Tobacco purveyors have a love-hate relationship with the high-speed, high-tech "roll-your-own" machines that let customers make cigarettes on the cheap. Those who operate and profit from them love the machines. Those who don't say the machines might be illegal and are killing their tobacco businesses.
In the end, the government and the courts will decide whether these machines -- known as RYO filling machines -- represent a massive tax dodge or just a more efficient way to hand-roll cigarettes.
"These places are manufacturing cigarettes," plain and simple, said Regan Bartley, co-owner of Smoker Friendly, a tobacco chain with stores in West Virginia, Ohio and Maryland. Her stores compete with tobacco shops, gas stations, convenience stores and other businesses that buy or lease the machines.
She said manufacturer RYO Machine Rental of Youngstown, Ohio, approached Smoker Friendly about putting machines in her stores. But Smoker Friendly balked because the legal status is unclear.
First, a primer for nonsmokers: Cigarettes are expensive. But they are less so if you roll them yourself, avoiding state and federal per-carton excise taxes. A carton, instead of costing $50, is $25 or so.
RYO customers don't pay the full cigarette excise taxes because they're technically buying loose pipe tobacco (subject to its own federal excise tax) and rolling tubes. Purveyors don't have to be bonded or purchase the cigarette "stamps" that show each carton was legally sold.
Customers rent time at a freezer-sized rolling machine, which can roll a full carton in 10 to 15 minutes. Eight ounces of loose tobacco yield 200 cigarettes.
The federal Alcohol and Tobacco Tax and Trade Bureau says the roll-your-own machines take advantage of the "personal use" tobacco tax exemption so customers and stores can avoid paying cigarette excises.
In September, the bureau announced that shops with roll-your-own machines were manufacturing cigarettes, just like Philip Morris USA, but on a much smaller scale. That designation would mean tobacco shops with RYO machines would have to obtain tobacco manufacturers' permits and remit taxes on sales -- effectively doubling the rolled smokes' price.
"We do not believe that Congress intended for a consumer to be able to purchase at retail commercially manufactured cigarettes upon which tax has not been appropriately paid," the bureau said in its ruling.
The makers of the RYO machines have won a preliminary injunction that, at least for now, allows the RYOs to continue making cigarettes without stamping the boxes or collecting excise taxes.
Phil Accordino, president and co-owner of RYO Machine Rental, said the feds had it all wrong: The machines are not cigarette manufacturers.
"If anyone buys our machine to manufacture cigarettes, they will be sadly disappointed," he said. "They only make four cartons an hour," or about 800 cigarettes. An industrial cigarette roller makes 20,000 cigarettes in a minute, Accordino said.
Some tobacco retailers think it's just a matter of time before RYO cigarettes are taxed.
More ominously, others say buyers may merely be delaying the excise tax payment, not evading it.
Opponents of the machines -- including traditional tobacco shop owners and big tobacco companies that stand to lose market share -- claim RYO customers could face thousands of dollars in back taxes.
For the last four years, the Pennsylvania Department of Revenue has cracked down on smokers who buy cigarette cartons online to avoid the state's sales tax and tobacco excise levy. Federal law compelled companies that sold the cigarettes to hand over customer records, and thousands of Pennsylvanians received bills for excise and sales taxes.
Could it happen again? Bartley said some RYO machines have computer hard drives, which could keep buyers' drivers license and purchasing information for years. If permitted, state or federal authorities could trace purchases and bill customers for taxes owed after the fact.
The revenue department says that it's not considering such a scenario but that it's monitoring sales closely. It estimates 114 machines are across Pennsylvania in 58 stores.
Potentially, the state could be losing "tens of millions of dollars," revenue information specialist Allison Roberts says.
So far, Pennsylvania has looked upon the machines more neutrally than regulators in other states. In Michigan, the state Department of the Treasury notified retailers that "the operation of a machine that is loaded with loose tobacco and rolling tubes for the purpose of producing cigarettes constitutes 'cigarette manufacturing' in Michigan."
With authorities looking at the machines, why take a chance on them?
Because they are profitable. RYO Machine Rentals boasts that owners "can expect a 20-30 percent margin on a carton of RYO produced in your store."
Ray Di Pasquale, who owns four Pittsburgh-area Tobacco Outlets, said he might buy a machine if he were more certain of their legal status.
"That's my dilemma," he said. "... They're legal now, but are they going to be legal six months from now?"
(Distributed by Scripps Howard News Service, www.scrippsnews.com.)