Smokers who stop by the Tobacco Direct store on Midlothian Turnpike looking for a carton of their favorite cigarettes might be surprised by what they find there.
They won't find stacks of Marlboro, Camel or Newport cigarettes or other products stocked at a typical tobacco shop.
In fact, there are no cigarettes at all — just packages of loose-leaf pipe tobacco for sale behind the counter along with a variety of brands of cigarette rolling paper.
Customers willing to spend some time making their own cigarettes, by using automated rolling machines in the store, can save almost half of what a typical carton costs in Virginia.
The rolling machines and cheaper smokes have put Tobacco Direct and stores like it in Virginia and other states at the center of a fierce, national controversy that highlights the complexities surrounding tobacco regulation and taxation.
That debate is now playing out in the Virginia General Assembly, with lawmakers so far voting against the roll-your-own businesses and for the views of tobacco companies such as Henrico County-based Altria Group Inc., the parent company of top U.S. cigarette maker Philip Morris USA, who say the shops are evading taxes and regulation.
But Tobacco Direct's co-owner and manager, Eddie Siu, said his Chesterfield County store is offering convenience and affordability to people who like to roll their own smokes.
"We are not trying to get more people to smoke," Siu said. "Instead, we are trying to offer savings for people who already smoke and might be struggling in this economy."
The ATM-size machines, made by a company in Ohio, can produce cigarettes at a rate of about 200 every 10 minutes, making a swooshing noise as the tobacco is packed into the paper tubes and spitting the cigarettes out of a small chute at the bottom of the device.
Altria argues that the roll-your-own cigarette shops that have opened in Virginia and other states are taking advantage of legal loopholes to avoid excise taxes and federal and state regulations on cigarettes.
The company is backing legislation that would declare roll-your-own operations to be cigarette manufacturers, rather than retailers and make them meet the same tax and regulatory requirements as the major cigarette producers.
"Our view is that the operators of these types of establishments are basically acting as manufacturers of cigarettes," Altria spokesman David Sutton said. "We think they should be treated the same as other cigarette manufacturers."
Opposing the legislation is RYO Machines LLC, a company in Ohio that builds and sells roll-your-own machines, along with retailers such as Tobacco Direct that have installed the machines in their stores at a cost of $32,500 each. At least 18 machines are now operating in Virginia in 10 retail stores.
The roll-your-own businesses argue the legislation is simply intended to eliminate them, pushing a small but growing source of competition for major cigarette brands out of the market.
"Right now, the giant cigarette companies are trying to put us out of business, because they feel like we are one of their competition now," Siu said. "We are a small business and cannot compete with the giants."
Siu said the legislation would put his Tobacco Direct out of business.
The legislation is sponsored in the Senate by Sen. John Watkins, R-Powhatan, and in the House by Del. R. Lee Ware Jr., R-Powhatan.
Watkins' bill likely will come up for a vote in the full Senate this week. An identical bill in the House of Delegates will be heard in the House finance committee, after a subcommittee recommended approving it Friday.
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The issue ultimately might be decided in court.
If the legislation in Virginia becomes law, roll-your-own businesses here that have bought the machines would have little recourse but to sue, said Ashley Taylor, a lawyer for the Troutman Sanders law firm, which represents RYO Machines.
One federal lawsuit concerning roll-your-own businesses is now on appeal. That lawsuit was filed in Ohio in 2010 to challenge a federal Alcohol and Tobacco Tax and Trade Bureau ruling that said roll-your-own retail businesses should be treated as manufacturers.
Roll-your-own stores have ignited controversy in other states, too.
The New York City government last year sued a cigarette retailer whose customers were using roll-your-own machines in the store, arguing that it amounted to tax evasion. (The retailer decided to shut down.) Connecticut's attorney general also filed a lawsuit against a roll-your-own tobacco shop, arguing the store must obtain a cigarette-manufacturing license and pay taxes on the cigarettes made in the store.
Governments in several other states, including West Virginia, Illinois, Wisconsin, Michigan and New Hampshire, either have issued warnings or taken actions against roll-your-own businesses. Legislation that would declare the businesses to be manufacturers also is being considered in South Dakota.
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Consumers have long been able to buy loose tobacco and roll their own cigarettes at home. Devices that make it easier and faster to roll cigarettes have been on the market for decades, too.
Supporters of the roll-your-own businesses say that's the market they primarily serve.
"We did not create this category," said Phil Accordino, president of RYO Machines, which has sold about 1,700 cigarette rolling machines in 42 states.
The machines can make cigarettes a lot faster than a person could roll them by hand, but "you would have to run one of our machines for about 16 hours to produce what a (cigarette factory) machine could make in one minute," Accordino said.
He sees the furor over the roll-your-own businesses as part of a clamor in the cigarette industry to hang on to market share as the overall U.S. cigarette market slowly declines.
"Obviously, the companies that have the lion's share of that shrinking market are going to be the most threatened by anything that comes along and has the potential — imagined, or perceived, or real — to cut into that market, so they are going to frown upon that and try to eliminate it," Accordino said.
Altria isn't the only major cigarette company supporting the Virginia legislation. So are Lorillard Inc. and Reynolds-American Inc.
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Although roll-your-own businesses say they mainly serve a niche market, the rise of the roll-your-own segment of the tobacco industry has been fueled in recent years by increases in cigarette taxes at the state and federal level, said Darryl Jayson, vice president of the Tobacco Merchants Association, a trade group in Princeton, N.J.
"This phenomenon is a reply to the high taxation of cigarettes," Jayson said. "It is a way for people to get their cigarettes at a lower cost than buying a pack of cigarettes."
Roll-your-own cigarettes are not now subject to excise taxes like manufactured smokes bought at retail. Virginia's excise tax is $3 per carton.
Congress also increased the federal excise tax on cigarettes from 39 cents to $1.01 per pack in 2009 to pay for a children's health insurance program. As part of that legislation, taxes on other tobacco products were increased, too, but not all equally.
The tax on loose leaf, roll-your-own cigarette tobacco, for example, was increased from $1.09 per pound to $24.78 per pound. The tax on pipe tobacco, however, was increased from $1.09 per pound to just $2.83 per pound, which some industry observers say has created an incentive to use pipe tobacco for roll-your-own cigarettes.
The Tobacco Direct store on Midlothian Turnpike stocks a variety of pipe tobacco for its customers. Signs out front of the store advertise cigarettes at $22.85 per carton. That price includes Virginia's tax on "other tobacco products" which covers non-cigarette tobaccos such as pipe tobacco and is assessed at 10 percent of the wholesale cost.
Even when the 5 percent sales tax is added, the total price is far less than the cost of a carton of cigarettes at retail in Virginia, which typically runs at $40 to $45.
The store opened in early January. Siu and a group of business partners have opened seven stores in Virginia, with an eighth planned for opening in February. He said four part-time employees work in each store.
He said the Tobacco Direct stores are playing by the rules that the tobacco industry and the government have established.
"We follow the rules and follow the law," he said. "We have licenses. We pay taxes. We contribute to the community."
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