A dispute is smoldering over cigarettes that consumers can roll at tobacco shops, pitting lobbyists from Patton Boggs and Arent Fox against each other as they seek to win the backing of Washington policymakers.
Patton represents discount cigarette manufacturer Liggett Vector Brands LLC, which supports U.S. government efforts to eliminate discrepancies that can subject cigarettes rolled by consumers in a store to a lower federal excise tax rate than premanufactured cigarettes. Arent is advocating for roll-your-own cigarette device manufacturer RYO Machine LLC, which is fighting to preserve the current tobacco tax structure.
But it is a game of catch up for RYO Machine. Former Rep. Philip English (R-Pa.), an Arent senior government relations adviser, began to lobby for the company in October. About a year before he took on the account, the U.S. Treasury Department’s Alcohol and Tobacco Tax and Trade Bureau issued a ruling that would give cigarettes that consumers produce with machines in stores the same tax as their premanufactured counterparts on top of taxes for loose tobacco and cigarette tubes. RYO Machine filed suit a few weeks later, and soon after, a federal judge issued an injunction stopping the ruling from being enforced.
Patton lobbyists have advocated for Liggett parent company Vector Group Ltd. since 2001, according to congressional records. A few weeks before the Sept. 30, 2010, ruling, Patton partners Stephen McHale and Darryl Nirenberg had an appointment with the Tax and Trade Bureau, which collects federal excise taxes on tobacco, alcohol, firearms and ammunition, according to court documents. The group met with agency officials that included the top official with the Tax and Trade Bureau, Administrator John Manfreda, Nirenberg said.
“It seems like more than coincidence to us,” said Jeffrey Burd, outside counsel for RYO Machine.
McHale and Nirenberg, as well as Liggett CEO Ron Bernstein and General Counsel John Long, had a more than 50-slide computer presentation to deliver to the Treasury Department agency on Sept. 9, 2010. The presentation outlined concerns with the RYO Filling Station, the cigarette-making machine manufactured by RYO Machine. The presentation and an e-mail about the meeting were presented as evidence during a court hearing, but not included in the docket.
Nirenberg said the ruling was the agency’s decision. “We’ll leave it to them to tell how they reached it,” he said.
Tax and Trade Bureau spokesman Tom Hogue declined to comment on what — if any — effect Patton and Liggett had on the agency’s decision. But he said the bureau has “an open door for any stakeholder that has an issue.” Said Hogue: “If there is information out there, we want to have it.”
Patton made sure to deliver its information to the agency. As part of its representation of Vector, the firm made at least one lobbying contact with the agency every three months from July 1, 2010, to Sept. 30, 2011, according to the most recent congressional lobbying records. Patton received $220,000 for lobbying work it did on behalf of Vector during that time frame, the records show.
English said last month that RYO Machine hired his firm to make Washington policymakers aware of “unfair attention” it has received from the Treasury Department.
“If the [Tax and Trade Bureau] ruling went into effect, we would have to shut down our company entirely,” RYO Machine CEO Phil Accordino said in a written statement.
The Ohio-based company on Oct. 28, 2010, filed a lawsuit in U.S. district court in Cleveland, challenging the agency ruling. Two months later, Judge David Dowd Jr. granted a preliminary injunction against the Tax and Trade Bureau, preventing the agency from enforcing its ruling.
The government currently is appealing the decision. Accordino said he expects the U.S. Circuit Court of Appeals for the 6th Circuit to rule in the first few months of 2012.
RYO Machine says on its Web site that its consumer-operated machine, which can make up to about 200 cigarettes in eight minutes, is a “gold mine,” increasing the typical revenue of stores that use the device by $500 to $600 per day. Since its establishment in 2008, RYO Machine has delivered more than 1,000 of the devices to shops in dozens of states.
“We do not believe that Congress intended for a consumer to be able to purchase at retail commercially-manufactured cigarettes upon which tax has not been appropriately paid,” the Tax and Trade Bureau said in its ruling. “We also do not believe Congress intended to authorize a commercial cigarette-manufacturing operation to occur on premises not subject to Federal regulation.”
The battle over the roll-your-own cigarette machines stems from the Children’s Health Insurance Program Reauthorization Act, which President Barack Obama signed into law in February 2009.
The statute increased the federal excise tax on premanufactured cigarettes by 158% and roll-your-own tobacco by 2,159%. The increases meant that the tax set retailers back $10.07 on a carton of 200 cigarettes and $12.39 on a half-pound of roll-your-own tobacco that makes about 200 cigarettes.
The law also raised the federal excise tax on pipe tobacco by 158%. But a retailer only pays a $1.42 tax on a half-pound of that type of tobacco, making it a tempting filler for roll-your-own cigarettes.
In the reference and training manual for the RYO Filling Station machines, RYO Machine says it “strongly recommends” consumers use Kentucky Select and 1839 tobacco brands. The brands include products labeled as pipe tobacco. If Kentucky Select and 1839 from the U.S. Tobacco Cooperative Inc. aren’t used, the manual says, the user will void the warranty on the device.
Nirenberg, McHale and a group of Liggett officials in June delivered to the Tax and Trade Bureau a 25-slide computer presentation on tobacco that the company claims is mislabeled pipe tobacco, proposing a new tax code definition of the product, according to a comment the company submitted to the agency. The agency currently is seeking to clarify the standards used to differentiate between pipe and roll-your-own tobacco.
Liggett spokesman Paul Caminiti said in a written statement that “mislabeling” tobacco puts cigarette manufacturers at a significant competitive disadvantage.
“Some companies are not complying with law, obtaining an unfair advantage which is costing the government $1 billion annually in lost tax revenue,” Caminiti said.
Big City Tobacco Outlet owner and operator Austin Karls, who uses the machines in five of his stores in Maryland, said the devices are a “good investment,” helping his company’s sales grow. He charges $24.95 for the about 200 cigarettes the machine makes, compared with between $60 to $65 for a carton of major name-brand cigarettes. “It’s profitable,” Karls said. “It’s good for the customer.”
Andrew Ramonas can be contacted at firstname.lastname@example.org.