PIERRE, S.D. -- The South Dakota Legislature is considering whether tobacco shops that offer machines for roll-your-own (RYO) cigarettes should be classified as manufacturers, reported the Aberdeen News. The change would mean the cigarettes made there would be subject to the same higher taxes as commercially marketed cigarettes in South Dakota starting July 1, 2014.
The House committee on state affairs gave its backing to the change on Wednesday on a nine-to-four vote. The legislation, House Bill 1138, would be up for debate by the House as soon as Friday afternoon.
People who buy pipe tobacco that can be used for rolling cigarettes currently pay $2.39 of state taxes on a quantity sufficient to make a carton of cigarettes, said the report. The normal tax for a carton of commercial cigarettes is $15.30.
"The loophole is a growing problem. It's not good for South Dakota," State Representative Justin Cronin (R), told the newspaper. He is the legislation's prime sponsor.
Among the long list backing the change are the South Dakota Retailers Association, the state Revenue Department, the South Dakota Petroleum & Propane Marketers Association (its convenience store group) and state attorney general Marty Jackley. Another was former state legislator Garry Moore of Yankton, whose family is in the wholesale tobacco business.
Speaking against the legislation was Bob Riter, a lawyer representing the RYO industry. Riter said there are lawsuits in other states.
"This matter is still going through the courts," he said. "Let's let that work its way out."
Another former legislator, Kay Davis, testified in opposition. Davis said her family runs what she called smoke shops.
"We are not manufacturers. We only provide the original product," she said.
Davis said people who buy tobacco in the stores can go home and spend several hours rolling cigarettes or wait their turn to use the machine at the shop. She referred to the finished product as "smokes."
"I don't call them cigarettes, because they're made from pipe tobacco," Davis added.
Other opponents who took the witness chair included Todd Florey of Watertown and Doug Backlund, who has a gas station in Mitchell and a tobacco store in Brookings. Backlund said 14 small businesses in South Dakota will be put out of business.
One related issue is whether allowing the RYO shops to operate without a manufacturer designation would violate the master settlement agreement (MSA) reached between tobacco companies and state governments a decade ago for smoking-related damages, said the report.
Charles McGuigan, the chief deputy attorney general, said there has not been a request for an official opinion on whether the RYO shops are manufacturers.
"However, we have been analyzing the situation," he said.
State lawyers began to discuss the issue among themselves during 2011 and contemplated enforcement action, McGuigan told the paper. He said that because of the MSA, the AG feels an obligation to do something, but there has not been a decision on what should be done.
Rep. Peggy Gibson (D) tried to block the legislation, which she labeled as "premature." But Cronin said people already can fill out a form at the tobacco shop and return later to pick up their rolled cigarettes.
House Democratic leader Bernie Hunhoff said the smoke shops are designed as a tax dodge. "This is the time to do it," he said.
Giving two years for the stores to come into compliance or remove the machines seemed to help the legislation's acceptance among the committee members, the report said.
"I think that's more than fair," Rep. Gene Abdallah (R) said.