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04/30/98 10:44 9 202 622 2882 GENERAL COUNSEL +++ NATL ECONOMIC CO 5. 002 in which assessments are levied and other specifics. Nonetheless, the Treasury Department believes that the creation of a sound regulatory system -- one that will close the distribution chain for tobacco products - will ensure that the diversion and smuggling of tobacco can be effectively controlled and will not defeat the purposes of comprehensive tobacco legislation. By closing the distribution chain for tobacco products, we will be able to ensure that these products flow through legitimate channels and effectively police any leakages that do take place. The Treasury Department already licenses tobacco manufacturers and export bonded warehouses in connection with collecting tobacco excise taxes. We believe that such licensing should be extended to the other entities in the upper end of the tobacco distribution chain -- wholesalers, exporters, importers and distributors. We are comfortable with a system that places primary responsibility for licensing retailers on state governments, as provided in Senator McCain's bill. Under this system, tobacco products would move through legitimate channels. Most importantly, such channels would not be open to America's youth. An effective system must include the following elements: First, as I have described above, jall entities in the distribution chain for tobacco products -- manufacturers, wholesalers, exporters, importers, distributors and retailers -- should be required to hold a license or a permit. Licensing of retailers could be done at the state level. Licenses would be issued based on certain clearly specified criteria and could be revoked or suspended for certain specified violations. Those conducting business without a license would be subject to penalties. Licensed entities should only be authorized to sell tobacco products to other licensed entities. The sale or distribution to any entity that is unlicensed would be unlawful. Second, legislation should require the marking, branding and identification of packages of tobacco products intended for domestic distribution and for export so that they may not be diverted or smuggled in circumvention of the legitimate channels of distribution. Third, any regulatory proposal should include penalty and administrative provisions that will allow for effective, efficient and uniform enforcement of controls over distribution. A regulatory scheme for tobacco products such as that I just described would be similar to the way the Federal Government has effectively regulated alcoholic beverages for over sixty years. The system in place has allowed for effective commerce in alcoholic beverages while effectively curtailing trafficking in illicit, non-tax paid products. In addition, all states currently regulate their alcohol retailers. Current laws regulating tobacco are aimed at collecting the Federal excise tax and assisting states in their efforts to collect excise taxes imposed on certain tobacco products, not at regulating the distribution of tobacco products and preventing smuggling. For example, the Contraband Cigarette Trafficking Act, or CCTA, was designed solely to assist states in enforcing 2

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    "ocrText": "04/30/98\n10:44\n9 202 622 2882\nGENERAL COUNSEL +++ NATL ECONOMIC CO\n5.\n002\nin which assessments are levied and other specifics. Nonetheless, the Treasury Department\nbelieves that the creation of a sound regulatory system -- one that will close the distribution chain\nfor tobacco products - will ensure that the diversion and smuggling of tobacco can be effectively\ncontrolled and will not defeat the purposes of comprehensive tobacco legislation.\nBy closing the distribution chain for tobacco products, we will be able to ensure that these\nproducts flow through legitimate channels and effectively police any leakages that do take place.\nThe Treasury Department already licenses tobacco manufacturers and export bonded warehouses\nin connection with collecting tobacco excise taxes. We believe that such licensing should be\nextended to the other entities in the upper end of the tobacco distribution chain -- wholesalers,\nexporters, importers and distributors. We are comfortable with a system that places primary\nresponsibility for licensing retailers on state governments, as provided in Senator McCain's bill.\nUnder this system, tobacco products would move through legitimate channels. Most importantly,\nsuch channels would not be open to America's youth.\nAn effective system must include the following elements:\nFirst, as I have described above, jall entities in the distribution chain for tobacco products\n-- manufacturers, wholesalers, exporters, importers, distributors and retailers -- should be\nrequired to hold a license or a permit. Licensing of retailers could be done at the state\nlevel. Licenses would be issued based on certain clearly specified criteria and could be\nrevoked or suspended for certain specified violations. Those conducting business without\na license would be subject to penalties. Licensed entities should only be authorized to\nsell tobacco products to other licensed entities. The sale or distribution to any entity that\nis unlicensed would be unlawful.\nSecond, legislation should require the marking, branding and identification of packages\nof tobacco products intended for domestic distribution and for export so that they may not\nbe diverted or smuggled in circumvention of the legitimate channels of distribution.\nThird, any regulatory proposal should include penalty and administrative provisions that\nwill allow for effective, efficient and uniform enforcement of controls over distribution.\nA regulatory scheme for tobacco products such as that I just described would be similar to\nthe way the Federal Government has effectively regulated alcoholic beverages for over sixty\nyears. The system in place has allowed for effective commerce in alcoholic beverages while\neffectively curtailing trafficking in illicit, non-tax paid products. In addition, all states currently\nregulate their alcohol retailers.\nCurrent laws regulating tobacco are aimed at collecting the Federal excise tax and\nassisting states in their efforts to collect excise taxes imposed on certain tobacco products, not at\nregulating the distribution of tobacco products and preventing smuggling. For example, the\nContraband Cigarette Trafficking Act, or CCTA, was designed solely to assist states in enforcing\n2"
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