Roll-Your-Own Cigarette Retailers Lose Tax Ruling

     CINCINNATI (CN) – The government can tax makers of roll-your-own cigarette machines the same as mass tobacco manufacturers, the 6th Circuit ruled.
     RYO Machine and Tobacco Outlet Express, which make high-speed rolling machines, had been granted an injunction blocking enforcement of a ruling by the U.S. Alcohol and Tobacco Tax and Trade Bureau. That ruling deemed the companies “manufacturers of tobacco products” under federal law, exposing them to certain excise taxes.
     A three-judge panel of the 6th Circuit lifted the injunction on appeal, saying an amended version of the Highway Act effectively mooted the companies’ claims.
     The Highway Act, which Congress revised while the appeal was pending, defines tobacco manufacturers to include “any person who for commercial purposes makes available for consumer use … a machine capable of making cigarettes, cigars or other tobacco products.”
     Circuit Judge David McKeague said the modified Highway Act “definitively settles the legal status of retailers who provide the companies’ machines to customers as manufacturers of tobacco products. Because there is now no question as to the proper interpretation of [the Act] as amended, it appears there is no longer any live controversy between the parties with respect to tobacco removed after the amendment’s enactment.”
     The revised Highway Act notwithstanding, the panel ruled that the companies’ case should have been dismissed anyway, as it was barred by the Anti-Injunction Act, which states that “no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court.”
     The machine manufacturers argued that their case was against the permit requirement and not the tax itself, and thus fell under an exception to the Anti-Injunction Act.
     But the panel was not swayed.
     “[T]he purpose of the [agency’s] ruling – and the permitting requirements that go with it – is to clarify the taxation status of retailers who offer high-speed rolling machines to customers so that the bureau can enforce the excise tax,” McKeague wrote. “It follows that the companies’ complaint is directed at the assessment and collection of taxes, and comes within the ambit of the AIA.”
     The panel said the proper course of action for the companies is to obtain the permit, pay the tax and then sue for a refund.
     “[T]he companies primarily seek to preserve the position of their customers and thereby to protect themselves from lost profits,” McKeague wrote. “This would be analogous to an investment advisor who specializes in placing clients under a tax shelter suing to halt the IRS’s invalidation of that shelter because the advisor would lose business.”
     The 6th Circuit remanded the case with instructions to dismiss.

%d bloggers like this: