Surge in illegal tobacco sales and vaping in Australia could lead to A$5 billion in lost tax revenue

Supermarket and gas station owners in Australia have warned that a surge in smokers turning to illegal tobacco, counterfeit cigarettes, and e-cigarettes has led to a dramatic drop in tobacco sales, resulting in losses of tobacco excise and goods and services tax, leaving the federal government facing a budget shortfall of up to A$5 billion.

According to Australian media, tobacco sales at independent supermarkets, gas stations, convenience stores, and corner shops have plummeted sharply as legal tobacco prices soar, prompting smokers to seek savings under cost-of-living pressures, which has fueled demand for illegal, counterfeit, and loose tobacco (known as "chop-chop").

The popularity of illegal e-cigarettes has also deprived legitimate retailers of sales, which, combined with the significant increase in illegal tobacco, has led to losses in tobacco excise and goods and services tax.

One of Australia's largest independent supermarket chains, Ritchies, recently revealed the potential threat to the treasury during a presentation to its main food and grocery suppliers two weeks ago—the Australian Association of Convenience Stores estimates that this loss could reach A$5 billion.

Ritchies CEO Fred Harrison told suppliers at a confidential briefing that tobacco sales across the company's network of 75 supermarkets have dropped by A$1.2 million per week compared to the same period two years ago. At a supplier meeting on March 30, Mr. Harrison disclosed that total sales at his chain fell by 2.97% from July 2022 to February 2023, with 90% of that decline attributed to falling tobacco sales.

"This is caused by illegal tobacco. People are buying illegal tobacco, e-cigarettes, and e-cigarettes are simply crazy," Mr. Harrison stated.

"Currently, e-cigarettes are a big problem in Australia, most of which are illegal. People are turning to loose tobacco, smuggled tobacco, and e-cigarettes instead of spending A$50 on a pack of cigarettes."

Australia's largest supermarket chain, Woolworths, recently reported a 15% decline in tobacco sales in its latest half-year results, while competitor Coles indicated a weakening in its tobacco sales.

Tobacco taxes are raised twice a year, in March and September. As cost-of-living pressures tighten household budgets, the average price of a pack of cigarettes has rapidly risen to nearly A$50 amid soaring inflation. For those who refuse to quit smoking to protect their health and wealth, smoking has proven to be an expensive habit, and many are now attracted to cheaper forms of tobacco led by illegal tobacco that avoids consumption tax, goods and services tax (GST), and other corporate taxes.

Not only are retailers seeing declining sales, but the federal government is also suffering heavy losses in consumption tax and goods and services tax as criminal organizations flood the market with illegal tobacco, most of which is smuggled into Australia, while many also purchase illegal e-cigarette products from various underground channels and social media.

Mr. Harrison stated, "The federal government is likely to miss out on about A$4 billion in consumption tax; they are too slow to react."

The CEO of the Australian Association of Convenience Stores, Theo Foukkare, stated that the surge in illegal tobacco (including loose tobacco and contraband tobacco imported from Asia) and tobacco smuggling has led to a reduction of A$1.8 billion to A$3.5 billion in tobacco consumption tax for the federal government and the Australian Taxation Office each year.

Foukkare represents a gas station and convenience store industry worth A$10 billion, with 6,500 members, including national retailers such as 7-Eleven, BP, Ampol, and Caltex, which derive about 36% of their retail revenue (excluding fuel) from tobacco sales.

He noted that tobacco sales have declined by about 5% over the past three years.

Driven by illegal operators and underground e-cigarette supplier networks, e-cigarette prices have surged.

"Our independent research confirms that conservatively, Australia's e-cigarette market#p#分页标题#e# is worth A$2 billion, with about 90% currently sold through retail or storefronts, online retailers, and social media on the black market."

Foukkare stated that he has expressed his concerns to both state and federal governments, raising issues regarding the spread of counterfeit and illegal tobacco, as well as consumption tax and tax losses.

"We have spent a lot of time working with past and present (federal) governments; I have personally met with the Treasury multiple times to outline the overall impact. The current long-term (budget) estimate of the impact is A$1.7 billion, which includes losses from goods and services tax, plus import duties and corporate tax.

"When you combine this with the approximately A$3.5 billion loss in illegal tobacco consumption tax, it results in A$5 billion in losses that are beyond the government's control, which are actually operated by organized criminals."

Recently, the Parliamentary Joint Committee on Law Enforcement's investigation into illegal tobacco found that high tax rates and price-based incentives to reduce the affordability of tobacco are lowering smoking rates.

However, one negative consequence of these high taxes is that some tobacco users are attempting to evade these taxes by purchasing untaxed illegal tobacco.

"Essentially, the illegal tobacco market is driven by these individuals trying to avoid Australia's price-based incentives to increase taxes to reduce tobacco use. The report submitted by the Department of Health states that the lower prices of illegal tobacco directly affect the effectiveness of price-based public health policies aimed at reducing smoking rates," the report stated.

This has also caused headaches for the ATO. The ATO regularly conducts "tax gap" studies to estimate the difference between the amount collected by the ATO if every taxpayer fully complied with tax laws and the amount that should be collected. The Australian Taxation Office estimates that the net gap for tobacco tax in the 2017-18 fiscal year was 5%, or A$647 million, far lower than the A$2 billion claimed by the tobacco industry.

However, a recent report from the Australian Taxation Office stated that the total tobacco tax for the 2020-21 fiscal year reached A$14.3 billion, and it is estimated that illegal tobacco entering the market evaded A$1.9 billion in taxes.

"We estimate that the net gap for 2020-21 was 1,234 tons. This is the amount of illegal tobacco on the Australian market that went undetected. The customs value is A$1.89 billion," the ATO report stated. E-cigarettes, e-cigarettes, and other similar items, including nicotine-containing e-cigarettes, are not subject to consumption tax and are not included in the tax gap estimates, but the shift of smokers from tobacco to e-cigarettes has resulted in a loss of government revenue.