Article by Erik Smith. Published on Wednesday, February 07, 2012 EST.
Tax Measure Would Snuff a Promising Industry, Shopkeepers Say, and it Sounds Like That’s the Idea
Hulking RYO Filling Station machines line the wall in a slick promotional video posted on the company’s website — think of it as a “money machine,” the company says.
UPDATE, Feb. 8.–House Bill 2565, which would have declared shopkeepers with “roll your own” machines to be cigarette manufacturers for taxation purposes, did not get a vote in the House Ways and Means Committee Tuesday night. Tuesday was the deadline for passage of bills that had been forwarded by policy committees. But because the proposal has a fiscal impact it may be determined necessary to implement the budget and thus could be considered later in the session.
By Krista Norsworthy
Staff writer/ Washington State Wire
OLYMPIA, Feb. 7.—It’s a smokin’ deal! A carton of cigs for half the price! And all it takes is a machine the size of a commercial refrigerator and a willingness to wink at the state tax code.
A fair portion of Olympia’s lobbying community is fuming over the roll-your-own cigarette machines, currently installed in 65 stores statewide. The machines take advantage of a quirk in the state and federal tobacco taxes, which tax ready-made cigarettes at a higher rate than loose pipe tobacco. So you can buy ready-rolled cigarette “tubes” and a sack of loose tobacco, pour it all into the machine, and voila! A carton’s worth of smokes that might ordinarily run $70 or $80 can be had for $36.50.
The state’s retailers and grocers say it’s nothing less than a scheme to dodge state taxation – and that’s not fair.
“They’re popping up all over the state,” complained lobbyist T.K. Bentler at a hearing of the House Ways and Means Committee this week, representing the Washington Association of Neighborhood Stores. He waved an advertising card with a photo of a smiling woman and a promise of smokes at $36.50 a carton.
“$36.50, to get the same carton of cigarettes that at one of our stores is as high as 80 bucks,” he said. “We are asking you to stop the bleeding. We have invested in our land and our stores and we play by the rules that you have set here in the Legislature. And we have a company that has gotten very creative in selling cigarettes at $36.50 a carton.”
Lawmakers this session have been considering a reward for that creativity – a revision in the tax code that would declare the small shopkeepers to be cigarette manufacturers, subject to all the same taxes and regulations that govern the big boys. The House Ways and Means Committee was pondering that measure, HB 2565, late Tuesday night.
Or if that wasn’t clear enough, a bill that died in the Senate Ways and Means Committee Tuesday would have imposed an outright ban.
Smothering a Dream
To hear the merchants tell it, lawmakers are trying to snuff a promising new industry with intrusive regulation and sky-high taxation. The debate appears to center on a single company, RYO Machine Rental LLC. The firm’s website says it has installed 1,000 machines in stores nationwide, fulfilling a dream for entrepreneurs and the cravings of smokers everywhere who have noticed the obvious – that “commercial cigarette costs have skyrocketed.”
The copy draws a direct relationship between high cigarette prices and the growing popularity of home roll-your-own machines. “Although recent legislation has significantly increased the tax on tobacco,” it says, “the cost to roll a carton of cigarettes is still roughly one-third of the cost of pre-manufactured product.”
And the main reason it says more people don’t roll their own is that it just takes so long – close to three hours for the average consumer to fill a carton of cigarettes. But what if you could automate the process, touch a few buttons on a touch-screen and wait for the smokes to pop out?
Think of it as a money machine, the company says.
“With the development of the RYO Filling Station, and a filling speed of 8 minutes per 200 smokes, the sky is now the limit,” it says. “And so is your profit potential.”
A Taxing Problem
There’s a reason cigarettes cost so much. Washington has one of the highest cigarette taxes in the country at $3 a pack, as much to raise money for the state as to discourage people from smoking in the first place. And opponents say the machines are just a clever way to get around state rules that not only set high tax rates but also require manufacturers to pay for smoking-prevention programs.
“I would prefer that we not even have these machines in the state at all,” said Mary Selecky, secretary of the state Department of Health. “But if they are going to be here we have got to have a level playing field and they should be taxed the same. And the request I would have is that if we do have them, we tax them the same and that some of the money go into the tobacco prevention account.”
Other notable organizations declaring their opposition are the Washington Retail Association, the Washington Food Industry Association and the Korean-American Grocers Association, which pay the full ticket when cigarettes are sold in their stores. Notably absent from the Monday hearing were the established cigarette manufacturers, though Bentler noted that his neighborhood-store association represents both convenience stores and the wholesalers that serve them. Cigarettes account for 30 to 35 percent of their sales, he said.
David Versus Goliath
Washington’s 65 Roll Your Own stores are small fry by comparison with big manufacturers, company officials say. The stores are selling about 30,000 carton-equivalents a month, about 360,000 a year, said Washington state distributor Joe Baba. The stores do pay taxes, albeit at the lower rate for loose tobacco. But the company is making an economic argument – that the state would actually lose money by imposing the same tax burden on the shopkeepers, because customers would cross state lines to buy cheaper smokes in Idaho and Oregon, on Indian reservations or over the Internet.
RYO lobbyist Ron Main said the roll-your-own market is three to four percent of overall cigarette sales, whether customers use the automated machines or assemble their cigarettes the old-fashioned way, by hand. The House taxation measure would simply shut the stores down, he said, but it wouldn’t mean people would shift to more expensive branded cigarettes. “All that would be lost by passing this bill are businesses and jobs,” he said. About 250 people are employed in the stores, he said.
“It’s not leveling the playing field,” said RYO salesman Joshua Baba. “It’s shutting us down, letting Goliath beat David.”
Will Ruin Lives
A parade of RYO smokeshop operators told the committee they had sunk their life’s savings into the machines. If convenience stores fear competition, maybe they should buy them, too, said store owner Jeanne Wood of Butts Tobacco in Edgewood. “They need to get them themselves and not complain about us having them,” she said. “Don’t vote for this. It will ruin some lives. Quite a few lives actually. That’s really all I can say.”
Store owner Lisa Suave said there is a big difference between pre-packaged cigarettes and those that are produced by the RYO machines. “We are willing to discuss being taxed in a fair way, but not being taxed as manufacturers, because we are not manufacturing our own cigarettes,” she said. “Our customers are doing it themselves.”
Rainier Valley store owner Renee Goodall said her customers will roll their own regardless of whether they get the smokes from a machine. “They cannot afford to buy cigarettes from regular retailers,” she said.
And Aberdeen store owner Wayne Brown said the stores really provide a public service. When you roll by hand, he said, “you make one at a time, which the old arthritic people can’t do. This makes it easier for them, and that’s the whole thing.”
“These are popping up all over the state,” complains lobbyist T.K. Bentler, representing the Washington Association of Neighborhood Stores.
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