Roll-Your-Own Tobacco

Last Updated: March 25, 2022

The Issue

The Internal Revenue Code imposes different excise taxes on different forms of tobacco, with the tax on cigarette tobacco and roll-your-own tobacco greatly exceeding that for pipe tobacco. Excise taxes on tobacco increased significantly in April 2009 with the enactment of the State Children's Health Insurance Program (S-CHIP) expansion. Many retailers took advantage of this different treatment by purchasing so-called roll-your-own (RYO) machines, which they "rented" to customers, who produced mass quantities of cigarettes out of pipe tobacco that was taxed at a lower rate than cigarette tobacco. A customer could purchase enough pipe tobacco for a carton of cigarettes, and then use the on-site machine to produce them, generally at about half the retail price of a national brand of cigarettes.

To close this loophole in September 2011, the Alcohol and Tobacco Tax and Trade Bureau (TTB) ruled that retailers participating in such an enterprise are "manufacturers" of cigarettes, and therefore subject to Department of Treasury permit and licensing regulation.

Retail Impact

RYO tobacco machines cost approximately $30,000 and produce a carton of cigarettes every 5 to 8 minutes. The cigarettes produced with pipe tobacco at a lower tax rate put retailers who sell legal products and pay the applicable cigarette taxes at a considerable disadvantage.

NACS Position

NACS sought to enhance certainty while avoiding penalizing retailers who already invested in RYO machines. Toward this end, NACS pursued legislation that would stipulate that all production of RYO products made with pipe tobacco be taxed at equal rates as traditionally packed cigarettes (and RYO products made with cigarette tobacco). This legislation was signed into law July 6, 2012.