Roll-your-own machines let consumers save money in part because state taxes don't apply to the machine-produced cigarettes. As state budget negotiations progress, some lawmakers are pushing for that to change.

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Tobacco shops say they would take a serious hit if state lawmakers, struggling to cover a $1 billion budget gap, change how the state taxes roll-your-own machine cigarettes.

Those fighting for the change say it would close a tax loophole that gives a burgeoning industry an unfair competitive advantage.

The machines in question let consumers roll loose-leaf tobacco into a carton of cigarettes in about 10 minutes, at roughly half the price of a retail carton. That’s in part because state taxes — 15 cents per cigarette — don’t apply to those produced by the roll-your-own machines.

As state budget negotiations progress, some lawmakers are pushing for that to change.

Chuck Bertrand owns Payless Smokes in University Place, and another roll-your-own store in Fife — two of 65 such locations in Washington, he says. If the do-it-yourself products are taxed like retail cigarettes, he says he’ll be put out of business.

“Who would roll smokes if you can buy them already packaged at the same price?” Bertrand said.

He says the cheaper alternative is important for his customers.

“The people that come in here are pretty poor people,” Bertrand said. “The vast majority of smokers are lower-income and older people. … They really think that roll-your-own is a blessing for them.”

But supporters of taxing roll-your-owns like retail cigarettes say the Legislature should be more concerned with fairness and public health.

House Bill 2565, sponsored by Democratic Rep. Steve Kirby of Tacoma, would have applied the cigarette tax to roll-your-owns. It passed the House during the regular legislative session but didn’t make it out of the Senate.

However, Gov. Chris Gregoire told reporters Friday that she supports collecting the tax and that it’s still on the table for budget negotiations.

The bill’s fiscal note shows the efforts would result in more than $12 million in increased revenue for the state in the first year and roughly $13 million annually after that.

Collecting the tax would raise the average price for a roll-your-own carton to $67.60 from $34.50, the note shows. The cigarette tax, as well as additional sales and business-and-occupation taxes, would mostly account for the increase.

Applying the tax would be a public-health move, some say.

“We’re not curtailing people’s addiction to smoking by having a cheap alternative way with roll-your-owns. … The health issue is my greatest concern,” Gregoire said.

Convenience stores are lobbying for the change. They argue that they take a hit when customers opt for the cheaper alternative.

“The answer here is to treat these (roll-your-own) stores like they’re selling cigarettes, because that’s what they’re doing. … You’ve got a company coming in who has found a very creative way to evade cigarette taxes,” said T.K. Bentler, who represents roughly 4,000 mom-and-pop convenience stores as executive director for the Washington Association of Neighborhood Stores. He also lobbies on behalf of Reynolds American, which produces Camel cigarettes.

Congress sharply raised cigarette taxes in 2009 but did not dramatically increase those on the pipe tobacco used by roll-your-own machines.

Bentler says the disparity led to a boom in the do-it-yourself industry.

“If you don’t do this, you’re going to continue to see this migration of people buying cigarettes for 50 percent or less,” Bentler said of the state proposal.

Bertrand, the tobacco-shop owner, says many of his customers previously bought cigarettes out of state or from tribal outlets to cut costs. He argues they aren’t having enough of an effect on retail cigarette sales or tax collections to warrant legislation.

The state has a pact with the Puyallup Tribe under which the tribe charges nontribal buyers an amount equal to 70 percent of the state cigarette taxes and shares the proceeds with the state.

Other tribes must charge 100 percent of the tax, but the state does not get a cut.

Bertrand and others see the tax proposal as one skirmish in the battle between Big Tobacco and Little Tobacco.

Legislation to apply federal taxes and regulations to roll-your-own products is working its way through Congress, and many other state governments are taking up the issue.

“We would go out of business if the (Washington) bill is passed,” said Joe Baba, the primary distributor of the state’s roll-it-yourself machines. “… It’s Big Tobacco trying to level the competition, not the playing field.”