Pipe tobacco taxed less, so smokers roll their own

Every day in a dozen or so Metro Detroit smoke shops from Westland to Waterford, tax-weary, recession-wracked smokers create roll cigarettestheir own cartons of cigarettes for half the $60 they’d pay for manufactured name brand smokes.

Thanks to a $30,000 automated roll-your-own machine from an Ohio manufacturer and a bargain tax rate on pipe tobacco created by Congress, smokers can take a box of pre-made cigarette tubes, 8 ounces of tobacco and 15 minutes to produce a carton of freshly rolled cigarettes for under $30 — less than just the federal and state tobacco taxes they would pay for a pre-made carton.

Although the machines have been around for years, state and federal tax officials now are trying to stub out the controversial RYO Filling Machine that automates the cigarette rolling process.

In March, the Michigan Department of the Treasury warned 300 smoke shop owners that using the machine on their premises constitutes the illegal manufacture of cigarettes. That follows a similar federal ruling, which has been stayed by a restraining order filed by the machine manufacturer, RYO Machine Rental LLC of Girard, Ohio.

Even if the RYO machines are banned, the low tax rate on pipe tobacco means plenty of smokers will continue to light up on the cheap. Metro Detroit smokers who skip the RYO machines and roll their own cigarettes at home already are saving even more — assembling a carton of cigarettes for as little as $13.

“The people that come here are basically the people that are trying to save money,” said Kyle Mio, owner of Dirt Cheap Tobacco in Sylvan Lake. The store opened in February and, even though he doesn’t use the RYO Filling Station, business is good enough that he and his father opened a location in Waterford.

‘An awful lot cheaper’

Rhett Berry is a Dirt Cheap customer who can put together a pack of cigarettes at home with a small tabletop rolling machine in about five minutes.

“I found it was an awful lot cheaper to do it that way,” said the 56-year-old Keego Harbor property manager. “Two packs of pre-made cigarettes are the same price as a carton for me. I pay about 12 to 13 bucks a carton.”

Kyle’s father, Norman Mio, worked in wholesale tobacco and saw an opportunity when Congress hiked the excise tax on roll-your-own cigarette tobacco to $24.78 a pound. The tax on pipe tobacco, however, is a mere $2.38 a pound. What’s more, industry experts say, the official definition of pipe tobacco is loose enough that anything labeled pipe tobacco gets the lower tax rate.

So, while federal tax is $1.01 on a pack of cigarettes, with another $2 added by the state, a smoker who rolls his cigarettes with “pipe tobacco” pays about 25 cents in excise taxes.

“I was working as a wholesaler, and we saw a 100 percent increase in sales of roll-your-own tobacco,” Norman Mio said. “I figured there’s potential selling to people who want to save money by rolling their own.”

He isn’t the only one to spot the difference. According to the Alcohol and Tobacco Tax and Trade Bureau, the amount of roll-your-own cigarette tobacco produced in 2010 dropped by 14.6 million pounds from 2008, while the amount of pipe tobacco produced has increased by 17.3 million pounds. The difference in lost tax revenue would total more than $321 million.

Michigan tax revenue

In Michigan, the tax on rolling tobacco and pipe tobacco is the same, so revenue to the state is lost only when smokers switch from manufactured cigarettes to rolling their own — whatever kind of tobacco they use. Despite growth in the roll-your-own business, taxes collected on cigarettes in Michigan far outstrip revenue from other kinds of tobacco: $985.6million for cigarettes in 2009 vs. $55.9 million for other tobacco products.

Just northwest of Youngstown, Ohio, it was party time at RYO Machine Rental in Girard recently, after the 1,000th RYO Filling Station was finished. The 790-pound machines stand a little under 5 feet high and shouldn’t be considered cigarette manufacturing equipment, said president Phil Accordino.

“A cigarette manufacturing machine will roll upwards of 20,000 cigarettes a minute,” said Accordino, a retired chiropractor. “Ours may hit about 20. It defies logic to say that our machine is a manufacturing device.”

Accordino had been distributing his machines for more than year before the tobacco tax changes happened.

He suspects that tax agencies aren’t moving against his machine because of lost tax revenue, but because cigarette manufacturers are nervous about the machines cutting into their business.

“They can’t single out our machine and blame pipe tobacco on us,” Accordino said. “When a retailer does turn his machine off, his pipe tobacco and tube sales do not decrease at all. The same people that are buying tobacco and using our machine will buy tobacco and tubes and process it at home. This is just a convenience.”

Accordino said he’s particularly surprised by the state ban in Michigan, and his attorneys are trying to open discussions with the state. A state spokesman said no enforcement actions have been taken against shops still using the machines.

“Michigan is one of the largest roll-your-own states in the country, because of your economy,” Accordino said. “It’s all about the dollars and cents.”

At Dirt Cheap Tobacco, Norman Mio isn’t worried about the state ban on big rolling machines, since he and his son don’t offer them, instead selling small at-home rollers for about $40.

“You’re manufacturing cigarettes if you use those machines,” Mio said. “But if a customer wants to save money and take tobacco home to roll for personal use, they save money, we make a little and everybody’s happy.”

Beyond the RYO Filling Station machines, federal regulators also have looked into tightening the definition for pipe tobacco. The Alcohol and Tobacco Tax and Trade Bureaurequested public comments by the end of September on proposals to distinguish between pipe tobacco and roll-your-own tobacco, but hasn’t issued any new rules.

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