Several States Pass RYO Tax Bills

Lawmakers in Iowa, Wash., Okla., Tenn. concerned over tax fairness, loss of revenues

Melissa Vonder Haar, Freelance Writer

OAK BROOK, Ill. -- CSP Daily News has learned that the state legislatures in Iowa, Washington and Oklahoma, as well as Tennessee, have all passed roll-your-own (RYO) cigarette machine legislation. Governors of all four states are expected to sign the legislation into law.

The source, who requested anonymity, said, "We had three successes in one day."

Thomas Briant, executive director for the National Association of Tobacco Outlets (NATO), told CSP Daily News, "The Washington bill signed into law by the governor will level the playing field between RYO machine operators and traditional cigarette retailers by equalizing the tobacco tax paid by RYO store operators with the state's $3.02 per pack cigarette tax. The RYO law enacted in Iowa is similar in that it requires RYO machine operators to pay a per-stick state excise tax. In Oklahoma, the bill passed by the legislature and sent to the governor for consideration would ban the use of commercial RYO machines except in adult-only, age-restricted facilities and require the operator to obtain a federal permit from the Alcohol & Tobacco Tax & Trade Bureau to operate as a cigarette manufacturer."

The Tennessee legislature has also passed a bill, SB1738/HB1054, that requires RYO tobacco retailers to charge cigarette tax:

"Beginning January 1, 2014, the present tobacco tax law ... would apply to cigarettes produced by a cigarette rolling machine at a retail establishment; however, the five-cents-per-pack enforcement and administration fee ... would not apply to such cigarettes, and the three-cent cigarette tax would be reduced by the amount of the 6.6% state excise tax paid by the cigarette rolling machine operator for the purchase of tobacco products used to produce such cigarettes," it said.

It also "requires cigarette rolling machine operators to obtain licensure as such and requires that applications for such licenses be accompanied by a fee of $500 for each cigarette rolling machine purchased or leased for use, or controlled, possessed or maintained by the cigarette machine operator" (click here to view the details of the legislation).

State lawmakers said they are concerned about loss of revenues and want the state's tax policy to be fair, according to TN Report.

The  argument for this bill is that, although the RYO cigarettes are nearly identical to prepackaged cigarettes, they are taxed at a much lower rate, meaning that they are sold for a much lower price, said State Rep. Steve McDaniel (R) on the House floor April 30.

"The conventional cigarettes are taxed under the agreement, the Federal MSA directory, the Attorney General's directory, and created the escrow account and the payments--we get over $140 million a year, because of the lawsuit that was settled some time ago," McDaniel said. "We could endanger, I believe, that agreement, where we're getting that money into our state system, into our revenues."

The bill passed the House 68 to 22.

While the House bill passed with little-to-no discussion, it was a different story in the Senate, said the report.

"The dilemma we have as a state--and we're not the only state that's addressing this--is how do we treat these cigarettes that are manufactured, that are made in a machine in eight minutes, and you walk out of the store," said State Sen. Jack Johnson (R), sponsor of the bill. "They're not paying the [MSA] fees, they're not paying the 62-cent state tax, and they're not paying federal tax on these cigarettes."

Watch the embedded video or click here to see how a RYO cigarette machine works.

Meanwhile, Senators Dick Durbin (D-Ill.), Tom Harkin (D-Iowa), Frank Lautenberg (D-N.J.) and Richard Blumenthal (D-Conn.) expressed concern about the findings of a study released yesterday by the Centers for Disease Control & Prevention (CDC) revealing more than $1.3 billion in lost state and federal revenue by tobacco manufacturers relabeling roll-your-own tobacco as pipe tobacco.

Last month, a Government Accountability Office (GAO) released a similar report. It found that "large federal excise tax disparities among tobacco products ... created opportunities for tax avoidance and led to significant market shifts by manufacturers and price sensitive consumers toward the lower-taxed products. Monthly sales of pipe tobacco increased from approximately 240,000 pounds in January 2009 to over three million pounds in September 2011, while roll-your-own tobacco dropped from about two million pounds to 315,000 pounds. For the same months, large cigar sales increased from 411 million to over one billion cigars, while small cigars dropped from about 430 million to 60 million cigars. According to government, industry and nongovernmental organization representatives, many roll-your-own tobacco and small cigar manufacturers shifted to the lower-taxed products ... to avoid paying higher taxes."

It added, "While revenue collected for all smoking tobacco products from April 2009 through fiscal year 2011 amounted to $40 billion, GAO estimates that federal revenue losses due to market shifts from roll-your-own to pipe tobacco and from small to large cigars range from about $615 million to $1.1 billion for the same period.

The senators accused tobacco manufacturers of skirting the law. "We ... remain committed to closing this loophole," they said.

Click here for more details on the CDC report. And click here for more details on the GAO report.