A proposed state tax on roll-your-own cigarettes could put dozens of small tobacco retailers out of business.

Roll-your-own tobacco retailers avoid Washington’s lofty cigarette taxes because, by definition, they don’t manufacture cigarettes for sale. Customers purchase the tobacco and paper tubes, then roll the cigarettes themselves, using a machine available on site.

With this method, 200 self-rolled smokes — the same number in a standard carton — sell for about $34. That’s less than half the cost of prepackaged cartons of cigarettes.

This do-it-yourself approach offers a cheaper alternative to smokers. However, tobacco corporations and convenience stores say this tax loophole creates an unfair market advantage. Roll-your-own retailers even have their own parlance for legal reasons, referring to the finished product as “smokes” instead of cigarettes, and avoiding terms like carton and pack.

In Washington, prepackaged cigarettes cost about $7.50 per pack, although some stores mark up the price to more than $9. Washington’s excise tax is $3.025 per pack or 15 cents per cigarette, which ranks fifth among all states. New York’s excise tax of $4.35 per pack of cigarettes is the highest, and in New York City, an additional $1.50 tax is imposed. Virginia has the lowest excise tax at 30 cents per pack.

House Bill 2565 calls for applying the same taxes to roll-your-own smokes in Washington. The bill redefines owners of rolling machines as manufacturers, and includes roll-your-own smokes under the definition of cigarette.

Sponsored by State Rep. Steve Kirby (D-Tacoma), the bill passed the House during the regular session, but stalled in the Senate. Gov. Christine Gregoire announced last month that the tax is still “on the table” for the current budget deliberations in the Legislature. If approved, the new tax could take effect as early as July 1.

The amount of state taxes lost to roll-your-own products may be as high as $26 million a year, according to one bill report.

Convenience stores and tobacco manufacturers support the proposed tax as a way to level the playing field. Opponents say the bill will close 65 tobacco stores in Washington and cost the state 250 jobs.

One of those stores is Tobacco Station, which opened in October 2011 at Pacific Highway and South 348th Street in Federal Way. Store owners Donald and Sandi Urban said the new tax would add about $23 to every batch of 200 self-rolled smokes — and likely lead to their business closing.

The store owners already pay tax on wholesale tobacco. In addition, they say their tobacco contains fewer harmful and addictive chemicals than found in commercially manufactured cigarettes.

The proposed state bill also cites concern about a link between roll-your-own smokes and access to tobacco by minors. Don Urban refutes that notion. Most of his customers are smokers ages 45 and older who want to save money, he said, and some customers come from as far away as Bonney Lake.

“This isn’t creating any new smokers,” said Urban, a Federal Way resident who has lobbied in Olympia on behalf of roll-your-own tobacco retailers. “This has been around for years.”

The issue of taxing roll-your-own tobacco retailers is nothing new at the federal level. Last month, the U.S. Senate passed a highway appropriations bill with an amendment to tax roll-your-own retailers the same as commercial manufacturers.

According to the Washington State Department of Revenue, cigarette taxes go toward the state general fund and the education legacy trust account — almost $400 million total in 2009. House Bill 2565 says that any new revenue from the proposed tax will be deposited into the Youth Tobacco Prevention Account.

On a related note, Indian tribes in Washington collect their own tribal tax on cigarette sales. While required to charge state taxes to non-Indian customers, the tribes themselves are exempt from paying state cigarette taxes. In one agreement, the Puyallup Indian Tribe pays 30 percent of the tribal tax revenue on all cigarette sales to the state.

PHOTOS

To see photos of a roll-your-own smokes machine at Tobacco Station in Federal Way, click here.