Loophole in New York Tobacco Taxes Leaves Officials In Flames

Tobacco is tobacco, right? Not so in New York and a few other states. When the tobacco taxes were increased, loose leaf tobacco missed the hike and is taxed at a mere $2.80 per pound versus $25 per pound for manufactured tobacco cigarettes. Some wise people banned together and created a business out of the variation in taxes. Those businesses are now feeling the heat from New York officials.

Island Smokes with two stores, one in Manhattan and another on Staten Island, offer customers the opportunity to purchase loose leaf tobacco and access to cigarette rolling machines to make their own cigarettes. Customers can spend approximately 45 minutes rolling cigarettes out of paper tubes and loose leaf tobacco and walk out of the store with a nominal $4 per pack expense versus paying a minimum of $13 per pack for commercial counterparts. In a lawsuit filed on November 14, 2011 by New York City's legal department claims Island Smokes is participating in "blatant tax evasion."

The shops included in the lawsuit do not pay into the cigarette manufacturer trust fund, nor do they have local tax stamps. In New York City, the local tax stamp includes a $1.40 city tax atop a $4.35 state tax. The complaint states, "By selling illegally low-priced cigarettes, defendants not only interfere with the collection of city cigarette taxes, they also impair the city's smoking cessation programs and impair individual efforts at smoking reduction, thus imposing higher health care costs on the city and injuring public health."

Jonathan Behrins, a lawyer for Island Smokes said, "Everything about the business is legal, precisely because the company is neither selling cigarettes nor manufacturing them. It is simply selling loose tobacco and tubes and gives customers access to the rolling machines to make the cigarettes themselves." Behrins went on to explain that some smoke shops across the country use roll-your-own machines that can produce a carton of cigarettes in eight minutes. His clients machines require a near-hour investment of time to create the same 200 cigarettes.

New York will continue to fight this battle in court, claiming that their higher tax rates are encouraging people to quit smoking and for current non-smokers; never start. What are your thoughts? Is New York City looking to increase their revenue through higher taxes or are they really trying to improve the health of their residents?