Federal reclassification of niche tobacco sellers leads to costly new hurdles, lack of customers
Arizona business owners who capitalized on a booming niche market for customers who rolled their own cigarettes face a questionable future.
The operation was simple — customers bought pipe tobacco that was cheaper than cigarette tobacco and blended to their liking, bought paper tubes, and then poured the tobacco into a roll-your-own machine. Out popped a carton’s worth of freshly rolled cigarettes that cost about half the price of a store-bought carton. Smokers came to the stores in droves, business owners said.
But a new federal regulation contained in the 584-page federal transportation bill added the classification of manufacturer to businesses that cater to roll-your-own customers. Previously, they were classified as retailers. The change is forcing owners to comply with a set of new, and costly, state and federal regulations.
Large tobacco companies were the driving force behind the new rules, arguing that the stores operated under an unfair tax loophole; owners of the shops accused tobacco companies of crushing a market that kept business local.
Since it was signed into law on July 6, stores are now considered manufacturers if they use the roll-your-own machines. But the business owners say their machines are too slow to act as a real manufacturer. As a result, they are unable to use the machines if they want to say within the new regulations.
In Arizona, that means small-business owners are sitting on a $30,000 investment that they can’t use. No businesses have applied for any of the new regulatory requirements of cigarette manufacturers, state agencies confirmed.
For Bob Mizer of Tobacco Mizer in Glendale, that likely means closing up shop in the next couple of months. He paid almost $100,000 for three machines, but now they sit unused.
“This place is usually jumping, all day long,” said Mizer, who remembered a full store with customers waiting sometimes up to an hour to roll their own cigarettes. “We were just a small mom-and-pop neighborhood store.”
Before the regulations, Mizer planned to open a second store in Flagstaff. Now, he’s had to lay off four of his seven employees and he doesn’t know how long he’ll stay open.
Ronnie Sweis, owner of Big Bear Tobacco in Phoenix, has already closed one of his five locations and considers his $400,000 investment in rolling machines a loss. But he’ll remain in business as long as he can.
“It was a totally new idea,” Sweis said. “We gave it a shot.”
Sweis said he wishes the law would have remained under state authority; a bill proposed earlier this year at the Arizona Legislature didn’t garner enough support.
For many consumers, the loss of roll-your-own is affecting their wallets.
“It’s very disappointing, they’re not hurting nobody,” said Doug Mason, 67, who used roll-your-own machines. “They’re not doing the work, we’re doing the work. We’re just buying the materials to do it with,” he said as he bought packs of prepackaged cigarettes.
But Philip Morris USA sees the issue differently.
“They are cigarette manufacturers and should make tax payments, be regulated by the FDA and make state settlement payments just like other cigarette manufacturers,” David Sutton, spokesman for Philip Morris’ parent company, Altria, said in a prepared statement.
The company that manufacturers the rolling machines, RYO Machines Ltd., considers those who buy their machines retailers who give customers an option to do the work.
“That is all smoke and mirrors by our opponents,” said Julie Rauzan, sales director for RYO Machines. “They (customers) do all of the work, they do everything for themselves, so there is a cost savings, just like when you go to the store and buy a filet and you take it home and grill it.”
Now that more than 2,000 machines in the U.S. are virtually unusable, RYO Machines is exploring options overseas, Rauzan said.
“We are no threat to anyone, we were a little niche market. We used American parts, paid American wages and made a good product,” Rauzan said. “My opinion is they (tobacco companies) feel they are entitled to control all things that are nicotine-related in this country.”
Sutton said that characterization overlooks the fact that regular cigarettes are subject to heavy regulation and requirements, when essentially it’s the same product.
“Consumers come into these retail businesses to buy cigarettes and leave with cigarettes in bags or boxes. From the consumer’s point of view, the end result is the same,” Sutton said, adding that the businesses were exploiting a tax loophole by using lower-taxed pipe tobacco and evading regulatory requirements.
“RYO tobacco is being mislabeled as pipe tobacco to take advantage of this tax differential,” Sutton said.