The Wisconsin Department of Revenue has put roll-your-own cigarette businesses – including one in Mauston – on notice that they are manufacturers and distributors and must pay appropriate excise taxes.
Paying those taxes, and meeting a requirement that they sell at least half the cigarettes they produce to other vendors, would obliterate the business model of RYO stores operating in Mauston, Reedsburg, Portage, Baraboo and Wisconsin Dells.
RYO stores – the department estimates there are 50 to 100 in Wisconsin – operate on the rationale that they are not selling manufactured cigarettes, but rather are selling components such as tobacco and tubes and then renting time on jukebox-sized machines that put all the pieces together to create “smokes.”
The retailers require customers to load, start and empty the machines. And, according to the sellers’ rationale, because they’re not selling manufactured cigarettes, they shouldn’t have to pay the excise taxes that are paid on manufactured cigarettes.
For each pack of cigarettes sold in Wisconsin, a state excise tax of $2.52 per pack and a federal excise tax of $1.01 per pack are charged.
So, on a carton of 10 packs of cigarettes, the total excise tax charged in Wisconsin is $35.21. Because of that, convenience stores charge $60 or more for a name-brand carton of cigarettes.
On the other hand, the owners of the RYO stores don’t call their products “cigarettes” because cigarettes are manufactured. Their products are assembled by customers. The owners say their “smokes” are not subject to cigarette excise taxes.
At J&S Liquor in Mauston, for example, a “box” of “smokes” costs just over $30 and can be tailored to taste like name-brand cigarettes, saving customers up to $50 per “box.”
For a carton of brand-name cigarettes purchased in Wisconsin, that price wouldn’t even cover the required $35.21 in taxes.
“We have heard from small-business owners who say they can’t compete,” said Stephanie Marquis, a spokeswoman for the Department of Revenue. “We estimate there are about 8,000 small-business owners who are selling tobacco, and they’re following the law.”
She said the department is not trying to put RYO stores out of business but rather to bring them voluntarily into compliance.
The Department of Revenue notice, dated Sept. 22 and sent by certified mail to RYO retailers, ignores the questions of semantics.
“Under state law, if a retailer or the retailer’s customer operates a RYO machine on the retailer’s premises to make cigarettes with loose tobacco, the retailer is both a cigarette manufacturer and distributor,” the notice reads.
According to the notice, as manufacturers and distributors, RYO retailers must obtain permits and certifications and pay appropriate taxes. Also, if they want to continue selling directly to customers, they must sell more than 50 percent of their RYO cigarettes to other retailers or vending-machine operators.
J&S Liquor owner Jason Rodebaugh believes the notice, as well as the law, regarding RYO machines is not as clear as it needs to be.
“There’s a lot of confusion with the notices and the law,” he said. “We stopped use about a week ago on Friday when they served notice.”
There is no confusion, however, when it comes to the effect of the notice on his business.
“All I know for sure was we were running up pretty nice numbers since the machine came in and established a customer base,” he said. “It had increased our in-store sales. Already we’re seeing sales drop off.”
Rodebaugh had invested $35,000 in the machine, as well as thousands more in training and staffing. He said he currently has around $10,000 of tobacco and related supplies sitting on his shelves.
“I did my due diligence before I bought the machine,” he said. “Obviously if I had any idea of this, I would not have made the decision [to buy it].”
Allison Miller, the American Cancer Society’s government relations director for Wisconsin, praised the action.
“A cigarette by any other name is still a cigarette,” Miller said in a news release last week. “Our concern is that these roll-your-own machines are skirting the law just enough to make their deadly products much more affordable and appealing, especially to youths.
“If a high school kid can get a ‘box’ of ‘smokes’ for half the cost of a carton of cigarettes, suddenly smoking seems that much more enticing.”
The Department of Revenue doesn’t have an exact number for how many RYO machines are in Wisconsin, Marquis said, because the retailers that own them don’t have permits.