Sidestepping a revenue setback handed down from Superior Court, the legislature’s Finance Committee passed a bill last week requiring tobacco shops with roll-your-own cigarette machines to obtain a $5,000 manufacturer’s license.
The state had sought an injunction against at least one of the shops, which rent out machines that can produce what amounts to a carton of cigarettes in about 10 minutes at a price around $40.
Purchased at a conventional retail store, a carton of cigarettes costs somewhere around $36, but that’s before the state adds an additional $34 in taxes, bringing the cost of a carton up to $70 for 200 cigarettes.
Susan Kinsman, spokeswoman for the attorney general, said the court’s decision was too narrow to resolve the issue. The court found that the shops couldn’t be labeled manufacturers because customers make the cigarettes, but the state doesn’t have the manpower to monitor how much help customers received from shop owners.
The judge concluded the state would likely prevail in its claim against Tracey’s Smoke Shop in Norwalk only if the employees were helping customers use the machines.
In steps the legislature.
A bill that would officially classify these stores as manufacturers passed the Finance Committee last week by a 33-17 vote. The proposal came from the Department of Revenue Services which wants the shops to pay for the licenses and wants their customers to pay the state’s cigarette tax.
Finance Committee Co-Chairwoman Sen. Eileen Daily said last week that the change was a matter of fairness and suggested the businesses still have a wide enough profit margin to absorb the additional expense or pass it along to their customers, who are still saving about $30 per carton by using these machines.
“Many people in our state are paying the cigarette tax as we have levied it,” she said. “They still have a big number between what we hear they’re selling for and what a carton of cigarettes is selling for. So they have the ability to recoup this expense.”
But Rep. Sean Williams, R-Watertown, said he was disappointed the Department of Revenue Services did not propose the legislation earlier in the session. The court case was decided at the end of February, but with around a month left in the legislative session, it’s too late for the provision to get a public hearing.
Last week at the committee’s only meeting, it was lumped into a nondescript bill titled “An Act Concerning Various Statutes Pertaining to the Department of Revenue Services.”
Left to figure out what type of impact the new tax would have on these businesses, Williams visited one of the tobacco shops. He left feeling the legislation would negatively impact the stores’ mostly blue collar clientele. He said the shops likely wouldn’t even exist if Connecticut’s cigarette tax wasn’t so high.
“People are using roll your own cigarette shops in response to the artificially high cost of cigarettes caused by state government,” he said. “These are blue collar people, already getting slammed every which way.”
Williams said there’s also the businesses, who made substantial investments in the machines, to consider.
“To not give them the benefit of a public hearing — it’s not uncommon in this legislature, but it should be,” he said.
Sen. Andrew Roraback, R-Goshen, said last week that the language was only added to the bill because the current law doesn’t allow the Department of Revenue Services to tax the cigarette rolling machines.
“Now they want to expand the reach of the law to touch these people and I can imagine that none of them is looking forward to writing a check for $5,000 to the state of Connecticut and I don’t perceive this as being friendly to small business,” he said.
However, Revenue Services Commissioner Kevin Sullivan said it’s hard to feel bad for the businesses, who bought the machines in an effort “to avoid playing by the same rules as everyone else.”
Sullivan said the department was surprised by the judge’s decision and was left with the option of strengthening the law via legislation.
“The Finance Committee has included language to make it abundantly clear that the businesses selling the product and the [rolling] process are manufacturers,” he said.
Sullivan said the loophole for cigarettes made by the machines creates three sets of concerns. For one thing it bypasses the revenue the state counts on from the sale of cigarettes.
It also creates a product safety issue, he said. While the typical pack of Marlboros are rolled in sleeves designed to extinguish themselves if they’re not being smoked, Sullivan said there’s no way for the state to regulate self-rolled cigarettes to ensure they’re safe.
Those safety concerns jeopardize the state’s ability to receive money from the tobacco settlement fund, he said.
Though he acknowledged some people roll their own cigarettes at home and are not considered manufacturers, Sullivan said the issue is different based on sheer volume of cigarettes the machines create.
“This really is a manufacturing process. It’s not the same as an individual rolling one on his back porch for a smoke,” he said.
A handful of tobacco shop owners referred all calls to Capital Results, the Virginia-based public relations and government affairs firm. Capital Results did not return calls for comment on the issue.
And apparently it’s not only a statewide issue, it looks like Congress is tackling this tobacco loophole too.
According the Washington Post, the U.S. Senate inserted similar language into its federal highway bill last month.