Feds Curtail Discount Cigarettes Rolled On Premises

The U.S. Treasury's Alcohol and Tobacco Tax and Trade Bureau has ruled that tobacco retailers may not sell cartons of cheap cigarettes rolled on premises without paying appropriate taxes and adhering to manufacturing regulations, the Wall Street Journal reported Oct. 2.

The ruling affects approximately 150 retailers in about 20 states. The retailers used rented or purchased machines that can produce a full carton of cigarettes in their stores in about eight minutes. They had been able to sell the cartons for as little as $16, or about half the cost of brand-name cigarettes like Marlboro and Camel. The Bureau's ruling will likely make the practice too costly to continue. 

Retailers had been able to sell the cigarettes so cheaply until now because, unlike cigarette manufacturers, they have not had to get permits from the Alcohol and Tobacco Tax and Trade Bureau, keep the records the Bureau requires, or pay a $10-per-carton excise tax. 

“We do not believe that Congress intended for a consumer to be able to purchase at retail commercially manufactured cigarettes upon which tax has not been appropriately paid,” the Bureau wrote in its ruling. “We also do not believe Congress intended to authorize a commercial cigarette-manufacturing operation to occur on premises not subject to federal regulation.”

Tobacco retailers had also been able to offer steep discounts because they have been using pipe tobacco, which is much cheaper than rolling tobacco. In 2009, Congress increased excise taxes on roll-your-own tobacco to $24.78 per pound – the excise tax on pipe tobacco is currently $2.83 per pound.

The tax loophole has gotten the attention of members of Congress and some cigarette manufacturers, like Vector Group Ltd.'s Liggett Vector Brands Inc. The Bureau is working on new rules to better distinguish pipe tobacco and rolling tobacco.