The Rise of AI-Driven Excise Tobacco and Vape Tax Enforcement: Are You Ready?

The tobacco and vape industries are facing a seismic shift: governments around the world are harnessing artificial intelligence (AI) to enforce excise tax compliance more aggressively and intelligently than ever before. In the past, some companies operated in the shadows, either through discreet loopholes, manual reporting deficiencies, or inconsistent regulatory oversight. But those days are ending. With AI in the mix, tax authorities are not just playing catch-up; they’re getting ahead.

The message is clear: adapt or face the risk.

The AI Advantage in Tax Enforcement

AI is no longer a futuristic concept in tax administration; it’s being deployed at scale today. Machine learning, natural language processing, and pattern detection are now powerful tools in the hands of tax authorities.

• According to the OECD’s report, 79% of tax administrations are using AI for fraud detection, tax evasion, and uncovering hidden patterns in data.
• These systems can sift through unstructured data such as social media posts, handwritten forms, or public filings, to flag potentially non-compliant behavior.
• The IMF, in a 2025 technical note, explicitly describes how generative AI (GenAI) can support compliance risk analysis by identifying high-risk taxpayers or suspicious transaction flows.

Put simply: AI enables tax authorities to analyze more data, in real time, more effectively than any human auditor ever could.

Tobacco and Vape Industries in the Crosshairs

The tobacco and vape sectors are uniquely exposed to this new wave of AI-driven enforcement. Due to a combination of high tax rates and a history of compliance challenges, these industries have become a primary focus for tax authorities looking to deploy advanced analytical tools. The financial incentive for evasion is significant, which in turn motivates regulators to adopt more sophisticated methods of detection.

1. High tax rates and high abuse risk

Excise taxes on tobacco and vape products are among the highest in any industry. This makes them a critical source of government revenue but also a prime target for illicit trade, under-reporting, and other forms of tax evasion. Regulators are fully aware of this dynamic and are arming themselves with AI-powered systems specifically designed to uncover non-compliance that manual audits might miss. The potential for substantial revenue recovery makes investing in these technologies a clear priority for governments.

2. Real-world AI enforcement is happening

The use of AI in tax enforcement is not a future concept; it is an active strategy delivering measurable results today. Tax authorities across the globe are already demonstrating the power of these tools:

• In Austria, the use of AI boosted its tax revenues by EUR 185 million in 2023. The Finance Ministry’s Centre for Forecast Analytics Competence employed AI and machine learning algorithms to review 34 million cases, identifying 375,000 suspicious ones for detailed investigation. This approach helped optimize their tax audit processes.
• In India, some states’ excise departments are planning to use AI to enhance audit enforcement, giving them “real-time data on defaulters” to identify revenue leakages as stated by the Business Standard.
• In Tanzania, the Revenue Authority reportedly raised compliance in excisable goods (including tobacco) by deploying AI-assisted inspection for tax stamp enforcement.

These examples represent a global trend toward intelligent, data-driven enforcement where algorithms continuously scan for anomalies. For businesses in the tobacco and vape supply chain, this means the margin for error has disappeared.

The Implications for Tobacco & Vape Businesses

For companies in these sectors, the rise of AI-driven enforcement means non-compliance is no longer just a risk but a threat.

• Continuous audit risk: AI systems don’t sleep. They can analyze supply chains, shipments, tax filings, and even social media in near real-time. Discrepancies are now more likely to be flagged immediately.
• Hefty penalties: Once flagged, businesses can face serious financial consequences like fines, back taxes, or even license suspensions and criminal charges. With automated systems, investigations can scale quickly.
• Reputational damage: Beyond financial costs, being caught in a high-profile enforcement action can severely damage brand reputation, investor relations, and regulatory trust.

In short: it’s no longer optional to “hope for the best” with manual processes or spreadsheet-based compliance.

The Future of Excise Tax Enforcement

AI is just getting started.

• Governments are already exploring predictive models that forecast evasion trends, helping them proactively target high-risk actors.
• There is growing interest in using “rules-as-code” where tax laws are encoded in machine-readable formats so AI systems can apply them consistently and transparently. The OECD has been promoting this approach as part of its broader AI governance framework.
• As technology evolves, risk scoring, real-time audits, and even automated case prioritization will likely become the norm. Tax authorities are gearing up and planning ahead.

Automation: Your Compliance Lifeline

As tax regulators increasingly automate enforcement, businesses should also adopt automation to guarantee compliance. Relying solely on manual processes and spreadsheets to handle complex excise tax obligations can hinder efficiency. Embracing tax automation software is a proactive way for tobacco and vape businesses to stay ahead in this evolving landscape.

Modern tax platforms are designed to handle the specific challenges of excise tax, offering the control and accuracy necessary for compliance. Instead of waiting for audits and inquiries, you can take steps to prevent them.

Below are some practical steps to integrate automation and strengthen your compliance strategy:

1. Invest in Automated Compliance Tools

The most critical step is to replace outdated manual systems with a platform built for the intricacies of tobacco and vape excise tax. These tools are engineered to handle high-volume data, complex jurisdictional rules, and constantly changing regulations, moving your team from reactive data entry to proactive compliance management.

An automated excise tax system, like IGEN, provides a centralized platform to reconcile data, calculate tax liabilities, and generate accurate returns. By flagging discrepancies and potential errors before a return is filed, it significantly reduces the risk of human error. This allows your team to operate with greater efficiency and confidence, knowing that your filings align with regulatory expectations.

2. Implement Real-Time Monitoring

AI-powered enforcement relies on continuous data analysis. Your compliance process should mirror this capability. Integrating systems that pull data from your supply chain, inventory management, and shipment logs into a single tax engine provides a complete and timely view of your operations.

This unified data allows for real-time reconciliation and anomaly detection. For example, the system can automatically flag mismatches between shipment volumes and declared excise tax liabilities. Catching these issues internally, before a regulator’s algorithm identifies them, transforms your compliance function from a historical reporting task into a real-time risk management tool.

3. Build a Proactive Compliance Culture

Technology alone is not enough. A fundamental shift in mindset is required, where tax compliance is elevated from a back-office burden to a strategic, board-level priority. Leaders must recognize that in an AI-driven world, compliance risk is business risk.

This involves training your teams on the importance of accurate data flows and the capabilities of new regulatory technologies. When your organization embraces a culture of proactive compliance, every department understands its role in maintaining data integrity. This creates a powerful defense against the scrutiny of automated enforcement systems and positions your business for long-term stability and growth.

4. Ditch Manual Workflows for Automated Control

Relying on spreadsheets and manual checklists to manage tax compliance might have worked in the past, but it is slow, prone to error, and simply cannot keep up with the demands of today’s regulatory environment. Manual workflows create significant operational drag and introduce unnecessary risks, including missed deadlines, inaccurate filings, and a complete lack of visibility for leadership.

These outdated processes force highly skilled teams into a cycle of redundant data entry, frantic deadline chasing, and last-minute problem-solving. This not only increases the risk of costly penalties but also leads to burnout and prevents your team from focusing on higher-value strategic work. When compliance depends on manual tracking, one person’s absence or one broken spreadsheet formula can jeopardize the entire process.

This is pushing tax teams toward modern tax operations management, which transforms the compliance function from a reactive burden into a streamlined, predictable, and strategic asset. By centralizing due-date tracking, standardizing approval workflows, and providing real-time visibility into compliance status, you can eliminate the risks associated with manual processes. An automated platform ensures every deadline is tracked, every step is accounted for, and every team member is aligned.

The rise of AI-driven excise tax enforcement is not a distant threat, it’s already here and gearing up. For tobacco and vape companies, the time to act is now. The era of flying under the radar is over. To survive and thrive in this new landscape, businesses must embrace automation, invest in robust compliance infrastructure, and fundamentally rethink how they manage excise risk.

Are you ready to meet the new reality?

This analysis is intended for informational purposes only and is not tax advice.  For tax advice, consult your tax adviser. See the full disclaimer here.