State not alone in targeting roll-your-own cigarettes tax loophole

State officials here weren’t the only ones concerned that the growing roll-your-own cigarette industry represented a loophole in tax law.

A segment of the new federal highway funding bill extends the U.S. government’s definition of a “tobacco products manufacturer” to those who make RYO machines available for commercial purposes. As a result, smoke shops offering these machines will have to pay federal cigarette taxes and licensing fees.

If this sounds familiar, it’s because the Connecticut General Assembly voted in special session last month to revise its definition of cigarette manufacturers to include those who make RYO machines available commercially.

“Practically speaking, there now couldn’t be a more level playing field,” Kevin B. Sullivan, commissioner of Connecticut’s Department of Revenue Services, said Thursday. “It couldn’t be more overdue.”

According to nonpartisan legislative analysts, about 15 shops in Connecticut feature RYO machines for their customers’ use, allowing smokers to buy cigarettes at much lower prices than those sold pre-rolled in convenience and other stores.

State officials tried to impose the $5,250 annual cigarette manufacturer’s licensing fee on these RYO shops in 2011, but owners argued they didn’t fit the description of a manufacturer as defined under state law.

A Superior Court judge agreed earlier this year, ruling in a case filed by Tracey Scalzi, owner of Tracey’s Smoke Shop of Norwalk and Orange.

Gov. Dannel P. Malloy’s administration and the legislature responded by changing the definition, a shift that Sullivan said Thursday not only has happened on Capitol Hill and Connecticut, but also in other states.

Connecticut expects to collect an extra $3 million annually from the change.

According to Congress’s Joint Committee on Taxation, the federal government will collect about $94 million over 10 years from RYO shops.

Scalzi was at the Capitol on several occasions during the final weeks of the regular legislative session lobbying against the definition change, arguing it would unfairly harm many small businesses.

Several members of the Republican minorities in the House and Senate agreed.

Sen. Len Suzio, R-Meriden, said Thursday that smoke shop owners who bought RYO machines complied with the law at the time and invested tens of thousands of dollars in expensive machinery to grow their businesses. “There’s probably going to be a dramatic decline in their businesses, and some of them probably won’t survive” because of the rule changes, he said.

“I think it has a dramatic impact on the confidence of small business and entrepreneurship,” added Rep. Vincent J. Candelora, R-North Branford. “People are going to think twice before they open a small business.”

But Sullivan responded Thursday that the only message state government sent was one of fairness.

“If your innovative business model is entirely premised on unfair competing by evading taxes everyone else has to pay, then we have a message for you,” he said.

Both administration officials and many state legislators also said not reclassifying the RYO shops as manufacturers could have threatened a crucial source of state revenue.

Connecticut has received more than $100 million annually from major tobacco manufacturers for nearly a decade-and-a half since it settled a lawsuit against five major firms in 1998. More traditional cigarette manufacturers might have sued over the inequity in hopes of ending their financial obligations to the state, officials said.

The RYO debate also has become the center of a political scandal tied to state House Speaker Christopher G. Donovan’s campaign for Congress in the 5th District.

A federal indictment returned Wednesday against Robert Braddock Jr., Donovan’s former campaign fundraiser, describes a conspiracy to kill the state RYO legislation.

Braddock was accused of conspiring to accept $27,500 in illegal campaign contributions. Donovan is described in the indictment as meeting smoke shop owners, without being told of their interest in the legislation.

An internal investigation commissioned by Donovan’s campaign and conducted by former U.S. Attorney Stanley Twardy disclosed last week that Donovan had a breakfast meeting last fall with smoke shop owners.

Twardy also said he found no evidence that Donovan, a Meriden Democrat, had any knowledge of, or made any deals regarding, contributions secretly funneled to his congressional campaign in exchange for killing the tobacco-related legislation.