By ELIZABETH BEWLEY, Gannett Washington Bureau
WASHINGTON -Dozens of Tennessee tobacco shops have taken advantage of a tax loophole that allows them to sell roll-your-own cigarettes at a deep discount - but those days may be drawing to a close as state and federal lawmakers zero in on the practice.
Tennessee lawmakers this week passed a bill that would require roll-your-own retailers to pay a licensing fee and a cigarette tax on each carton they sell. And proposals in Congress - including one sponsored by Republican Rep. Diane Black - would stymie the growth of roll-your-own machines by designating the smoke shops that house them as manufacturers.
The tax loophole has cost Tennessee almost $4 million in lost tax revenue since 2009, according to a report released Wednesday by the Centers for Disease Control and Prevention.
Jason Wells, manager of the Cigar Parlor and Roll Smokes and Go in Hendersonville, says state and federal legislation could shut down his business and hurt the recession-weary customers who benefit from the lower prices of roll-your-own smokes.
Tax savings allow the Cigar Parlor to charge just under $22, plus tax of about $2, for a carton of 200 cigarettes - less than half the cost of a carton of Marlboros.
"These are very profitable machines," he said of the two $32,500 roll-your-own machines at the Cigar Parlor. "They give the consumer a choice, which is nice. We should always have a choice in what we'd like to buy."
The popularity of roll-your-own cigarettes has shot up since federal tobacco taxes increased three years ago. Congress raised taxes on both roll-your-own tobacco and packs of cigarettes in April 2009, but enacted a smaller tax increase for pipe tobacco, which has become a cheaper substitute for roll-your-own tobacco.
Since then, monthly sales of pipe tobacco have increased twelve-fold, from about 240,000 pounds in January 2009 to more than 3 million pounds in September 2011, said a recent report by the nonpartisan Government Accountability Office.
As a result, states have lost $374 million in revenue, including Tennessee's $3.95 million, according to the new CDC report.
"Tax structures that provide tobacco users with an opportunity to switch to other low-cost tobacco products not only result in lower federal and state revenue from these products, but also blunt the public health impact that excise tax increases would otherwise have on . . . reducing cigarette consumption," said the report, noting that smokers are less likely to quit if cheap cigarettes are available.
State lawmakers passed a bill Tuesday that would require smoke shops to pay an annual licensing fee of $500 for each roll-your-own machine. The bill would also force the shops to pay a cigarette tax similar to the 3-cent-per-cigarette tax currently levied on manufactured cigarettes -- a move that could increase the price of roll-your-own cigarettes by some $6 per carton, retailers say. If Gov. Bill Haslam signs the bill into law, businesses would have to comply by October 2013.
Federal lawmakers are also pushing a number of proposals. A House measure sponsored by Black, of Gallatin, would classify as manufacturers the retailers that have roll-your-own machines - which would impose extra costs and regulations on the shops. Black has 59 co-sponsors for that bill, including Republican Rep. Marsha Blackburn of Brentwood.
A similar provision was included in the transportation reauthorization bill that passed the U.S. Senate in March.
Lobbyists for big tobacco companies have supported such measures, arguing that smoke shops using the machines have an unfair price advantage. Black and Blackburn each have received campaign contributions from the tobacco industry, as have Tennessee Sen. Bob Corker and Reps. Stephen Fincher, Scott DesJarlais and Jim Cooper, according to the Center for Responsive Politics, which analyzes campaign finance data.
Blackburn ranks No. 11 among House recipients of contributions from the tobacco industry, having received $15,000 from tobacco companies since the 2010 elections, according to that data.
Campaign finance reports show Black has received $4,500 from Altria Group, formerly named Philip Morris Companies, during this election cycle.
Black said her bill aims to make sure that everyone "is playing by the same rules."
"Retailers with roll-your-own machines are exploiting a loophole in the tax code to avoid paying taxes," she said Wednesday.
Blackburn's office did not immediately respond to requests for comment Wednesday.
Wells said roll-your-own shops shouldn't be considered manufacturers because while the retailers provide the raw materials - tubes and tobacco - customers make the cigarettes themselves, essentially renting the machine from the shop for the eight minutes it takes to produce 200 cigarettes. Employees don't load or operate machines, he said.
Legislation to raise costs is "the worst thing that can happen" to small smoke shops, said Wells.
"It could absolutely put us out of business," he said.
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Contact Elizabeth Bewley at ebewley@gannett.com or follow her on Twitter @ebewley.