Connecticut’s legislature may have given roll-your-own smoke shops until October, but many may be out of business at midnight tonight, if President Barack Obama signs the federal highway legislation passed last week by Congress.
“That’s it. We’re done tomorrow,” Tracey Scalzi, owner of Tracey’s Smoke Shop in Norwalk and Orange, said Thursday evening.
She said RYO shop owners and their customers are calling the White House seeking a veto of section 10122 of the federal highway bill, but it’s uncertain if their voices will be heard.
Section 10122 of the federal highway bill expands the definition of a tobacco manufacturer to include businesses operating roll-your-own machines. The legislation undercuts the business model being employed by the stores and subjects them to higher taxes.
The RYO business model was built on allowing customers to purchase loose tobacco to pour into large ATM-sized cigarette rolling machines, which can produce about 200 cigarettes in 10 minutes. The cost per carton in Connecticut is about $30 less than purchasing a name brand cigarette from a retail or convenience store.
A Connecticut court in February ruled that as long as the customers, and not the store employees were using the machines, then the stores would not be subjected to a manufacturing license.
But the Department of Revenue Services then went to the legislature and asked them to close what they believed was a tobacco tax loophole.
The Connecticut legislature failed to approve the manufacturing license during the regular session, but succeeded in including it in a 468-page budget implementer on June 12.
At the time the General Assembly estimated it will gain $2.3 million in revenue in 2013 and $3.1 million annually, by implementing the manufacturing license on the state’s 15 RYO shops.
However, if Obama creates the manufacturing license nationwide, these shops and the revenue the state anticipated getting from them will no longer exist.
Gov. Dannel P. Malloy’s Budget Director Ben Barnes isn’t concerned.
He said if the same number of residents keep smoking and instead of getting a discount on the cigarettes at a RYO shop, they’re paying the full retail tax for name-brand cigarettes, then the state won’t see a dip in revenues.
The language was added to the federal highway legislation back in April after the U.S. Government Accountability Office released a report saying the federal government was lost nearly $500 million between April 2009 and September 2011 because of this alleged tax loophole.
Robert Langer, a partner at Wiggin & Dana who defended Scalzi when the Department of Revenue Services sought an injunction against her, said he doesn’t know how any RYO shop will be able to get a Tobacco Product Manufacturer’s license if this law goes into effect immediately.
He said it’s possible all 15 shops in the state of Connecticut could be out of business by the end of the day Friday. He said it’s unclear at the moment if the shops will seek an injunction against the bill, once it’s signed into law, but it’s a possibility.
He said it was very distasteful how both Congress and the Connecticut legislature adopted the legislation by putting into a “completely unrelated piece of legislation.”
Then there‘s the revenue question.
“I’m not sure if the state really ever understood this won’t increase revenues because they won’t be in business any more,” he said.
Some of the smoke shop owners have invested their life savings in these businesses and it’s unclear what will happen to the machines once they’re out of business. Langer said it’s possible they could create a nonprofit and use the machines in a non-commercial manner, but it remains to be seen how the government will handle it. The shops could also continue selling the loose tobacco and table-top rolling machines to customers willing to devote the time and energy to the rolling process on their own.
Each of the machines cost Scalzi around $35,000.
“I’ll have to go overseas to do business,” she said half-jokingly.
In the meantime, Scalzi said her machines are rolling around the clock as thrifty smokers seek to stock up on the discounted cigarettes while they can.