Roll-your-own cigarettes put out by state, fed taxes

About 16 months ago, Mohammad Khan at Spokane Cigar bought a roll-your-own cigarette machine that slowly but surely developed a following among his customers.

By last month, it was producing and selling as many as 10 cartons a day to people who liked the lower-cost cigarettes.

Now, thanks to state court rulings and the federal highway bill, that $33,000 machine has become little more than “an expensive paperweight,” he said. It was moved to a back room in the North Division store and may never roll another cigarette.

“I’ll give you a great deal,” Khan joked Tuesday, but he turned serious when explaining he may have to cut staff.

The machines, which were once a growth industry in Washington as smokers sought to avoid one of the nation’s highest cigarette tax rates, are essentially being put in mothballs by federal legislation that was signed last Friday and by state court rulings handed down a few days earlier.

The massive federal bill, designed mainly to start or continue major transportation projects, also has a provision that requires owners of the machines to obtain federal licenses like the major cigarette manufacturers. Getting that license can take as long as a year, said Mike Gowrylow, of the state Department of Revenue.

Additionally, the stores must start collecting the same state and federal taxes on roll-your-own cigarettes that are assessed on commercially produced cigarettes.

The federal tax is about $1 per pack for cigarettes; the state tax is another $3 per pack, or 15 cents per cigarette.

Earlier in the week, the state Supreme Court dismissed a challenge to Washington tax law filed by the manufacturer and operators of roll-your-own cigarette machines. The operators had won the first round in the fight over the tax in June, when a trial judge said the Legislature improperly extended the state’s taxes on cigarettes to the roll-your-own machines.

But the state appealed, and the roll-your-own industry was ordered to post a $200,000 bond to cover the taxes they might owe if they lost the appeal. When they didn’t post the money, the tax went into effect as scheduled. After Congress passed the highway bill at the end of June, the machine distributors and owners agreed with the Revenue Department to dismiss the case in state courts.

With the new state and federal taxes combined, the cost of a carton of roll-your-own smokes – 10 packs with 20 cigarettes each – would go from about $33 to about $55, Khan said.

That’s close to the cost of a carton of factory-rolled cigarettes. The differential was what generated the steady rise in customers to the machines, he said, and made them popular among people with low or fixed incomes.

By some projections, Eastern Washington was going to have 55 of the machines by the end of the year, Khan said, and the Interstate 5 corridor as many as 100, some in stores set up just for roll-your-own business. That kind of growth is also what made Congress and the Legislature focus on roll-your-owns as a tax source.

Stores that relied principally on the revenue generated by the machines have shut down. Khan’s store sells cigars and other tobacco products, so it will just cut back. He’s not sure if he’ll have to lay off one employee or reduce all the workers’ hours.

He said the state will now lose the sales tax and the tobacco tax the stores were generating because customers in Spokane will have a bigger incentive to drive to Idaho for cheaper smokes.

But Gowrylow said Washington expects to see a net increase of about $12 million a year in revenue as smokers shift to the higher-taxed cigarettes. Driving across the state line to avoid taxes always has been an issue. It’s illegal, he said, even though “there’s not a lot of emphasis on catching individuals.”