Automated Roll-Your-Own (RYO) Tobacco Machines

Commercial-grade automated RYOs at tobacco retail stores are a new trend in cigarette and little cigar manufacturing. At the retail store, the customer purchases loose tobacco and either cigarette or little cigar papers, and then uses the retailer’s onsite RYO automated machine to manufacture the cigarettes or little cigars. The customer can either operate the machine without assistance, or receive assistance from the retailer.

On May 14, 2014, the Alcohol and Tobacco Tax and Trade Bureau of the U.S. Treasury issued a notice regarding RYO tobacco machine consumer usage in retail stores, reminding the public that such practices are unlawful under federal law.

Public health advocates have been concerned about the possibility of circumventing state and federal tobacco tax laws since the retail cost of and taxes on loose tobacco and paper is much lower than the retailer selling cigarettes or little cigars. Tobacco retailers are offering a cigarette or little cigar manufacturing process to the customer, so the retailer may also be required to register as a manufacturer of cigarettes and/or other tobacco products, and perhaps as a distributor as well, which requires paying the State an annual fee to operate as such a manufacturer and/or distributor, in addition to being registered as a cigarette and/or tobacco retailer. Additionally, the customer may also be considered a manufacturer, which could require a state license.

Participating states of the 1998 Master Settlement Agreement (including NJ) are required to collect payments of about $0.42 cents per pack from tobacco product manufacturers. Retailers using the commercial RYO machines may result in a State not collecting 42 cents/pack for those packs of cigarettes, unless that retailer or customer is registered as a manufacturer.

On September 30, 2010 the Department of the Treasury Alcohol and Tobacco Tax and Trade Bureau (TTB) issued Ruling 2010-4 stating the proprietor of a retail establishment with a cigarette-making machine for use by customers is considered a manufacturer and is therefore subject to the permit and tax requirements of the amended Internal Revenue Code of 1986. The TTB attempt to classify RYO machine owners as manufacturers led to a court placing a legal injunction on their efforts.

On March 7, 2012, the National Fire Prevention Assocation (NFPA) issued a letter to all state fire marshals, stating that RYO commercial store operators need to comply with fire safe cigarettes law since RYO operators fall under the definition of “manufacturer” under the state fire safe cigarette laws. The March/April 2012 issue of NFPA Journal quotes Lorraine Carli, NFPA vice-president of Communications:

“NFPA feels strongly that stores with roll-your-own machines fall under fire-safe cigarette laws that define manufacturers as “any entity that manufactures or otherwise produces cigarettes or causes cigarettes to be manufactured,” and states should be enforcing this provision.”

The state fire safe cigarette laws are enforceable by local fire marshals. Read more about the NFPA’s decision.

On July 6, 2012 President Obama signed the federal transportation bill into law, which included an amendment to define RYO commercial store operators as tobacco manufacturers under federal law. New federal requirements imposed on RYO commercial RYO store operators (now defined as a “manufacturer”) include the following (find specific U.S. Code sections here):

• Collect the federal tax on cigarettes which is $1.01 per pack.
• Affix the U.S. Surgeon General’s cigarette health warnings to the cigarette packs.
• RYO products must be placed in packages with other federally required marks and labels.
• Abide by the federally required minimum package size for cigarettes.
• Prohibit sale of flavored cigarettes (except menthol) made by commercial retailer RYO machine.
• Abide by federal restrictions on cigarette sampling.
• Apply for a federal permit to engage in the business and file a bond.
• Maintain records and submit reports.

This federal law signed by President Obama in July defines roll-your-own (RYO) cigarette machine stores as cigarette manufacturers, closing a tax loophole for RYO cigarette sales. Read the U.S. Alcohol and Tobacco Tax and Trade Bureau’s (TTB) October 2012 bulletin outlining the statutory and regulatory requirements.

While the TTB announced that it will begin enforcing the new tax requirements for RYO tobacco starting in late August, another related tax loophole persists. According to the Campaign for Tobacco-Free Kids, much of the RYO tobacco purchased in the U.S. is mislabeled as “pipe tobacco” in order to avoid the higher federal excise tax on RYO tobacco. CTFK has released a new fact sheet which proposes to equalize taxes on all combustible tobacco products, including loose tobacco and cigars.

Prior to the federal law, New York City filed lawsuits against several tobacco stores with RYO machines, claiming that the sales of loose tobacco and tubes of cigarette papers and in-store access to cigarette-making machines amounts to selling untaxed cigarettes. NYC settled with some New York-based RYO stores that agreed to halt the RYO production, and has filed complaints with other New York-based RYO stores. Read the December 20, 2011 articles from The New York Times the The Daily News, and SILive.com.

Taking a different approach, the New Hampshire attorney general recently took a retailer to court, which ruled that the operation of a roll-your-own machine constitutes the manufacture of cigarettes.

In Wisconsin, the state’s Department of Revenue issued notices last year asking roll-your-own stores to obtain tobacco manufacturing and distributor permits in addition to paying an excise tax applicable to cigarette manufacturers; a circuit court has placed a temporary restraining order on the department’s requests while it decides on a ruling. And officials in New York City have begun shutting down stores, in part for violating the state’s fire-safe-cigarette law, which was enacted in 2004.

Other states also took steps to close the tax loophole. The West Virginia Department of Revenue put forth an Administrative Notice in September 2010 which states:

“The Tax Department has determined that the use in the retail dealer’s place of business of the machine, whether owned or leased by the retail dealer, that manufactures cigarettes for the consumer is a ruse and an illegal attempt to evade the cigarette tax. The illegality of this activity does not change depending on whether the retail dealer charges a fee for usage of the machine or allows the machine to be used free of charge. In both situations, the retail dealer is providing the equipment and method for the manufacturing of cigettes upon which the cigarette tax has not been paid.”

Wisconsin’s Division of Tax Revenue put out a September 22, 2011 notice informing businesses that providing an RYO machine to customers requires both a manufacturer and retail permit and cigarette packages must be affixed with the appropriate cigarette tax stamp.

The U.S. TTB has appealed a court decision that found in favor of RYO defendants based in Ohio. On October 28, 2010, Plaintiffs RYO Machine Rental LLC, Tobacco Outlet Express LLC, and Tightwad Tobacco LLC filed a federal lawsuit in Ohio against the TTB, challenging the TTB ruling. On October 29, 2010, a federal judge issued a temporary restraining order against collecting the tax based on the TTB ruling on decision on Oct. 29, 2010. On November 12, 2010, the District Court issued a preliminary injunction prohibiting TTB from enforcing the ruling. On February 11, 2011, the TTB appealed this preliminary injunction to the U.S. Court of Appeals.

Prior to the federal law that determined RYO retailers were manufacturers, many states introduced legislation to define them as such. Many of the bills had the support of cigarette manufacturing corporations who were seeing their sales decline as customers tried to save money by using RYO machines. After the federal law passed in July, many state passed laws to classify the RYO retailers as manufacturers to ensure compliance with all state-mandated manufacturing licenses and fees.

Legislators in Virginia and Michigan passed similar bills to identify such retail establishments as a cigarette manufacturer, requiring manufacture licensing and the collection of cigarette taxes.

This list includes, but is not limited to, Florida (HB 615/SB 1008), West Virginia (HB 4428), Michigan (SB 930), South Dakota (HB 1138), and Virginia (HB 314).

Washington State, passed a similar bill (HB 2565) to close the “manufacturing loophole”, has just introduced a new Senate Bill (SB 6564) which would make RYO machines illegal in the state. Interestingly, this bill is sponsored by Philip Morris. Read the news article. In June 2012, Washington State’s new law to impose a tax of 15 cents per cigarettes, on cigarettes manufactured at RYO tobacco shops, was temporarily put on hold, due to a judge’s ruling that the vote required a 2/3 legislative approval. Read the news article.

Based on a different legal objection, New Jersey has filed a lawsuit against a New York-based company, alleging that the firm violated the state’s Consumer Fraud Act through its advertisement and sale of roll-your-own tobacco to New Jersey residents. Read a January 10, 2012 news article.