigarette taxes add to the variability. In Chicago, 

for example, the combined federal ($1.01) state ($1.98), 

county ($3.00) and city ($1.18) taxes amount to $7.17 

per pack, while combined taxes on cigarettes sold in 
11

Preventing and Reducing Illicit Tobacco Trade in the United States 

Centers for Disease Control and Prevention

nearby Indiana are $2.06 per pack. Moreover, given 

the sovereign status of Native American tribes, tobacco 

products sold on Native American reservations often 

do not include state or local taxes, potentially creating 

additional opportunities for tax avoidance and evasion. 

As a result, some US jurisdictions are a significant 

source of illicit tobacco products, capturing additional 

revenues at the expense of other jurisdictions that 

face lost revenue. Some of those latter jurisdictions 

also fail to realize health care and economic benefits 

associated with reduced tobacco use that can be 

expected to accrue from higher taxes. These benefits 

are clearly illustrated by the NRC’s state-by-state 

estimates of the differences between adjusted selfreported cigarette consumption and tax-paid sales in 

2010-2011 (Figure 7). Some states are net “exporters” 

of cigarettes, selling many more tax-paid cigarettes 

than are consumed by state residents, while others are 

net “importers” of cigarettes, consuming many more 

cigarettes than are sold with the relevant state and 

local taxes. In general, exporting states are low-tax 

states, either absolutely (e.g., Virginia, South Carolina, 

and North Dakota) or relative to others in their region 

(e.g., New Hampshire, Delaware, and California), 

while “importing” states are generally high-tax states 

(e.g., New York and Rhode Island) or states with taxes 

that are significantly higher than taxes in neighboring 

states (e.g., Ohio and Kansas). Additionally, some (but 

not all) states with large populations concentrated 

near Native American reservations without effective 

controls on tribal sales are among the largest 

“importing” states (e.g., Arizona, New Mexico, New 

York, and Washington). 

The extent of the problem is even greater in some 

localities, in part because of significant differences 

between local taxes and those of nearby areas. For 

example, one recent littered-pack study for five 

large Northeastern cities estimated that almost half 

of cigarettes consumed in New York City, which has 

relatively high state and local taxes ($5.85 total), had 

avoided or evaded state and local taxes (Davis et 

al., 2014), while another noted higher levels of illicit 

tobacco in socioeconomically deprived areas of the 

city (Kurti et al., 2013; Kurti et al., 2015).

As a result, some states benefit economically from 

illicit tobacco trade, generating considerably more 

tax revenue by selling cigarettes to individuals 

avoiding their home state or local taxes or to more 

organized efforts where they are resold elsewhere 

to evade state and local taxes in the jurisdiction in 

which they are consumed, while others lose revenues 

from consumption of cigarettes that were legally 

sold and taxed in other jurisdictions. In 2010-2011, 

Figure 6. State Cigarette Excise Tax Rates, United States, April 2015

AZ 

WY 

OR 

ID 

MT 

UT 

NV 

WA 

CA 

TX 

AR OK 

ND 

LA 

KS 

IA NE 

SD 

CO 

NM 

MO 

MN 

TN 

AL 

KY 

OH 

MS 

MI

IN 

GA 

FL 

PA 

ME 

NY 

WV VA 

NC 

SC 

VT 

D.C. 

NJ 

MD 

DE 

NH 

MA 

IL 

WI 

Chicago

$6.16 

NYC 

$5.85

CT 

RI 

AK 

Anchorage

$3.45 

HI 

>$3.00 per pack 

$2.00-$2.99 per pack 

$1.50-$1.99 per pack 

$1.00-$1.49 per pack 

50-99 cents per pack 

<50 cents per pack 

Source: Campaign for Tobacco-free Kids, 2015.
12

Preventing and Reducing Illicit Tobacco Trade in the United States 

Centers for Disease Control and Prevention

NRC estimates that New York and Washington were 

the biggest “losers” from cigarette tax avoidance and 

evasion, with estimated revenue losses of nearly $1.4 

billion and over $370 million, respectively, while 

California and South Carolina gained almost $150 

million and $110 million in revenues, respectively. 

Overall, despite gains in some states, the NRC estimates 

that gross state and local tax revenue from cigarette tax 

avoidance and evasion amount to a loss of $3 billion to 

$7 billion annually. The total gross tobacco tax revenue 

losses are almost certainly higher, given similarly 

sizable differences in other tobacco product taxes and 

prices across states and localities and the likely tax 

avoidance and evasion caused by these differentials.

Despite the illicit trade that results from significant tax 

and price differentials in the United States, states and 

localities can still generate reductions in tobacco use 

and increase tobacco tax revenues when they increase 

tobacco taxes. The sizable state and city cigarette tax 

increases in New York City, for example, contributed to 

sharp reductions in youth and adult smoking prevalence 

over the past 2 decades (Figure 8) while generating 

greater state and local tax revenues following each tax 

increase (Coady et al, 2012). Every state cigarette tax 

increase of 25 cents or more per pack has generated 

a significant increase in cigarette tax revenues, despite 

any increase in tax avoidance and evasion, as shown in 

Table 1 (Chaloupka and Huang, 2015). 

Figure 8. Cigarette Taxes and Youth/Adult Smoking 

Prevalence Rates, New York City, 1997-2011

0

5

10

15

20

25 Adult Smoking

Youth Smoking

201320112009200720052003200119991997

Total Cigarette Tax Per Pack, $

Smoking Prevalence, %

0

1

2

3

4

5

6

7

8

Excise Tax

Year

Source: Schroth, 2013. Reprinted with permission.

Figure 7. State Cigarette Importing/Exporting Shares, 2010-2011 

High: >30%

Importing States

Exporting States

Moderate: 10%-29%

Low: <10%

High: >30%

Moderate: 10%-29%

Low: <10%

AZ

WY

OR

ID

MT

NV

WA 

CA

TX

AR OK

ND

LA

IA NE

SD

CO

NM

MO

MN

TN

AL

KY

OH 

MS

MI

IN

GA 

FL 

PA 

ME 

NY 

WV VA 

NC 

SC 

VT 

D.C. 

NJ 

MD 

DE 

NH 

WI MA 

CT 

RI 

UT

KS

IL

AK 

HI 

Note: “Importing states” are those where some consumers avoid or evade taxes by obtaining their tobacco products from states or federal tribal lands where 

taxes are lower. “Exporting states” are those where some tobacco products intended for consumption within that state are purchased by consumers from 

outside of the state to avoid or evade their “home” taxes.

Source: Created from data in National Research Council and Institute of Medicine, 2015. 
13

Preventing and Reducing Illicit Tobacco Trade in the United States 

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Table 1. State Experiences With Large Cigarette Tax Increases, 2003-2013

State

Effective 

Date

Tax Increase, 

$ per pack

New State 

Tax Rate, $

per pack

State Pack 

Sales 

Change, %

Nationwide 

Pack Sales 

Change, %

Revenue 

Increase, 

%

Gross New 

Revenues, $ 

(millions)

Alaska 1/1/05 0.60 1.60 -23.2 -4.2 22.8 9.3

Arkansas 3/1/09 0.56 1.15 -27.8 -10.2 33.5 46.5

Arizona 12/8/06 0.82 2.00 -32.5 -4.4 13.6 44.5

Colorado 1/1/05 0.64 0.84 -24.3 -4.2 220.2 131.0

Delaware 7/31/07 0.60 1.15 -35.1 -4.9 35.1 31.8

Washington, DC 10/1/08 1.00 2.00 -25.9 -7.0 57.3 13.2

Florida 7/1/09 1.00 1.339 -27.4 -8.4 193.2 828.8

Hawaii 7/1/09 0.60 2.60 -11.3 -8.4 14.5 15.1

Illinois 6/24/12 1.00 1.98 -31.2 -2.3 39.0 229.2

Iowa 3/15/07 1.00 1.36 -30.6 -4.7 140.2 128.0

Maine 9/19/05 1.00 2.00 -12.3 -1.8 76.5 71.5

Maryland 1/1/08 1.00 2.00 -27.1 -4.2 45.8 126.9

Massachusetts 7/1/08 1.00 2.51 -20.3 -5.3 32.2 137.2

Massachusetts 7/1/13 1.00 3.51 -15.0 -4.7 15.3 81.9

Michigan 7/1/04 0.75 2.00 -15.2 -1.7 28.1 238.9

Minnesota 8/1/05 0.75 1.23 -16.1 -1.8 160.7 258.4

Minnesota 7/1/13 1.60 2.83 -24.0 -4.7 56.0 204.1

Mississippi 5/15/09 0.50 0.68 -22.8 -9.5 188.3 88.9

Montana 5/1/03 0.52 0.70 -7.3 -2.9 259.8 30.5

Montana 1/1/05 1.00 1.70 -42.0 -4.2 36.5 18.8

New Jersey 7/1/03 0.55 2.05 -9.0 -2.3 26.6 157.4

New Mexico 7/1/03 0.70 0.91 -32.3 -2.3 191.8 39.2

New Mexico 7/1/10 0.75 1.66 -7.8 -2.6 67.5 37.5

New York 6/3/08 1.25 2.75 -15.2 -5.8 40.3 377.4

New York 7/1/10 1.60 4.35 -24.8 -2.6 18.8 244.6

Ohio 7/1/05 0.70 1.25 -20.6 -1.6 78.9 437.6

Oklahoma 1/1/05 0.80 1.03 -34.7 -4.2 98.2 81.6

Rhode Island 7/1/04 0.75 2.46 -18.7 -1.7 16.9 18.7

South Dakota 1/1/07 1.00 1.53 -25.8 -4.9 115.4 31.8

Rhode Island 4/10/09 1.00 3.46 -14.7 -11.1 15.1 17.8

South Carolina 7/1/10 0.50 0.57 +7.8a -2.6 434.2 116.8

Texas 1/1/07 1.00 1.41 -21.0 -4.9 191.7 1,003.7

Utah 7/1/10 1.005 1.70 -24.5 -2.6 85.0 47.0

Vermont 7/1/06 0.60 1.79 -15.2 -3.0 27.9 13.2

Washington 7/1/05 0.60 2.025 -8.4 -1.6 29.1 95.5

Washington 5/1/10 1.00 3.025 -20.5 -3.9 17.0 62.0

Wisconsin 1/1/08 1.00 1.77 -15.0 -4.2 93.9 286.0

a

 The increase in sales in South Carolina is largely due to a surge in sales in July 2010, before implementation of the state’s new tax rate in August 2010.

Source: Chaloupka and Huang, 2015. 
14

Preventing and Reducing Illicit Tobacco Trade in the United States 

Centers for Disease Control and Prevention

Tax Harmonization

Given that illicit tobacco trade in the United States 

largely is largely driven by inter-jurisdictional 

differences in taxes and prices, tax harmonization holds 

significant potential to dramatically reduce the scope 

of illicit trade. Tax harmonization is when jurisdictions 

agree to cooperate and work to equalize tax rates across 

their respective jurisdictions. Harmonization can be 

based on a percentage of excise tax in the price or a flat 

minimum value. It can use either an excise tax ceiling 

(i.e., requiring higher-tax jurisdictions to reduce taxes in 

order to align with lower-tax jurisdictions) or an excise 

tax floor (i.e., requiring minimum levels of taxation 

while also allowing jurisdictions to levy higher taxes). 

In practice, tax harmonization is complicated because 

it requires coordination among multiple governments 

across multiple jurisdictions with potentially 

competing interests. Difficulties in gaining support for 

an excise tax floor that would require a tax increase 

in lower-tax jurisdictions make harmonization with 

higher-tax jurisdictions more attractive; however, an 

excise tax ceiling that would require high-tax states 

to cut tobacco excise taxes could have adverse public 

health effects that may outweigh the positive effects 

of eliminating the illicit market. Tax harmonization 

agreements that set a high minimum floor, while 

more difficult to achieve, could reduce tax avoidance 

and tax evasion, increase revenues for governments, 

and ultimately decrease the health harms of tobacco 

by preventing uptake and cutting prevalence. As an 

intervention, tax harmonization is not included in the 

set of comprehensive strategies in this report because 

it is a fundamentally different approach that deals 

with the main driver of illicit trade in the United States 

(price differentials), rather than dealing with actual tax 

avoidance and evasion activities. 

Tobacco taxes vary greatly across jurisdictions in the 

United States. State and local taxes range from a low 

of 17 cents per pack in Missouri cities that do not 

levy local taxes, to $6.16 in Chicago (Figure 6). While 

harmonization of state taxes has not been tried in the 

United States, the federal government has used the 

threat of withholding various funds to encourage states 

to harmonize some tobacco and alcohol policies. In 

1992, for example, the Synar amendment required states 

to set the minimum legal purchase age for tobacco 

products at 18 years or older and to demonstrate 

minimum levels of retailer compliance or face the loss 

of a portion of their federal substance abuse prevention 

and treatment block grant funding (Substance Abuse 

and Mental Health Services Administration, 2015). 

The European Union (EU) has implemented a 

successful regional tax harmonization scheme that 

has reduced tax and price differences among its 

28 member states. The most recent EU tobacco tax 

directive was adopted in June 2011 and requires 

countries to implement cigarette excise taxes that 

account for at least 60% of the weighted average 

retail price for cigarettes (see Figure 9). The total 

excise tax must account for at least €90 per 1,000 

cigarettes, or €1.8 per pack of 20 cigarettes. Though 

several member states are still working towards this 

goal (Bulgaria, Lithuania, Czech Republic, Latvia and 

Hungary), most member states have achieved or 

exceeded requirement (Figure 10).

Figure 9. Cigarette Excise Tax as a Percentage of Retail Selling Price, EU Member States, January 1, 2015

0

10

20

30

40

50

60

70

80

AT ITIEHUHRFRFIESELEEDKDECZCYBGBE LT LU LV UKSKSISEROPTPLNLMT

Specific Ad Valorem

Percentage of Retail Selling Price

Country

Source: European Commission, 2015. Reprinted with permission.
15

Preventing and Reducing Illicit Tobacco Trade in the United States 

Centers for Disease Control and Prevention

Figure 10. Total Cigarette Excise Taxes per 1,000 Cigarettes, EU Member States, January 1, 2015

0

50

100

150

200

250

300

350

AT ITIEHUHRFRFIESELEEDKDECZCYBGBE LT LU LV UKSKSISEROPTPLNLMT

Euros

Country

Source: European Commission, 2015. Reprinted with permission.

Potential Impact of Tax Harmonization

A policy that reduces interstate tax and price 

differences by requiring minimum state taxes on 

tobacco products would address both tax avoidance 

(e.g., by reducing incentives for cross-border 

shopping) and tax evasion (e.g., by reducing the 

profitability of bootlegging). A minimum state 

cigarette tax of $1.60 per pack,a along with equivalent 

minimum for other tobacco product taxes, could be 

a feasible starting point, with periodic increases in 

the minimum tax levels over time to keep pace with 

inflation. 

The impact of a tax harmonization policy would vary 

across states. Low-tax states (those with a tax below 

the minimum required under tax harmonization) 

would see reductions in tax-paid sales of tobacco 

products, as the higher prices that result from the 

minimum taxes reduce cross-border purchases 

from tobacco users in nearby high-tax states and 

bootlegging of tobacco products from these lowtax states. The higher taxes and prices would also 

discourage tobacco use in these states, leading to 

increased cessation among current tobacco users, 

a $1.60 was chosen by the authors as the current average price per pack, 

such that roughly 50% of states’ taxes would increase to meet this average.

reduced uptake of tobacco use among young people, 

and reduced tobacco consumption among continuing 

users. The reductions in tobacco use would lead 

to improvements in public health in these states, 

reducing the deaths, diseases, and economic costs 

caused by tobacco use. 

Moreover, low-tax states would almost certainly see 

sizable increases in tobacco tax revenues, despite the 

reductions in tax-paid sales, given that the increases 

in taxes would be large relative to the reductions in 

sales.

High-tax states (those with taxes above the required 

minimums) would be likely to see an increase in taxpaid sales as the supply of illicit bootlegged tobacco 

products declines and the incentives for tobacco users 

to cross-border shop in other states are also reduced. 

At the same time, these states would likely see 

reductions in tobacco use from the general increase 

in tobacco product prices as a result of the drop in 

supply of illicit products and reduced opportunities 

for tax avoidance. These effects would likely be 

greatest among the most price-sensitive populations—

youth and people with low incomes. The increase 

in tax-paid sales in these states would lead to an 

increase in tobacco tax revenues, while the reductions 

in tobacco use would lead to reductions in the health 

and economic consequences of tobacco use.
16

Preventing and Reducing Illicit Tobacco Trade in the United States 

Centers for Disease Control and Prevention

As a result of a tax harmonization policy, federal 

spending on tobacco-related conditions and diseases 

through Medicaid, Medicare, and other public health 

insurance programs would eventually decline, given 

the reductions in tobacco use that would follow the 

general rise in tobacco product prices. This reduced 

federal spending on tobacco-related conditions and 

diseases could partially counter decreases in federal 

tobacco tax revenues that might occur, given the 

net reductions in overall tax-paid sales of tobacco 

products resulting from the higher taxes in current 

low-tax states and the reduced incentives for tax 

avoidance and evasion. Although increased longevity 

due to fewer people dying prematurely from tobacco 

use could somewhat attenuate these savings, given the 

evidence in the recent Congressional Budget Office 

(CBO) report, whether positive or negative, those 

health effects on the federal budget would be very 

small (CBO, 2012).
17

In this report, approaches and measures applicable to the US federal government will be discussed, followed 

by approaches and measures applicable to state, local, and tribal jurisdictions. Case examples from US states 

or municipalities, or other countries, highlight each measure. The potential impact of implementing these 

measures is described for each measure where possible. Considerations for federal, state and local actions 

to curb tax avoidance and evasion are offered as appropriate. The final section of the report provides a brief 

summary.

Identifying Relevant Measures 

National, state, and local governments have many 

options for curbing tobacco tax avoidance and 

evasion. Many of these measures are outlined in 

the Protocol to Eliminate Illicit Trade in Tobacco 

Products, the first and, to date, only protocol to the 

World Health Organization’s Framework Convention 

on Tobacco Control (FCTC) (WHO, 2012) and 

discussed in WHO’s Technical Manual on Tobacco 

Tax Administration (WHO, 2010). Brief definitions 

of common approaches are outlined in Table 2. 

This report identifies and describes a number of 

measures that have potential to reduce and prevent 

illicit trade in the United States. The overall approach 

of prioritizing enhanced coordination, enforcement, 

and penalties is appropriate at both federal and state/

local jurisdiction levels. Some measures are only 

appropriate at the federal level, while others are 

only appropriate at the state/local jurisdiction level. 

Several measures are appropriate at both the federal 

and state/local jurisdiction levels. These are indicated 

in the highlight box below and in the text in each 

section. 

Experiences in many countries, states, and other 

jurisdictions demonstrate that a comprehensive 

approach to address illicit tobacco markets is most 

effective. Table 3 highlights the approaches to 

addressing illicit trade taken by a selection of countries. 

As with other tobacco control strategies, the majority 

of these actions would be most effective as part of 

a comprehensive approach rather than as individual 

interventions. For the purposes of this report, a 

“comprehensive approach” refers to an approach that 

includes enhanced coordination, enforcement, and 

penalties at all levels of government, and the set of 

measures in the highlight box below. Furthermore, 

enforcement is a theme that runs through most 

interventions. 

Federal and State Measures and Case Studies Highlighted in this Report

Level of Government Measure Highlighted Case Study

Federal Comprehensive approach including coordination, 

enforcement, and penalties

United Kingdom

State/local Comprehensive approach including coordination, 

enforcement, and penalties

New York City

Federal Tax harmonization European Union

Federal Track-and-trace system Turkey

State/local Three-legged stool:

• High-tech tax stamps (product markings)

• Licensing

• Enforcement and Penalties

California, Massachusetts, and 

Michigan

Federal Public education: awareness United Kingdom, Canada

State/local Public education: tip lines Chicago Cook County

State/local Policies addressing tribal sales Canada, various US states 

Measures to Prevent and Reduce Illic
18

Preventing and Reducing Illicit Tobacco Trade in the United States 

Centers for Disease Control and Prevention

Table 2. Brief Definitions of Common Approaches to Addressing Illicit Tobacco Trade

Approach Definition

Licensing Official authorization for engaging in any activity within the tobacco supply chain, from tobacco growing 

to product manufacturing to product transportation, retail, and export.

Product markings/

stamps

Counterfeit-resistant, affixed images on product packaging that indicate date and location of manufacture 

and the intended retail market.

Track-and-trace Systems incorporating both markers and national record-keeping structures to enable tracking of 

tobacco products throughout the supply chain; tracing the movement of products by transferring the 

tracking data into a national information-sharing database.

Tax harmonization Equalizing tax rates across neighboring jurisdictions to lower imbalance in cigarette prices across borders.

Tribal policies Agreements between states and Native American tribes addressing tribal tobacco sales.

Enforcement Commitment to detect and prosecute illicit trade activity.

Agencies’ 

coordination

Coordination between agencies within and across borders to support intelligence gathering, joint 

customs operations, and sharing of best practices.

Penalties High/escalating fines, license revocation, or other measures that can be aimed at retailers, consumers, 

and other participants in illicit trade to deter this activity.

Public awareness Disseminating information about the risks associated with illicit tobacco trade to motivate support for 

enforcement activities.

Source: Ross et al, 2015.

Table 3. Common Approaches to Address Illicit Tobacco Trade and Year of Ratification of the WHO FCTC and Signing/

Accessiona of FCTC Protocol to Eliminate Illicit Tobacco Trade, by Nine Countries and the EU

Approach

Approach Implemented?

EU Canada Spain Italy UK Brazil Hungary Romania Turkey Malaysia

Licensing yes yes yes yes yes yes yes yes yes yes

Markers yes yes yes yes yes yes yes yes yes

National record keeping yes yes yes yes yes yes yes yes yes

Track-and-trace yes yes yes yes

Enforcement yes yes yes yes yes yes yes yes yes yes

Export tax yes yes

Tax harmonization yes yes yes yes yes yes

Agreements with industry yes yes yes yes yes yes yes yes

Public awareness yes yes yes yes

Agencies’ coordination yes yes yes yes yes yes yes yes yes

WHO FCTC: year ratified 2005 2004 2005 2008 2004 2005 2004 2006 2004 2005 

WHO FCTC Protocol to 

Eliminate Illicit Trade in 

Tobacco Products: year 

signed/year of accession

2013 2013/ 

2014

2013 2013

Abbreviations: WHO, World Health Organization; FCTC, Framework Convention for Tobacco Control; EU, European Union; UK, United Kingdom.

a

 Accession is an act by which a state signifies its agreement to be legally bound by the terms of a particular treaty.

Source: Ross et al, 2015.
19

Preventing and Reducing Illicit Tobacco Trade in the United States 

Centers for Disease Control and Prevention

Overarching Elements of Comprehensive 

Approach to Eliminate Illicit Trade

Comprehensive Federal Approach 

Prioritizing action on illicit trade and committing to 

enhanced coordination, enforcement, and penalties 

are the foundational elements of a comprehensive 

overall approach to preventing and reducing 

illicit trade. This approach has been successfully 

implemented in a number of countries. In the United 

States, many agencies at different levels of government 

are involved in enforcing tobacco laws, taxes, and 

regulations, creating immense coordination challenges 

for effective intervention in the illicit tobacco trade. 

Key federal agencies (NRC and IOM, 2015) include

•	 The Bureau of Alcohol, Tobacco, Firearms, and 

Explosives (ATF). 

•	 US Immigration and Customs Enforcement. 

•	 Customs and Border Protection. 

•	 The Alcohol and Tobacco Tax and Trade Bureau.

•	 The Food and Drug Administration (FDA). 

In many states, multiple state and local agencies 

are also engaged in tobacco tax administration and 

enforcement. For example, in Virginia, key agencies 

include the Virginia Department of Taxation, the 

Northern Virginia Cigarette Tax Board, the state 

police’s Criminal Interdiction and Counterterrorism 

Unit, and the Attorney General’s Tobacco Enforcement 

Unit (NRC and IOM, 2015). Local, state, and federal 

agencies involved in tobacco tax administration and 

enforcement have overlapping roles and different 

levels of resources for enforcement. Different levels of 

government also have different enforcement strengths: 

local agencies have the most access to information 

about retailers, state agencies may have most 

familiarity with transport routes and methods, and 

the federal government has the greatest resources and 

range of enforcement powers (NRC and IOM, 2015). 

Current federal efforts targeting illicit tobacco trade may 

benefit from a more cohesive approach. Enforcement 

efforts in particular could benefit from both enhanced 

coordination and resources commensurate with 

the scale of the challenge. Historically, ATF has led 

enforcement efforts; however, resources dedicated to 

this aspect of their mandate have both diminished over 

time while illicit trade has increased (NRC and IOM, 

2015). International and US jurisdictional examples 

illustrate coordination of activities to address illicit 

tobacco trade as a key priority for solving the problem. 

The United States could consider taking this approach, 

which would include designating one agency to lead 

federal efforts and to coordinate and collaborate with 

other federal, state, and local authorities, and with 

relevant international agencies. Enforcement efforts 

are complicated by the dynamic and adaptive nature 

of illicit tobacco markets, which further reinforces 

the need to coordinate across various agencies, 

participants, and levels of government (NRC and IOM, 

2015). Although enforcement efforts may reduce the 

size of the illicit tobacco market, the market may adapt 

and reemerge in the absence of sustained interventions 

that are comprehensive and coordinated. Enforcement 

activities that are flexible and responsive, and that focus 

on the aspects of the trade that present the greatest 

problems, are the most effective. Flexible enforcement 

can take advantage of the instability of illegal activities 

and intervene before new markets are established and 

illegal business has a chance to reorganize (NRC and 

IOM, 2015).

Enforcement is a necessary component of many 

individual illicit trade countermeasures, such as 

licensing, tax stamps and other markings, and 

tracking-and-tracing systems (Sweeting et al, 2009). 

Effective enforcement requires adequate resources 

in manpower, equipment, and level of training; it 

also requires that law enforcement agencies have the 

motivation, opportunity, and legal authority to enforce 

illicit trade laws. Equipping officials with appropriate 

technology to monitor and assess the legal status 

of tobacco products, and the authority to directly 

penalize offenders, is fundamental to enforcement 

(Sweeting et al., 2009). Enhanced border enforcement 

through x-ray scanners, spot-checks, and strict 

penalties have high potential to disrupt illicit tobacco 

trade. Swift and severe penalties for those caught 

engaging in illicit tobacco trade are an essential 

element of a comprehensive approach to enforcement 

(WHO, 2010). Furthermore, criminal prosecution of 

those found to be involved in illicit trade is a critical 

part of deterring and disrupting this activity following 

enforcement action (NRC and IOM, 2015).

Licensing and Enhancing Inspections

Licensing and enhanced inspection are considered 

effective enforcement and deterrence measures directed 

at retailers. Those with the greatest impact include high 

initial penalties and escalating penalties, up to license 

revocation for repeat offenders.
20

Preventing and Reducing Illicit Tobacco Trade in the United States 

Centers for Disease Control and Prevention

Penalties for illicit trade are driven by a number 

of factors, including magnitude of illicit activity 

and individual charges levied by federal, state, or 

local authorities. Charges typically include some 

combination of receiving or trafficking in counterfeit 

goods, money laundering, conspiracy, false reporting, 

aiding and abetting criminal activity, and racketeering. 

Penalties range from loss of licenses and permits, to 

fines and seizure of assets, to jail time, and can vary 

significantly among jurisdictions (Interpol, 2014). 

Comprehensive Approach Case Study: United Kingdom

At the turn of the century, the UK was experiencing 

among the highest levels of illicit tobacco trade in 

Western Europe, with an estimated 22% of cigarette 

consumption and over 61% of roll-your-own tobacco 

(RYO) consumption avoiding or evading taxes. Illicit 

trade cost the government about £3.4 billion in lost 

tax revenues (HM Revenue and Customs and Border 

Force [HMRC], 2015). Most of this was accounted 

for by tax evasion through tobacco smuggling; a 

relatively minor share was from tax avoidance through 

individual cross-border shopping.

The UK’s success in reducing illicit tobacco trade, 

particularly illicit cigarette trade, is the result of a 

comprehensive and adaptive strategy that focuses on 

illicit tobacco trade as one component of a broader 

tobacco control strategy aimed at reducing overall 

tobacco use. The first step in this illicit trade reduction 

effort was to formally prioritize national action on 

illicit tobacco trade, highlighted by the adoption of the 

“Tackling Tobacco Smuggling” strategy implemented 

in 2000. One key component of this strategy was the 

coordination of enforcement activities. HMRC took 

the lead role and activities were supported by other 

enforcement agencies, the Department of Health, the 

public health community, and tobacco manufacturers. 

Other key elements of the UK strategy included

•	 A focus on large-scale smuggling; enhanced 

penalties for those engaged in illicit tobacco trade, 

such as seizure of vehicles/vessels used in illicit 

trade, confiscation of assets, collection of lost taxes, 

and jail sentences. 

•	 Significantly increased resources for enforcement, 

including the initial addition of 1,000 new customs 

officers/investigators and acquisition of x-ray 

scanners and other equipment to improve detection 

of illicit products; implementation of public 

awareness programs.

UK Success

By 2013-2014, the illicit cigarette market share had been 

more than halved, to 10%, with an even larger reduction 

in the absolute volume of illicit cigarettes.

•	 Implementation of pack markings with 

“UKDUTYPAID” printed prominently on licit 

cigarette packs and pouches of RYO.

•	 The negotiation of memoranda of understandings 

(MOU) with major tobacco manufacturers to enlist 

their help in addressing illicit trade. 

The MOUs were of particular importance given the 

evidence that cigarettes produced in and exported 

from the UK, particularly by Imperial Tobacco, were 

being smuggled back into the country (NRC and IOM, 

2015).

These efforts were highly successful in reducing illicit 

tobacco trade in the UK By 2013-14, the illicit cigarette 

market share had been more than halved, to 10%, with 

an even larger reduction in the absolute volume of 

illicit cigarettes, given significant reductions in overall 

cigarette consumption (Figure 11). There was also 

a large reduction in the illicit market share of RYO, 

although this still remains a problem, with the illicit 

market share estimated at 39% in 2013-14 (HMRC, 

2015). Following its success in reducing illicit tobacco 

trade, the UK resumed its policy of raising tobacco 

taxes above the rate of inflation in recent years, 

which has increased prices, reduced tobacco use and 

its consequences, and at the same time generated 

significant new revenues (HMRC, 2015). However, the 

Figure 11. Estimated Number of Cigarettes Consumed, by 

Duty-Paid, Illicit, and Cross-Border Purchased Status, 2000-

2001 to 2013-2014

0

10

20

30

40

50

60

00-01 02-03 04-05 06-07 10-11008-09 12-13

Billions

UK duty paid

Illicit market

Year

Cross-border purchased

Source: HM Revenue and Customs and Border Force, 2014.
21

Preventing and Reducing Illicit Tobacco Trade in the United States 

Centers for Disease Control and Prevention

illicit market adapted to the new regulatory climate, 

with counterfeit cigarettes becoming more prevalent 

and illicit products appearing in postal shipments. 

This led to a “refresh” of the anti-smuggling strategy 

including continued strong enforcement actions and 

sanctions, the addition of covert security markings on 

cigarette packs and RYO pouches intended for sale in 

the UK market and additional public education efforts. 

Over time, the UK’s strategy has continued to evolve 

and adapt to changes in the illicit market, leading 

to continued declines in the market share for illicit 

tobacco products (NRC and IOM, 2015). In addition 

to coordination of domestic activities, the UK has 

also played a leading role in furthering international 

cooperation within the EU and through other regional 

and global initiatives (HRMC, 2015). 

Comprehensive State/Local Approach 

In addition to action at the federal level, prioritizing 

efforts to curb illicit tobacco trade through the 

centralization, coordination, strengthening of 

enforcement actions, and enhancement of penalties 

is an effective state or local strategy. These efforts 

can be most successful when coordination extends 

across jurisdictions. For example, collaboration with 

counterparts in jurisdictions that are the sources for 

illicit products and with relevant federal authorities 

can strengthen an individual state’s comprehensive 

approach. While this approach would require 

sufficient funding to be effective, costs could be offset 

by increased revenues that result from increased taxpaid sales in states and localities where illicit tobacco 

markets are sizable. 

Comprehensive Approach Case Study: New York City 

New York City’s combined state and local taxes are 

$5.85 per pack, the second highest in the country 

after Chicago. The city’s high taxes create significant 

incentives for tax avoidance and evasion, with one 

recent littered-pack study finding that less than 40% of 

collected packs had the proper local tax stamp, while 

significant numbers had nonlocal stamps (33.4%, with 

nearly half of these bearing stamps from Virginia), no 

stamp (15.7%), or foreign or unknown stamps (11.6%) 

(Davis et al., 2014; Kurti et al., 2015). 

The high rate of cigarette tax avoidance and evasion, 

together with the city’s public health objective of 

reducing tobacco use and its consequences, have 

made reducing the illicit tobacco trade a renewed 

enforcement priority in New York City in recent years. 

The New York City Department of Finance conducted 

approximately 5,000 targeted retail inspections 

between 2008 and 2012. In 2012, 55% of inspected 

stores had contraband cigarettes (Schroth, 2013) 

(Figure 12). 

In August 2011, the New York City Department 

of Finance, Office of the Sherriff created the 

Tobacco Task Force with 14 permanent staff and 

an intelligence unit comprising two investigators, 

one intelligence analyst, and one financial auditor, 

all charged with conducting inspections of licensed 

retailers (New York City Department of Finance 

[NYCDOF], 2013). From August 2011 through 

December 2014, the Task Force conducted 3,674 

inspections and found that 45.5% of inspected retailers 

possessed contraband cigarettes (NYCDOF, 2015a). 

Almost 25,000 cartons of cigarettes were confiscated, 

averting nearly $1.5 million in state and local excise 

and sales tax losses (NYCDOF, 2015b).

Figure 12. New York City Inspections and Violations, 2011-

2014

0

500

1,000

1,500

2,000

1,087

2011 2012 2013 2014

340

1,111

591

1,151

552

325

191

Violations

Inspections

Number of Inspectinos

Year

Source: New York City Department of Finance, 2012a.

More recently, on November 19, 2013, the city passed 

the “Sensible Tobacco Enforcement” law (Local 

Law 97 of 2013), implemented in steps and fully 

operational by August 2014. The law targeted retailers 

possessing illicit tobacco products and those selling 

to underage youth, and required retailers to post 

signs encouraging customers to report violations. At 

the same time, it increased penalties for violations, 

reduced the amount of cigarettes required to meet the 
22

Preventing and Reducing Illicit Tobacco Trade in the United States 

Centers for Disease Control and Prevention

city’s definition of retailing to more than 400 cigarettes 

(to deter sales by unlicensed vendors), established 

a $10.50 minimum price per pack for cigarettes and 

little cigars (to make it easier to identify products 

likely to be illicit), and required that cigars and 

cigarillos selling for less than $3.00 each (including 

all applicable taxes) be sold in packages of at least 

four and little cigars be sold in packs of 20. Although 

it is too early to assess the impact of the law, it seems 

plausible that New York City’s efforts will be effective, 

given the success of other multi-component strategies 

such as those in the UK that prioritize efforts to curb 

illicit tobacco trade (NRC and IOM, 2015). However, 

the continued availability of tobacco products from 

other states with lower taxes could attenuate the 

impact of comprehensive efforts in New York City and 

elsewhere in the United States.

Potential Impact of Comprehensive Approaches 

to Eliminate Illicit Trade

Quantitative Estimates of the Impact of a 

Federal Comprehensive Approach

As explored by Joossens and colleagues (2009), 

decreased availability of low-price, illicit products 

resulting from a comprehensive strategy to reduce 

tobacco tax avoidance and evasion will, in effect, raise 

overall prices on tobacco products and ultimately 

lessen tobacco use and its consequences. However, 

estimating the potential effect of a comprehensive 

strategy on market prices is challenging, given the 

limited information available on prices of illicit tobacco 

products. That said, comparisons of prices from various 

sources produce a range for the potential increase in 

market prices resulting from a comprehensive strategy. 

Comparing data on self-reported cigarette prices from 

the 2010-2011 TUS-CPS and the prices reported in 

the Tax Burden on Tobacco (TBOT), collected from 

retailers, produces such a range. 

The TUS-CPS data report the prices smokers actually 

pay for cigarettes, and thus reflect a combination of 

fully tax-paid purchases, individual tax avoidance 

activities, and purchases of bootlegged cigarettes, as 

well as the use of any price-reducing promotions. The 

weighted average price per pack from the 2010-2011 

wave of the TUS-CPS was $4.92. As expected, this is 

well below the average price reported in the TBOT, 

which was $5.55 in November 2010. 

The TBOT price likely overstates the average price 

of fully tax-paid sales, given that it reflects retailerreported list prices for cigarettes and does not account 

for some price-reducing promotions. According to 

tobacco industry spending and sales data reported by 

the Federal Trade Commission (FTC) for 2010, these 

promotions amount to between 2 and 48 cents per 

pack, with the low end reflecting coupons only, and 

the high end reflecting all price-reducing promotions, 

most of which are accounted for by price discounts 

directly to retailers (FTC, 2012). Assuming that the 

average price after accounting for price-reducing 

promotions reflects the price of fully tax-paid 

cigarettes, eliminating cigarettes that avoid or evade 

taxes would raise the average market price by 3.0% to 

12.3% (2010-2011 CTS-CPS). 

An alternative approach that uses self-reported prices 

from the ITC-US survey for purchases that are likely 

to reflect tax avoidance and evasion and those that 

are likely to be fully tax-paid (Hyland et al., 2006). 

Using the NRC’s estimated range for the market share 

of illicit cigarettes (NRC and IOM, 2015) produces a 

similar range, with the impact of eliminating illicit 

cigarettes estimated to raise price by 4.0% to 10.4%.

Given estimates for the impact of price increases 

on adult and youth smoking prevalence and overall 

consumption, current smoking rates, population 

estimates, cigarette sales, and the probability of 

premature death for regular smokers, the potential 

effect of a comprehensive strategy on smoking, 

deaths, and federal cigarette tax revenues can be 

estimated.b The 3.0% to 12.3% price increase could 

lead to an estimated 0.6% to 2.5% reduction in adult 

smoking prevalence, or a drop of 250,000 to 1 million 

adult smokers. Assuming youth (aged 12-17) take up 

smoking at similar rates as young adults (aged 18-25), 

this price increase is estimated to deter 200,000 to 

800,000 current youths from initiating smoking. As a 

result, 120,000 to 500,000 smoking-attributable deaths 

could be averted by a comprehensive strategy that 

eliminated tobacco tax avoidance and evasion. At the 

same time, overall consumption could drop by 1.2% to 

4.9%, reducing federal cigarette tax revenues by $150 

million to $600 million in the first year. 

b These University of Illinois at Chicago estimates were based on TUS-CPS 

data.
23

Preventing and Reducing Illicit Tobacco Trade in the United States 

Centers for Disease Control and Prevention

As these rough estimatesc suggest, implementation 

of a comprehensive strategy that is effective in 

eliminating tobacco tax avoidance and evasion is 

likely to reduce tobacco use, which can produce 

significant public health benefits while having a 

modest effect on federal tax revenues. These estimates 

are based on fully eliminating illicit tobacco trade. 

Estimates based on reducing, but not fully eliminating 

illicit trade would be smaller, but still significant. 

Qualitative Estimates of the Impact of a State 

Comprehensive Approach

A comprehensive strategy to curb tax evasion includes

•	 Prioritization and coordination of enforcement 

efforts.

•	 Enhanced penalties for those engaged in illicit 

tobacco trade. 

•	 Implementation of licensing and product markings 

with enforcement (three-legged stool).

•	 Public education efforts.

•	 Tribal policies where applicable could vary 

considerably across states. 

This section estimates qualitative impacts because the 

available data do not permit further drill-down. 

States where illicit tobacco products are 

available would be the primary beneficiaries of 

a comprehensive strategy targeting tobacco tax 

avoidance and evasion. Reducing illicit tobacco 

products in these states would cause some tobacco 

users currently buying in the illicit market to 

purchases in the licit market, raising tax-paid sales 

and increasing tobacco tax revenues. Others would be 

deterred from using tobacco products as a result of 

the higher prices, leading to reductions in prevalence 

and the health and economic consequences of tobacco 

use in these states. 

Low-tax states that are the sources of bootlegged 

cigarettes would see reductions in tax-paid sales, 

and associated tobacco tax revenues, as a result of a 

comprehensive strategy to curb tax evasion. Given 

that the illicit tobacco market in these states is limited 

at best, these states would see little change in tobacco 

c The University of Illinois at Chicago based these estimates on Tobacco use 

Supplement to the Current Population Survey (TUS-CPS) data.

use and, as result, would be less likely to experience 

the public health and economic benefits from 

reductions in tobacco use.

Multiple options at the federal, state, and local levels 

have been found to be effective in reducing tobacco 

tax avoidance and evasion; however, a comprehensive 

national strategy will have a greater impact than a 

single intervention. In many cases, the success of 

one intervention depends on the implementation of 

others (e.g., state licensing of all involved in tobacco 

distribution, stamping tobacco products, and increased 

enforcement of these measures are necessary for 

effective implementation of a national tracking-andtracing system). Further efforts that could reduce illicit 

trade in the United States are increased enforcement 

actions, a comprehensive strategy for curbing illicit 

trade that is periodically reviewed and adapted to 

address changes in the illicit tobacco market, more 

severe penalties for those engaging in illicit tobacco 

distribution, and ongoing evaluation. 

Reducing Illicit Trade in the United States: 

Potential National Actions

• Adopt a comprehensive national approach, which 

incorporates federal and as state/local options to 

prevent and reduce illicit trade, in tobacco control 

efforts.

• Enhance national, state, and local illicit tobaccorelated surveillance and evaluation to provide the 

data needed for understanding and monitoring 

illicit tobacco markets in the United States and for 

distinguishing among the different activities that 

contribute to these markets (e.g., tax avoidance 

vs. tax evasion), which are essential for developing 

appropriate interventions.
24

Preventing and Reducing Illicit Tobacco Trade in the United States 

Centers for Disease Control and Prevention
25

Federal Track-and-Trace System

Tracking is a crime prevention tool that involves systematic real-time monitoring of the movement of products 

through the supply chain (WHO, 2012). It often involves the installation of an advanced anti-counterfeiting 

system at the start of production, systematic control throughout the supply chain, and audit measures at 

the point of sale. Tracing occurs during or after enforcement action (e.g., seizure or investigation audit) 

and involves reconstructing the flow of merchandise to identify the point of diversion into illicit channels. It 

increases the probability of identifying those involved in illegal activities, which can be used to aid further 

enforcement and prosecution action to prevent recurrent illicit trade. High-tech tax stamps and other pack 

markings are a key component of a tobacco product tracking-and-tracing system that facilitates investigations 

into tobacco smuggling and identifies the points at which tobacco products are diverted into illicit markets. 

An effective track-and-trace system needs to perform 

several functions: verify the quantity produced or 

imported, verify correct tax payments, track products 

through the supply chain, trace products back to 

their sources, and ensure product authenticity (WHO, 

2012). The installation of automatic production 

counters at each production line permits the detection 

of anomalies and ensures that the manufacturer pays 

all relevant taxes. Product markings applied by the 

manufacturer or at exporter/importer sites contain 

data that allow for tracking and tracing and help 

ensure products are authentic. 

The WHO FCTC’s Illicit Trade Protocol specifies the 

minimum data needed for a tracking-and-tracing 

system, including information on the date and 

location of manufacture, the manufacturing facility, 

the intended market for retail sale, and a product 

description (WHO, 2012). Other data that can be 

collected include the machine used to manufacture 

tobacco products; the production shift or time of 

manufacture; the first and subsequent customers; 

and the intended shipment route (Colledge, 2012). 

Additional system features (Colledge, 2012) can 

include

•	 Collection of data on brand names.

•	 Trademark holders.

•	 Harmonized tariff schedule numbers

•	 Customs duties and payment records.

•	 Taxes paid and payment records. 

•	 Information on whether the goods have been 

previously reported stolen, destroyed, seized or 

returned to the manufacturer. 

•	 Information about the date and location of intended 

destruction. 

The vital components of the tracking-and-tracing 

system are the independence, security, and reliability 

of the system; these require strict and exclusive 

control and enforcement by governments (WHO, 

2014). Manufacturing companies already incorporate 

product markings such as UPC codes in their 

production processes. 

Important elements of a tracking-and-tracing system 

include 

•	 Real-time control on all production lines with realtime secured data transmission to a government 

authority.

•	 Tracking-and-tracing code activation on production 

lines. 

•	 Independent real-time control of aggregation on all 

production lines with real-time data transmission to 

a government authority. 

•	 Linking of stock keeping unit (SKU) labels and 

logistic codes with the tracking-and-tracing code. 

•	 Integration of the tracking-and-tracing system with 

a computerized system for monitoring movements 

of excise goods for which no excise duties have yet 

been paid, allowing physical control of declared 

goods movement. 

•	 A push-button device capable of immediate 

and unequivocal authentication of fiscal marks, 

confirmation of genuine products, fulfilment of 

excise obligation, verification of tracing information, 

and uploading information for reporting of audit 

results (European Parliament’s Committee on 

Budgetary Control, 2014). 

For the system to work as intended, all legally 

manufactured and imported unit packs (including 

products for export) need to be marked and 

aggregation needs to be possible (i.e., individual pack 

Individual Elements of a Comprehensive Approach to Reduce
26

Preventing and Reducing Illicit Tobacco Trade in the United States 

Centers for Disease Control and Prevention

codes that are linked to the unique codes on cartons, 

master cases, and palettes). Marks placed only on 

master cases or pallets help with business logistics, 

but do not offer the security provided by tracking 

and tracing. The security of track-and-trace systems 

is enhanced by unique and apparently random 

serialization, or nonsequential numbering on packs. 

An individual algorithm may still be copied, but a 

quick check with the database will identify duplicates 

or invalid serials (Power, 2015). 

Tracking-and-tracing systems are generally nonintrusive 

and require only minor adjustments to production 

lines (WHO, 2014). The costs of establishing a national 

tracking-and-tracing system vary by country. The main 

factors that affect the direct costs are the size of the 

market; the scope of domestic manufacturing, imports, 

and exports; the comprehensiveness and the length 

of the contract with a vendor; the level of industry 

concentration; and the implementation strategy. There 

will also be costs associated with linking a national 

system to the global tracking-and-tracing system, but 

these can be reduced if a global information-sharing 

center develops a uniform software solution shared by 

multiple countries (WHO, 2014). Several countries that 

have implemented tracking-and-tracing systems have 

required the tobacco industry to bear the costs because 

the system components can be implemented by the 

industry relatively easily and in bulk at the point of 

manufacturing, meaning the costs per pack are reduced.

Multiple companies offer a variety of track-and-trace 

systems with differing features. These systems use two 

main approaches—one based on IT/data processing 

(digital security) and the other on security printing 

(material security). An IT/data processing approach 

seems more able to meet the standards of WHO’s 

Illicit Trade Protocol for several reasons: it is capable 

of handling the large volume of data produced by a 

high-volume product such as cigarettes, it has greater 

capacity to aggregate product units and preserve 

the parent-child relationship, it can be operated by 

other parties (the printing companies prefer to retain 

direct control, which can hinder collaboration), and 

is compatible with open standards and a range of 

applications, which facilitates data sharing (Tax Stamp 

News, 2014).

Tracking-and-tracing systems with varying degrees 

of sophistication have been implemented by several 

governments around the world, including Turkey, 

Brazil, Kenya, Malaysia, Albania, Canada, Panama, 

Morocco, and the Philippines. In the United States, 

limited track-and-trace systems have been implemented 

in California (SICPA), Massachusetts (SICPA), and 

Michigan (Xerox). These systems only allow tracking 

and tracing for products that have entered into each 

state’s legitimate distribution system. They do not allow 

tracking of products from the point of manufacturing 

or import to entry into the state distribution system 

and do not allow tracing of products back to sources 

outside of the state. As a result, while helpful in 

identifying illicit products, these state-based systems 

have limited effectiveness in curbing bootlegging 

and other illicit trade because they do not provide 

information on where illicit products were diverted 

from licit distribution channels into the illicit market 

and do not identify who was responsible for the 

products when first diverted. Therefore, a national 

system that could capture these missing links and 

allow for information sharing between states could be 

important for maximizing the effectiveness of tracking 

and tracing. Coordinated enforcement action could 

help to clamp down on illegal activity in national and 

sub-national regions, not just standalone states or 

jurisdictions. 

Currently two federal agencies have the authority to 

implement tracking-and-tracing systems. In the United 

States, the FDA was given the authority to implement 

a national tracking-and-tracing system when it was 

granted regulatory authority over tobacco products by 

the Family Smoking and Prevention Act of 2009. Of 

note, tobacco tax enforcement falls outside of FDA’s 

regulatory authority (Government Accountability 

Office, 2011). The TTB has tax collection-related 

authorities. In its Report to Congress in 2010 regarding 

illicit trade, TTB recommended as its top priority that 

“the Treasury Department work with the FDA on the 

development of any tobacco product tracing system so 

that the system can be used to the extent possible for 

enforcement purposes. Any ‘track and trace’ system that 

is implemented at the federal level should be shared 

by those agencies that have a jurisdictional interest, so 

as to maximize enforcement efforts with the least cost 

to the government” (US Department of the Treasury, 

2010). Other agencies’ efforts could also be important 

in ensuring the effectiveness of a track-and-trace 

system. For example, within the Justice Department, 

a robust enforcement and prosecution element could 

further ensure that any detected problems were 

followed up with action to close down illicit sources 

and with appropriate penalties, prosecution, and other 

deterrents to prevent repeat offenses. 
27

Preventing and Reducing Illicit Tobacco Trade in the United States 

Centers for Disease Control and Prevention

Turkey’s Success

Tobacco tax revenues rose by 31.5% within the first year of 

implementing the track-and-trace system, with no increase 

in tax rates. Subsequent increases in tax rates have led to 

additional increases in tobacco tax revenues in Turkey.

Tracking-and-Tracing Case Study: Turkey 

Over the past decade, Turkey has become one of the 

global leaders in tobacco control, implementing a 

comprehensive strategy that includes

•	 A complete ban on tobacco advertising, promotion, 

and sponsorship. 

•	 A comprehensive smoke-free policy covering all 

enclosed public spaces and private workplaces. 

•	 Multiple tax increases that have raised the share-oftax in tobacco prices to among the highest in the 

world. 

•	 Mass media public education programs. 

As part of this effort, Turkey was the first country in 

the world to adopt and implement a tracking-andtracing system, albeit with limited tracking features. 

Beginning in November 2007, all cigarettes sold in 

Turkey were required to carry digital tax stamps with 

overt and covert security features, including invisible 

ink and unique serial numbers that can be read with 

hand-held or other scanning devices. These stamps 

are applied at either local production facilities for 

cigarettes produced in Turkey or at foreign production 

facilities for imported cigarettes, with activation of the 

stamp’s invisible code as the stamp is being applied 

during the production process. The average cost of the 

system was about $0.00436 per stamp.

Enforcement efforts include random compliance checks 

using handheld scanners in retail outlets, as well as 

random inspections of imported tobacco products. 

Violators are penalized with fines amounting to 

double the amount of taxes owed on illicit products. 

Enforcement efforts were enhanced beginning in 2011 

to include more frequent compliance checks, stronger 

penalties on violators, and greater cooperation and 

coordination among the revenue authorities and the 

Ministries of Justice, Foreign Affairs, Economy, and 

Internal Affairs (Tayyan, 2013). 

Even though a number of factors, including slow 

judicial processes, low penalties for offenders, and 

insufficient collaboration with neighboring countries 

limited the effectiveness of Turkey’s track-and-trace 

system efforts (Tayyan, 2013), its tobacco tax revenues 

rose by 31.5% within the first year of implementing 

the system, even though tax rates remained the same 

(NRC and IOM, 2015). Subsequent increases in tax 

rates have led to additional increases in tobacco tax 

revenues in Turkey, despite the reductions in tobacco 

use resulting from the tax hikes and implementation 

of other tobacco control policies (NRC and IOM, 

2015). 

The market share of illicit cigarettes in Turkey has 

fluctuated in the range of 14.0% to 17.5% in recent 

years (Euromonitor International, 2015). However, 

overall cigarette consumption in Turkey has fallen 

during this time, while cigarette taxes, cigarette prices, 

and tax revenue have been steadily increasing (Figure 

13). This suggests that Turkey’s tracking-and-tracing 

system has been at least partially effective in keeping 

the illicit tobacco market from growing, despite the 

country’s high and increasing tobacco taxes.

Turkey renewed and expanded its contracts with 

SICPA-Assan in 2014, extending the system to cover 

cigarettes produced for export in an effort to assist 

foreign governments. The new system also includes 

a feature that allows end consumers to verify that a 

product is legitimate using a smart-phone app. The 

current system continues to have limited tracking 

features and is not fully compatible with WHO FCTC 

ITP standards for track-and-trace systems. 

Figure 13. Estimated Number of Cigarettes Consumed, by 

Tax-Paid and Illicit Status, Turkey, 2002-2013

0

20,000

40,000

60,000

80,000

100,000

120,000

02 03 04 05 06 07 08 09 10 11 12 13

Million Cigarettes

Tax Paid Illicit

Year

Source: Created from data in Euromonitor International, 2015.
28

Preventing and Reducing Illicit Tobacco Trade in the United States 

Centers for Disease Control and Prevention

Potential Impact of Track and Trace

Controlling the tobacco product distribution chain 

from manufacture/import through retail sale is 

an essential component of curbing illicit tobacco 

trade. A growing number of countries have adopted 

tracking-and-tracing systems. A tracking-and-tracing 

regimen alone may reduce, but will not eliminate, 

all forms of illicit trade—for example, it cannot 

monitor production in illegal manufacturing facilities 

or counterfeit production. A national tracking-andtracing system in the United States can achieve part 

of the public health and economic benefits described 

earlier (pp. 22-23), but needs to be a part of a wider 

comprehensive approach to reach its potential. 

State Measure: Three-Legged Stool 

(Licensing, Product Markings, and 

Enforcement)

The measures in the three-legged stool strategy are 

combined because of the high interaction between 

them. In this section, licensing and product markings 

will be described, followed by case examples where 

both measures were used and enforced.

Licensing 

Effective control of the tobacco product supply 

chain requires an understanding of all parties 

involved in the manufacture and distribution of 

tobacco products, including producers, exporters and 

importers, distributors, wholesalers, and retailers, 

as well as those involved with key inputs into 

tobacco product production such as producers of 

manufacturing equipment. In the United States, there 

are relatively few tobacco product manufacturers, 

importers, exporters, distributors, and wholesalers, 

but many thousands of tobacco product retailers. 

Therefore, tobacco retail licensing is the primary 

component of licensing the supply chain. Many 

states and local jurisdictions already require some 

or all tobacco retailers to be licensed (Table 4). 

State and local governments can prohibit licensed 

operators from dealing with unlicensed ones, 

thereby creating a stronger chain of accountability. 

A license can be revoked if the holder breaks the 

law, creating economic disincentives for engaging in 

illegal business practices such as illicit production 

or tax evasion. “Negative licensing” schemes can 

also be implemented, wherein regulated entities 

can be specifically excluded from engaging in 

any tobacco business because of their previous 

noncompliance. Retail licensing is a useful tool for 

both tax administration and point-of-sale tobacco 

control policies. Linking licensing systems with 

recordkeeping, tax stamps/markings, and a trackingand-tracing system makes it more effective for 

deterring the sale of illicit tobacco products in 

otherwise legitimate retail outlets. Background checks, 

enhanced enforcement, and zero tolerance also make 

licensing more effective. For example, if inspectors are 

empowered to revoke retail licenses, retailers have an 

incentive to keep their stock clear of noncompliant 

products. 

Table 4. State Legislation for Retail Tobacco Product Licensure, United States, January 1, 2015

License Type Number of States State or District of Columbia

Over-the-counter and vending 

machine licenses

36 Alabama, Alaska, Arkansas, California, Connecticut, Delaware, 

District of Columbia, Florida, Georgia, Hawaii, Indiana, Iowa, Kansas, 

Louisiana, Maine, Maryland, Massachusetts, Minnesota, Mississippi, 

Montana, Nebraska, Nevada, Ne, Hampshire, New Jersey, New York, 

North Dakota, Ohio, Oklahoma, Pennsylvania, Rhode Island, Texas, 

Utah, Vermont, Washington, West Virginia, Wisconsin

Over-the-counter license only 1 Idaho

Vending machine license only 5 Illinois, Kentucky , Michigan, North Carolina, South Carolina

No license 9 Arizona, Colorado, Missouri, New Mexico, Oregon, South Dakota, 

Tennessee, Virginia, Wyoming
29

Preventing and Reducing Illicit Tobacco Trade in the United States 

Centers for Disease Control and Prevention

While illegal manufacturing is not currently a 

significant contributor to illicit tobacco trade in 

the United States, strategies that reduce current 

forms of tax avoidance and evasion could increase 

incentives for illegal manufacturing (NRC and IOM, 

2015). Therefore, it is important to take steps to 

prevent this from becoming problematic in the 

future. There are relatively few producers of the 

acetate tow used for cigarette filters, the specialized 

paper used for cigarette production, and tobacco 

product manufacturing equipment. Licensing of those 

producers and distributors, as well as others who 

supply materials and equipment necessary in tobacco 

production could help prevent illegal manufacturing 

by adding controls to this part of the supply chain. 

Licensing Case Study: California

California’s Cigarette and Tobacco Products Licensing 

Act of 2003 required the state Board of Equalization 

(BOE) to license all tobacco product importers, 

manufacturers, distributors, wholesalers, and retailers; 

before the Act, licenses were only required for 

distributors responsible for remitting taxes (NRC and 

IOM, 2015). The Act also gave the BOE enhanced 

enforcement authority, allowing its inspectors and 

investigators to issue civil and criminal citations. 

Licensing Case Study: Canada 

Canada adopted the Raw Leaf Tobacco Growers’ 

Licensing Program in 2008, which reduced the 

production of raw tobacco in Canada and controlled 

its commercialization. As result, illegal manufacturers 

had to rely on imported tobacco, which increased 

their production costs. Since the imported tobacco 

was often of lower quality, illicit cigarettes could only 

be sold for a very low price, which lowered profit 

margins for illicit manufacturers and smugglers, and 

made this a less attractive business for large criminal 

organizations (Daudelin et al, 2013). While this isn’t 

entirely pertinent to the United States because illegal 

manufacturing is not currently a major source of illicit 

cigarettes in the US market, this example demonstrates 

how other parts of the tobacco supply side can be 

regulated.

Potential Impact of Licensing 

Licensing can be effective as part of a comprehensive 

approach to preventing and reducing illicit trade 

but will have limited impact on its own. However, 

licensing does address several important issues 

such as identifying the key players (e.g., retailers), 

and provides a penalty option for repeat offenders 

(e.g., suspending or revoking a license), which may 

deter illegal behavior. It is notable that licensing, as 

a tobacco control measure, is also a way to address 

minors’ access to tobacco products and supports some 

point-of-sale initiatives such as zoning restrictions, so 

it could be helpful in broader tobacco control efforts.

Knowing who is involved in tobacco manufacturing, 

importing, wholesaling, distribution, and retailing 

is critical for effective control of the tobacco 

product distribution chain. While many states have 

implemented licensing requirements that help 

them enforce their tobacco tax laws and youth 

access policies, others have not. In addition to 

improving control of the distribution chain, licensing 

requirements also deter illicit trade, given the potential 

suspension or revocation of violators’ licenses. License 

requirements could also be extended to suppliers 

of key inputs into tobacco product manufacturing, 

including manufacturing equipment, cigarette papers, 

and acetate tow. Nontrivial licensing fees could also 

generate revenues that could be used to support other 

efforts to reduce tax avoidance and evasion. 

Tax Stamps and Other Product Markings

Tax stamps and other product markings can serve 

as a product authentication tool, a tracking/tracing 

tool, and a revenue collection tool. These markings 

can have both overt and covert security features 

that enable end users to verify the legitimacy of the 

product and allow authorities to determine whether 

taxes have been paid. In the United States, tax stamps 

are the key product marking for tobacco products 

and are typically applied at the wholesale level. 

All states but three (North Carolina, North Dakota, 

and South Carolina), and many local governments 

with significant local taxes, require tax stamps 

on cigarettes. In contrast, very few state or local 

governments require stamping of other tobacco 

products (Figure 14) (Gourdet et al., 2015). Requiring 

stamps on other tobacco products, especially 

cigarette analogues such as little cigars and RYO, 

is an important aspect of preventing tax avoidance 

by minimizing opportunities and incentives for 

substitution (Chaloupka et al, 2012).
30

Preventing and Reducing Illicit Tobacco Trade in the United States 

Centers for Disease Control and Prevention

Figure 14. Types of Cigarette and Other Tobacco Product Stamps, by State, United States 

High-tech stamp cigarettes only (N=2)

Low-tech stamp including one or 

more OTP (N=5)

No stamp (N=3)

Low-tech stamp cigarettes only (N=39)

High-tech stamp authorized but not 

implemented (N=1)

AZ 

WY 

OR 

ID 

MT 

UT 

NV 

WA 

CA 

TX 

AR OK 

ND 

LA 

KS 

IA NE 

SD 

CO 

NM 

MO 

MN 

TN 

AL 

KY 

OH 

MS 

MI

IN 

GA 

FL 

PA 

ME 

NY 

WV VA 

NC 

SC 

VT 

D.C. 

NJ 

MD 

DE 

NH 

MA 

IL

WI 

AK 

CT 

RI 

HI 

High-tech stamp including one or 

more OTP (N=1)

Source: Chriqui et al, 2015. 

Over time, stamping technologies have become 

increasingly sophisticated. Today’s high-tech stamps 

use security features that enhance enforcement 

capabilities and make them harder to counterfeit. 

These include

•	 Security papers, such as embedded threads and 

watermarks.

•	 Special inks and coatings, such as color shifting 

or florescent inks and “invisible” inks that can be 

observed only with special devices. 

•	 Complex imaging, such as fine-line graphical 

backgrounds and borders, microprinting, and 

embedded images. 

•	 Secure appliqués, such as holograms, foils, and 

hidden markings. 

•	 Informational add-ons, including magnetic stripes, 

radio frequency identification chips, and other 

encrypted add-ons that contain bearer or other 

unique information. 

•	 Calculated or changeable content, such as check 

digit numbering and images that alter after coding.

•	 Laser coding.

•	 Taggants. 

While the use of high-tech stamps has increased 

globally, only three US states have adopted cigarette 

tax stamps with some of these features: California 

(2005), Massachusetts (2013), and Michigan (2014). 

New Jersey adopted enabling legislation in 2009, but 

has yet to require a high-tech stamp. More recently, 

New York state has proposed an amendment to its tax 

law (NY Tax Law § 472-a) to allow for an encrypted 

tax stamp on cigarette packs sold in the state (New 

York State Assembly, 2015).

Given their enhanced security features, these stamps 

cost considerably more than the traditional stamps 

used in most states. Costs vary based on the number 

and types of features included. For example, in 

California, the traditional tax stamp used before 2005 

cost $0.42 per 1,000 stamps (Bartolo and Kimsey, 

2013). The first generation of high-tech stamps, which 

used several new security features, raised the cost to 

$4.77 per 1,000 stamps. California’s current, secondgeneration encrypted stamp, which adds additional 

security features, costs $8.20 per 1,000 stamps. 

However, as discussed in the case examples below, 

increased revenues through better tax collection more 

than paid for these costs. 
31

Preventing and Reducing Illicit Tobacco Trade in the United States 

Centers for Disease Control and Prevention

High-Tech Tax Stamp Impacts 

• California: In the first decade following the 

implementation and upgrading of California’s 

encrypted tax stamp, the state has recovered an 

estimated $450 million in additional tax revenue, well 

beyond incremental implementation and enforcement 

costs.

• Massachusetts: Despite decreases in smoking rates and 

consumption, which reduced overall sales, the state 

still generated an average of $551 million in cigarette 

excise tax revenues in the first 3 years following the full 

implementation of the encrypted stamp in July 2010, 

compared to $555 million in FY 2010 when smoking 

rates and consumption were higher.

Tax Stamps Case Studies: California, Massachusetts, and 

Michigan 

Three US states have adopted and implemented 

encrypted tax stamps for cigarettes: California in 

2005, Massachusetts in 2010, and Michigan in 2014. 

California adopted the stamp to address unrealized 

cigarette tax collections, estimated to be at least $180 

million annually in the early 2000s, and to counter 

high-quality counterfeit stamps that were nearly 

impossible to distinguish from the state’s official 

stamp (Bartolo and Kimsey, 2013). In contrast, the 

primary driver of adoption in Massachusetts was 

to ensure that the state received its full Master 

Settlement Agreement (MSA) payments, given 

concerns that nonparticipating manufacturers were 

not fully compliant with escrow payments and other 

obligations, which led to withholding of $20 million 

to $35 million in annual MSA payments to the state 

(Massachusetts Commission on Illegal Tobacco, 2014). 

Both factors—tax avoidance/evasion and withheld 

MSA payments—were behind Michigan’s more recent 

adoption of an encrypted tax stamp. The encrypted 

stamp is one component of a more comprehensive 

effort, including licensing, to deter illicit tobacco trade 

in these states.

California adopted an encrypted stamp and related 

technology, with implementation beginning in 2005. 

Features of California’s initial encrypted stamp included 

the name and address of the licensed distributor 

applying the stamp; the date the stamp was affixed; 

overt markings, including the California state bear and 

the denomination of the stamp; and covert features, 

including invisible ink and a unique serial number 

(Figure 15). Encrypted information on the stamp 

allows state investigators to verify that taxes have been 

paid and to detect counterfeit stamps. The state hired 

additional inspectors and investigators to conduct 

compliance checks across the state. Before 2003, about 

1,200 inspections were conducted annually; since then, 

the state has averaged well over 10,000 inspections 

per year, or roughly one-quarter of licensees. 

Despite different motives for adopting its encrypted 

tax stamp, Massachusetts has followed a similar 

path. In 2010, the state adopted an encrypted stamp 

with a variety of overt and covert security features, 

including color-shifting ink, unique alphanumeric 

identifiers, information on the distributor applying 

the stamp and the date on which it was applied, and 

other information. Covert features were readable by a 

handheld scanner. In 2013, Massachusetts began using 

a new stamp with enhanced security features. As part 

of the implementation, Massachusetts has stepped up 

enforcement efforts, conducting compliance checks in 

about one-third of the state’s tobacco product retailers 

each year. A unique feature of the Massachusetts effort 

is that retailers also play a role in compliance efforts, 

using a low-cost (about $20) credit card-sized device 

that allows them to authenticate the stamp. Under 

the state’s law, retailers are responsible for inspecting 

products when they are received and are required 

to immediately return unstamped or improperly 

stamped products to the supplier. Estimates of the 

effectiveness of Massachusetts’s encrypted stamp 

and related enforcement efforts in recovering lost 

cigarette tax revenue are not available. However, in 

a recent report, the state’s Commission on Illegal 

Figure 15. California Encrypted Cigarette Tax Stamps 

2005-2010

2011-2013

Source: Bartolo and Kimsey, 2013.
32

Preventing and Reducing Illicit Tobacco Trade in the United States 

Centers for Disease Control and Prevention

Tobacco notes that the combination of the encrypted 

stamp and compliance checking has increased 

retailer compliance in recent years (Massachusetts 

Commission on Illegal Tobacco, 2014). Given the 

underlying downward trend in cigarette smoking 

during this time, by an average of 2% to 3% each year, 

revenues would have been expected to fall by $11 

million to $17 million each year. However, the state 

generated an average of $551 million in cigarette 

excise tax revenues in the first 3 years following 

the full implementation of the encrypted stamp in 

July 2010, compared to $555 million in FY 2010 

(Massachusetts Commission on Illegal Tobacco, 2014). 

In 2013, Michigan deployed a new digital cigarette tax 

stamp with several overt and covert security features, 

including a holographic shifting image, markings 

indicating the number of cigarettes in the pack, micro 

and nanotext than can only be read with a magnifying 

glass, and a unique quick response (QR) code and 

serial number (Figure 16). The QR code is unique 

because consumers can use a smart-phone or tablet 

QR-reading app to access information on cessation 

programs, report violations of the state’s youth access 

policies, link to a tip line to report noncompliant 

packs, and be educated about the harms from illicit 

tobacco sales and purchases. Enforcement authorities 

can validate stamps using the smart-phone-based 

eTRACS system. As part of the implementation of 

the system, the Michigan state police department has 

created teams of enforcement officers in each of the 

state’s seven districts, and the state Department of 

Treasury has created its own enforcement team. 

Potential Impact of Tax Stamps and Other 

Product Markings

The initial implementation of California’s encrypted 

stamp was highly successful, leading to the recovery 

of $125 million in tax revenues in the first 20 months 

of implementation (US Department of the Treasury, 

2010). In the first decade following the implementation 

and upgrading of California’s encrypted tax stamp, 

the state has recovered an estimated $450 million in 

additional tax revenue, well beyond the incremental 

implementation and enforcement costs (NRC and IOM, 

2015) (Figure 17). 

Replication of these efforts across all US states could 

support recovery of billions of dollars of state tax 

revenue that would otherwise be evaded or lost.

Tax stamps are an important component of effective 

tobacco tax administration. Three states (North 

Carolina, North Dakota, and South Carolina) do 

not require cigarette tax stamps, facilitating the 

bootlegging of cigarettes from these states to other 

jurisdictions. Most other states use older heat applied 

(low-tech) tax stamps rather than the harder-tocounterfeit digital (high-tech) tax stamps with a 

variety of overt and covert security features, including 

information that allows tracking of tobacco products 

once they’ve entered the state distribution chain. 

Only some states require stamping of other tobacco 

products and even those that do, do not require 

stamping of all other tobacco products. Therefore, all 

states could facilitate more effective tax administration 

and enforcement and help curb illicit tobacco trade 

by enhancing their use of this intervention, whether 

by upgrading to high-tech stamps or by bringing 

Figure 17. Projected and Actual Cigarette Tax Stamps Sold, 

California, 2000-2013

Year

 800,000 

 900,000 

 1,000,000 

 1,100,000 

 1,200,000 

 1,300,000 

 1,400,000 

00 01 02 03 04 05 06 07 08 09 10 11 12 13 

Cigarrette Stamps Sold (in thousands) 

Actual Expected 3% Decline 

2010 Stamp 

2005 Stamp 

Source: Created from data in Bartolo and Kimsey, 2013.

Figure 16. Michigan’s Encrypted Tax Stamp

Source: OpSec Security, Inc. Reprinted with permission.
33

Preventing and Reducing Illicit Tobacco Trade in the United States 

Centers for Disease Control and Prevention

other tobacco products into the stamping system. For 

greater effectiveness, states could implement digital 

tax stamps and related systems in a way that supports 

the ability of one state to track all tobacco products 

and to trace illicit tobacco products back to sources 

in another state, and that maximizes the sharing of 

information across states. 

Federal and State Public Education Efforts

Public education efforts have been an effective tool 

for tobacco control, contributing to reduced smoking 

initiation among youth and increasing cessation 

among adult tobacco users (NCI, 2008; McAfee et al., 

2013). Public education efforts on the negative effects 

of illicit trade on government revenue and public 

safety, as well as the public health consequences of 

increased smoking rates, particularly among youth, 

can curb both the supply of and demand for illicit 

tobacco products. Such efforts have been implemented 

around the world, and mostly run by governments 

(e.g., in the UK and Canada), but other entities, such 

as retailer associations or advocacy groups, have also 

supported them (e.g., in Ireland and Hong Kong). 

These are generally one component of a broader, 

comprehensive approach to reducing illicit tobacco 

trade (NRC and IOM, 2015). In the United States, 

public education efforts on illicit trade are rare. 

Some of these education efforts try to change 

public attitudes by directly attacking the “culture of 

tolerance” for smuggling and the perception that 

tobacco smuggling is a victimless crime, which allows 

illicit tobacco trade to thrive. Several encourage citizen 

activism (e.g., by calling a hotline to report illegal 

activities). Others discuss the negative implications 

of smoking and illicit consumption, thus building 

support for tobacco control in general. Some target 

disadvantaged communities, and others focus on 

retailers, educating them on how to distinguish 

authentic from counterfeit tax markings and how to 

identify counterfeit goods. As with national efforts in 

this area, states and local jurisdictions can educate 

the public about the health, economic, and social 

consequences of illicit tobacco trade and provide 

mechanisms for consumers to report illicit tobacco 

sales to relevant enforcement authorities. Some state 

and local public education efforts have been effective 

at enhancing compliance and enforcement efforts 

by providing rewards for tips that lead to successful 

enforcement actions. Publicizing these enforcement 

actions and the resulting penalties for those involved 

in illicit trade could further increase compliance.

Public Education Case Studies: UK and Canada

Public education can be an effective intervention 

when implemented as part of a comprehensive 

approach to addressing illicit trade at both federal and 

state levels. The UK, Canada, the EU, and Malaysia, 

have used this measure as a part of broader efforts to 

combat illicit trade. In both the UK and Canada, public 

education focused on health-related messaging and 

used a variety of traditional and new media channels 

to reach the public. 

The goal of the public education effort run by the 

Royal Canadian Mounted Police between 2008 and 

2011 was to raise awareness about the public safety 

and health consequences of the illicit tobacco trade. 

The communication strategy involved public meetings 

with local decision makers, partnership with local 

drug-focused groups, presentations to local police, 

information sheets for retailers, information booths at 

local malls, public service announcements, and new 

websites (both internal and for general public) (NRC 

and IOM, 2015). Early public education efforts in the 

UK highlighted the harms from illicit tobacco using 

a variety of mass media channels. The latest efforts 

in the UK specifically avoided the “greater harms” 

message and focused on the illegality of counterfeits 

and their increased availability to children, in an 

effort to address the illicit trade problem while not 

promoting legal cigarettes as less harmful. 

Public Education Case Study: Chicago and Cook County

As a part of their efforts to curb tax evasion, both the 

city of Chicago and Cook County have established 

reward programs that encourage consumers to report 

retailers selling inappropriately stamped cigarettes, 

with some limited efforts to raise awareness of these 

programs through transit and other advertising 

on websites and in other channels. Cook County’s 

“Cigarette Tax Reward Program” began in 2011, 

while Chicago’s “Check the Stamps” program started 

in June 2014. Both programs allow consumers to 

report violations via dedicated websites (https://apps.

cookcountyil.gov/dor/index.php) or a telephone tip 

line. The programs differ in their reward schemes. 

Both provided rewards for tips that lead to actions 

against noncompliant retailers. The county’s program 

provides escalating rewards based on the number of 

illegal packs confiscated as a result of a tip. Rewards 

ranged from $250 for confiscations of 40 or fewer 

packs to $1,000 for confiscations of more than 250 

packs. The Chicago program provides a flat reward of 
34

Preventing and Reducing Illicit Tobacco Trade in the United States 

Centers for Disease Control and Prevention

$100 and rewards reports of single cigarette sales or 

sales to minors, in addition to tax violations.

Chicago’s program also highlights the consequences 

of illegal cigarette sales, emphasizing the negative 

impact on honest businesses, contribution to youth 

smoking, and lost tax revenues. While the program 

operates on a relatively limited budget ($285,000 in 

2014, which included the fixed costs of the creative 

work and other startup costs), it has included some 

spending for transit and other advertising efforts, 

while generating a fair amount of earned media 

coverage. Although still in its infancy, the program 

does appear to be having some impact, with reports 

of violations up sharply since it began. Moreover, the 

early data suggest that the program is highly costeffective, generating considerably more revenue from 

fines than it costs. Given its relatively low marginal 

costs, it is likely to be even more cost-effective over 

time (City of Chicago, 2014). 

Potential Impact of Public Education

Educating the public about the consequences of 

illicit trade may reduce the demand for illicit tobacco 

by highlighting the economic, health, and social 

consequences of illicit tobacco use. Encouraging the 

use of tip lines and other approaches for reporting 

illicit tobacco sales can facilitate enforcement actions, 

which can reduce the supply of illicit tobacco 

products, as seen in Chicago (NRC and IOM, 2015). 

To date, education efforts focused on illicit tobacco 

products in the United States have largely focused on 

getting consumers to report illegal sales. 

Some indicators suggest that the UK public education 

effort has reduced demand for illegal products, even 

though it is difficult to separate the impact of the 

program from a broader UK strategy to reduce illicit 

trade (NRC and IOM, 2015). Public education efforts 

may require significant investment and have variable 

results (Sweeting et al, 2009). Thus this measure 

may not be as effective on its own but can be more 

effective as part of a comprehensive approach to 

prevent and reduce illicit trade. 

Tribal Tobacco Policies

Despite tribal sovereignty, which gives Native 

American tribes federally protected interests in selfgovernance, federal tobacco policies and tobacco 

taxes apply to all tobacco products sold on tribal 

lands. The same is not true for state tobacco control 

policies. Under the premise of tribal sovereignty, 

tribes are considered to be “distinct, independent 

political communities” (Worcester v. Georgia, 

1832) that maintain the right to self-govern (Williams 

v. Lee, 1959). Thus, states are generally unable to file 

suit against tribes unless sovereignty is waived, or 

Congress explicitly authorizes the suit (Kiowa Tribe v. 

Manufacturing Technologies, 1998). 

Under the Indian Commerce Clause, on-reservation 

sales to tribal members are exempt from state taxation. 

Tribal members are registered members of the tribe 

on whose land the purchase is being made. Native 

Americans on another tribe’s land (nonmembers) 

and non-Native Americans are not exempt from 

state taxation on purchases made on-reservation 

(Oklahoma v. Chickasaw Nation, 1995). Because of 

this stratified tax obligation, there is a potential conflict 

between a tribe’s interest in protecting its right to selfgovern, and a state’s interest in being able to enforce 

its tobacco laws on nontribal member and non-Native 

American consumers. To remedy this potential conflict, 

the US Supreme Court held that states could impose 

basic enforcement mechanisms on tribal lands when 

such mechanisms were determined to be a “minimal 

burden” (Washington v. Confederated Tribes of Colville 

Indian Reservation, 1980; Oklahoma Tax Com’n v. 

Chickasaw Nation, 1995). Nevertheless, jurisdictional 

issues can make it difficult for states to enforce tax 

collection on nonmembers or non-Native Americans 

who purchase tobacco on tribal lands.

Further, the US Supreme Court has held that tribal 

sovereignty does not completely prevent a state from 

seeking remedy. Specifically, states may seek recourse 

by filing suit against individual agents or tribal 

officers for lost tax revenue, by collecting taxes from 

wholesalers before purchase by tribal retailers, or by 

entering into tax agreements with a tribe (Oklahoma 

Tax Com’n v. Citizen Band Potawatomi Indian Tribe 

of Oklahoma, 1991). It is under this guidance that 

many states have created tobacco taxation policies 

that apply to tribal tobacco sales, including tax-free 

allotments (quotas) or refunds, tax stamps, and/or 

revenue sharing agreements (compacts). 

A quota or allotment system establishes a quantity 

of tax-exempt products to be distributed to tribal 

retailers, usually based on member population and 

estimated consumption by members. The effectiveness 

of this approach depends on the allocation formula, 

which can be overly generous and result in more 

tax-exempt products being provided to tribal retailers 

than are consumed by tribal members. Additionally, 
35

Preventing and Reducing Illicit Tobacco Trade in the United States 

Centers for Disease Control and Prevention

this approach provides no mechanism to ensure that 

tax-exempt products are only purchased by eligible 

consumers. Tobacco products can be stamped under 

this system, with one stamp for the tax-exempt 

products intended for sale to tribal members and 

another stamp for tax-paid products intended for sale 

to nontribal members. Under this system, stamping 

agents apply the alternative stamps, and retailers are 

responsible for ensuring that appropriately stamped 

packs are sold to tribal and nontribal purchasers.

In a refund system, tobacco products are sold to 

tribal retailers with all taxes included, and the retailer 

applies to a state’s tax authority for a refund on sales 

to eligible customers (registered tribal members) 

who are not required to pay taxes. Selling fully taxed 

tobacco products in these communities will eliminate 

the economic incentive of nonmembers to purchase 

tobacco products from tribal retailers for either 

their own consumption or for resale elsewhere. This 

approach can be combined with imposing a “purchase 

quota,” which sets a maximum quantity for purchase 

of tax-exempt products by the same eligible individual 

at any given time, acting as a measure to stop the 

purchase of larger quantities of tax-exempt products 

for potential resale to noneligible customers. Tobacco 

products sold under this system can be stamped for 

ease of identification/enforcement and to prevent the 

diversion of tax-exempt products to nontribal retailers 

off reserve. 

Alternatively, states can enter into revenue-sharing 

agreements with tribes, typically referred to as 

compacts. Under these agreements, tribes agree to 

levy a tribal tax on tobacco products sold on tribal 

lands, narrowing the price differentials between 

tobacco products sold on and off reservations, 

with the tribe retaining some or all of the revenues 

collected from the “tribal taxes.” The effectiveness 

of these compacts in minimizing price differentials 

will depend on the level of the tribal taxes relative to 

state and local tobacco excise taxes and sales taxes 

in nearby jurisdictions. Tax stamps or other markings 

may also be required under these compacts. Tribal 

compacts have become increasingly important as 

tribes have begun manufacturing tobacco products 

on reservations. As a result, tobacco products 

produced and sold on reservations will not pass 

through traditional distribution channels, limiting the 

effectiveness of quota or rebate systems. 

Use of these approaches vary across states, as 

well as within states and across tribes (Figure 18)

(Chaloupka et al., 2015). The following case studies 

provide more detailed descriptions of the approaches 

used in various states.

Figure 18. Types of State Policies on Tribal Tobacco Sales

Use both compacts and other sales laws (N=11) 

Use compacts only (N=3) 

Use sales laws only (N=6) 

Use no tribal-specific tobacco sales laws (N=14) 

No tribal reservations within state borders (N=17) 

AZ 

WY

OR 

ID 

MT

UT 

NV 

WA 

CA 

TX 

AR 

OK

ND 

LA 

KS 

IA NE

SD 

CO 

NM

MO 

MN

TN 

AL 

KY 

OH 

MS 

MI

IN 

GA 

FL 

PA 

ME 

NY 

WV VA 

NC 

SC 

VT 

D.C. 

NJ 

MD 

DE 

NH 

MA 

IL

WI

AK 

CT 

RI 

HI 

Source: DeLong et al, 2014.
36

Preventing and Reducing Illicit Tobacco Trade in the United States 

Centers for Disease Control and Prevention

Figure 19. State Policies Limiting Amount of Tax Exempt Cigarettes Tribes Can Receive 

Limit – Coupon/Voucher System (2) 

No Limit (11) 

Limit – No Coupon System (4) 

Tribal State - No Exemption Laws (3) 

No tribal lands or no policies implemented (31) 

AZ 

WY

OR 

ID

MT 

UT

NV

WA 

CA 

TX 

AR 

OK

ND

LA 

KS

IA NE

SD 

CO 

NM

MO 

MN 

TN 

AL 

KY 

OH 

MS 

MI

IN 

GA 

FL 

PA 

ME 

NY 

WV VA 

NC 

SC 

VT 

D.C. 

NJ 

MD 

DE 

NH 

MA 

IL

WI

AK

CT 

RI 

HI 

Source: DeLong et al, 2014.

Tribal Sales Case Studies: US States 

Thirty-four US states have lands belonging to federally 

recognized tribes within their borders. Twenty of 

these states have implemented policies to reduce tax 

evasion originating on these lands, include negotiation 

of compacts with some or all tribes in the state and/

or allotment, quota, or rebate schemes (Figure 19). 

State legislation authorizing the compacts suggests or 

requires a variety of provisions, most often addressing 

the sharing of the tobacco tax revenues between states 

and tribes but also including provisions on the use of 

these revenues, minimum selling prices, enforcement 

provisions, and stamping requirements. 

Three states (Oregon, Michigan, and South Dakota) 

rely solely on compacts and have relatively low rates 

of smokers purchasing cigarettes on tribal lands, 

according to the most recently available wave of the 

TUS-CPS (Table 5) (Oregon Health Authority, 2014; 

Nordeen, 2013; and South Dakota Department of 

Revenue, 2012). These compacts are likely successful 

in part because they govern all cigarettes sold on 

tribal lands. That is, there are no allowances for taxexempt cigarettes intended for sale to tribal members, 

limiting opportunities for tax evasion—all cigarettes 

sold on tribal lands under these agreements include 

state taxes (Figure 19). 

The lack of action in the remaining 14 states with 

tribal lands may be due to a combination of factors, 

including a limited tribal presence in the state, the 

location of tribal lands far from state population 

centers, or low state tobacco taxes so that taxexempt tobacco products sold on tribal lands are not 

significantly less expensive than those sold elsewhere 

in the state.

Figure 20. Example of Washington Tax Stamps

Source: Washington State Department of Revenue, 2015.
37

Preventing and Reducing Illicit Tobacco Trade in the United States 

Centers for Disease Control and Prevention

Table 5. Percentage of Smokers Reporting Cigarette Purchases and Relative Prices on Native American Reservations

State

State Excise Tax, 

$ per Pack

Smokers Purchasing 

on Reservations, %

Reservation Price as a Percentage 

of Off-Reservation Price

ALa 0.43 1.87 94.00

AKa 2.00 0.45 87.07

AZ 2.00 21.10 72.90

CAa 0.87 1.68 92.42

COa 0.84 0.56 87.42

CTa 3.00 0.67 109.37

FLa 1.34 3.72 91.12

ID 0.57 8.10 76.05

IAa 1.36 2.35 48.62

KS 0.79 5.31 43.39

LAa 0.36 0.38 91.19

MEa 2.00 0.58 93.38

MAa 2.51 0 NA

MIa 2.00 0.94 80.65

MNa 1.57 2.44 93.18

MSa 0.68 0 NA

MTa 1.70 3.06 90.71

NEa 0.64 3.05 72.00

NV 0.80 14.58 78.66

NM 1.35 27.42 74.81

NY 3.78 17.09 39.28

NCa 0.45 1.04 98.39

NDa 0.44 6.69 90.24

OK 1.03 31.89 78.39

ORa 1.18 0.52 113.14

RI 3.46 1.83 79.43

SCa 0.41 0.27 121.90

SDa 1.53 1.25 86.47

TXa 1.41 1.41 83.87

UTa 1.34 0 NA

VAa 0.30 0.43 89.89

WA 2.91 16.95 64.71

WI 2.52 6.72 85.15

WY 0.60 5.14 82.95

Abbreviation: NA, not applicable.

a

 Indicates estimates based on fewer than 20 respondents reporting reservation purchases; states with no federally recognized tribes are excluded. 

Source: National Cancer Institute. 
38

Preventing and Reducing Illicit Tobacco Trade in the United States 

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Table 6. Overview of Tribal Taxation Measures

Measure State Example Key Features

Rebate 

agreements

Wisconsin Applies the state tax to all cigarettes sold on tribal lands but then provides rebates to the 

tribes intended to offset the taxes paid by tribal consumers.

Compact 

agreements

Washington Has unique tax stamps for cigarettes sold by tribes with a compact and another stamp for 

cigarettes sold by tribes without compacts (Figure 20).

Differential 

tax stamps

Arizona Uses color-coded stamps to tax some or most of the cigarettes sold on tribal lands, while 

allocating enough tax-exempt products that are intended for sale to tribal members to 

satisfy tribal demand.

Allocation 

via coupons

Florida Compacts with the Seminole and Miccosukee tribes that apply the state tax to all cigarettes sold 

on tribal lands, but the state then issues coupons to tribes for tax-free cigarette purchases. 

Mixed 

approach

Oklahoma

New York

Has agreements that levy “tribal taxes” that may differ across tribes, with the agreements 

varying in how the revenues generated from the tax are shared between the state and the tribe.

Allows tribes to choose among various options, including receiving an allocation of tax-exempt 

cigarettes intended to satisfy tribal demand (“prior approval”), collecting the state tax on all 

cigarettes sold on the reservation while providing coupons to offset the tax for tribal members, 

or individually negotiated agreements that allow for different approaches to protecting tribal 

sovereignty while limiting availability of nontaxed products to nontribal members.

There are multiple approaches and combinations 

of approaches available to states and tribes to work 

together on taxation. Table 6 highlights a number of 

examples from different states. Note that these are not 

inclusive of all states that use each measure. 

Fifteen states have policies addressing the stamping of 

cigarettes (and in some cases other tobacco products, 

including little cigars and RYO) sold on tribal lands 

(Figure 21). 

Tribal Sales Case Study: Canada’s First Nation Experience

In conjunction with the Royal Canadian Mounted 

Police (RCMP) launch of its first “Contraband Tobacco 

Enforcement Strategy” in 2008, Alberta, British 

Columbia, Saskatchewan, Manitoba, Quebec, and New 

Brunswick began implementing quota and/or refund 

policies to reduce the sale of tax-free cigarettes to 

non-Natives on Native reserves. The policies either 

allow for the allocation of tax-exempt cigarettes 

to First Nation retailers, based on population and 

consumption estimates, or require all applicable 

taxes to be applied to cigarettes sold on reserves, 

while allowing retailers to sell products to members 

of the reserve at net-of-tax prices, and then apply 

for a refund for the taxes they pay on these sales. In 

addition, British Columbia has implemented a policy 

that effectively limits the number of retailers operating 

on First Nation reserves in the province (RCMP, 2008). 

Potential Impact of Policies Addressing 

Tribal Sales

In the United States, the effects of efforts to curb 

reservation-based tax avoidance and evasion 

would be largely confined to states where tobacco 

products bootlegged from reservations are relatively 

available and where tobacco user purchasing on 

reservations is relatively common. By reducing price 

differences on and off reservations, sales would 

shift from reservation outlets to other retailers in 

the state, leading to increases in tax-paid sales and 

state tax revenues, while overall tobacco use and its 

consequences would fall as a result of the reduced 

availability of cheaper cigarettes. 

To the extent that the price differences are reduced 

through compacts that allow tribes to retain some or 

all of the taxes collected on sales made by reservation 

retailers, tribes could also see an increase in revenues. 

Increasing revenues could benefit tribes in a number 

of ways, particularly if these funds are earmarked for 

tobacco cessation or other health initiatives. A rise in 

on-reservation prices could also reduce tobacco use 

among tribal members, which would help to reduce 

tobacco-related health disparities in this population 

related to high tobacco use prevalence.
39

Preventing and Reducing Illicit Tobacco Trade in the United States 

Centers for Disease Control and Prevention

Figure 21. Types of State Policies Regarding Stamping of Cigarettes Sold on Reservations

All products require stamps (N=9) 

Some products require stamps (N=4) 

N/A – No reservation within state 

borders (N=17) 

Stamps prohibited (N=2) 

No state laws governing tribal 

tobacco sales (N=19) 

AZ

WY 

OR 

ID 

MT 

UT 

NV

WA 

CA 

TX 

AR 

OK

ND 

LA 

KS 

IA NE

SD 

CO 

NM

MO 

MN 

TN 

AL 

KY 

OH 

MS 

MI

IN 

GA 

FL 

PA 

ME 

NY 

WV VA 

NC 

SC 

VT 

D.C. 

NJ 

MD 

DE 

NH 

MA 

IL

WI

AK 

CT 

RI 

HI 

Source: Chriqui, 2015.

States with populations near tribal lands in other 

states would likely see some benefits as fewer tobacco 

users in these states would cross borders to make 

purchases from tribal retailers, leading to increased 

tax-paid sales and tax revenues, and to overall 

reductions in tobacco use. 

Enhancing Surveillance and Evaluation

Finally, federal and state actions to enhance 

illicit tobacco-related surveillance and evaluation 

would provide support to most other measures to 

prevent and reduce illicit trade. Existing illicit trade 

surveillance is limited in its ability to provide the 

data needed for understanding and monitoring 

illicit tobacco markets in the United States and for 

distinguishing among the different activities that 

contribute to these markets (e.g., tax avoidance vs. 

tax evasion), which is essential for developing and 

evaluating appropriate interventions. As a result, 

national estimates of the size of the illicit market vary 

greatly, and only limited information is available on 

the extent and nature of tax avoidance and evasion 

at the state and local levels. Enhanced efforts could 

build on existing surveillance systems (e.g., the TUSCPS survey) and could incorporate new measures 

and approaches such as pack inspection or collection 

methods, including littered-pack surveys that provide 

national and sub-national measures of tax avoidance 

and evasion. Broader and more reliable information 

on retail purchases, purchase price, and the supply 

side of the illicit market would also be beneficial in 

measuring the impact of illicit trade and initiatives to 

reduce it (NRC and IOM, 2015). Similarly, surveillance 

systems that assess federal, state, and local policy 

and enforcement efforts targeting illicit tobacco trade 

would also be useful. Existing information on these 

efforts has very limited utility for assessing the effects 

of policy and enforcement efforts on illicit tobacco 

markets. Such data are essential for evaluating the 

impact of specific interventions and would enable 

adaptation of strategies based on changes in the illicit 

markets. 
40

Preventing and Reducing Illicit Tobacco Trade in the United States 

Centers for Disease Control and Prevention
41

1. Tax avoidance and evasion are significant and growing problems in the United States. An estimated 8.5% 

to 21% of cigarette purchases avoid or evade state and local cigarette taxes. Sizable differences in taxes 

across jurisdictions are the primary driver of tobacco tax avoidance and evasion, leading to individual 

cross-border purchases in nearby localities and on Native American reservations, and elsewhere, and to 

bootlegging of tobacco products from low-tax jurisdictions for resale in high-tax jurisdictions.

2. Comprehensive tobacco prevention and control practices, including regulation, are effective in reducing 

death and disease caused by tobacco. Implementing measures to reduce illicit trade should not impede 

continued efforts to put effective, evidence-based tobacco control and regulatory interventions in place in 

the United States.

3. Proven measures to reduce tax avoidance and evasion include: 

•	 Prioritizing and coordinating enforcement efforts; increasing penalties for those caught engaging in 

illicit tobacco trade. 

•	 Harmonizing tobacco taxes across jurisdictions by setting minimum tax rates. 

•	 Increasing control over the supply chain through licensing, adopting newer technologies such as 

encrypted tax stamps, and implementing a tracking-and-tracing system. 

•	 Educating the public about the consequences of illicit tobacco markets and providing mechanisms for 

consumers to report violators. 

4. Governments that have adopted and implemented some combination of these interventions have 

succeeded in curbing illicit tobacco trade. More comprehensive and coordinated approaches are more 

effective. Improving surveillance, regularly updating and revising measures to account for changes in the 

illicit tobacco markets, and adopting newer technologies as they become available are critical. The use of 

these approaches can increases revenues that exceed their implementation costs while improving public 

health by reducing tobacco use and its consequences.

Conclusion
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Preventing and Reducing Illicit Tobacco Trade in the United States 

Centers for Disease Control and Prevention
43

Referenc

Barker DS, Wang S, Merriman D, & Chaloupka FJ. (In progress). 

Estimating the Prevalence of Tax Avoidance and Evasion in the U.S.: 

Results from A National Littered Cigarette Pack Collection. Chicago, 

IL: Tobacconomics, Health Policy Center, Institute for Health 

Research and Policy, University of Illinois at Chicago.

Bartolo L, & Kimsey B. (2013, July). California’s Cigarette Tax 

Stamp. Presented at Combating the Illicit Tobacco Trade, Centers for 

Disease Control and Prevention, Atlanta GA.

Campaign for Tobacco-free Kids. (2015, September 28). State 

cigarette excise tax rates and rankings. Retrieved from http://www.

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