'Roll-your-own' cigarette battle at center of congressional finance scandal
Published 3:31 pm, Sunday, June 10, 2012
The roll-your-own cigarette bill embroiled in a 5th District congressional campaign scandal garnered little attention during this year's session of the state General Assembly.
But the proposal to force smoke shops to apply hefty packaged cigarette taxes to roll-your-own products is part of a national debate involving federal officials, Big Tobacco, numerous states and a variety of trade organizations.
"There are some pretty big guns all around this," said Kevin Sullivan, Connecticut's commissioner of revenue services, whose agency asked the General Assembly to take up the roll-your-own bill after a court setback on the issue.
In May, the federal Centers for Disease Control and Prevention reported a loophole in tax law making cartons of roll-your-own cigarettes half the price of manufactured brands resulted in a $1.3 billion hit to state and federal revenues.
Worried about the competition cutting into market share, the major tobacco companies and convenience stores want governments to crack down on what they view as tax-dodging roll-your-own producers and level the playing field.
States like Connecticut that receive millions annually from the multi-state 1998 federal tobacco settlement fear if they do nothing to regulate roll-your-own tobacco, they will be in violation of the terms and also lose out on those funds.
Meanwhile, Ohio-based RYO Filling Station, one of the major suppliers of roll-your-own cigarette machines, promises on its website that tobacco shops interested in the $32,500, ATM-sized equipment will purchase a "gold mine" that can triple their investment in one year. Machines typically produce a carton of 200 rolled cigarettes in around 15 minutes, versus the time and effort smokers put into using the traditional home table top equipment.
Observers say with so much profit at stake, it is not surprising the Connecticut roll-your-own bill is at the heart of a controversy involving the campaign for Congress by state House Speaker Chris Donovan, D-Meriden.
Donovan's campaign finance director was recently arrested on federal charges of concealing the identity of roll-your-own opponents, who donated $20,000 to the speaker's campaign expecting him to kill the bill.
Donovan has denied any knowledge of the arrangement. The roll-your-own proposal, which did not come up for a vote before the General Assembly adjourned May 9, may be passed during a special budget session on Tuesday.
Big guns and big money
The roll-your-own debate kicked off April 1, 2009, when the federal government hiked excise taxes on tobacco to help fund the State Children's Health Insurance Program, or S-CHIP.
Thomas Briant, head of the National Association of Tobacco Outlets, said members of Congress targeted roll-your-own cigarette tobacco in particular because, for years, the product had been taxed at a far cheaper rate than packaged cigarettes.
"Roll-your-own tobacco went from $1.09 per pound -- the same rate as pipe tobacco -- to $24.78 per pound," Briant said. "Congress tried to tax roll-your-own on an equivalent basis with the new higher cigarette tax."
But pipe tobacco, Briant said, was only increased from $1.09 per pound to $2.83 per pound. Producers saw an opening for savings, relabeling roll-your-own cigarette tobacco as pipe tobacco.
The S-CHIP tax hike and the faltering economy helped the roll-your-own market take off.
"This is all about saving money," Smith said. "Whenever there's a differential between what something costs taxed and not taxed, you have people gravitating to take advantage of that differential. That's exactly what's happening here."
The federal Alcohol and Tobacco Tax and Trade Bureau in September 2010 attempted to close the tax loophole by declaring participating roll-your-own retailers and cigarette manufacturers liable for the same taxes and fees.
RYO Filling Station took the bureau to court, winning a temporary injunction.
The case is pending, with a ruling expected in the fall, although Congress may deal with the matter legislatively.
In the meantime, federal authorities began urging states, with their varied cigarette and sales taxes, to begin grappling with the roll-your-own machine phenomenon.
"The federal bill only defines these retailers as manufacturers for federal purposes," Briant said. "The states have to take action if they mean to recoup all the cigarette taxes and sales taxes."
According to Briant's group, in 2012 alone, 11 states enacted roll-your-own laws, ranging from assessing higher taxes on the cigarettes to licensing retailers to banning the machines.
In Connecticut, the matter wound up in court, with the state Department of Revenue Services targeting Tracey Scalzi's roll-your-own shops in Norwalk and Orange. RYO is part of her legal team.
"We went in (to Scalzi's shops) and saw what was going on," Sullivan said. "It happened to be the test case."
Neither Scalzi nor RYO have been linked to the Donovan scandal.
Like at the federal level, Sullivan's case has not gone well. A Superior Court judge in an initial decision in late February concluded roll-your-own shops are not manufacturers as long as the customers are the ones operating the machines.
So Sullivan asked the General Assembly to remedy the issue by passing the bill that wound up at the heart of the Donovan controversy. The proposal was introduced late in the session and did not receive the normal public hearing.
RYO hired a lobbyist to help Scalzi oppose the measure at the Capitol in Hartford, with major cigarette manufacturers and trade groups like the national associations of tobacco outlets and convenience stores taking the other side.
Jeff Lenard, the latter group's vice president, said his members are losing cigarette sales and the traffic the product lures into their stores to roll-your-own shops.
"We just want market certainty," Lenard said.
In the tough economy, each side claims the other is putting independent, mom-and-pop businesses under.
Scalzi has told Connecticut legislators Sullivan's roll-your-own bill will close her stores, putting 15 people out of work.
"I am a single mother with two children," she recently added in an email to lawmakers.
Chris Herb, vice president of the Independent Connecticut Petroleum Association, whose members include convenience stores, counters, "This isn't going to cost jobs."
"Retailers doing roll-your-own need to compete fairly, complying with all the laws and paying their taxes," he said.
RYO spokesman Bea Gonzalez, of Capital Results in Virginia, characterizes the roll-your-own market as "a blip" that has been targeted by the major cigarette companies.
"I feel like we're being bullied by Big Tobacco in all the states," Gonzalez said. "Our small mom-and-pops have taken over vacant store fronts all across the country in very economically challenged states ... Those will just go away and the profits for Big Tobacco will increase."
RJ Reynolds does have a lobbyist involved in the Connecticut fight, but the company declined to comment.