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Roll-your-own cigarette outlets now subject to manufacturing tax

CHARLESTON, W.Va. -- After being targeted for litigation and legislation at the state level, the fate of roll-your-own cigarette outlets appears sealed by a rider in the federal transportation bill signed into law last week by President Obama.

The amendment defines the roll-your-own outlets as cigarette manufacturers, making them subject to the $1-a-pack federal excise tax, as well as state cigarette taxes.

"It will basically put the companies out of business," West Virginia Tax Commissioner Craig Griffith said Tuesday. "They will no longer have a price advantage over cigarettes sold in retail stores."

Nationally, roll-your-own outlets -- where customers buy loose tobacco, rolling papers and filters and put those products into machines that produce individual cigarettes -- began to proliferate in 2009, when the federal cigarette tax increased from 39 cents to $1 a pack.

Locally, the stores sell the equivalent of a carton of cigarettes for about $30, or roughly $12 to $15 less than a carton of name-brand cigarettes.

The savings can almost be entirely attributed to the difference between the $15.50 of state and federal taxes on a carton of cigarettes and the much lower tax rates for pipe tobacco, used to manufacture the roll-your-own cigarettes.

West Virginia has a 7 percent excise tax on pipe tobacco.

"Without the price advantage, if the taxes are equal, they're probably not going to be in business anymore," Griffith said of the outlets.

In September 2011, a Kanawha Circuit Court ruling held that the roll-your-own outlets are cigarette manufacturers and ordered the defendant in the case, a Moundsville outlet, to pay $82,500 in back taxes.

That case is on appeal to the West Virginia Supreme Court, with oral arguments tentatively scheduled for this fall. However, John Dalporto, a senior assistant attorney general, said he's hopeful the new law will moot the case.

"If I were them, I think I would withdraw the appeal. I would just call it quits," said Dalporto, who said the new federal law resolves the primary issue in the case.

"It pretty much disposes of the issue of what a tobacco product manufacturer is," he said.

Operators of roll-your-own outlets contended they were not manufacturers, since they merely sold customers loose tobacco and provided them with access to the machines.

Dalporto said he was surprised Congress acted so quickly to resolve the debate.

"I think this is great," he said. "We're delighted."

During the 2012 regular session of the Legislature, bills were introduced in both the House and Senate to either define roll-your-own establishments as cigarette manufacturers for tax purposes, or ban them outright.

The Senate passed its version of the legislation 32-1, but House leadership deferred action on the bills, pending the outcome of the Supreme Court case.

Griffith said the Tax Department probably will not attempt to collect state cigarette taxes from the outlets until the federal law goes into effect in October, at which point he said he doubts if any of the stores will still be in business.

He said the roll-your-own outlets have not proliferated in West Virginia as they have in other states, with just over a dozen stores operating around the state.

"Because the cigarette tax is relatively low in West Virginia, we really haven't seen the numbers ... as they have in Ohio and some of the high-tax states," he said.

In Ohio, taxes on a carton of cigarettes total $22.50.

Calls to Ciggy Shack, a roll-your-own outlet with stores in Kanawha City and South Charleston, went to answering machines at both locations Tuesday, and employees were not reached for comment.

Reach Phil Kabler at philk@wvgazette.com or 304-348-1220.


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