Michigan Contract For Cigarette Stamps Questioned

By DAVID EGGERT
Associated Press

LANSING (AP) - Michigan wants to award a $9.6 million contract to Xerox to help make sure taxes are paid on cigarettes, despite allegations of bias in the selection process and an offer from a competitor to do the work for at least $1.7 million less.

The State Administrative Board is poised to approve the Treasury Department's recommendation for a five-year contract with Xerox State & Local Solutions Inc. as early as next week. Xerox would provide 450 million counterfeit-resistant stamps, which are applied to cigarette packs to show taxes have been paid, for about $1.9 million a year.

The vote is expected after two other finalists unsuccessfully lodged protests, according to documents reviewed by The Associated Press.

Virginia-based De La Rue North America, whose parent is headquartered in Britain, said its bid would provide the best value to the state because it was significantly cheaper. The company also said the bid was incorrectly evaluated. Virginia-based SIPCA Product Security, whose bid scored highest but would cost the state more money than Xerox's, also protested the decision.

Michigan's $2-per-pack cigarette tax, 11th-highest in the country, has made the state a target for smuggling that hurts tax revenues. Switching from old, heat-applied stamps to higher-tech stamps with scanner-friendly barcodes is designed to help.

But the 14-month process of choosing a company to provide the new technology has led to complaints.

De La Rue accused state officials of favoring Arizona-based Xerox - which already provides Michigan a stamp-ordering system for tobacco distributors - by giving Xerox an equal grade on experience, even though it said the company has far less direct experience printing the stamps. De La Rue said it has contracts with countries such as Ireland, Thailand and Cameroon.

The state also was accused of not asking De La Rue or the other finalist, SICPA, about the cost of a new ordering system and instead arbitrarily raising their bids by $626,000 when Xerox said it would continue providing its system at no additional cost but would charge to integrate with a new stamp maker.

"The other bidders were not aware of the State's preference for its current system, and did not have the opportunity to address this in their bids," De La Rue's attorney, Jeffrey Theuer, wrote on Aug. 7. He said Xerox was credited for providing other optional services like stamp storage that are unnecessary.

Treasury spokesman Terry Stanton stood by the Xerox recommendation, saying the move would avoid additional costs to change systems.

"Xerox's bid was determined to be the best value for the state due to stamp samples, stamp storage at no cost, longer stamp warranty, and all deliverables would be performed on-shore, among other issues," he said.

If awarded the contract, De La Rue would do software development and updates, or 25 percent of production, outside the U.S. It argues that actual operation of the cigarette stamp program would be in the U.S.

"We're continuing to pursue all of our options because De La Rue's industry experience and proven technology met the required criteria set out in the (request for proposal), and at the same time offered the most cost-effective solution," De La Rue spokesman Rob Hutchison said.

SIPCA, whose parent is in Switzerland, declined to comment.

Regardless of disputes over the process, De La Rue says the state's reasons to choose Xerox are negligible considering the higher price tag.

The state initially requested bids to produce 605 million stamps a year. Three of six responders surpassed the minimum threshold to be considered.

De La Rue would charge $10.5 million, Xerox $12.5 million and SICPA - which does similar work for California and Massachusetts and whose bid ranked the best technically - $17.4 million.

The state now wants 450 million stamps per year. De La Rue would charge $7.9 million, Xerox $9.6 million and SICPA $13.3 million.

Xerox spokesman Carl Langsenkamp said its bid provides the best value on a number of factors.

"With experience in numerous excise stamp programs internationally, along with delivering over a billion security stamps per year in the U.S. alone, Xerox and its partners are well qualified and experienced for the Michigan program," he said.

(© Copyright 2013 The Associated Press. All Rights Reserved. This material may not be published, broadcast, rewritten or redistributed.)