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Roll-your-own cigarette businesses face excise tax

The Wisconsin Department of Revenue has put roll-your-own cigarette businesses on notice that they are manufacturers and distributors and must pay appropriate excise taxes.

Paying those taxes, and a requirement that they sell at least half of the cigarettes they produce to other vendors, would obliterate the business model of RYO stores operating in Portage, Baraboo, Wisconsin Dells, Reedsburg and Beaver Dam.

RYO stores - the department estimates there are 50 to 100 in Wisconsin - operate on the rationale that they are not selling manufactured cigarettes at all, but rather selling components such as tobacco and tubes and renting time on jukebox-sized machines that put all the pieces together into "smokes"; the store owners won't call the products "cigarettes" because "cigarettes" are manufactured, they said.

The retailers require their customers to load, start and empty the machines. And, the rationale goes, because they're not selling manufactured cigarettes, they shouldn't have to pay the excise taxes on manufactured cigarettes, which are $2.52 per pack for Wisconsin and another $1.01 per pack for the federal government. Instead of being forced to charge $60 or more for a name-brand carton, as convenience stores must do, the RYO stores can sell for about half as much.

Discount Smokes in Portage, for example, from its opening this spring offered a package deal that resulted in a price of $29.99 a box. For a carton of brand-name cigarettes purchased in Wisconsin right now, that price wouldn't even cover the required $35.21 in taxes.

"We have heard from small-business owners who say they can't compete," said Stephanie Marquis, a spokeswoman for the Department of Revenue. "We estimate there's about 8,000 small-business owners who are selling tobacco, and they're following the law."

She said the department is not trying to put RYO stores out of business but rather to bring them voluntarily into compliance with the law.

The Department of Revenue notice dated Sept. 22 and sent by certified mail to RYO retailers ignores semantic questions:

"Under state law, if a retailer or the retailer's customer operates a RYO machine on the retailer's premises to make cigarettes with loose tobacco, the retailer is both a cigarette manufacturer and distributor," it reads.

The notice says that as manufacturers and distributors, RYO retailers must obtain permits and certifications; pay appropriate taxes; and, if they want to continue selling directly to customers, sell more than 50 percent of the RYO cigarettes to other retailers or vending machine operators.

Allison Miller, the American Cancer Society's government relations director for Wisconsin, praised the action.

"A cigarette by any other name is still a cigarette," Miller said in a news release issued Friday. "Our concern is that these roll-your-own machines are skirting the law just enough to make their deadly products much more affordable and appealing, especially to youth. If a high school kid can get a 'box' of 'smokes' for half the cost of a carton of cigarettes, suddenly smoking seems that much more enticing."

The Department of Revenue doesn't have an exact number for how many RYO machines are in Wisconsin, Marquis said, because the retailers that own them don't have permits; the letter said anyone aware of a retailer with an RYO machine who might not be in compliance may contact the Alcohol & Tobacco Enforcement Unit at 266-6757 or DORAlcohol& People who contact the department may remain anonymous.

"We're not trying to shut the businesses down. We're asking them to come into compliance with the law," Marquis said.

Local stores

Lon Chester and his business partners own Discount Smokes in Portage as well as RYO stores in Baraboo and Wisconsin Dells. They plan to open another one in Columbus on Oct. 1.

"If you figure that each place employs three to four people who previously did not have a job, you're talking about unemploying another 300 to 400 people," he said of the letter.

Chester said he and his partners sent the notice to their RYO machine's manufacturer and is waiting to hear back before deciding what to do.

The Discount Smokes machine's manufacturer, Ohio-based RYO Machine LLC, has about 1,500 machines in the country, according to its president, Phil Accordino.

"Obviously we don't agree with this ruling," he said Friday. "We're evaluating some of our options."

Accordino said his company has had a dialogue with Wisconsin's Department of Revenue and has talked through issues in other states. He said retailers who buy his company's machines don't pose a serious threat to other tobacco sellers. For one, he said, there aren't enough of them.

"We have less than 1,500 machines out there," he said of the national market. "So how much of an impact can we truly be having?"

Accordino further said that convenience stores are free to buy machines from his company, but RYO Machine LLC contracts with buyers to guarantee exclusivity. Accordino said the area can range from a few blocks in a major city to 25 miles in a rural area.

He also said the machine's speed can't keep up with that of a typical brand-name cigarette manufacturer's machine of what he said was 20,000 a minute or more.

"No one is going to use one of my machines that manufactures four cartons in an hour," he said. "It is not a manufacturing machine. It's just not."

He said the usage of "smokes" and "boxes" instead of "cigarettes" and "cartons" came about because of accusations related to the latter terms.

"We've completely divorced ourselves from that terminology," he said. "It is really unjust."

He also disagreed with the criticism that RYO machines encourage children to smoke, saying all RYO outlets are adult-only facilities. Discount Smokes, for example, has a posted sign that clearly states no juveniles are allowed.

"Young people are not encouraged to use this machine," he said.

The owner of Golden Smokes in Beaver Dam declined to comment on Friday when contacted, but he said the action is similar to action taken in other states.

Federal ruling

In October, the federal Alcohol and Tobacco Tax and Trade Bureau ruled that the rolling machines were being used for manufacturing and therefore should be subject to taxes paid by the name-brand tobacco manufacturers.

"The permit requirement is triggered by the manufacture of a cigarette by the commercial cigarette-making machine, which forms the tobacco into the roll and applies the cigarette paper or tube," the bureau said in its ruling. "The permit requirement is triggered regardless of whether the person operating the machine, by inputting loose tobacco and cigarette tubes, is an employee of the retail establishment or the ultimate consumer of the cigarettes manufactured."

Accordino said he has had some success in other states arguing his company's side of the issue.

The letter the Wisconsin Department of Revenue sent to RYO store owners includes this note: "Retailers who fail to meet the above requirements could face fines, penalties, permit revocation, imprisonment, and/or seizure of the tobacco and other personal property used in this activity."

Marquis, the agency spokeswoman, said that while there are penalties for noncompliance, enforcement isn't the part of the process the department is interested in right now.

"The first step in this right now is to make them aware of their legal obligations," she said. "Anything beyond that i think would be hypothetical at this point."

Published: Friday, September 23, 2011

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