Tobacco Companies Are Successfully Skirting Steep Taxes... For Now

In 2009, tobacco companies took a great hit when Congress sharply raised the federal excise tax on rolling tobacco, in order to expand the children's health insurance program. Rolling tobacco is the essential element in any cigarette, which accounts for most of the sales within the tobacco industry. The tax, at $24.78 per pound is incredibly high - especially compared to the tax on pipe tobacco, which is only $2.83 per pound. To combat this tax, the companies have managed to find a very substantial loophole. As many as 150 independent tobacco outlets in about 20 states have implemented a "roll-your-own" cigarette machine, which produces a carton of cigarettes in as little as 8 minutes, and reduces the cost by more than half of a carton of Marlboro cigarettes. So how do they avoid the tax? Where does the price cut come from? Well, customers simply have to insert rolling tobacco, but label it as pipe tobacco. "Other companies created new brands they call pipe tobacco but essentially contain the same tobacco as in their roll-your-own products," said Kevin Altman, an industry consultant.

The FDA and the Treasury's tobacco tax bureau are hoping to rewrite the regulation to close the loophole and crack down on rule breakers. For instance, some retailers are labeling their roll-your-own cigarettes a "light," which is not supposed to be used, according to FDA regulations. The FDA and the Treasury's tobacco-tax bureau will need some time to determine what action they need to take against these companies.

If the loophole is not closed, this could affect the way that the entire tobacco industry works. Successfully avoiding taxes could help the tobacco industry get back on its feet, especially since the recession has discouraged smokers from buying cigarettes at such expensive prices. This could be the way for them to reel in customers again. In a way, this could also be seen as an act of desperation though, because there are some risks involved for some of the individual retailers. This is because many are accusing them of breaking some state and even U.S. laws that determine what can and cannot be done with cigarette manufacturing. They could be hit hard with having to pay certain manufacturing fees that they have not had to pay before. So far, they are helping themselves, but how long until the law catches up with them?

I think it will be interesting to see how this pans out for the companies and for the economy itself. Pipe tobacco sales have tripled, but rolling tobacco sales have fallen by 60%, and this stunt has cost the U.S. government more than 345 million dollars, estimates Daniel Morris. What could this mean for the industry and for the U.S. as a whole?

Catherine Reeves
Source: http://online.wsj.com/article/SB10001424052748704913704575453584132202718.html?KEYWORDS=Roll+your+own+cigarettes