Shisha tobacco business collapses – black market boom?

The legal shisha tobacco business has plummeted in Germany, raising concerns about an increase in the black market.

Shisha tobacco business collapses – black market boom?

The legal shisha tobacco business has plummeted in Germany, raising concerns about an increase in the black market. The Treasury received only 42.3 million euros last year for water pipe tobacco tax marks, as figures from the Federal Statistical Office show. There is no official comparative figure because this tax category has only been shown separately since 2022. However, the Federal Ministry of Finance had expected 127 million euros - as additional income that should come on top of the usual shisha tax income as a result of the reform.

The figures show that the discrepancy between desire and reality is large. One reason for the development is a controversial packaging regulation that has been in effect since July 2022. Since then, shisha tobacco companies have only been allowed to produce 25 gram packs and no longer the 200 or 1000 gram containers that have been common for years. This amendment was intended to put a stop to tax evasion.

For a long time, shisha bars bought large packs and then resold small portions that were filled into the water pipes. A bar would have had to pay more tobacco tax than it did when buying a large pack. While resale is common in the industry, in most cases this should not happen as it is tax evasion. In the past, customs have repeatedly checked shisha bars and found violations. But that was ultimately a battle against windmills. The situation should be improved with the ban on large packs.

The logic of the reform: If the packs are so small that their contents are no longer sufficient for several portions, the ban on individual packaging can no longer be violated. Roughly speaking, 20 grams of tobacco fit into a shisha bowl - slightly less than is contained in a 25 gram pack.

Shisha Association criticized the reform

The hookah industry was enraged by the change. On the one hand, she complained that this would result in unnecessary packaging waste. The companies were also annoyed that they had far too little time to convert their machines. The Shisha Association warned that production bottlenecks could mean that demand can no longer be met and that the black market is boosted. In addition, the gram price for small packaging is higher than for large packaging - this could be another reason for consumers to switch to the black market.

"The figures from the Federal Statistical Office confirm our worst fears," says Folke Rega from the Shisha Association. According to the Federal Statistical Office, 38.6 million euros of the 42.3 million euros net income from tax stamps for hookah tobacco came from the first half of the year, when the regulation did not yet apply, and only 3.7 million euros to the second half of the year. "It's hard to assume that a lot of people suddenly stopped inhaling water pipes," says Rega.

However, the development was partly due to a pull-forward effect in the growth market: Before a tax increase that took effect in January 2022, manufacturers produced much more than usual in order to be able to sell the goods according to the more favorable tax rate. In 2021, the state issued revenue stamps for 6,914 tons of hookah tobacco, an estimated one-third more than a year earlier. In 2022, the net volume collapsed to 962 tons - just a seventh of 2021.

Is there a black market boom?

The strong drop in tax revenue in 2022 can only be partially explained by the pull-forward effect, says industry representative Rega. "The black market has increased massively." He refers to the observations of manufacturers who have noticed counterfeit products on the market more and more often, and to shisha bar operators who, according to their own statements, are repeatedly approached by black market dealers to ask whether they don't want to buy cheaper from them. "This packaging regulation harms the honest entrepreneur and instead helps the black market trader."

Is there a black market boom? The General Customs Directorate reports that data on violations of hookah tobacco are currently still being evaluated. The Federal Ministry of Finance does not justify the declining development in tax revenue with the said packaging regulation, but with the anticipatory effect before the tax increase at the beginning of 2022.

There are different opinions in politics. The CSU member of the Bundestag Sebastian Brehm is of the opinion that "a considerable black market has now developed". The packaging regulations may have been a decisive reason for this. "I strongly advise reversing the limit on sales sizes and going back to the old sales sizes," said Brehm.

The SPD member of parliament Michael Schrodi, on the other hand, cannot understand an alleged migration to the black market - he too considers the tax increase and the anticipatory effect to be decisive instead. With a view to the cancer risks of shisha consumption, the social democrat emphasizes that the tobacco tax rules are about health protection and prevention. The tobacco tax reform decided by the then grand coalition shows "the desired and correct effect".

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