OLYMPIA, July 10.—A high-profile tax lawsuit concerning “roll your own” cigarettes has been snuffed, and so, most likely, has been the fast-growing business that brought it all on.
Attorneys representing R.Y.O. Machine, LLC, asked the state Supreme Court Tuesday to dismiss the last remaining motion in the case, and the court agreed. That was the final fizzle in what promised to be one of the biggest tax battles of the year, and one that might finally have established whether the Legislature’s two-thirds-for-taxes rule is constitutional. On July 3, a judge in Franklin County agreed to dismiss the original lawsuit.
It also could mean a $12 million hole in the budget, at a time when there isn’t much room to spare.
What happened? Just as the legal battle was getting started in this state, over a tax bill that may or may not have passed the Legislature legally last session, Congress came in and rolled over everything. With a passage in the national highway bill, the U.S. House and Senate declared shopkeepers who offered “roll your own” machines to be cigarette manufacturers. And now some 2,000 store owners nationwide have to obtain federal cigarette manufacturing licenses, comply with the same regulations as the big boys, and start paying state and federal taxes on cigarettes. It is not clear whether any of them will.
So apparently ends a burgeoning business that was birthed by a gray area in the tax code. There were 65 such stores in Washington state. Customers purchased “pipe tobacco,” which is taxed at a low federal rate, poured it into a cigarette-stuffing machine, pushed a button on a touch screen and in a matter of minutes produced a carton’s worth of smokes at half the price of cigarettes purchased at a grocery or convenience store.
R.Y.O. Machine LLC posted a notice on its site just after the vote June 29 saying it no longer would provide tobacco or “cigarette tubes” for the machines after the president signed the bill. That has since happened. It also said the company would not buy back the machines. Each cost upwards of $30,000.
Legislature Imposed Own Tax
The lawsuit here was notable because it was the first time a plaintiff had gone to court seeking enforcement of the Legislature’s two-thirds-for-taxes rule, and had made it the sole basis of the case. The Senate passed the tax bill 27-19, but not by a two-thirds majority. The rule, imposed four times by voters with initaitives, requires a two-thirds vote for new taxes. Though Lt. Gov. Brad Owen ruled it wasn’t a new tax, Franklin County Judge Bruce Spanner disagreed and issued an injunction last month that would have blocked the state law from taking effect. The state sought a stay in the Supreme Court. Had the full lawsuit advanced to the high court, it might have provided an opportunity for the court to decide once and for all whether the two-thirds rule is constitutional. Three rather different suits have been shot down by the court over the last 19 years on procedural grounds; a fourth is on the way up – but this one, because it was brought by a party directly affected by a tax, seemed a more likely way to get the court to rule on the merit of the argument.
Mike Gowrylow, spokesman for the Department of Revenue, said 26 or 27 roll-your-own shops had applied to purchase state tax stamps under the new law, but there was only one who paid for them. That store owner, in the Puget Sound area, is eligible for a refund.
Is it a Hit?
And there is one other implication of the congressional smoke-out: The Legislature assumed that it would make some money from the deal. The tax was supposed to generate $12 million a year at the current rate of sale, though it was uncertain whether any of that money would actually be collected. Lawmakers assumed that money when they built their budget this year. Now it’s clear the state won’t be getting a dime that way. So that’s a $12 million hit to a budget that already was just $78 million from going into the red.
Revenue’s Gowrylow says the agency figures it won’t happen quite like that. Smokers will have to go somewhere — and so most of them will be buying fully-taxed cigarettes through normal channels. But it’s worth noting that during the last legislative session opponents of the bill argued that the sort of person who buys cheap smokes isn’t the sort who buys from stores. They’ll go to out-of-state Indian reservations, or maybe they’ll continue buying cheap pipe tobacco and truly roll their own, at the kitchen table. Or even deadlier, maybe they’ll quit.