NYC sues roll-your-own cigarette shops over taxes

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There is no place in the U.S. more expensive to smoke than New York City, where the taxes alone will set you back $5.85 per pack. Yet, addicts who visit Island Smokes, a "roll-your-own" cigarette shop in Chinatown, can walk out with an entire 10-pack carton for under $40, thanks to a yawning tax loophole that officials in several states are now trying to close.

The store is one of a growing number around the country that have come under fire over their use of high-speed cigarette rolling machines that function as miniature factories, and can package loose tobacco and rolling papers into neatly formed cigarettes, sometimes in just a few minutes.

The secret to Island's low prices is simple: Even though patrons leave carrying cartons that look very much like the Marlboros or Newports, the store charges taxes at the rate set for loose tobacco, which is just a fraction of what is charged for a commercially made pack.

Customers select a blend of tobacco leaves, intended to mirror the flavor of their regular brand. Then they feed the tobacco and some paper tubes into the machines, and return to the counter with the finished product to ring up the purchase.

The savings come at every level. Many stores sell customers loose pipe tobacco, which is taxed by the federal government at $2.80 per pound, compared with $25 per pound for tobacco made for cigarettes. The shops don't pay into the cigarette manufacturer trust fund, intended to reimburse government health programs for the cost of treating smoking-related illness. And the packs produced by "roll-your-own" shops are generally also being sold without local tax stamps, which in New York include a $1.50 city tax and a $4.35 state tax.

New York City's legal department filed a lawsuit against Island Smokes on Nov. 14, arguing that the company's Manhattan store and another on Staten Island are engaging in blatant tax evasion.

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