NYC Sues RYO Shops

City files suit that shops engage in tax evasion

NEW YORK -- New York City's legal department has filed a lawsuit against Island Smokes' stores in Manhattan and Staten Island, arguing that the stores' roll-your-own (RYO) offerings mean Island is engaging in tax evasion.

A 10-pack carton of the RYO cigarettes at Island costs less than $40, because Island charges taxes at the rate set for loose tobacco, a fraction of the price of commercially made cigarettes, according to an Associated Press article. For commercially made cigarettes, the taxes alone are $5.85 per pack ($4.35 for the state tax and a $1.50 city tax).

According to city lawyers, every package of cigarettes sold in the state must bear a New York tax stamp, with businesses that sell unstamped cigarettes violating local law and the federal Contraband Cigarette Trafficking Act. The suit, which was filed in Manhattan federal court, also says that the stores violate a state law requiring cigarettes to meet fire-safety standards.

"By selling illegally low-priced cigarettes, defendants not only interfere with the collection of city cigarette taxes, they also impair the city's smoking cessation programs and impair individual efforts at smoking reduction, thereby imposing higher health care costs on the city and injuring public health," the complaint said.

A lawyer for Island Smokes, Jonathan Behrens, said the company is simply selling loose tobacco and tubes and giving customers access to rolling machines to make the cigarettes themselves -- and "not selling unstamped cigarettes."

Legal battles over shops using RYO machines are ongoing in Wisconsin, West Virginia and New Hampshire. The U.S. Treasury Department's Alcohol and Tobacco Tax and Trade Bureau also issued a ruling Sept. 30, 2010, that retailers who give customers access to RYO cigarette machines are manufacturers, and are subject to the same licensing rules as other cigarette makers. In December of 2010, a federal district court judge issued a temporary injunction against the enforcement of the TTB rule on RYO machines.  The lawsuit is now on appeal to the U.S. Circuit Court of Appeals.