Altria and Anti-Smokers Aim to Close Roll-Your-Own Shops

Todd Ridge stopped smoking Camel Lights last year after taxes pushed the price to $4.60 a pack. Now he makes his own cigarettes at the Liberty Tobacco store in Archdale, North Carolina, cutting his habit’s cost in half.

Over the past 4 1/2 years, mom and pops have installed more than 1,900 roll-your-own cigarette machines in 42 states, according to RYO Machines, which makes them. Taking advantage of a loophole in federal tax laws, some retailers are selling tobacco labeled as the pipe variety, which is taxed less, even though it often winds up in cigarettes.

Liggett Group says it’s losing sales to the roll-your-own upstarts. The discount tobacco maker and Altria Group Inc. (MO) are fighting alongside health advocates -- after decades at odds -- to press Congress and the Food and Drug Administration to equalize tax payments on various forms of tobacco and to enforce the same health rules imposed on major producers.

“Tobacco is tobacco is tobacco,” Liggett Chief Executive Officer Ron Bernstein said in an interview at the company’s headquarters in Morrisville, North Carolina. “All we want is a level playing field.”

The U.S. in 2009 boosted taxes on a carton of cigarettes to $10.07 from $3.90 and raised levies on an equivalent amount of roll-your-own cigarette tobacco to $10.07 from 45 cents. Makers of pipe tobacco won a smaller increase -- to $1.15 from 45 cents -- by convincing Congress that sharply higher taxes would “demolish” them, said Craig Williamson, president of the Washington-based Pipe Tobacco Council. The tax disparity led some small processors to start mislabeling their product as pipe tobacco, he said.

Photographer: Daniel Acker/Bloomberg

Altria Group Inc. Marlboro cigarettes are arranged for a photograph. The U.S. government loses $9.36 in tax revenue for every carton of roll-your-own cigarettes filled with pipe tobacco, according to Richmond, Virginia-based Altria, which makes one of every two cigarettes sold in America. Close

Altria Group Inc. Marlboro cigarettes are arranged for a photograph. The U.S.... Read More

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Photographer: Daniel Acker/Bloomberg

Altria Group Inc. Marlboro cigarettes are arranged for a photograph. The U.S. government loses $9.36 in tax revenue for every carton of roll-your-own cigarettes filled with pipe tobacco, according to Richmond, Virginia-based Altria, which makes one of every two cigarettes sold in America.

Strip Mall Shop

Tommy Bunn, president of U.S. Flue-Cured Tobacco Growers Inc., a major supplier of tobacco for the roll-your-own cigarette machines, didn’t return a telephone call or e-mail yesterday. The Raleigh, North Carolina-based group is a cooperative of farmers.

Liberty Tobacco, tucked in a strip mall alongside L.A. Nails and Spirit of Triad Ministries, is one of the retailers that sprang up because of the tax difference. At lunch-time one day last week, two smokers waited in line while 71-year-old Dennis Smith watched his cigarettes plop into a plastic bin at the ATM-sized machine’s base. The RYO Filling Station made by RYO Machines in Girard, Ohio, makes 200 cigarettes in about eight minutes, including the time needed to pour the loose tobacco and insert a cartridge of tubes with filters.

“They are better than any other brand,” Smith said. “You don’t cough as much. I guess it’s because it is made from natural tobacco.”

Health Claims

Such health claims are unproven and show why the FDA needs to regulate roll-your-own cigarettes, Bernstein said. Liggett, the fourth-biggest U.S. tobacco company, estimates that almost 2.7 million consumers smoked cigarettes made with mislabeled pipe tobacco last year, triple the number in 2009. About 45.3 million American adults were smokers in 2010, according to the U.S. Centers for Disease Control and Prevention.

An expansion of the roll-your-own industry may hurt sales at major U.S. tobacco companies, which are experiencing falling demand. That decline has accelerated since 2009, when President Barack Obama’s push to discourage smoking led to the tax increases that forced tobacco companies to raise prices.

While demand for cigarettes has declined steadily, tobacco shares have brushed off surging volatility during the financial crisis and Europe’s debt crisis because smokers are reluctant to scale back when cigarette prices rise or the economy struggles. As a result, the companies can return cash to investors. Altria hit a record high yesterday of $30.61.

Tax Revenue

The U.S. has lost $1.3 billion in tax revenue from mislabeled pipe tobacco since 2009, according to Liggett, owned by Miami-based Vector Group Ltd. (VGR) Shipments by Altria’s Philip Morris USA sank 4 percent last year compared with a 3.3 percent drop in 2008.

The U.S. government loses $9.36 in tax revenue for every carton of roll-your-own cigarettes filled with pipe tobacco, according to Richmond, Virginia-based Altria, which makes one of every two cigarettes sold in America. The company’s Marlboro is the top-selling U.S. cigarette brand.

The cheaper prices encourage consumers who otherwise would quit or cut back to keep smoking cigarettes that carry no health warnings, said the Campaign for Tobacco-Free Kids.

The U.S. Senate sided with Big Tobacco two weeks ago, passing a $109 billion highway appropriations bill with an amendment that would classify tobacco shops with roll-your-own machines as tobacco manufacturers. That means cigarettes made in roll-your-own machines would be taxed at the same rate as Marlboros and Camels.

Pipe Tobacco

While the amendment would help solve the issue of roll- your-own machines in stores, “smokers would still be able to buy the cheap, lower-tax pipe tobacco and roll their own cigarettes at home,” said Vince Willmore, a spokesman for the Campaign for Tobacco-Free Kids in Washington. The group agrees with Liggett that loose tobacco and cigarettes should be taxed equally.

Declaring retailers to be manufacturers “would put us out of business,” said Josh Justice, 25, owner of the Liberty Tobacco in Archdale and a second location in nearby High Point. He estimated the machines in his stores have cranked out 7 million cigarettes since opening almost a year and a half ago.

“It’s another effort to put the small man out,” said Ridge, 46, as he returned to Liberty Tobacco last week for a week’s supply for him and his wife, Angie. Ridge pays about $9.95 for the tobacco, $2.52 for 200 tubes and $9.19 to rent the machine.

“The cost is half and they taste good,” Ridge said.

To contact the reporter on this story: Chris Burritt in Greensboro at cburritt@bloomberg.net

To contact the editor responsible for this story: Robin Ajello at rajello@bloomberg.net

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