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Roll-your-own tobacco shop owners bristle at bill to expand taxation

GLENDALE – Customers of Tobacco Mizer save $30 on the equivalent of a carton of cigarettes by buying loose tobacco and hollow tubes and then renting a machine that rolls their cigarettes.

“Each customer has his own blend,” said Bob Mizer, the store’s co-owner. “We have eight different types of tobacco here, and they can mix and blend to match what they want.”

The finished cigarettes come cheap because they aren’t subject to the same state and federal taxes as those from companies considered manufacturers under Arizona law.

Mizer says this setup allows his operation and others similar to it to compete with tobacco stores on American Indian reservations, where customers pay less in excise taxes.

That’s why Mizer and other roll-your-own shop owners say a bill advancing in the state Legislature would be a death blow.

HB 2717, authored by Rep. Jim Weiers, R-Phoenix, would classify businesses with cigarette rolling machines as manufacturers and subject them to the same regulations and taxes as companies that produce finished cigarettes.

The House Commerce Committee endorsed the bill Feb. 15 on a 5-3 vote, sending it to the full House by way of the Rules Committee.

Mizer said losing a tax advantage would be only part of the problem should the bill become law.

If he were classified as a manufacturer, he would be required to obtain a state manufacturing license. However, those seeking a state license must first obtain a federal manufacturing license, and with that comes a prohibition against selling directly to customers in the area where they manufacture cigarettes.

Mizer said he’d have no option other than giving up his three rolling machines, which together cost him about $100,000. And because his business relies heavily on them, he said he’d have to close and put his 13 employees out of work.

“It’s like a Catch-22,” Mizer said. “You say we’re manufacturers, but we can’t get a license. We’re going to be out of business if this bill passes.”

This isn’t the first effort to classify retailers with roll-your-own machines as manufacturers. In 2010, the U.S. Treasury Department’s Alcohol and Tobacco Tax and Trade Bureau issued a ruling calling for that, but a federal court in Ohio granted an injunction in response to a lawsuit by RYO Machine Rental LLC, which sells and leases roll-your-own machines.

Jeffrey Burd, an Ohio attorney representing RYO Machine Rental, told lawmakers that he found the timing of this bill odd given that a hearing in his company’s suit is scheduled for April.

Machines used by roll-your-own tobacco shops aren’t comparable to the machines used by mainstream cigarette manufacturers, Burd said, adding that it would take a tobacco store rolling machine 16 hours to produce as many cigarettes as a manufacturer’s machine makes in a minute.

“This is simply a situation where cigarette manufacturers would like to take a convenience away from ‘rolling your own’ customers because they would prefer their product be purchased,” Burd said.

John Mangum, an attorney representing Altria Group Inc., formerly known as Philip Morris Companies Inc., which manufactures cigarettes under brands including Marlboro, told the committee that without a law customers will migrate to stores such as Mizer’s. That will cut into revenue from the $1.01 per pack federal manufacturer’s tax and $2 per pack state manufacturer’s tax, he said.

Portions of both taxes go toward anti-smoking programs.

“The issue here is an unclear tax advantage,” Mangum said. “What we are trying to do is restore what we would call a level playing field.”

Burd said tobacco store machines aren’t causing people to roll their own cigarettes but are merely a convenience for people who were already rolling their own cigarettes on less efficient machines at home.

“There is no tax loophole,” he said.

Groups joining Altria Group in signing support for the bill included Reynolds American Inc., the Arizona Retailers Association and the Cigar Association of America.

Groups joining RYO Machine Rental LLC and shop owners, including Mizer, in opposing the bill included the Goldwater Institute, an independent watchdog group that promotes limited government and free enterprise.

In voting for his bill, Weiers said the issue boils down to making sure no business has an unfair advantage when it comes to taxes.

“This is really a touchy issue with me because it goes to the very nerve of what I believe when it comes to taxes and how silly people have become,” Weiers said.

Reps. Rick Gray, R-Sun City, Bob Robson, R-Chandler and J.D. Mesnard, R-Chandler, voted against the bill.

“If I go out and rent all the equipment needed to do landscaping, does that make me a landscaper? None of this really makes any sense,” Robson said.

The taxes:

• State tax on .0325 ounces of loose tobacco, enough to be rolled into 20 cigarettes: 14.5 cents
• State tax on a pack of manufactured cigarettes, which typically come in packs of 20: $2
Source: Arizona Department of Health Services

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