October 3, 2010 - The United States (U.S.) Treasury Department's Alcohol and Tobacco Tax and Trade Bureau (TTB) have ruled that the proprietor of a retail establishment who is in the business of making cigarettes for others, or who facilitates the making of cigarettes by or for others by providing the use of a commercial cigarette-making machine at its premises is engaged in the business of a tobacco products manufacturer and must qualify for and obtain a permit from TTB to engage in such business.
The proprietor must also obtain a bond and comply with the applicable regulatory record keeping, reporting, and inventory requirements. As a manufacturer of tobacco products, the proprietor is liable for the payment of tax on the cigarettes produced. Once qualified as a manufacturer of tobacco products, a proprietor may, under the Internal Revenue Code of 1986 (IRC), obtain roll-your-own tobacco and cigarette papers or tubes without payment of tax for use in the manufacture of cigarettes.
Background: Many tobacco retailers in the U.S. are taking advantage of a federal tax loophole to offer deep discounts on roll-your-own cigarettes. Here's where the tax loophole comes into play: At retailers, The Wall Street Journal found, store employees or customers insert into the machines tobacco labeled "pipe tobacco." This substantially reduces the stores' and smokers' costs because the federal excise tax on pipe tobacco is $2.83 a pound—compared with $24.78 a pound (raising the excise tax by more than 2,000%) for the rolling tobacco traditionally used to make hand-rolled cigarettes. TTB has found that retailers selling cigarettes produced by these machines at prices ranging from $16.02 to $25.50 per carton.Referenecs: Cigarette-making Machines in Retail Establishments, U.S. Treasury Department's Alcohol and Tobacco Tax and Trade Bureau (TTB), John J. Manfreda Administrator, 9/30/2010; Cigarette ruling deals a blow to 'roll-your-own' retail shops by David Kesmodel, The Wall Street Journal, Saturday/Sunday, 10/2-3/2010 - hard copy.
TTB has found retailers selling cigarettes produced by these machines at prices ranging from $16.02 to $25.50 per carton. For reference, the Federal excise tax liability on 200 cigarettes is $10.066 per 200 (at $50.33 per 1,000), while the tax on 8 ounces of roll-your-own tobacco is $12.39 (at $24.78 per pound).
In the 14 months since the tax increase, the volume of pipe tobacco sold in the U.S. more than tripled to about 21 million pounds, according to data from the U.S. Treasury's Alcohol and Tobacco Tax and Trade Bureau. Rolling-tobacco sales volumes, in contrast, fell about 60%.
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