Tobacco executives quickly find big tax loophole

WASHINGTON — When President Barack Obama signed a law expanding children's health insurance this spring, he slapped tobacco companies with huge tax increases to pay for it.
It didn't take long for the companies to find a multimillion-dollar loophole.
As soon as the new law took effect, raising taxes on roll-your-own cigarettes from $1.10 to $24.78 a pound, companies adapted. They all but shut down their roll-your-own brands and reinvented them under a less-restricted, less-taxed category: pipe tobacco. It's still destined to be rolled and smoked, but it's taxed at only $2.83 a pound.
Pipe tobacco is normally too coarse and moist to roll into a cigarette, but nothing says it has to be. In fact, the Obama administration says the only distinction between pipe tobacco and roll-your-own tobacco is how it's labeled, effectively giving tobacco marketing executives an opportunity to shape their own tax rate.
Nearly overnight, roll-your-own brands like Criss Cross and Farmers Gold were replaced by pipe tobacco with the same names. The cuts may be slightly different, but they're suitable for rolling. Knowing this, retailers steer customers to the new products, sometimes with a wink and a nod, sometimes with outright advertising.
"They tried to make a product within the elements of the law that they could, in fact, market as pipe tobacco," said Scott Bendett, owner of Habana Premium Cigar Shoppe in Albany, N.Y., which advertises the new pipe tobacco for hand-rolled cigarettes.
Loophole may be closed Tobacco companies say they're just trying to find a legal way to stay afloat after being saddled with an enormous tax increase. But both the Obama administration and some in Congress say they'll try to come up with a distinction between the tobacco types, closing a loophole that could cost taxpayers hundreds of millions of dollars year.
"If the companies won't do what is right, then we will," said Sen. Frank Lautenberg, D-N.J.
Anti-tobacco groups say the companies' move is deception, and not just because of the taxes. While flavored cigarettes are now banned in an effort to reduce the appeal of smoking to children, no such ban applies to pipe tobacco, allowing companies to sell black cherry, vanilla and other varieties.