WOOD DALE, Ill. -- Scores of tobacco retailers in the U.S. are taking advantage of a federal tax loophole to offer deep discounts on roll-your-own cigarettes. But the practice is attracting scrutiny from regulators and cigarette manufacturers, reported The Wall Street Journal.
At Smoke Zone, a store in Wood Dale, Ill., customers recently flocked to two high-speed rolling machines that produce a carton of cigarettes in eight minutes, said the report. The price: $21less than half the cost of a carton of Marlboro cigarettes.
"People have waited an hour for [image-nocss] these some days," manager Taren DeNicolo told the newspaper.
About 150 tobacco outlets in some 20 states are deploying the novel roll-your-own machines to tempt recession-weary smokers, according to the paper, citing an estimate by one maker of the devices. But some regulators say the stores may be violating U.S. and state laws that govern cigarette manufacturing.
"These machines raise a number of questions," David Rienzo, an assistant attorney general in New Hampshire, which has sued several retailers alleging they are acting as cigarette manufacturers and should pay applicable fees, told the paper.
At Smoke Zone and other retailers, the Journal found, store employees or customers insert into the machines tobacco labeled "pipe tobacco." This substantially reduces the stores' and smokers' costs because the federal excise tax on pipe tobacco is $2.83 a poundcompared with $24.78 a pound for the rolling tobacco traditionally used to make hand-rolled cigarettes.
Congress in 2009 sharply raised the federal excise tax on rolling tobacco to help finance the expansion of a children's health-insurance program backed by President Barack Obama.
Rienzo said that after the tax increase took effect, "numerous manufacturers that sold roll-your-own [tobacco] said, 'Why not just put a pipe-tobacco label on it, and you won't have to pay the increased federal excise tax?'"
Other companies created new brands they call pipe tobacco but essentially contain the same tobacco as in their roll-your-own products, Kevin Altman, an independent tobacco-industry consultant in Richmond, Va., told the paper.
Shargio Patel, president of Inter-Continental Trading USA Inc., Mount Prospect, Ill., confirmed for the paper that his company began offering pipe tobacco under its OHM brand that is similar to its rolling tobacco due to the tax increase. "We're just following what other companies are doing," he said.
Some cigarette makers decry the loophole that has created new low-priced competition, the report said. "We are complying with the law, but some companies are not doing so in order to gain an unfair advantage," Ron Bernstein, CEO of cigarette maker Liggett Vector Brands Inc., a unit of Vector Group Ltd, told the paper.
In the 14 months since the tax increase, the volume of pipe tobacco sold in the United States more than tripled to about 21 million pounds, according to data from the U.S. Treasury's Alcohol and Tobacco Tax & Trade Bureau cited by the paper. Rolling-tobacco sales volumes, in contrast, fell about 60%.
The tax loophole cost the U.S. government more than $345 million in the first 15 months since the tax increase, estimated Daniel Morris, who tracks tobacco production data for the Oregon Public Health Division, the report added.
TU.S. Department of the Treasury's tobacco-tax bureau is soliciting industry input to help write new rules to clearly differentiate pipe tobacco from rolling tobacco. The process could take months, an agency spokesperson told the Journal.
Some loose-tobacco makers and retailers said they are doing nothing wrong and that Congress created the problem by raising the excise tax on rolling tobaccotypically used by smokers with lower incomesby more than 2,000%.
Phil Accordino, co-owner of RYO Machine Rental LLC, Girard, Ohio, told the paper that his company has sold or leased about 200 of the rolling machines. He said his company, which is about two years old, simply has improved on gadgets some consumers use to roll their own cigarettes.
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