Roll-your-own cigarettes evade taxes, come under fire

There is no place in the U.S. more expensive to smoke than New York City, where the taxes alone will set you back $5.85 per pack. Yet, smokers who visit Island Smokes, a “roll your own” cigarette shop in Chinatown can walk out with an entire 10-pack carton for less than $40, thanks to a yawning tax loophole that officials in several states are now trying to close.

The store is one of a growing number around the country that have come under fire over their use of high-speed cigarette rolling machines that function as miniature factories, packaging loose tobacco and rolling papers into neatly formed cigarettes, sometimes in just a few minutes.

Even though patrons leave carrying cartons that look very much like Marlboros or Camels, the store charges taxes at the rate set for loose tobacco, just a fraction of what is charged for a commercially made pack.

The savings come at every level. Many stores sell customers loose pipe tobacco, which is taxed by the federal government at $2.80 per pound (450 grams), compared with $25 per pound for tobacco made for cigarettes. The shops don’t pay into the cigarette manufacturer trust fund, intended to reimburse government health programs for the cost of treating smoking-related illness. And the packs produced by “roll your own” shops are generally also being sold without local tax stamps, which in New York include a $1.50 city tax and a $4.35 state tax.

New York City’s legal department sued Island Smokes on Nov. 14, arguing that the company’s Manhattan store and another on Staten Island are engaging in blatant tax evasion.

Every package of cigarettes sold in the state, the suit argued, must bear a New York tax stamp. The suit also accused the store of violating a law requiring cigarettes to meet fire safety standards.

“By selling illegally low-priced cigarettes, defendants not only interfere with the collection of city cigarette taxes, they also impair the city’s smoking cessation programs and impair individual efforts at smoking reduction, thereby imposing higher health care costs on the city and injuring public health,” the city said.

A pack contains 20 cigarettes and sells for about $13 in New York City after taxes are added. That compares with the national average in 2010 of $4.80 a pack, according to the Centers for Disease Control and Prevention. A pack from Island Smokes can cost less than $4.

Everything about the business is legal, precisely because the company is neither selling cigarettes, nor manufacturing them, said Jonathan Behrins, a lawyer for Island Smokes. It is simply selling loose tobacco and tubes, he said, and giving customers access to the rolling machines to make the cigarettes themselves.

“What’s the harm?” he said.

Behrins said the business had developed a clientele of people who were trying to save money.

“It’s a certain demographic that rolls their own. They don’t really want to be bothered with (New York Mayor Michael) Bloomberg reaching into their pockets.”

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