Cigarette-rolling machines boon for businesses, bane for feds

Finished cigarettes At Tightwad Tobacco in North Union, all three roll-your-own cigarette machines were whirring.

Every two or three seconds, a paper tube, neatly stuffed with shredded brown tobacco leaves, popped out of a chute at the base of one of the refrigerator-sized machines and landed in a plastic grocery bag.

“They’re just as good as what I used to smoke,” said Lyndall Ryan, who was dragging on one as she waited for the machine to roll the rest of her cigarettes.

In the past two years the $35,000 machines, known as RYO Filling Stations, sold by Ohio-based RYO Machine Rental, have spread to 25 states and created 3,000 jobs, said Lisa Fleck, who owns Tightwad with her husband, Don. In Western Pennsylvania, Tobacco Outlet Express, which the Flecks also own, has distributed about 35 of the machines.

But the machines’ popularity troubles government officials, who say the technology is just a clever way of circumventing tax laws.

In September, the federal Alcohol and Tobacco Tax and Trade Bureau declared that shops with roll-your-own machines were manufacturers of tobacco products, a designation that would require the businesses to get permits and pay taxes on the cigarettes produced. While cigarettes that a person rolls for personal use are exempt — and bulk tobacco already is taxed — the bureau said the personal-use exemption does not apply if the machine that rolls the cigarettes is under the control of a business.

“We believe that all of the circumstances described in this ruling have been structured so that the consumer is purchasing a carton of commercially manufactured cigarettes without the appropriate payment of tax,” bureau officials wrote in a ruling signed by administrator John Manfreda.

Tobacco Outlet Express and RYO Machine Rental have challenged that ruling in a federal lawsuit.

“We really don’t think that it’s right that the government is trying to restrict the use of these machines simply because it’s newer technology,” Fleck said.

With more than 80 machines in the state, the state Department of Revenue says, the lost revenue from sales of rolled cigarette is substantial.

“We estimate that a single one of these machines has the potential to decrease tax revenues by more than half a million dollars per year,” said department spokeswoman Elizabeth Brassell. She said that the estimate was for a machine running every day for 15 hours.

That is money that would have gone into funds for children’s health insurance and farmland preservation, along with the state’s general fund.

The federal government also collects an excise tax of $10 per carton of cigarettes in addition to the state’s $16 tax. The federal tax finances the Children’s Health Insurance Program, which provides health coverage for poor children.

The federal ruling also noted that in many cases, people buy pipe tobacco to fill their cigarettes. Pipe tobacco, differentiated by its label and rougher cut, is taxed at a much lower rate than bulk cigarette tobacco.

Bob Busche, owner of Puff Discount Tobacco, with 10 locations in Allegheny and Armstrong counties, said he bought his RYO Filling Stations a year ago. He denied that he is manufacturing cigarettes.

“The customer comes in, and they rent the machine from us,” Busche said.

U.S. Department of Justice lawyers claims in papers filed in the case that the plaintiffs sued merely to avoid the collection of taxes. Claims that business opportunities would be lost were “speculative and unsubstantiated,” the government alleged.

In October, a federal judge in Ohio issued a preliminary injunction against the Tax and Trade Bureau’s enforcement of its ruling. The injunction has allowed the machines to continue operating without the businesses being subject to additional requirements. Lisa Fleck said the parties are scheduled to meet with the judge next month to set a court date.

Jim Bezeredi, who owns Ciggy’s Discount Tobacco, said he will be watching the lawsuit closely. Bezeredi acquired his first machines for his East Huntingdon store in February. In July, he opened a second location in Delmont with two more machines. He plans to open a third Ciggy’s location if the suit is decided in the machine distributor’s favor.

“I’m just a guy who’s trying to make a buck, put customers in a win-win situation and employ people,” Bezeredi said. “This is just a money-grab by the federal government.”

source: pittsburghlive.com

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