The Internal Revenue Code imposes different excise taxes on different forms of tobacco, with the tax on cigarette tobacco and roll-your-own tobacco greatly exceeding that for pipe tobacco. Excise taxes on all forms of tobacco increased significantly in April 2009 with the enactment of the State Children’s Health Insurance Program (S-CHIP) expansion. Many retailers have begun to take advantage of this different treatment by purchasing so-called “roll-your-own” (RYO) machines, which they then "rent" to customers, who produce mass quantities of cigarettes out of cheaper pipe tobacco.
A customer can purchase enough pipe tobacco for a carton of cigarettes, and then use the on-site machine to produce them, generally at about half the retail price of a national brand of cigarettes. To close this loophole, the Alcohol and Tobacco Tax and Trade Bureau (TTB) ruled that retailers participating in such an enterprise are “manufacturers” of cigarettes, and therefore subject to Department of Treasury permit and licensing regulation. In mid-November, a manufacturer of RYO machines obtained a temporary restraining order (TRO) against the enforcement of the TTB’s ruling.
If TTB is unable to enforce Ruling 2010-4, a growing number of tobacco consumers and retailers will exploit it. Over time, this lack of tax parity will dramatically alter the retail tobacco space, permitting consumers to purchase large quantities of RYO cigarettes using pipe tobacco for a substantially lower price than traditional packaged cigarettes. However, because the competitive advantage these machines offer could be nullified by a federal court ruling, retailers are justifiably reluctant to invest in them.
NACS is seeking to enhance certainty while avoiding penalizing retailers who have already invested in RYO machines. Toward this end, we are pursuing legislation that would, as of a date certain, stipulate that all production of RYO products made with pipe tobacco be taxed at equal rates as traditionally packed cigarettes (and RYO products made with cigarette tobacco).
The TTB’s ruling remains in effect. At NACS’ request, Representative Diane Black (R-TN) introduced language which clarifies that retailers who for commercial purposes permit consumers to use RYO machines to produce tobacco products are “manufacturers” under the Internal Revenue Code.
Read more about roll your own tobacco in the January 2012 issue or NACS Magazine.