Customs and Excise (Tobacco Products) Amendment Bill

I present a legislative statement on the Customs and Excise (Tobacco Products) Amendment Bill.

💬 DEPUTY SPEAKER: That legislative statement is published under the authority of the House and can be found on the Parliament website.

I move, That the Customs and Excise (Tobacco Products) Amendment Bill be now read a first time.

The purpose of this bill is to ensure the correct excise and excise-equivalent duty is able to be applied to certain tobacco goods and to reduce revenue evasion. Tobacco products are highly taxed for public policy reasons, in particular to reflect the negative health impacts and costs of tobacco consumption on individuals and society. The bill addresses two issues: under-declaration of the tobacco content of water-pipe tobacco, and the need for technical amendment to the definition of tobacco products in the Customs and Excise Act 2018. These issues are not related but are both urgent due to their impacts on Crown revenue and the potential to undermine the Smokefree Aotearoa 2025 Action Plan.

Water-pipe tobacco is also known as flavoured shisha, hookah, molasses, and fruit tobacco. Unlike other tobacco, water-pipe tobacco contains other items, including glycerol. It may also contain aromatic oils and extracts, molasses, or sugar, and may be flavoured with fruit. These other items may make up a significant proportion of the weight of the product. It is for this reason that in New Zealand it is taxed based on the kilo of tobacco content. When importing water-pipe tobacco, importers are required to declare the kilograms of tobacco content on their import entry. Customs suspects that self-declaration of the tobacco content by some importers is leading to material under-declaration of tobacco content in water-pipe tobacco products and revenue evasion.

In the cases of other goods where Customs question the information provided, testing and investigations can be undertaken to determine the accuracy of the information. As there is no testing facility available internationally or domestically, it is not technically possible for Customs to accurately determine the tobacco content of water-pipe tobacco. Customs is forced to use the declared tobacco content provided by importers to determine the excise on the product. As the accuracy of the declared tobacco content cannot be determined, this also means Customs is unable to meet the evidential threshold for seizure and prosecution.

The bill addresses the difficulty in accurately determining tobacco content in water-pipe tobacco for the correct levying of excise and excise-equivalent duty. The bill achieves this through imposing import controls, changing the statistical unit for calculating duty, and creating a new excise and excise-equivalent duty rate for water-pipe tobacco.

Paying incorrect revenue denies the Crown of revenue that is due to it and also undermines our health strategy of using tobacco taxation to increase prices, reduce consumption, and reduce the harm that smokers cause to New Zealanders’ health. The supply of cheaper tobacco products can also counteract the incentive to quit tobacco products that are fully taxed. It also creates an uneven playing field in the market, as honest importers who correctly declare the tobacco content of their goods are able to be undercut on price by dishonest importers who evade duty.

To combat this, the bill changes the method of calculating excise and excise-equivalent duty from per kilo of tobacco content to total weight of the water-pipe tobacco, including anything added to the tobacco during manufacturing or processing. This brings New Zealand into line with a number of other countries, such as the United Kingdom and Australia, who have encountered the same issues in determining tobacco content of this product.

Moving from tobacco content to total weight requires a new excise and excise-equivalent duty rate. The bill amends the rate to one based on an assumed tobacco content of 15 percent. Customs believes 15 percent is a fair, standardised percentage, broadly in line with the actual tobacco content that most of this type of product is likely to contain. The bill sets the excise and excise-equivalent duty rate for water-pipe tobacco at $234.77 per kilogram based on the current tobacco excise rate and a tobacco content of 15 percent.

This bill imposes the same import controls on water-pipe tobacco that most other tobacco products are subject to, making it a prohibited import. Those wanting to import water-pipe tobacco will require a permit to be issued by Customs prior to importation. The bill is not about making the system harder for compliant importers. It will have minimal impact on them. They will need to apply for a permit to import. There is no cost for a permit to import. This bill aligns with the Government’s vision of eliminating the harm that smoked tobacco causes communities and of having a tax system that is efficient and fair.

Finally, this bill also amends the definition of “tobacco products” in the Customs and Excise Act 2018 to include new tariff and excise headings. These new headings are required as a result of changes made to the Harmonized Commodity Description and Coding System, an international system that codifies all goods, that came into effect on 1 January 2022. The Customs and Excise Act 2018 defines tobacco products for the purpose of the annual inflation adjustment by reference to specific tariff and excise headings. The harmonised code has reclassified some tobacco products under a newly created tariff heading, which also needs to be included in the relevant excise item. These must be included in the definition of tobacco products to enable the goods to be adjusted annually for inflation. Without this, they will become out of step with the excise and excise-equivalent rates for other tobacco products. This bill amends the definition of tobacco products to include the new excise item and tariff heading, ensuring that excise on all tobacco products can be adjusted for inflation.

I ask Parliament to support this bill. It will come into force the day after Royal assent. I am confident that it will ensure a fair market playing field for legitimate importers of water-pipe tobacco, protect Crown revenue, and support the Government’s Smokefree Aotearoa 2025 Action Plan. I am pleased to commend this bill to the House.

The question is that the motion be agreed to.

Thank you, Mr Speaker. National will be supporting this amendment to the Customs and Excise Act, a bill that fundamentally is trying to deal with two problems: first of all, the avoidance of excise tax on tobacco products and, secondly, to standardise the tobacco in flavoured tobacco with other tobacco products. The use of flavoured tobacco is very common—also known as water-pipe tobacco—and we’ve heard some of the names. It’s also known more commonly as shisha, hookah, nargile, goza, and hubble-bubble—is how you might hear it, certainly through the Middle East. I was very familiar with this where it’s a common practice.

The difficulty that we’ve got is that the tobacco in the flavoured tobacco product is also bundled together with glycerol and aromatics and molasses, and you can’t tell the weight of just the tobacco content, the KTC or the kilo tobacco content. In fact, the regulatory impact statement describes the challenge and the difficulty in trying to determine that. You’d think you could just send it to a laboratory or do some sort of test, but it’s not quite how it is. In 2016, Customs engaged Company A to test an importation to determine the tobacco content. Company A had to clean the samples with a bleaching treatment followed by water washes, as the leaf material was deeply coloured by other materials that are added to the leaf fragments during manufacture, and the samples then had to be dried to allow microscopic examination. The result they came up with was about 4 to 5 percent kilo tobacco content, which they suspected was substantially less, which is the problem we’re dealing with, than what the tobacco content actually was.

The regulatory impact statement also talks about the high index of suspicion of avoidance where manufacturers or importers, actually—of which there’s about 15, it turns out—commercial importers, are reporting 0.4 percent KTC as a self-declared importer, where, in fact, the suspicion is that it’s at least up to the 10 percent, if not the 15 percent level. The excise over the past two years, the excise tax on these products, has been $5 million. The suspicion is that there may be $31.5 million of excise avoidance over that two-year period, and so the suggestion is that it move to a total weight and then a percentage of that total weight—and a threshold analysis was done as to what that percentage should be, 15 percent, 20 percent, and 30 percent, and 15 percent was thought to be a fairer proportion and probably more representative of the true KTC component.

So this bill tries to simplify—it’s a bit of a guess, but it’s as much of a guess as any other jurisdiction as well—the mechanism and get some more accuracy as far as possible into assessing the true tobacco content of flavoured tobacco or water pipe tobacco. And it suggests this be done just by the total weight times the 15 percentage points. The second thing it does is to standardise the reference to tobacco across these products with the rest of the tobacco framework. So National will be supporting this bill. Thank you.

E te Māngai, tēnā koe, tēnā koutou e te Whare. I’d like to join with other parties so far in their contributions in stating that the Greens, of course, will be supporting this piece of legislation today.

As others have outlined, this Customs and Excise (Tobacco Products) Amendment Bill amends the Customs and Excise Act 2018 and the Excise and Excise-equivalent Duties Table—or, for those who are well-initiated, the EEDT—to ensure that the correct excise and excise-equivalent duty is applied to certain tobacco goods and reduce duty evasion, as was just well-outlined by my colleague Dr Shane Reti. It is very much the case that this is primarily for water-pipe tobacco or for those who may know it as hookah, shisha, molasses tobacco, and also fruit or flavoured tobacco.

It obviously makes sense to simplify this system, as others have well outlined, to ensure that some are not avoiding taxes that are levied on others by exploiting a loophole. Just to really drive this home, I want to thank the Minister’s officials for getting back to me on some of the concerns and considerations that the Greens had here—always making sure that we are trying to put in place the best form of harm reduction measures that don’t err too far towards prohibition and, in turn, have those perverse consequences of an extreme underground black market.

So, to that effect, I understand that some importers have been basing their import entry on tobacco content of between 2 and 5 percent and one at 0.4 percent. However, it is the case that rates that are this low are simply not credible, but due to the unavailability of testing facilities and some of the complexity around it—which Dr Shane Reti just outlined—Customs are unable to meet the evidentiary threshold for seizure and for prosecution.

I understand that Customs has also been trying to work alongside these importers, and has contacted some of the overseas manufacturers to enable the true tobacco content to be identified. However, as Customs has found, when overseas manufacturers are refusing to cooperate, there is, in fact, little that Customs can do because, of course, they fall outside of Aotearoa New Zealand’s legal jurisdiction.

All in all, this creates an unfair situation, or an uneven playing field, which impacts negatively on those who are playing by the rules and those who are not able to exploit this loophole. In turn, Customs has decided, advised the Minister, and we’ve ended up with this legislation, that assessing on around the 15 percent average basis is a fair standardised percentage, broadly in line with the actual tobacco content that most of this type of product is likely to contain.

I asked the Minister’s officials about what this would actually look like in practice, we’re not often, when we’re debating in this House, talking about what that looks like for the people on the street. So for those who may find themselves, for whatever reason, tuned in to Parliament TV on this Friday, listening to these budgetary debates, I can tell you that a typical retail price, in New Zealand, for a 50 gram pack of flavoured tobacco is currently around $25. With the changes to the way that excise and excise-equivalent duty is charged on these types of tobacco products, it’s estimated that that price could increase by $3, to around $28 including GST.

On the point around flavoured tobacco, we understand that it is, of course, a niche product in Aotearoa. There were only 15 importers of this product operating here in 2021. All importers will need to pay that new rate. It’s not a greater rate, because, of course, it assumes a tobacco content of 15 percent, which, as I just outlined before, Customs believes is a fair averaging out, based on the limited data that is available internationally.

Just in closing, in my contributions, particularly alluding to the concerns and considerations that the Greens have, just a brief comment on the notion of sin taxes for those who are interested in harm reduction and prohibition and what it looks like to regulate substances in such a way that we actually do go about achieving the things that we purport to want to achieve.

Sin taxes, for those who are uninitiated, are the kinds of taxes that we as the State or as a Parliament levy on the kinds of social harms that we want to see less of. This is, in practice, a kind of nudge economics, whereby we are trying to encourage people to do less of harmful things and, hopefully, to be moved into doing more of better things.

However, it’s really important to note again that when you really look into sin taxes, there is a point at which these sin taxes progress beyond the point of efficacy. That is, that they err in to being something incredibly regressive but also producing a substantial black market—actually, again, on the regulatory spectrum, kind of potentially more towards the end of prohibition in practice. This, of course, drives the black market model.

I’d note that, in the broader Budget, the Government has put aside millions of dollars for tackling the underground black market that is currently starting to get a grip in Aotearoa. To that effect, I just think it’s really important that we, as a House, when reflecting on the efficacy of the likes of not only the regulatory models for the kinds of social harms that exist out there, particularly in substances, which we can all approach with evidence if we want to, but also when we’re talking about the likes of these sin taxes, that we try and get it right.

As far as I’m concerned, as far as the Greens are concerned, there is a need to continue to look into the evidence, particularly as the Government considers, per the Cabinet papers proactively released around getting to Smokefree Aotearoa 2025, that we, of course, are paying heed to what the most evidentially based harm reduction model would look like.

So the Greens support this bill because it closes that tax loophole, which creates an unfair market, frankly, but we also pay heed to the fact that we have to continue to have an evidence-based policy when it comes to drug harm reduction. Kia ora.

Thank you, Mr Speaker. Well, the ACT Party will go into a slightly different direction here because I think we are in different territory compared to previous bills this afternoon. Here, we believe we’ve got a slightly inappropriate use of urgency. The objectives of this bill may be perfectly well intentioned, but frankly if the under-declaring of water pipe tobacco products was such a big deal, one would assume that the Government would want to go through a full select committee with submissions, and a full consultation so they could really get a grip on all of this. We would ask what evidence exists to show that this bill is needed under urgency following the Budget—what’s the rush, what are the costs and benefits? And it would have been nice to have had the regulatory impact statement released in good time.

But, you know, there are some interesting points in the documents leading up to this. There has been no stakeholder consultation, and the regulatory impact statement mentions the limitation on analysis—the lack of quality data and evidence used in developing the proposal—and Customs acknowledge that the data limitations were significant.

Assuming this is part of the Smokefree Aotearoa 2025 scheme or objective, the evidence around taxation as a disincentive—or an effective disincentive—to reduce smoking is slightly marginal. In fact, skyrocketing prices through taxation has had mixed results—it works for some communities, but for others it actually causes quite a lot of harm. It certainly hurts the poorest communities the most. I wonder if this bill will increase the black market sale of water pipe tobacco, and we just ask: are these regulations actually well designed or will they make things worse? Will people find other ways to bring things in? I assume they will, because they bring all sorts of things in that they’re not supposed to.

So, in this case, the objectives of the bill, as I said, may be well intentioned, but the process by which the Government is doing this is not good enough, especially given the lack of data analysis and consultation. So for those reasons, we oppose this bill.

I rise on behalf of the National Party, and as a member of Parliament for North Shore, in support of the Customs and Excise (Tobacco Products) Amendment Bill. We’ve heard, from prior speaker Dr Shane Reti, the importance of this bill in terms of putting in place assessment criteria to ensure that the appropriate quantity of tobacco is within a product and that assessment is done in a way that can substantiate that in a more accurate manner than what is currently available—will lead to the avoidance of excise tax under the current model.

Obviously, the consumption of these products is something that is a burden on our society. We are, obviously, in support of ensuring that excise tax, in regards to these products, is proportionate and appropriate. It is our belief that what this bill will achieve is changes that will achieve that outcome. On that basis, we support this bill.

I take a brief call on the Customs and Excise (Tobacco Products) Amendment Bill. I have only one chance in my life to do so, so I’ll take that opportunity this afternoon. This bill is designed to combat suspected under-declaration of tobacco content by importers of water-pipe tobacco and to secure Crown revenue from taxes on the same. It imposes import controls, changes the statistical unit for calculating duty, and creates a new excise and excise-equivalent duty rate for water-pipe tobacco, which is also known as flavoured tobacco, hookah, shisha, molasses tobacco, and fruit tobacco. The National Party will be supporting this bill as it is a relatively straightforward and simple solution to a problem that has been identified. With that, I will end my words this afternoon.