- Associated Press - Monday, November 21, 2011

NEW YORK — 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 tax loophole that officials in several states are trying to close.

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

Customers select a blend of tobacco leaves, feed the tobacco and some paper tubes into the machines, and return to the counter with the finished product to ring up the purchase.

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, compared with $25 per pound for cigarette tobacco. 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 generally are 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 filed a lawsuit against Island Smokes on Nov. 14, arguing that the company’s Manhattan store and another on Staten Island are engaging in tax evasion.

“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 complaint said.

A pack contains 20 cigarettes and sells for about $13 in New York City after taxes are added. A pack from Island Smokes can cost less than $4.

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

Mr. Behrins called the legal attacks “downright frightening” and blamed them on governments trying to drum up extra cash in tight times.

“They are looking for money every way they can. Parking tickets. Red light cameras. You name it. They are just ringing it up to bring in revenue.”

Legal battles over shops using roll-your-own machines are ongoing in several states.

Wisconsin’s Department of Revenue this year told machine owners that they need manufacturing and distribution permits. Enforcement of the order has been put on hold while a judge considers the matter. A hearing is scheduled for Nov. 23. In West Virginia, a judge ruled in September that a tobacco shop there was violating state and federal law by failing to charge excise taxes on cigarettes made by customers on-site.

The U.S. Treasury Department’s Alcohol and Tobacco Tax and Trade Bureau ruled Sept. 30 that roll-your-own tobacco shops are manufacturers, subject to the same licensing rules as other cigarette makers.

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