Ontario Issues RFI for Tracking Raw Leaf Tobacco

In the July 2016 issue of Tax Stamp News™, Sven Bergmann of Venture Global Consulting covered a report by the Macdonald-Laurier Institute – a conservative policy think tank in Ottawa, Canada – on the illicit tobacco trade in Canada.

Among other measures, the report recommended the use of tracking systems on raw materials to address a situation where illicit cigarettes were increasingly being produced within the country itself (most notably on Native American reservations in Ontario and Quebec), rather than being smuggled in from other countries.

Fast forward to the present day (ie. five years later), and the government of Ontario has at last issued a Request for Information on technology, products and industry best practice for implementing an automated registration and track and trace solution.

The aim of the solution is to allow the Ontario Ministry of Finance to manage and monitor the production and movement of raw leaf tobacco produced in or imported into the province. The solution is also intended to reduce the burden on the industry itself – including tobacco growers – by providing automated methods to meet labelling, reporting, record-keeping and notification requirements.

The raw leaf tobacco industry involves multiple types and methods of packaging (eg. bales, boxes and barrels), which will all require identification and tracking. The anticipated requirement for ID markers per year is stated in the RFI as being in excess of 150,000.

The government intends to make the solution initially available to ministry inspectors, to support the 2022 growing season, followed by Ontario tobacco growers in 2023.

Since the turn of the millennium, Canada has experienced a continuous increase in illicit manufacturing, wholesale and retail operations on reservation land along the St Lawrence River, with various degrees of legal compliance, reported Sven, in his 2016 article.

These illegal operations churn out cheap, untaxed and under-taxed tobacco products in the form of unlicensed, unregulated and sometimes unbranded products, including the notorious ‘baggies’ (200 cigarettes in unbranded plastic bags).

For example, Grand River Enterprises (GRE), the principal producer for the Six Nations reserve, is federally licensed and therefore has unfettered access to the Canadian tobacco leaf market, including cut-rag (tobacco that has been cut into fine strips for use in cigarettes) and other raw material inputs. As a result, GRE is able to produce high-quality contraband products on Canadian soil.

The MacDonald-Laurier Institute report provides a suite of policy recommendations to meet this threat profile, namely tighter licensing, reporting and tracking requirements.

Cigarettes are relatively simple products to manufacture, requiring only a handful of inputs or raw materials, including tobacco, acetate tow (industry-standard filters) and cigarette paper. These materials are quite unique to tobacco products, with few uses outside of the tobacco industry, and only a handful of manufacturers worldwide to produce them.

Sven agreed with the report that tobacco growers in Canada and the United States, as well as importers of tobacco, should be subject to stringent licensing, reporting and tracking requirements.

Once licensed, growers and importers should be required to identify the source and final destination of raw leaf and track raw leaf tobacco bales until the tobacco reached licensed manufacturing facilities. Strict reporting requirements should underpin such a tracking regime to ensure raw tobacco leaf used in tobacco manufacturing can be traced back to its point of origin.

And similar regulations should apply to acetate tow and cigarette paper, advised Sven.

The Ontario government advises that the unregulated tobacco market results in an estimated C$750 million ($600 million) in lost revenues each year.