End of the Road for RYO Stores

On July 6, 2012, President Obama signed a federal highway bill. The bill is worth more than $100 billion and will fund infrastructure projects for the next two years. That means thousands of new construction jobs and better roads, bridges and mass-transportation systems. But the bill also includes an amendment that will ultimately force Little Tobacco (around 1,000 stores in 42 states, including nearly 50 in New York State alone, that operate Roll-Your-Own (RYO) tobacco machines) out of business.

The new law classifies these RYO stores as manufacturers (not retailers or customers), subject to Big Tobacco’s taxes, regulations and safety standards. Because the RYO stores are in retail zones and their homemade cigarettes are not fire-safe, they will no longer be able to manufacture cigarettes that sell for more than half the price in NYC. BB’s Corner on 18th Avenue in Bensonhurst, Brooklyn and Nitecap on Gulf Avenue in Staten Island’s Bloomfield neighborhood sold smokes for about $4.50 a pack. That’s blatant tax evasion when a pack of cigarettes costs at least $11 in NYC.

Tobacco tax increases are part of a comprehensive approach to reduce smoking rates, particularly among youth. Higher tobacco taxes save money by reducing tobacco-related health care costs including Medicaid expenses. These tax revenues also fund programs that prevent children from smoking and help smokers quit. Unfortunately, a tax loophole was created when the government decided not to tax pipe tobacco as sharply as cigarettes, RYO stores quickly cropped up to take full advantage. The Centers for Disease Control and Prevention estimated New York lost $16.9 million on potential tobacco tax revenue between April 2009 and August 2011. And, what’s worse, the federal government lost between $615 million and $1.1 billion from April 2009 to September 2011.

Ironically, in New York State, Big Tobacco had joined forces with public health advocates and the state’s Association of Convenience Stores to push for a state bill that would regulate RYO stores. The bill would have forced them to pay the same taxes retailers pay and adhere to the same manufacturing safety standards that regulate Big Tobacco. That bill passed in the state Assembly this past Legislative session, but never made it to the floor of the Republican-led Senate that opposed the measure as a tax increase. We’re not sure, but maybe Senator Alfonse D’Amato lobbying on behalf of the Roll Your Own entrepreneurs paid off.

In the end, the RYO stores that manufactured cigarettes at a rate of 200 cigarettes in under 10 minutes will no longer be able to operate their ATM-sized rolling machines. They will be able to sell much smaller and slower rolling machines to customers for their own personal use, but they will no longer be able to evade taxes, endanger public health, ignore fire safety standards, and avoid health warning labels.

Who would have thought a federal highway bill would signal the end of the road for Little Tobacco?