A machine used to roll cigarettes sits idle at the Ciggy Shack in Menomonee Falls on Monday. Credit: Angela Peterson

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Madison - A new breed of tobacco retailer is shutting down around the state in the face of challenges from the state Department of Revenue over what taxes should be levied for operating roll-your-own machines.

The roll-your-own stores sell loose tobacco that customers load into machines on the premises. The machines pump out a carton of cigarettes in 10 to 15 minutes. The cartons cost around $32 - about half the cost of premium brands - because customers are charged the taxes for pipe tobacco rather than the ones imposed on standard cigarettes.

On Sept. 23, the Department of Revenue sent letters to owners of those machines telling them they could not operate unless they secured manufacturing and distribution permits and received other administrative approvals. Revenue agents started following up last week with on-site visits, during which they unplugged the machines and posted notices on them that they were not to be used.

The department estimates there are 50 to 100 roll-your-own machines in the state, with some retailers owning multiple machines.

Some of the businesses have responded by shutting their doors while they consider their legal options. They argue the agency is overstepping its authority.

"We're not manufacturing and distributing cigarettes. We're selling loose tobacco," said Kurt Kruchten, owner of Smokes-4-Less in Slinger.

Kruchten opened his business in July after buying a roll-your-own machine for about $30,000. He was about to hire a worker and buy a second machine when he got the letter from the Department of Revenue, he said.

Kent Krueger opened the Ciggy Shack in Menomonee Falls in May with two-roll-your own machines. He bought a third machine a month ago and said he planned on hiring his first two employees this month. He stopped running the machines after a Department of Revenue agent visited his store last week.

A former worker in a printing company, Krueger started his shop when he couldn't find work. He said the idea that he is a manufacturer is ridiculous.

"This is no different than people grinding their coffee at the grocery store," he said.

He said the action by the Department of Revenue was not in keeping with Gov. Scott Walker's pledge to make Wisconsin "open for business" and create 250,000 jobs and 10,000 new businesses by 2015.

"Is Wisconsin open for business?" Krueger asked. "I opened a business and four months later I'm closed. Is Wisconsin out of business for small business?"

Stephanie Marquis, a spokeswoman for the Department of Revenue, said the agency was simply enforcing laws that 8,000 traditional cigarette retailers follow.

"There are thousands of other businesses around the state who are providing jobs and following the law," Marquis said. "What this is about is making sure these (roll-your-own) businesses follow the law and fairly compete with other retailers."

The roll-your-own stores technically are cigarette manufacturers and distributors under a long-standing state law, Marquis said. They need to have appropriate permits and assess the required taxes, and the purpose of the recent letters was to inform them of that, she said.

In addition to getting permits, they would also need be certified by the state Department of Justice to be placed on its approved directory of cigarettes for sale in Wisconsin. They would also need to show they had met fire safety performance standards to the Department of Safety and Professional Services.

The Department of Revenue is giving the retailers 30 days to voluntarily comply with the requirements. Marquis did not say what the agency would do after the 30 days has passed, but she acknowledged it has the power to seize the machines.

Kruchten and Krueger bought their machines from Ohio-based RYO Machine Rental, which told its retailers to comply with the Department of Revenue while RYO conducts legal research. RYO Machine Rental CEO Phil Accordino said in an interview Monday that his firm would take the matter to court if necessary.

"We hope to prevail once we have a chance to tell our story," he said.

Accordino said his company has done business in 38 states and has not had problems in most of them.

Wisconsin authorities shouldn't compare roll-your-own operators to true manufacturers that operate machines that produce 20,000 cigarettes a minute, he said. "There's no confusing the two," he said.

But Marquis noted the U.S. Alcohol and Tobacco Tax and Trade Bureau deemed such operations to be manufacturers.