OLYMPIA, June 30.—A high-profile Washington-state lawsuit was doused Friday from 3,000 miles away, as Congress abruptly passed a bill aimed at snuffing out the entire “roll your own” cigarette industry nationwide.
So much for a court case that might have settled one of the biggest and longest-running legal questions in this state — whether Washington’s two-thirds for taxes rule is constitutional. The lawsuit, from a company that sold high-tech cigarette-stuffing machines to shopkeepers statewide, seemed certain to make its way to the state Supreme Court, and it held big implications for every taxpayer and tax-spender in Washington.
Now, in a brief filed before the high court Friday, RYO Machine, LLC acknowledges that the Washington suit may have been rendered pointless by the surprise move in Congress. It is unclear at this point whether the Ohio-based machine-maker will bother continuing. It failed to post a $200,000 bond payment that was due Friday.
What happened in the cigarette-rolling case might be called a violent twist that pretty much tore things.
Issue Decided in Other Washington
It all had to do with a couple of paragraphs quietly inserted in a conference committee report on a highway bill, and which was released to no particular publicity on a day when the nation’s attention was on the U.S. Supreme Court decision upholding health care reform. With those paragraphs Congress defined shopkeepers who operate high-speed cigarette-stuffing equipment to be “cigarette manufacturers.” That means shopkeepers across the country are liable for the same heavy taxes as the big boys in the cigarette business. They also have to comply with federal regulations regarding the manufacture of cigarettes.
The bill was approved by both chambers Friday and must be signed by the president Saturday so that it may take effect by July 1.
“It puts us out of business,” said Wayne Brown, owner of U Count Tobacco in Aberdeen. “No ifs, ands or buts about it. At 12:59 Saturday, these machines get shut off.”
Brown is one of nearly 2,000 smokeshop operators nationwide who bought the high-tech “RYO Filling Station” machines over the last couple of years. It is a burgeoning industry created entirely by a quirk in the federal tax code. Loose pipe tobacco is taxed at a much lower federal rate than loose cigarette tobacco, $1.73 a pound rather than $23.68. But it is just as rollable and it is just as smokable. And if a tobacco-shop operator offers customers the use of a machine in the back of his store that can stuff 200 paper “tubes” in a minute – well, that isn’t quite the same thing as being a cigarette manufacturer, subject to high taxes and regulations. The result is that the shops can offer a carton’s worth of smokes at about half the price of storebought pre-packaged cigarettes – a little over $30, rather than $70.
There’s no way to comply, Brown says. Leaving aside the taxes, cigarette manufacturers are supposed to have 30,000-gallon water tanks, and they are supposed to be located in industrial areas. And he says there’s really no point in looking at the list of rules any further. The way he sees it, there was something sneaky about the whole thing. “The thing that amazes me is why would this be attached to a transportation bill? And why would the president sign a bill that is going to put 1,900 businesses and 10,000 people out of work?”
A National Push
Of course, competing retailers and tobacco companies see the RYO stores as a bit sneaky themselves. The stores are operating in a gray area – the federal Alcohol and Tobacco Trade Bureau ruled in 2010 that they are cigarette manufacturers because “ultimate control of the machines is not with the consumer but with the retailer.” But the ruling was challenged in federal court, and the wheels turn slowly – the 6th Circuit Court of Appeals heard oral arguments in April.
So in legislatures across the country, lawmakers have been hearing arguments from convenience-store associations and retail groups that the RYO stores are unfair competition. Twelve states, including Washington, have passed bills that crack down on the business in some fashion, either declaring the stores to be manufacturers or imposing taxes by other means. In other states regulators have done the job – Kansas, for instance, is going after the stores for using unbranded paper.
In Washington, D.C., the National Association of Convenience Stores was pushing just as hard. The Senate version of the highway bill included an amendment from Sen. Max Baucus of Montana that defined anyone with a retail cigarette-making machine to be a manufacturer of tobacco products. Ultimately the Baucus amendment prevailed.
Tobacco companies also supported the measure. “It has been our position for a long time that businesses that operate roll-your-own machines are cigarette manufacturers and they should make the same tax payments and be regulated by the FDA and make the same state settlement payments, just like other cigarette manufacturers,” said David Sutton, spokesman for Philip Morris USA.
As for Brown’s question – a tobacco provision in a highway bill? – that’s normal operating procedure in the national capital. Unlike the Washington State Legislature, which faces a constitutional single-subject limitation on legislation, Congress can write bills that address any subject it pleases.
Turns State Case Upside Down
The lawsuit filed in this state by RYO Machine, LLC, is of particular significance because it appeared to be the best chance yet to get a ruling from the state Supreme Court on the constutionality of the state’s supermajority rule for tax increases. The rule, passed by voters four times since 1993, requires a two-thirds vote of the House and Senate before taxes can be increased. It has changed the way the Legislature does business, forcing majority Democrats to negotiate with Republicans, and blocking big tax increases that otherwise surely would have been imposed in the midst of the current recession. But many Democratic legislators and special-interest groups believe it to be unconstitutional.
The connection? Washington’s cigarette-crackdown bill increased taxes, but it didn’t pass with a two-thirds vote. The count in the Senate was 27-19. Washington’s measure defined the stores to be cigarette manufacturers and made them subject to state cigarette taxes. So every time the machine in the back of the store churned out a carton’s worth, the shopkeepers were liable for a payment of $30.25. The state, it should be noted, maintains that it isn’t a new tax, for complicated legal reasons.
It was the first time in 19 years that a perfect set of facts had been established that might cause the state Supreme Court to rule on the validity of the two-thirds rule. Challenges from legislators and interest groups had been rejected on procedural grounds. Another statehouse-based challenge is on the way up through the courts right now. But this one came from a party directly affected by a tax increase, and it certainly looked like this one was headed all the way to the top. On Monday, a Franklin County Superior Court judge issued an injunction preventing the new tax from taking effect on July 1, and on Thursday the Department of Revenue asked the Supreme Court for a stay. The high court granted a temporary stay on Friday.
The stay actually didn’t stay anything, because the injunction never took effect. RYO Machine and the other plaintiffs in the Franklin County case — a local smoker and a local shopkeeper — were supposed to post a $200,000 bond first; only then would the injunction keep the state law from taking effect. A check was supposed to be delivered Friday. But after Congress acted, the plaintiffs didn’t bother. Their attorney, Chris Weiss of the Seattle law firm Stoel Rives, filed a brief with the state Supreme Court saying they reserve the right to do so in the future. But the brief appears to say there isn’t much point. The brief states the action by Congress was an “intervening event” that “may effectively moot the state-law issues pending in this litigation.”
RYO Machine made no statements Friday, but its website notified machine operators that after Saturday it would no longer fill orders for tobacco and paper tubes. The notice also said it wouldn’t be buying the machines back.
And Brown, owner of a $37,000 machine he says he can no longer legally use, says he will try to stay in business by selling tobacco to those who roll at home. But he says he can look at the numbers and the chances do not appear promising. “This is just an attack on the little guy,” he said. “There are only three big tobacco companies in America, and there’s a reason.”