Smoke shops under fire for high-speed rolling machines


Written by Staff and wire reports

In smoke shops across the country, high-speed cigarette rolling machines that function as miniature factories can churn out a pack or a carton for a fraction of the price of commercial cigarettes. But the gaping tax loophole has caught the attention of officials in several states, including New York, and some — one of the most recent being New York City — are starting to crack down.
The battle has, thus far, not come to Rochester. Here, Look ah Hookah is one of the very few businesses in the rolling machine business, having added the novelty this year to shops in Henrietta and Greece.
“It’s not the coolest, the flyest,” said Toby Harmon, an employee at the Henrietta store. “It’s not the thing that is bringing us the most money, but it is an additive. … It’s cheaper.”
The machines can package loose tobacco and rolling papers into neatly formed cigarettes, sometimes in just a few minutes. A typical “pack” of 20 roll-your-own cigarettes at Look ah Hookah is $6.48, and a 10-pack “carton” will run you about $41. A pack of commercial smokes will set you back at least $8 at any gas station. That compares with the national average in 2010 of $4.80 a pack, according to the Centers for Disease Control and Prevention.
The secret to the low prices is simple: Even though patrons leave carrying cartons that look very much like the Marlboros or Newports, these smoke shops charge taxes at the rate set for loose tobacco, which is just a fraction of what is charged for a commercially made pack.
Customers select a blend of tobacco leaves, intended to mirror the flavor of their regular brand. Then they feed the tobacco and some paper tubes into the machines, and return to the counter with the finished product to ring up the purchase.
The savings come at every level. Many stores sell customers loose pipe tobacco, which is taxed by the federal government at $2.80 per pound, compared with $25 per pound for tobacco made for cigarettes. The shops don’t pay into the cigarette manufacturer trust fund, intended to reimburse government health programs for the cost of treating smoking-related illness.
Patrons are free to buy the tobacco and tubes, go home and roll their own, on their own, for even less cost. At Look ah Hookah, part of the expense is for patrons to rent time on the machine.
Still, legal battles are ongoing in several states, including Wisconsin, West Virginia and New Hampshire, where rulings have gone against the shop owners. New Hampshire’s Supreme Court ruled in July that a roll-your-own tobacco shop there was effectively a cigarette manufacturer, and thereby had to pay into the national fund that reimburses Medicare for smoking-related illnesses. Those payments amount to about $5.33 per carton, officials say.
New York City’s legal department filed a lawsuit on Nov. 14 against a roll-your-own smoke shop in Chinatown called Island Smokes. City lawyers argue that the company’s Manhattan store and another on Staten Island are engaging in blatant tax evasion.
Every package of cigarettes sold in the state, the New York City suit argued, must bear a New York tax stamp. But packs produced by “roll-your-own” shops are generally also being sold without local tax stamps, which in New York include a $1.50 city tax and a $4.35 state tax.
Businesses that sell unstamped cigarettes are violating both local law and the federal Contraband Cigarette Trafficking Act, city lawyers said. The suit, filed in federal court in Manhattan, also accused the store of violating 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 pack from Island Smokes can cost less than $4 a pack. A pack of cigarettes sells for around $13 in New York City after taxes are added. Look ah Hookah is not named in that case, nor does the business appear to be a target of any investigation.

A spokeswoman for the state Attorney General’s Office said officials there and are working with the state Department of Taxation and Finance to review legal options, looking generally at the issue statewide.
Everything about the “roll-your-own” business is legal, precisely because the company is neither selling cigarettes, nor manufacturing them, said Jonathan Behrins, a lawyer for Island Smokes. It is simply selling loose tobacco and tubes, he said, and giving customers access to the rolling machines to make the cigarettes themselves.
“What’s the harm?” he said. “They are not selling unstamped cigarettes.”

Behrins said Island Smokes, whose owners include a New York City police captain, opened in April. It has developed a clientele of people who are trying to save money, and don’t mind spending some time at the machines, rolling their own product.
“It’s a certain demographic that rolls their own. They don’t really want to be bothered with Bloomberg reaching into their pockets.”

He likened the operation to a brew-your-own-beer store, and chafed at the idea that it might cost the city substantial tax revenue. Some smoke shops use roll-your-own machines that can churn out a carton of 200 cigarettes in eight minutes, but Behrins said Island’s machines are far slower. City investigators said it took them about 45 minutes to make one carton.
“This is why I don’t understand why the city has us in their sights,” said Behrins.

The U.S. Treasury Department’s Alcohol and Tobacco Tax and Trade Bureau issued a ruling Sept. 30 that retailers who give customers access to roll-your-own cigarette machines are manufacturers, and are subject to the same licensing rules as other cigarette makers. Those regulations, among other things, would require the shops to apply for a permit before going into business, post a bond, and keep certain inventory records.
All of those rulings are being fought by manufacturers of the machines, which include companies like RYO Machine Rental of Cincinnati, which said it has 1,700 machines at stores in 40 states.
Look ah Hookah does keep records of who buys what, when and how much, and has a license to sell tobacco.

Behrins called the legal attacks “downright frightening,” and blamed them on governments trying to drum up extra cash in tight times.
“They are looking for money every way they can. Parking tickets. Red light cameras. You name it. They are just ringing it up to bring in revenue.”
Includes reporting by staff writer Brian Sharp and David B. Caruso of The Associated Press.

http://www.democratandchronicle.com/article/20111202/NEWS01/112020366/Smoke-shops-under-fire-high-speed-rolling-machines

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