TOBACCO TAXES

Large Disparities in 

Rates for Smoking 

Products Trigger 

Significant Market 

Shifts to Avoid Higher 

Taxes 

Report to Congressional Committees

April 2012 

GAO-12-475 

United States Government Accountability Office

GAO 
United States Government Accountability Office

Highlights of GAO-12-475, a report to 

congressional committees 

April 2012 

TOBACCO TAXES

Large Disparities in Rates for Smoking Products 

Trigger Significant Market Shifts to Avoid Higher 

Taxes

Why GAO Did This Study

In 2009, CHIPRA increased and 

equalized federal excise tax rates for 

cigarettes, roll-your-own tobacco, and 

small cigars. Though CHIPRA also 

increased federal excise tax rates for 

pipe tobacco and large cigars, it raised

the pipe tobacco tax to a rate 

significantly below the equalized rate 

for the other products, and its large 

cigar excise tax can be significantly 

lower, depending on price. Treasury

collects federal excise taxes on 

tobacco products. 

Also passed in 2009, the Family 

Smoking Prevention and Tobacco 

Control Act (Tobacco Control Act) 

granted FDA regulatory authority over

tobacco products. This act directed 

GAO to report on trade in tobacco 

products, including the effects of 

differing tobacco tax rates. This report

(1) reviews the market shifts in 

smoking tobacco products since 

CHIPRA; (2) examines the impact of 

the market shifts on federal revenue 

and Treasury’s actions to respond; and 

(3) describes differences in FDA’s 

regulation of various smoking tobacco 

products. GAO interviewed agency 

officials, industry members, and public 

health representatives. GAO analyzed 

tax and revenue data and reviewed 

relevant literature.

What GAO Recommends

As Congress continues its oversight of 

CHIPRA and Tobacco Control Act 

implementation, it should consider 

equalizing tax rates on roll-your-own 

and pipe tobacco and, in consultation 

with Treasury, consider options for 

reducing tax avoidance due to tax 

differentials between small and large 

cigars. Treasury generally agreed with 

GAO’s conclusions and observations. 

What GAO Found

Large federal excise tax disparities among tobacco products, which resulted from 

the Children’s Health Insurance Program Reauthorization Act (CHIPRA) of 2009, 

created opportunities for tax avoidance and led to significant market shifts by 

manufacturers and price sensitive consumers toward the lower-taxed products.

Monthly sales of pipe tobacco increased from approximately 240,000 pounds in 

January 2009 to over 3 million pounds in September 2011, while roll-your-own 

tobacco dropped from about 2 million pounds to 315,000 pounds. For the same 

months, large cigar sales increased from 411 million to over 1 billion cigars, while 

small cigars dropped from about 430 million to 60 million cigars (see figure). 

According to government, industry, and nongovernmental organization 

representatives, many roll-your-own tobacco and small cigar manufacturers 

shifted to the lower-taxed products after CHIPRA to avoid paying higher taxes. 

FY 01-11 Monthly Sales for Roll-Your-Own and Pipe Tobacco, and for Small and Large Cigars 

While revenue collected for all smoking tobacco products from April 2009 through 

fiscal year 2011 amounted to $40 billion, GAO estimates that federal revenue 

losses due to market shifts from roll-your-own to pipe tobacco and from small to 

large cigars range from about $615 million to $1.1 billion for the same period. 

The Department of the Treasury (Treasury) has limited options to respond to 

these market shifts. Treasury has attempted to differentiate between roll-yourown and pipe tobacco for tax purposes but faces challenges because the

definitions of the two products in the Internal Revenue Code of 1986 do not 

specify distinguishing physical characteristics. Treasury also has limited options 

to address the market shift to large cigars and faces added complexity in 

monitoring and enforcing tax payments due to the change in large cigar tax rates. 

Unlike cigarettes and roll-your-own tobacco, pipe tobacco and cigars are not 

currently regulated by the Food and Drug Administration (FDA) and thus are not

subject to the same restrictions on characterizing flavors, sales, or distribution. In

2011, FDA indicated its intent to issue a proposed rule that would deem products 

meeting the statutory definition of “tobacco product” to be subject to FDA’s 

regulation. However, FDA had not issued the proposed rule as of March 2012. 

FDA officials told GAO that developing the rule was taking longer than expected. 

View GAO-12-475. View related video clip. For 

more information, contact David Gootnick at 

(202) 512-3149 or gootnickd@gao.gov. 
Page i GAO-12-475 Tobacco Taxes 

Letter 1 

Background 3

Large Tax Disparities among Similar Tobacco Products Triggered 

Significant Market Shifts to Avoid Higher Taxes 14

Market Shifts to Avoid Taxes Have Reduced Federal Revenue, and 

Treasury Has Limited Options to Respond 21

FDA Currently Regulates Cigarettes and Roll-Your-Own Tobacco 

but Not Pipe Tobacco and Cigars 36

Conclusions 41

Matter for Congressional Consideration 43

Agency Comments and Our Evaluation 43

Appendix I Objectives, Scope, and Methodology 45 

Appendix II Sales of Smoking Tobacco Products in the United States, Fiscal 

Years 2001-2011 50 

Appendix III Summary of Treasury’s Proposed Rulemaking Actions to 

Distinguish between Roll-Your-Own and Pipe Tobacco 53 

Appendix IV Comments from the Department of the Treasury 55 

Appendix V GAO Contact and Staff Acknowledgments 57

Tables 

Table 1: Definitions of Smoking Tobacco Products in the IRC 5

Table 2: Federal Excise Tax Rates for Cigarettes, Roll-Your-Own 

Tobacco, Pipe Tobacco, and Small Cigars, Before and 

After CHIPRA 8

Table 3: Federal Excise Tax Rates for Large Cigars, Before and 

After CHIPRA 10

Table 4: Treasury Actions on Roll-Your-Own and Pipe Tobacco 

following CHIPRA, Industry Comments, and Status 28

Contents 
Page ii GAO-12-475 Tobacco Taxes 

Table 5: U.S. Sales of Cigarettes and Other Smoking Tobacco 

Products, Fiscal Years 2001-2011 (in Billions of Sticks) 51

Figures 

Figure 1: Examples of Cigarette and Cigar Products 6

Figure 2: Tax Rates for Cigarettes, Roll-Your-Own Tobacco, Pipe 

Tobacco, and Small Cigars, 1951-2010 7

Figure 3: Changes in Federal Excise Tax Rates as a Result of 

CHIPRA—for Cigarettes, Roll-Your-Own Tobacco, Pipe 

Tobacco, and Small Cigars 9

Figure 4: Changes in Federal Excise Tax Rates as a Result of 

CHIPRA—for Large Cigars under Three Different 

Scenarios 11

Figure 5: Payment of Federal, State, and Local Excise Taxes in the 

Supply Chain for U.S. Tobacco Products 12

Figure 6: Monthly and Annual U.S. Sales of Roll-Your-Own and Pipe 

Tobacco, Fiscal Years 2001-2011 15

Figure 7: Combined U.S. Sales of Roll-Your-Own and Pipe Tobacco, 

Fiscal Years 2001-2011 16

Figure 8: Number of Companies Producing Roll-Your-Own 

Tobacco, Pipe Tobacco, or Both, 2007-2011 18

Figure 9: Examples of Maryland Retail Prices for Cartons of 

Various Types of Cigarettes 19

Figure 10: Monthly and Annual U.S. Sales of Small and Large 

Cigars, Fiscal Years 2001-2011 20

Figure 11: Combined U.S. Sales of Small and Large Cigars, Fiscal 

Years 2001-2011 21

Figure 12: Estimated Revenue Losses for Roll-Your-Own and Pipe 

Tobacco 24

Figure 13: Estimated Revenue Losses for Small and Large Cigars 26

Figure 14: Post-CHIPRA Incentives for Some Manufacturers to 

Switch from Small to Large Cigars 32

Figure 15: Post-CHIPRA Incentives for Some Manufacturers and 

Importers to Lower the Sale Price of Large Cigars 34

Figure 16: Basic Phases in FDA’s Rulemaking Process 41

Figure 17: U.S. Sales of Cigarettes and Other Smoking Tobacco 

Products, Fiscal Years 2001-2011 52
Page iii GAO-12-475 Tobacco Taxes 

Abbreviations 

CHIPRA Children’s Health Insurance Program 

 Reauthorization Act of 2009 

FDA Food and Drug Administration 

IRC Internal Revenue Code of 1986 

RYO roll-your-own tobacco 

Tobacco Control Act Family Smoking Prevention and Tobacco Control 

 Act 

Treasury Department of the Treasury 

This is a work of the U.S. government and is not subject to copyright protection in the 

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Page 1 GAO-12-475 Tobacco Taxes 

United States Government Accountability Office

Washington, DC 20548 

April 18, 2012 

The Honorable Tom Harkin 

Chairman 

The Honorable Michael B. Enzi 

Ranking Member 

Committee on Health, Education, Labor, and Pensions 

United States Senate 

The Honorable Fred Upton 

Chairman 

The Honorable Henry A. Waxman 

Ranking Member 

Committee on Energy and Commerce 

United States House of Representatives 

Tobacco use is the leading cause of preventable death, disease, and 

disability and a significant contributor to health care costs in the United 

States. The Centers for Disease Control and Prevention reports that 

smoking and exposure to secondhand smoke account for over 440,000 

premature deaths per year and cost the United States an estimated $193 

billion annually in health care expenditures and productivity losses. 

Federal and state legislation has aimed to discourage tobacco use and 

raise revenues by increasing excise taxes on tobacco products. The most 

recent federal increase occurred in 2009 when Congress passed the 

Children’s Health Insurance Program Reauthorization Act of 2009 

(CHIPRA),1

 which amended the Internal Revenue Code of 1986 (IRC) by 

raising excise tax rates on tobacco products. The Department of the 

Treasury (Treasury) is responsible for collecting these taxes. In addition, 

in order to reduce tobacco use and protect public health, in June 2009, 

Congress passed the Family Smoking Prevention and Tobacco Control 

Act (Tobacco Control Act),2

 which granted the Food and Drug 

Administration (FDA) authority to regulate the manufacture, distribution, 

and marketing of tobacco products. 

 

1

Pub. L. No. 111-3, 123 Stat. 8. 

2

Pub. L. No. 111-31, Div. A, 123 Stat. 1776. 

 
 

Page 2 GAO-12-475 Tobacco Taxes 

Title III of the Tobacco Control Act directed GAO to report on various 

aspects of trade in tobacco products, including the effects resulting from 

the differing tax rates applicable to tobacco products.3

 This report 

examines the federal revenue effects resulting from different federal 

excise tax rates on various smoking tobacco products and differences in 

FDA’s regulation of these products. Specifically, we (1) review the market 

shifts among smoking tobacco products since CHIPRA went into effect on 

April 1, 2009; (2) examine the impact of these market shifts on federal 

revenue and Treasury’s actions to respond; and (3) describe differences 

in FDA’s regulation of various smoking tobacco products. Our review 

includes smoking tobacco products that are subject to federal excise tax: 

cigarettes and four other tobacco products—roll-your-own tobacco 

(sometimes called RYO), pipe tobacco, small cigars, and large cigars.4

However, in analyzing the market shifts among these products, we 

focused solely on the four smoking tobacco products other than 

cigarettes. 

To address the three objectives in this study, we reviewed documents 

and interviewed agency officials from Treasury’s Alcohol and Tobacco 

Tax and Trade Bureau, FDA, and the Centers for Disease Control and 

Prevention, as well as tobacco industry members, representatives of 

public health and other nongovernmental organizations, and academics, 

to obtain information on tobacco legislation and regulations, tobacco 

product sales trends, and consumption patterns. We also reviewed 

studies analyzing the relationship between tobacco tax increases and 

smoking, including among youth. We analyzed Treasury removals data to 

identify sales trends across the different tobacco products. As used in this 

report, for smoking tobacco products, “removals” means the amount 

removed for distribution in the United States from the factory or released 

from customs.5

 In this report, we consider removals to be equivalent to 

sales and use the term sales. In addition, we collected and analyzed data 

 

3

Responding to this mandate, in March 2011, we issued a first report on illicit tobacco 

trade and schemes. GAO, Illicit Tobacco: Various Schemes Are Used to Evade Taxes and 

Fees, GAO-11-313 (Washington, D.C.: Mar. 7, 2011). 

4

Smokeless tobacco products that are subject to federal excise taxes, such as chewing 

tobacco and snuff, were outside the scope of this review. “Processed tobacco” is not 

subject to federal excise tax and is defined in the IRC by what it is not: processed tobacco 

does not include the farming or growing of tobacco or the handling of tobacco solely for 

sale, shipment, or delivery to a manufacturer of tobacco products or processed tobacco. 

5

26 U.S.C. § 5702(j). 
 

Page 3 GAO-12-475 Tobacco Taxes 

on federal excise tax rates for these tobacco products and the revenues 

generated from their sale. We estimated what the effect on tax revenue 

collection would have been if the sales trends for roll-your-own and pipe 

tobacco and for small and large cigars had not been affected by 

substitution between the products but had been affected by the increase 

in price due to the tax—in other words, if the market shifts resulting from 

the substitution of higher-taxed products with lower-taxed products had 

not occurred. In this report, we refer to this estimated effect on federal tax 

revenue collection as revenue losses. Our analysis takes into account the 

expected fall in quantity demanded due to the price increases resulting 

from higher federal excise tax rates that CHIPRA imposed on all four of 

these smoking tobacco products. See appendix I for more information on 

our objectives, scope, and methodology. 

We conducted this performance audit from March 2011 to April 2012 in 

accordance with generally accepted government auditing standards. 

Those standards require that we plan and perform the audit to obtain 

sufficient, appropriate evidence to provide a reasonable basis for our 

findings and conclusions based on our audit objectives. We believe that 

the evidence obtained provides a reasonable basis for our findings and 

conclusions based on our audit objectives. 

Cigarettes continue to dominate the smoking tobacco product market, 

accounting for approximately 91 percent of sales in 2011. However, the 

use of other smoking tobacco products has increased over the past 10 

years. Between 2001 and 2011, combined sales of roll-your-own tobacco, 

pipe tobacco, and small and large cigars grew from 3 percent of the 

smoking tobacco market to 9 percent. Although cigarette use in the 

United States is declining, it is partially offset by growing use of other 

smoking tobacco products. (See app. II for data on U.S. sales of smoking 

tobacco products from fiscal year 2001 through fiscal year 2011.) 

Increasing the price of tobacco products by raising excise taxes is widely 

recognized as an effective policy for reducing smoking prevalence across 

Background 
 

Page 4 GAO-12-475 Tobacco Taxes 

socioeconomic and racial groups.6 Public health and economic studies 

have found that adolescents are more responsive than adults to tobacco 

tax and price increases because they have less disposable income.7

However, the impact of tax increases on reducing overall smoking 

prevalence is likely to be weaker if smokers can turn to tobacco products 

that can be used as functional equivalents of factory-made cigarettes and 

cost significantly less, according to public health officials and academics. 

Smoking tobacco products are broadly defined in the IRC.8

 Roll-your-own 

tobacco and pipe tobacco are defined by such factors as the use for 

which the product is suited and how they are offered for sale, as indicated 

by their appearance, type, packaging, and labeling. Cigars are 

differentiated from cigarettes by their wrapper and whether the product is, 

for a number of reasons, likely to be offered to, or purchased by, 

consumers as a cigarette. The tax rate for cigars is categorized into small 

and large cigars, which are differentiated by a weight threshold alone—

small cigars are defined as weighing 3 pounds or less per thousand 

sticks.9,10 The definitions found in the IRC characterize five types of 

 

6

The World Health Organization, for example, recommends raising tobacco taxes as one 

of the six components of its MPOWER framework, which provides guidance to countries 

to implement tobacco control policies. The World Bank recommends that, to curb tobacco 

use, excise taxes should account for two-thirds to four-fifths of the retail price of a pack of 

cigarettes. In the United States, the Centers for Disease Control and Prevention, the U.S. 

Surgeon General, and the Institute of Medicine of the National Academy of Sciences 

report that tobacco excise tax increases are one of the most effective tobacco strategies 

for reducing tobacco use. The Centers for Disease Control and Prevention, which through 

its Office on Smoking and Health is the lead federal agency for tobacco control and 

prevention, recognizes tobacco excise tax increases as an effective population-based 

tobacco control and prevention intervention at the federal and state levels. 

7

In 1989, GAO reviewed studies available at that time; see GAO, Teenage Smoking: 

Higher Excise Tax Should Significantly Reduce the Number of Smokers, 

GAO/HRD-89-119 (Washington, D.C.: June 30, 1989). 

8

26 U.S.C. § 5702. 

9

26 U.S.C. § 5701. 

10As with small and large cigars, the IRC distinguishes between small and large cigarettes 

based on weight. Small cigarettes are defined as weighing 3 pounds or less per thousand 

sticks. When we refer to cigarettes in this report, we are discussing small cigarettes, as 

defined in the IRC. Treasury data show that no large cigarettes were manufactured in the 

United States between fiscal years 2001 and 2011. 

Tobacco Products Have 

Broad Definitions 
 

Page 5 GAO-12-475 Tobacco Taxes 

smoking tobacco products that are relevant to our discussion, as shown 

in table 1.11

Table 1: Definitions of Smoking Tobacco Products in the IRC 

Product Definition 

Cigarette (1) Any roll of tobacco wrapped in paper or in any substance not containing tobacco or (2) any roll of 

tobacco wrapped in any substance containing tobacco which, because of its appearance, the type of 

tobacco used in the filler, or its packaging and labeling, is likely to be offered to, or purchased by, 

consumers as a cigarette described in (1). 

Roll-Your-Own tobacco Any tobacco which, because of its appearance, type, packaging, or labeling, is suitable for use and 

likely to be offered to, or purchased by, consumers as tobacco for making cigarettes or cigars, or for use 

as wrappers thereof. 

Pipe tobacco Any tobacco which, because of its appearance, type, packaging, or labeling, is suitable for use and 

likely to be offered to, or purchased by, consumers as tobacco to be smoked in a pipe. 

Small cigar Any roll of tobacco wrapped in leaf tobacco or in any substance containing tobacco (other than any roll 

of tobacco which is a cigarette) that weighs 3 pounds or less per thousand. 

Large cigar Any roll of tobacco wrapped in leaf tobacco or in any substance containing tobacco (other than any roll 

of tobacco which is a cigarette) that weighs more than 3 pounds per thousand. 

Source: 26 U.S.C. §§ 5701, 5702. 

Figure 1 shows a sample of different cigarette and cigar products. Several 

of the products closely resemble each other in size and shape. The three 

on the left are cigarettes. The first is a roll-your-own cigarette12 made by 

hand with roll-your-own tobacco. The second is a roll-your-own cigarette 

made in a commercial roll-your-own machine13 with pipe tobacco. And the 

third from the left is a factory-made cigarette. The three products on the 

right are cigars, which can vary widely in size, shape, flavor, and aroma. 

According to industry representatives, a nongovernmental organization, 

and government officials, traditionally, cigars are hand-rolled, wrapped in 

a tobacco leaf, large in size, and their smoke is not meant to be inhaled. 

However, they indicated that many small and large cigars now have 

filters, are wrapped in a type of paper made with tobacco, and can be 

similar in size and appearance to cigarettes. 

 

11The IRC also provides definitions for smokeless tobacco products, which are not listed 

here. 

12In this report, we define roll-your-own cigarettes as cigarettes made by consumers with 

loose tobacco, such as roll-your-own tobacco or pipe tobacco. 

13Commercial roll-your-own machines are located in some stores that sell tobacco 

products. These machines allow customers to make a carton of cigarettes in less than 10 

minutes. They are discussed in more detail in the next section of the report. 
 

Page 6 GAO-12-475 Tobacco Taxes 

Figure 1: Examples of Cigarette and Cigar Products 

While the enactment of CHIPRA in 2009 represents the most recent 

increase in federal excise taxes on tobacco products, Congress has taxed 

tobacco products since its inception as a means to raise revenue.14 Of the 

smoking tobacco products that we discuss in this report, Congress taxed 

only cigarettes, small cigars, and large cigars prior to 1989. Congress 

began taxing pipe tobacco on January 1, 1989,15 and roll-your-own 

tobacco on January 1, 2000.16 As the danger of tobacco became better 

known, congressional debates surrounding tobacco taxes expanded from 

increasing revenue to protecting the public from health risks of tobacco. 

 

14Act of August 10, 1790, ch. 39, §§ 1-2, 1 Stat. 24 (1789). 

15Technical and Miscellaneous Revenue Act of 1988, Pub. L. No. 100-647, § 5061(d), 102 

Stat. 3342, 3679. This tax became effective after December 31, 1988. 

16Balanced Budget Act of 1997, Pub. L. No. 105-33, § 9302(g), 111 Stat. 251, 672. This 

tax became effective after December 31, 1999. 

Federal Excise Taxes on 

Tobacco Products Most 

Recently Increased by 

CHIPRA 
 

Page 7 GAO-12-475 Tobacco Taxes 

Figure 2 shows the tax rates for four smoking tobacco products from 1951 

to 2010. 

Figure 2: Tax Rates for Cigarettes, Roll-Your-Own Tobacco, Pipe Tobacco, and Small Cigars, 1951-2010 

Note: Large cigar tax rates are not included in this figure because they are taxed at an ad valorem 

rate—a percentage of the manufacturer’s or importer’s sale price—up to a maximum tax per 

thousand sticks, rather than a rate based on units or weight. 

a

Roll-your-own and pipe tobacco taxes are shown at an equivalent tax per stick rate based on the 

Master Settlement Agreement conversion rate for roll-your-own tobacco of 0.0325 ounces per stick. 

We are applying this conversion rate to pipe tobacco for the purpose of comparison because 

Treasury has not yet differentiated the physical characteristics of roll-your-own and pipe tobacco. 

The federal excise tax rates on different tobacco products are calculated 

in different ways. Cigarettes and small cigars are taxed on a unit basis—

number of sticks. Roll-your-own and pipe tobacco are taxed by weight. 

Table 2 provides information on the different federal excise tax rates for 

cigarettes, roll-your-own tobacco, pipe tobacco, and small cigars before 

and after CHIPRA. 
 

Page 8 GAO-12-475 Tobacco Taxes 

Table 2: Federal Excise Tax Rates for Cigarettes, Roll-Your-Own Tobacco, Pipe 

Tobacco, and Small Cigars, Before and After CHIPRA 

Tobacco 

products Unit of taxation 

Before 

CHIPRA 

After 

CHIPRA

Percentage 

increase

Cigarettesa thousand sticks $19.50 $50.33 158%

Roll-Your-Own 

tobacco 

pounds $1.10 $24.78 2,159%

Pipe tobacco pounds $1.10 $2.83 158%

Small cigars thousand sticks $1.83 $50.33 2,653%

Source: GAO analysis of the IRC. 

Note: Although we rounded the tax rates to the nearest cent for this table, we used the exact tax rate 

in our calculations. 

a

The federal excise tax rate for large cigarettes up to 6.5 inches long was $40.95 per thousand sticks 

prior to CHIPRA and became $105.69 per thousand sticks after CHIPRA. Large cigarettes over 6.5 

inches long are taxed at the rate for small cigarettes, counting each 2.75 inches or fraction thereof of 

the length of each as one cigarette. 

Before CHIPRA, the federal excise tax rate on cigarettes was higher than 

the rates on roll-your-own tobacco, pipe tobacco, and small cigars. 

However, CHIPRA significantly raised the tax rates on these four 

products and equalized the rates on cigarettes, roll-your-own tobacco, 

and small cigars (see fig. 3). Congress equalized the tax rates on rollyour-own tobacco and small cigars with the cigarette tax rate in part in 

response to concerns that smokers had been using these two products as 

substitutes for higher-taxed factory-made cigarettes, according to 

nongovernmental organizations. CHIPRA also raised the federal excise 

tax rate on pipe tobacco, but to a rate that is considerably lower. Prior to 

CHIPRA, the tax rate on roll-your-own tobacco and pipe tobacco was the 

same. 
 

Page 9 GAO-12-475 Tobacco Taxes 

Figure 3: Changes in Federal Excise Tax Rates as a Result of CHIPRA—for 

Cigarettes, Roll-Your-Own Tobacco, Pipe Tobacco, and Small Cigars 

a

The roll-your-own tobacco and pipe tobacco cigarette stick equivalent is based on the weight of 

0.0325 ounces of tobacco per cigarette stick using the Master Settlement Agreement conversion rate. 

CHIPRA significantly changed the federal excise tax rate on large cigars. 

Large cigars are unique among tobacco products in that the tax rate is ad 

valorem—a percentage of the manufacturer’s or importer’s sale price per 

thousand sticks—up to a maximum tax per thousand sticks. Before 

CHIPRA, large cigars were taxed at 20.72 percent of the manufacturer’s 

or importer’s sale price up to a maximum tax of $48.75 per thousand 

sticks. After CHIPRA, the ad valorem rate increased to 52.75 percent of 

the manufacturer’s or importer’s sale price, and the maximum tax per 

thousand sticks increased to $402.60 (see table 3). According to an 

industry association, the retail prices of premium handmade large cigars 

range from $3 to $20. A public health organization noted that smaller 

factory-made cigars that meet the legal definition of a large cigar can cost 

as little as $0.07 per cigar. 
 

Page 10 GAO-12-475 Tobacco Taxes 

Table 3: Federal Excise Tax Rates for Large Cigars, Before and After CHIPRA 

Tobacco 

product Unit of taxation 

Before 

CHIPRA

After 

CHIPRA 

Percentage 

increase

Large cigars Ad valorem rate based on manufacturer’s or importer’s 

sale price up to a maximum tax rate 

20.72% 52.75% 155%

Maximum tax per thousand sticks $48.75 $402.60 726%

Source: GAO analysis of the IRC. 

Figure 4 illustrates the tax structure for large cigars, before and after 

CHIPRA and includes three different scenarios. The sloped line 

represents the ad valorem rate, which becomes flat when it reaches the 

maximum tax per thousand cigars. The following are examples of the 

federal excise taxes manufacturers and importers would have to pay for 

differently priced large cigars, before and after CHIPRA (see examples 

corresponding with fig. 4): 

A. If the manufacturer’s or importer’s sale price per thousand large cigars 

is $100, before CHIPRA the ad valorem tax rate was $20.72 per 

thousand; after CHIPRA it became $52.75 per thousand. 

B. If the manufacturer’s or importer’s sale price per thousand large cigars 

is $500, before CHIPRA the tax rate was the maximum tax of $48.75 

per thousand; after CHIPRA it became $263.75 per thousand based 

on the new ad valorem tax rate. 

C. If the manufacturer’s or importer’s sale price per thousand large cigars 

is $800, before CHIPRA the tax rate was the maximum tax of $48.75 

per thousand; after CHIPRA it became $402.60, which is the new 

maximum tax rate per thousand. 
 

Page 11 GAO-12-475 Tobacco Taxes 

Figure 4: Changes in Federal Excise Tax Rates as a Result of CHIPRA—for Large 

Cigars under Three Different Scenarios 

Note: The sloped lines represent the ad valorem rates for large cigars before and after CHIPRA, with 

the lines becoming flat when they reach the maximum rates of $48.75 (before CHIPRA) and $402.60 

(after CHIPRA). 

Treasury is responsible for administering and collecting the federal excise 

tax on all tobacco products, among other things.17 In general, federal 

excise taxes are collected when tobacco products leave the domestic 

factory or, in the case of imports, when the products are released from 

 

17Treasury’s Alcohol and Tobacco Tax and Trade Bureau administers Chapter 52 of the 

IRC (26 U.S.C. Chapter 52) pursuant to section 1111(d) of the Homeland Security Act of 

2002, codified at 6 U.S.C. § 531(d). The Secretary of the Treasury has delegated various 

authorities through Treasury Department Order 120-01 (Revised), dated January 21, 

2003, to Treasury’s Alcohol and Tobacco Tax and Trade Bureau Administrator to perform 

the functions and duties in the administration and enforcement of this law. Treasury 

conducts audits and investigations to enforce civil and criminal laws relating to tobacco tax 

collection, sometimes referring criminal cases to the U.S. Attorney’s Office for prosecution. 

It also operates a tobacco laboratory, which conducts analyses to evaluate products for 

tax compliance and to support appropriate tax classification of different tobacco products. 
 

Page 12 GAO-12-475 Tobacco Taxes 

customs custody.18 Tobacco manufacturers and importers are required to 

obtain a Treasury permit to operate and must comply with Treasury’s 

recordkeeping, reporting, and other requirements.19 Tobacco product 

wholesalers and distributors are responsible for paying state and local 

excise taxes, but they are not required to obtain a Treasury permit and 

are not subject to Treasury recordkeeping requirements. Figure 5 shows 

the major steps in the tobacco supply chain, including the key points at 

which taxes are paid. 

Figure 5: Payment of Federal, State, and Local Excise Taxes in the Supply Chain for 

U.S. Tobacco Products 

Note: Supply chains can differ by manufacturer/importer, and this figure does not represent all of the 

steps in the distribution process. 

 

18While Treasury collects federal excise taxes from domestic manufacturers, the U.S. 

Customs and Border Protection within the Department of Homeland Security collects 

federal excise taxes on imported tobacco products. Where tobacco products are imported 

for distribution in the U.S. market and first deposited into a customs warehouse or foreign 

trade zone, the federal excise taxes become due when they are removed from the first 

warehouse, even when they are removed for transfer to another warehouse (26 U.S.C. 

§ 5703). 

19CHIPRA also extended Treasury’s permit requirement and related recordkeeping and 

reporting requirements to manufacturers and importers of processed tobacco. Treasury’s 

temporary regulatory definitions provide that the processing of tobacco includes, but is not 

limited to, stemming, fermenting, threshing, cutting, or flavoring the tobacco, or otherwise 

combining the tobacco with nontobacco ingredients. This definition is in effect until June 

22, 2012. 
 

Page 13 GAO-12-475 Tobacco Taxes 

In the Tobacco Control Act passed in June 2009, Congress amended the 

Food, Drug, and Cosmetic Act by inserting a chapter governing tobacco 

products and granting FDA authority to regulate the manufacture, 

distribution, and marketing of tobacco products under that chapter.20 The 

act aims to, among other things, reduce the use of tobacco products to 

decrease health risks and social costs associated with tobacco-related 

diseases. It recognizes that virtually all new users of tobacco products are 

adolescents under the age of 18. According to the law, FDA’s regulation 

of tobacco products is based, in part, on a public health standard rather 

than the safety and effectiveness standard by which FDA regulates 

pharmaceutical drugs and medical devices. For example, FDA can issue 

restrictions on the sale, distribution, advertising, and promotion of a 

tobacco product, if the public health standard is met. This standard 

requires FDA to demonstrate that the proposed regulation is appropriate 

for the protection of public health, based on a consideration of the risks 

and benefits to the population as a whole, including users and nonusers 

of tobacco products. 

The act specifies that FDA’s authority over tobacco products under 

Chapter IX of the Food, Drug, and Cosmetic Act shall apply to cigarettes, 

roll-your-own tobacco, cigarette tobacco, and smokeless tobacco, as well 

as any other tobacco products that the agency deems by regulation to be 

subject to such authority.21 FDA does not at present regulate pipe tobacco 

and small and large cigars. To implement the Tobacco Control Act, FDA 

has established the Center for Tobacco Products. 

 

20Pub. L. No. 111-31. The Tobacco Control Act amended Chapter IX of the Food, Drug, 

and Cosmetic Act, the main federal law that governs FDA’s work. Chapter IX provides the 

primary authority for FDA’s regulation of tobacco products. 

21Pub. L. No. 111-31, § 101. The act defines cigarette tobacco as any product that 

consists of loose tobacco that is intended for use by consumers in a cigarette and 

smokeless tobacco as any tobacco product that consists of cut, ground, powdered, or leaf 

tobacco and that is intended to be placed in the oral or nasal cavity. 

Tobacco Control Act Gave 

FDA Broad Authority to 

Regulate Tobacco 

Products to Protect Public 

Health 
 

Page 14 GAO-12-475 Tobacco Taxes 

Large federal excise tax disparities among tobacco products resulting 

from CHIPRA caused sizable market shifts from higher to lower-taxed 

products. According to our analysis and interviews with knowledgeable 

sources, the tax disparities created incentives for price sensitive 

manufacturers and consumers to substitute higher-taxed products with 

lower-taxed products. The market for roll-your-own tobacco shifted to pipe 

tobacco and the growth rate of the combined market increased after 

CHIPRA. Roll-your-own tobacco manufacturers shifted to pipe tobacco 

with minimal, if any, changes to the products, and consumers substituted 

pipe tobacco for use in roll-your-own cigarettes. At the same time, the 

cigar market shifted from small to large cigars, and the combined cigar 

market continued to grow after CHIPRA. 

Market trends for roll-your-own and pipe tobacco changed immediately 

after CHIPRA, with sales of pipe tobacco rising steeply while sales of rollyour-own tobacco plummeted. According to government officials and 

representatives of industry and nongovernmental organizations, 

manufacturers and consumers switched to lower-taxed pipe tobacco to 

make roll-your-own cigarettes. After CHIPRA, the federal excise tax on 

roll-your-own tobacco was over $20 per pound more than the tax on pipe 

tobacco, whereas before CHIPRA, the taxes on both products were the 

same. Figure 6 shows the market shift through monthly sales of roll-yourown and pipe tobacco from fiscal year 2001 through fiscal year 2011. 

Total annual sales of pipe tobacco grew from approximately 3.2 million 

pounds in fiscal year 2008, the last year before CHIPRA, to 30.5 million 

pounds in fiscal year 2011, representing an increase of about 869 

percent. Over the same period, total annual sales of roll-your-own 

tobacco declined from approximately 19.7 million pounds to 5.2 million 

pounds, a decrease of about 74 percent. According to the representatives 

of industry and nongovernmental organizations we interviewed, the shift 

can be mostly attributed to consumers switching from using roll-your-own 

tobacco to pipe tobacco in roll-your-own cigarettes, rather than to a 

sudden increase in pipe smoking. 

Large Tax Disparities 

among Similar 

Tobacco Products 

Triggered Significant 

Market Shifts to Avoid 

Higher Taxes 

Market Shifted from RollYour-Own Tobacco to Pipe 

Tobacco after CHIPRA 
 

Page 15 GAO-12-475 Tobacco Taxes 

Figure 6: Monthly and Annual U.S. Sales of Roll-Your-Own and Pipe Tobacco, Fiscal Years 2001-2011 

CHIPRA’s increase in the federal excise tax for roll-your-own tobacco did 

not dampen the overall sales of roll-your-own and pipe tobacco. Instead, 

the combined sales of roll-your-own and pipe tobacco increased because 

of the rapid growth in pipe tobacco sales following CHIPRA. Before 

CHIPRA, from October 2000 through March 2009, the combined average 

monthly growth rate was 0.63 percent; after CHIPRA, the combined 

average monthly growth rate increased to 2.00 percent. See Figure 7 for 

the trends in combined sales of roll-your-own and pipe tobacco from fiscal 

year 2001 through fiscal year 2011. 
 

Page 16 GAO-12-475 Tobacco Taxes 

Figure 7: Combined U.S. Sales of Roll-Your-Own and Pipe Tobacco, Fiscal Years 2001-2011 

According to government officials, representatives of nongovernmental 

organizations, and industry, after CHIPRA many manufacturers of rollyour-own tobacco switched to producing pipe tobacco in order to avoid 

higher taxes. According to these representatives and government 

officials, the new pipe tobacco products have minimal, if any, differences 

from roll-your-own tobacco. Roll-your-own tobacco and pipe tobacco are 

defined in the IRC by such factors as the use for which the product is 

suited and how they are offered for sale, as indicated by their 

appearance, type, packaging, and labeling. To meet the definition of pipe 

tobacco in the IRC and Treasury’s regulations,22 a product must be clearly 

labeled as pipe tobacco and not indicate other uses. The definitions of 

tobacco products in the IRC do not specify physical characteristics that 

 

22In June 2009, Treasury revised regulations on packaging and labeling roll-your-own and 

pipe tobacco to more clearly differentiate the two products. See table 4 for more 

information. 

Manufacturers Switched 

from Roll-Your-Own to 

Pipe Tobacco, and 

Consumers Began to Use 

Commercial Roll-YourOwn Machines 
 

Page 17 GAO-12-475 Tobacco Taxes 

would differentiate pipe tobacco from roll-your-own tobacco. 

Representatives of industry and nongovernmental organizations provided 

examples of current pipe tobacco brands that had been roll-your-own 

brands prior to CHIPRA, with minimal differences in the packaging and 

the appearance of the tobacco itself. We also found examples of Internet 

retailers signaling to customers in their marketing that pipe tobacco was 

suitable for smoking in roll-your-own cigarettes. One manufacturer of pipe 

tobacco had designed its label with three-letter markings, to indicate to 

customers the product’s similarity to brand-name cigarettes. For example, 

the marking MRD indicated Marlboro Red and CML indicated Camel 

Light. 

We approached 15 pipe tobacco manufacturers to ask about their 

companies’ actions in response to the CHIPRA tax changes. Each of the 

three tobacco manufacturers that agreed to speak with us explained that 

their companies switched from selling higher-taxed roll-your-own tobacco 

to lower-taxed pipe tobacco in order to stay competitive. One company 

changed the cut of its roll-your-own tobacco and labeled it as pipe 

tobacco, although a company representative acknowledged that there 

was no real difference between its pipe-cut tobacco and its roll-your-own 

tobacco. A representative from another company that switched from 

selling roll-your-own tobacco to selling pipe tobacco stated that she was 

not aware of any difference in the two products other than the federal 

excise tax rate. 

Data show that the total number of companies exclusively manufacturing 

pipe tobacco increased significantly since CHIPRA, while the number of 

companies exclusively manufacturing roll-your-own tobacco decreased 

sharply. Treasury emphasized that it is unclear whether these 

manufacturers modified their roll-your-own tobacco beyond reclassifying it 

as pipe tobacco. Data also show the number of companies producing 

both roll-your-own and pipe tobacco has slowly increased since 2007 

(see fig. 8). 
 

Page 18 GAO-12-475 Tobacco Taxes 

Figure 8: Number of Companies Producing Roll-Your-Own Tobacco, Pipe Tobacco, 

or Both, 2007-2011 

The rise in pipe tobacco sales coincided with the growing availability of 

commercial roll-your-own machines. Treasury officials stated that there 

has recently been significant growth in commercial roll-your-own 

machines. These machines enable customers to produce a carton of 

cigarettes using pipe tobacco and cigarette-paper tubes with filters. By 

using pipe tobacco instead of roll-your-own tobacco, customers are able 

to save almost $9 per carton in federal excise taxes.23 A common 

commercial roll-your-own machine can produce a carton of cigarettes in 

less than 10 minutes, providing a significant time saving compared with 

making roll-your-own cigarettes by hand. 

 

23Treasury officials also stated that processed tobacco, which is not subject to federal 

excise tax, is being used in these machines to make roll-your-own cigarettes. 
 

Page 19 GAO-12-475 Tobacco Taxes 

During our visit to a tobacco outlet store in Maryland, we used a 

commercial roll-your-own machine to make a carton of 200 cigarettes 

using pipe tobacco in about 8 minutes. We made a video showing this 

machine being used to make cigarettes (See 

http:www.gao.gov/multimedia/video#video_id=589493). The carton we 

made in Maryland cost about $25, which included state and federal 

excise taxes. The total price of $25 for our carton was about half the price 

of a carton of discount cigarettes in nearby stores that sold tobacco24 (see 

fig. 9). 

Figure 9: Examples of Maryland Retail Prices for Cartons of Various Types of 

Cigarettes 

a

The retail price does not include sales tax. 

b

These roll-your-own cigarettes were made in a commercial roll-your-own machine. 

CHIPRA’s 2009 changes in federal excise tax rates on tobacco products 

also resulted in an immediate shift in the cigar market, with sales of lowertaxed large cigars rising sharply while sales of higher-taxed small cigars 

dropped. Figure 10 shows the market shift through monthly sales of small 

and large cigars from fiscal year 2001 through fiscal year 2011. Total 

annual sales of large cigars increased from approximately 4.8 billion 

sticks in fiscal year 2008 to about 10.3 billion sticks in fiscal year 2011, 

representing an increase of about 116 percent. For the same period, the 

total annual sales of small cigars declined from 5.3 billion sticks to 0.8 

 

24This is not nationally representative because states have varying tobacco tax rates. 

According to the Campaign for Tobacco-Free Kids, state cigarette taxes vary from $0.17 

to $4.35 per pack, and pipe tax rates vary from a tax per ounce to a percent of 

manufacturer’s or wholesale price. Maryland’s cigarette tax is $2.00 per pack, and pipe 

tobacco tax is 15 percent of the wholesale price. The price shown for the roll-your-own 

cigarettes made in a commercial roll-your-own machine with pipe tobacco includes a $10 

fee charged by the store for the use of the machine. 

Cigar Market Shifted from 

Small to Large Cigars after 

CHIPRA 
 

Page 20 GAO-12-475 Tobacco Taxes 

billion sticks, a decrease of 85 percent. According to government officials 

and representatives of nongovernmental organizations, because weight is 

the only characteristic that distinguishes small cigars from large cigars, 

many cigar manufacturers made their small cigars slightly heavier to 

qualify for the large cigar tax rate and avoid higher taxes levied on small 

cigars after CHIPRA. Figure 10 shows an increase in large cigar sales in 

the months immediately prior to the tax change. Treasury officials stated 

that although they have not specifically investigated the cause of this 

increase, there was an incentive for retailers and wholesalers to purchase 

and stockpile large cigars after the date CHIPRA was signed into law 

(February 4, 2009) and before the tax increase went into effect (April 1, 

2009). In addition, these officials noted that a floor stocks tax is typically 

imposed to prevent stockpiling just before a tax increase, but the floor 

stocks tax imposed by CHIPRA did not apply to large cigars. 

Figure 10: Monthly and Annual U.S. Sales of Small and Large Cigars, Fiscal Years 2001-2011 
 

Page 21 GAO-12-475 Tobacco Taxes 

The combined sales for small and large cigars continued to increase after 

CHIPRA, though at a slightly lower rate. Before CHIPRA, from October 

2001 through March 2009, the combined average monthly growth rate 

was 0.75 percent, compared with a 0.17 percent growth rate from April 

2009 through September 2011. See figure 11 for trends in overall cigar 

sales from fiscal year 2001 through fiscal year 2011. 

Figure 11: Combined U.S. Sales of Small and Large Cigars, Fiscal Years 2001-2011 

While tax revenue collected for all smoking tobacco products from April 

2009 through the end of fiscal year 2011 amounted to $40 billion, we 

estimate that the market shifts from roll-your-own to pipe tobacco and 

from small to large cigars reduced federal revenue by a range of 

approximately $615 million to $1.1 billion for the same period. We 

estimated what the effect on tax revenue collection would have been if 

the sales trends for roll-your-own and pipe tobacco and for small and 

large cigars had not been affected by substitution between the products 

but had been affected by the increase in price due to the tax—in other 

words, if the market shifts resulting from the substitution of higher-taxed 

Market Shifts to Avoid 

Taxes Have Reduced 

Federal Revenue, and 

Treasury Has Limited 

Options to Respond 
 

Page 22 GAO-12-475 Tobacco Taxes 

products with lower-taxed products had not occurred. In this report, we 

refer to this estimated effect on federal tax revenue collection as revenue 

losses. Although Treasury has taken steps to respond to these market 

shifts, it has limited options. For example, Treasury has pursued 

differentiating between roll-your-own and pipe tobacco for tax collection 

purposes but faces challenges because the definitions of the two 

products in the IRC do not specify distinguishing physical characteristics. 

Furthermore, Treasury also has limited options to address the market 

shift to large cigars. 

We estimated that federal revenue losses due to the market shifts from 

roll-your-own to pipe tobacco and from small to large cigars range from 

$615 million to $1.1 billion. This range includes combined tax revenue 

losses for the roll-your-own and pipe tobacco markets, as well as the 

small and large cigar markets. We conducted analyses of data from 

Treasury and the Bureau of Labor Statistics to estimate tax revenue 

losses in these markets.25,26 Our methodology takes into account the 

expected fall in demand for a product following a price increase, holding 

other variables constant. To calculate the range of federal revenue 

losses, we included high and low estimates based on assumptions about 

the effect of a price increase on projected sales.27 Economic studies show 

that, when the price of a product increases, the quantity demanded for the 

product will adjust downward, decreasing at an estimated rate based on 

the quantity demanded for the product, that is, price elasticity.28 Based on 

our interviews with government officials and academics and our literature 

review, we determined that the price elasticity for the smoking tobacco 

 

25In the absence of this market shift due to differential tax rates, more tax revenue would 

have been collected because roll-your-own tobacco and small cigars had historically much 

higher levels of sales than pipe tobacco and large cigars, and after CHIPRA these tobacco 

products also had a much higher tax rate. 

26Cigarettes are taxed at the same rate as roll-your-own tobacco and small cigars, but the 

analysis does not take into account the likely impact of a similar market shift from 

cigarettes to pipe tobacco and large cigars. See appendix II for information on sales of 

cigarettes and other smoking tobacco products. 

27Using a somewhat similar approach, Treasury estimated that in 2010, over $400 million 

in revenue was lost due to the shift from roll-your-own to pipe tobacco. Treasury’s 

estimate did not take into account the expected decline in demand following a price 

increase. 

28For example, a price elasticity of demand of -0.6 means that when prices go up by 10 

percent, demand will decrease by 6 percent. 

Estimated Federal 

Revenue Losses from 

Market Shifts after 

CHIPRA Range from $615 

Million to $1.1 Billion 
 

Page 23 GAO-12-475 Tobacco Taxes 

products ranges from -0.6 to -0.3 for the low and high revenue estimates, 

respectively. Our projections also take into account the historic sales 

trends for these products and the tax component of the price.29 Appendix 

I contains more information on our methodology for developing these 

estimates. 

Treasury collected $573 million in tax revenue from roll-your-own and 

pipe tobacco from April 2009 through September 2011.30 We estimate 

that during the same period the market shift from roll-your-own to pipe 

tobacco reduced federal revenues by between $255 million and $492 

million (see fig. 12). 

 

29For a detailed explanation of this methodology, see Frank Chaloupka and Jidong 

Huang, “A Significant Cigarette Tax Rate Increase in Illinois Would Produce a Large, 

Sustained Increase in State Tobacco Tax Revenues” (Chicago, IL: University of Illinois at 

Chicago, Jan. 3, 2011, working paper). 

30That is about $228 million per year after CHIPRA compared with $25.5 million for fiscal 

year 2008. 

Tax Revenue Losses in the RollYour-Own and Pipe Tobacco 

Markets 
 

Page 24 GAO-12-475 Tobacco Taxes 

Figure 12: Estimated Revenue Losses for Roll-Your-Own and Pipe Tobacco 

a

Low projected revenue loss is calculated as the difference between the projected revenue in the low 

scenario and the actual collected revenue. When the actual revenue is higher than the low projected 

revenue, the estimated figure of $255 million includes the difference. 
 

Page 25 GAO-12-475 Tobacco Taxes 

Treasury collected $1.7 billion in tax revenue from small and large cigars 

from April 2009 through fiscal year 2011.31 We estimate that during that 

same period the market shift from small to large cigars reduced federal 

revenue by between $360 million to $559 million (see fig. 13).32,33

 

31That is about $680 million per year after CHIPRA compared with $217.5 million for fiscal 

year 2008. 

32Treasury estimates that $723 million in revenue was lost due to the shift from small to 

large cigars over the 2 years after CHIPRA was enacted. Treasury did not include the 

price elasticity of demand in their estimate. 

33As with the roll-your-own and pipe tobacco estimates, the low and high scenarios are 

calculated using the price elasticity of demand of -0.6 and -0.3, respectively. Because 

cigar taxes are based on price, our estimate included price data. Small cigar revenues 

were calculated by multiplying the number of unit sales in each month by the tax rate. 

Large cigar revenues were calculated by subtracting small cigar revenue from cigar 

revenue. Once the large cigar revenue was calculated, the average tax paid was 

estimated by dividing the large cigar revenue by the number of large cigar units. From 

March 2007 through March 2009, this average was 4.3 cents per stick. 

Tax Revenue Losses in the 

Small and Large Cigar Markets 
 

Page 26 GAO-12-475 Tobacco Taxes 

Figure 13: Estimated Revenue Losses for Small and Large Cigars 

a

Low projected revenue loss is calculated as the difference between the projected revenue in the low 

scenario and the actual collected revenue. When the actual revenue is higher than the low projected 

revenue, the estimated figure of $360 million includes the difference. 

Differentiating between roll-your-own and pipe tobacco for tax collection 

purposes presents challenges to Treasury because the definitions of the 

two products in the IRC are based on such factors as the use for which 

they are suited and how they are packaged and labeled for consumers 

and do not specify distinguishing physical characteristics. Treasury 

officials and representatives of nongovernmental organizations we spoke 

with stated that because the two products were taxed at the same rate 

prior to CHIPRA, there was no revenue-related reason to clarify the 

differences between the two products beyond the existing statutory 

definitions. However, according to Treasury comments in the Federal 

Register, the large differences in tax rates resulting from CHIPRA created 

Developing Standards to 

Differentiate between RollYour-Own and Pipe 

Tobacco Presents 

Challenges to Treasury 
 

Page 27 GAO-12-475 Tobacco Taxes 

an incentive for industry members to present roll-your-own tobacco as 

pipe tobacco products, thus enabling them to pay a lower tax rate.34

After the CHIPRA tax changes and the market shift from roll-your-own to 

pipe tobacco that immediately followed, Treasury took steps through 

rulemaking notices in an effort to more clearly differentiate the two 

products for tax collection purposes. However, Treasury has not yet 

issued a final rule to distinguish the two products based on physical 

characteristics. The tobacco industry members’ comments on the June 

2009 temporary rule and the July 2010 advance notice of proposed 

rulemaking highlighted the complexity and difficulties in developing 

objective standards that clearly differentiate the two tobacco products. 

Treasury also issued a ruling determining that retail establishments that 

make cigarette-making machines available for use by customers are 

manufacturers of tobacco products.35 However, a U.S. District Court 

enjoined Treasury’s enforcement of the ruling pending the outcome of a 

court case on this ruling, which was still pending as of March 2012. Table 

4 summarizes Treasury’s actions on roll-your-own and pipe tobacco 

following CHIPRA, the resulting tobacco industry comments, and the 

status of Treasury’s actions. 

 

3474 Fed. Reg. 29,401 (June 22, 2009). 

35Treasury refers to the machines as cigarette-making machines rather than roll-your-own 

machines. Treasury’s position is that the retailers who make these machines available for 

use are manufacturers of cigarettes. 
 

Page 28 GAO-12-475 Tobacco Taxes 

Table 4: Treasury Actions on Roll-Your-Own and Pipe Tobacco following CHIPRA, Industry Comments, and Status 

Date Treasury action Tobacco industry commentsd Status 

June 2009 Temporary rule.a Treasury revised 

regulations on packaging and labeling of 

roll-your-own and pipe tobacco to more 

clearly differentiate the two products. 

The temporary rule is set to expire in 

June 2012. 

 New requirements are 

insufficient to prevent 

misclassification of roll-your-own 

tobacco as pipe tobacco. 

 Alternative standards based on 

physical characteristics are 

suggested. 

 Market continued to shift 

from roll-your-own to pipe 

tobacco. 

July 2010 Advance notice of proposed 

rulemaking.b

 Treasury requested public 

comments on proposed standards to 

differentiate between roll-your-own and 

pipe tobacco based upon physical 

characteristics. Treasury reopened the 

notice requesting comments in August 

2011.c

 Significant differences in views 

on proposed standards are 

expressed. 

 Treasury has not issued a 

subsequent rulemaking 

establishing standards to 

differentiate roll-your-own 

and pipe tobacco. 

 Market shift from roll-yourown to pipe tobacco 

continued. 

September 2010 Ruling on cigarette-making 

machines. Treasury determined that 

the owner of a retail establishment who 

facilitates the making of cigarettes by or 

for others by providing the use of 

commercial cigarette-making machines 

for use on the premises is engaged in 

the business of a tobacco product 

manufacturer and must obtain a 

Treasury permit to engage in such 

business. 

 A manufacturer of these 

machines sued Treasury, 

and a U.S. District Court 

enjoined Treasury’s 

enforcement of the rule 

pending the outcome of the 

case. 

 Use of cigarette-making 

machines in retail 

establishments is growing. 

Source: GAO analysis of Treasury information. 

a

74 Fed. Reg. 29,401 (June 22, 2009). 

b

75 Fed. Reg. 42,659 (July 22, 2010). 

c

76 Fed. Reg. 52,913 (Aug. 24, 2011). 

d

Treasury received comments from a range of tobacco companies and associations, and the 

comments cited in this table do not reflect industry consensus. Rather, they are intended to 

summarize key comments made by companies or associations. 

 Temporary rule36 on packaging and labeling requirements: Following 

the CHIPRA tax changes that took effect in April 2009, Treasury 

 

36A temporary rule is issued without an advance notice of proposed rulemaking, but in the 

publication of the rule the agency may request comments and state that it may modify the 

rule in response to the comments. 
 

Page 29 GAO-12-475 Tobacco Taxes 

published a temporary rule in June 2009, set to expire in June 2012, 

that outlined new labeling and packaging requirements for roll-yourown and pipe tobacco to more clearly differentiate the two products. 

The temporary rule required that, to be classified as pipe tobacco, the 

packaging must clearly indicate the product type by bearing the words 

“pipe tobacco” wherever the brand name appears, and that the 

packaging cannot suggest a use other than as pipe tobacco. Treasury 

also stated in the temporary rule that it was evaluating analytical 

methods and other standards to differentiate between roll-your-own 

tobacco and pipe tobacco, and it expected to publish rulemaking 

proposals on this subject for comment in the future. In response to 

this temporary rule, Treasury received comments from tobacco 

industry members indicating that its new labeling and packaging 

requirements were insufficient to prevent the misclassification of rollyour-own tobacco as pipe tobacco and that standards to further 

differentiate the products were urgently needed. Treasury received 

comments from industry members proposing alternative standards to 

distinguish between roll-your-own and pipe tobacco based on physical 

characteristics such as moisture content, cut, and variety of tobacco 

used. The market shift from roll-your-own to pipe tobacco continued 

despite Treasury’s issuance of this temporary rule. 

 Advance notice of proposed rulemaking37 on standards to differentiate 

roll-your-own and pipe tobacco: In July 2010, Treasury published an 

advance notice of proposed rulemaking issuing a request for public 

comments on standards and characteristics proposed by commenters 

to differentiate between roll-your-own and pipe tobacco, but it has not 

issued a subsequent rule proposing the standards it would use. In the 

notice, Treasury discussed the heightened need for more regulatory 

detail to clarify the difference between the two products and stated its 

primary concern that the standards be objective and enforceable. The 

industry members’ comments to Treasury highlighted the complexity 

and difficulties in developing objective standards that clearly 

differentiate the two tobacco products. Industry members disagreed 

on the standards and physical characteristics that should be 

implemented, with some commenters noting that the two products 

overlap greatly. Some industry commenters also expressed concerns 

that proposed standards could easily be manipulated by consumers. 

 

37An advance notice of proposed rulemaking can announce and explain agencies’ plans 

to solve problems and accomplish goals and give interested persons an opportunity to 

submit comments to improve the final regulation. 
 

Page 30 GAO-12-475 Tobacco Taxes 

For example, a proposed standard for the cut width of pipe tobacco 

could be compromised by a consumer using basic kitchen or 

hardware appliances to grind wider cut tobacco into a smaller width 

for use in cigarettes. 

In August 2011, Treasury issued a second advance notice of 

proposed rulemaking, thereby reopening the period for receiving 

comments on the proposed standards. Treasury said it did so 

because it had received an additional set of proposed standards after 

the original comment period closed. Treasury received a number of 

additional comments, many by the same companies that commented 

on the earlier notices, and the comments continued to reflect 

significant differences within the industry on standards that define and 

distinguish roll-your-own tobacco from pipe tobacco. This second 

comment period closed in October 2011. As of March 2012, Treasury 

has not issued a subsequent rulemaking based on the comments 

received, and no anticipated issuance date has been communicated. 

Throughout this period, the market shift from roll-your-own to pipe 

tobacco has continued, with negative impacts on federal revenue. 

Appendix III contains a more detailed summary of the Federal 

Register notices issued by Treasury related to differentiating between 

roll-your-own and pipe tobacco and the industry comments in 

response to these notices. 

 Ruling on commercial cigarette-making machines: Treasury also 

issued a ruling in September 2010 determining that retailers who 

make commercial cigarette-making machines available for use on 

their premises are tobacco product manufacturers and are thus 

subject to the permit and tax requirements of the IRC. In October 

2010, RYO Machine Rental LLC, the maker of the RYO Filling 

Stations, sued Treasury over this ruling. In December 2010, a federal 

district court judge in Ohio ordered a preliminary injunction on the 

enforcement of the Treasury rule, and the case is currently on appeal 

in the U.S. Court of Appeals for the Sixth Circuit. During the period 

that enforcement has been delayed, several organizations told us that 

businesses continue to maintain these machines on their premises, 

and the number of machines in use has increased. These machines, 

which cost the retailer about $30,000 each, have also been the focus 

of government regulation at the state level. A number of states are 

taking action against commercial roll-your-own machines, including 

Arkansas, Michigan, New Hampshire, and West Virginia. For 
 

Page 31 GAO-12-475 Tobacco Taxes 

example, Arkansas passed a law prohibiting tobacco retailers 

licensed, permitted, appointed, or commissioned under Arkansas 

tobacco tax law from possessing or using the machines.38

CHIPRA’s changes to the federal excise tax rate on large cigars also 

present challenges to Treasury. The first challenge resulted from 

CHIPRA’s tax rate on the most inexpensive large cigars, which was 

significantly lower than its rate for small cigars. This disparity in tax rates 

provided an incentive for some small cigar manufacturers to make 

minimal changes to their product to meet the legal definition of a large 

cigar. The second challenge came about because CHIPRA’s rate for 

large cigar taxes resulted in more large cigar manufacturers and 

importers paying taxes based on the manufacturer’s or importer’s sale 

price rather than simply paying the maximum set tax rate. This added 

complexity to Treasury’s monitoring and enforcement of large cigar tax 

payments and appears to have motivated some manufacturers and 

importers of large cigars to restructure their market transactions to lower 

the taxes they have to pay. 

The first challenge resulted from CHIPRA’s changes to the federal excise 

tax rate on large cigars, which created an incentive for small cigar 

manufacturers to switch to making large cigars when the manufacturer’s 

or importer’s sale price is less than $95.42 per thousand cigars. Before 

CHIPRA, there was little incentive for small cigar manufacturers to alter 

their product to meet the definition of a large cigar. Because small cigars 

are taxed at a fixed rate, and large cigars are taxed at an ad valorem rate, 

when CHIPRA raised the small cigar tax from $1.83 per thousand to 

$50.33 per thousand, manufacturers of inexpensive small cigars had an 

incentive to change their product to fit the lower-taxed large cigar 

category. According to Treasury officials and other industry experts, prior 

to CHIPRA, many small cigars weighed close to 3 pounds per thousand 

sticks, which is the dividing line between small and large cigars set by the 

IRC.39 Small cigars that weighed just under or exactly 3 pounds per 

thousand sticks would be able to qualify as large cigars with minimal 

changes. After CHIPRA, the same companies could use the same 

machines to add a small amount of weight to their product, turning small 

 

38Ark. Code Ann. § 26-57-263. 

39The IRC does not distinguish small and large cigars by any characteristic other than 

weight. 

CHIPRA’s Changes to Tax 

Rates on Large Cigars Also 

Present Challenges to 

Treasury 
 

Page 32 GAO-12-475 Tobacco Taxes 

cigars into a product legally defined and taxed as large cigars. For 

example, manufacturers could add weight by packing the tobacco more 

tightly. Some manufacturers then changed their labels from “small cigars” 

to “filtered cigars” or “cigars”—often with the same packaging and design. 

For example, if a manufacturer sold cigars for $50 per thousand before 

CHIPRA, by manufacturing small cigars instead of large cigars, it would 

pay $1.83 per thousand in taxes, a tax savings of $8.53 per thousand. 

After CHIPRA, the same manufacturer selling cigars for $50 per thousand 

would pay $26.38 per thousand in taxes, a tax savings of $23.95 per 

thousand, by manufacturing large cigars instead of small cigars (see fig. 

14). Treasury officials stated that the agency lacks the authority to 

remedy the tax revenue losses resulting from manufacturers’ legitimate 

modifications of small cigars to qualify them for the lower tax rate on large 

cigars. 

Figure 14: Post-CHIPRA Incentives for Some Manufacturers to Switch from Small to Large Cigars 

Note: The large cigar tax structure before CHIPRA is represented on the left side of the figure, with 

the sloped line showing the ad valorem rate and the line becoming flat upon reaching the maximum 

rate of $48.75 per thousand large cigars. For space reasons, the right side of the figure does not 

include the maximum rate of $402.60 per thousand large cigars. 

The second challenge resulting from CHIPRA’s changes to tax rates on 

large cigars is the complexity that has been added to Treasury’s efforts to 
 

Page 33 GAO-12-475 Tobacco Taxes 

monitor and enforce tax payments because many more manufacturers 

and importers must now determine the correct tax by applying the tax rate 

to the manufacturer’s or importer’s sale price per stick (ad valorem) rather 

than simply paying the maximum set tax rate. According to Treasury 

officials, prior to CHIPRA, the majority of domestic manufacturers of large 

cigars paid the federal excise tax at the maximum rate of $48.75 per 

thousand cigars. Specifically, manufacturers or importers that sold large 

cigars priced at $235.30 per thousand and above paid the set maximum 

tax. The increase in the large cigar maximum tax after CHIPRA resulted 

in many more manufacturers and importers of large cigars paying taxes 

based on the ad valorem rate, according to Treasury officials. Currently, 

the maximum tax rate does not apply until the manufacturer’s or 

importer’s price is $763.22 per thousand or above, and then, the 

maximum rate is $402.60 per thousand. For example, if a manufacturer 

sold large cigars for $400 per thousand, before CHIPRA, it would pay 

$48.75—based on the maximum tax. After CHIPRA, the manufacturer’s 

tax would increase to $211 per thousand—based on the ad valorem rate. 

If the manufacturer is able to lower its price for the large cigar product 

from $400 to $300 per thousand, its tax would decrease to $158.25 per 

thousand, a tax savings of $52.75 per thousand. Before CHIPRA, if the 

manufacturer had lowered its price from $400 to $300, its tax rate would 

have remained at the maximum rate of $48.75 (see fig. 15). 
 

Page 34 GAO-12-475 Tobacco Taxes 

Figure 15: Post-CHIPRA Incentives for Some Manufacturers and Importers to Lower 

the Sale Price of Large Cigars 

Note: The sloped lines represent the ad valorem rates for large cigars before and after CHIPRA, with 

the lines becoming flat when they reach the maximum rates of $48.75 (before CHIPRA) and $402.60 

(after CHIPRA) per thousand large cigars. 

After CHIPRA, according to Treasury officials, some large cigar 

manufacturers and importers began to restructure their market 

transactions to lower the manufacturer’s or importer’s sale price for large 

cigars in order to obtain the tax savings of a lower ad valorem rate, 

creating enforcement challenges. These Treasury officials stated that 

some manufacturers and importers are “structuring” or “layering” sales 

transactions by including an additional transaction at a low price before 

the sale to the wholesaler or distributor, and using this low initial price to 

calculate the tax. This transaction is conducted with an intermediary that 

may have a special contract arrangement with the manufacturer or 

importer. A large markup may then be added to the intermediary’s 

subsequent sale to the wholesaler or distributor. This added transaction 

effectively lowers the manufacturer’s or importer’s sale price, and thus 

reduces the taxes collected. According to Treasury officials, these layered 
 

Page 35 GAO-12-475 Tobacco Taxes 

transactions have become more common after CHIPRA. Treasury 

officials noted that manufacturers and importers of large cigars have 

approached the agency for advice on different proposals to structure their 

sales transactions to lower their taxes and still comply with the law. They 

also stated that Treasury has not determined the legality of all of the 

proposals under consideration, and that while Treasury can investigate 

individual cases, its authority to enforce additional tax collection from 

these kinds of large cigar transactions is limited. Officials stated that 

Treasury is carefully examining the tobacco importer and manufacturer 

pricing arrangements and taking corrective actions where appropriate on 

a case by case basis. 

The impact of the federal excise tax increases and the resulting actions 

by industry to mitigate the CHIPRA tax increase on large cigars are 

evidenced by large cigar pricing trends. Prior to CHIPRA, the average 

manufacturer’s or importer’s sale price for large cigars was $244 per 

thousand, Treasury officials stated. After the CHIPRA tax increases, the 

average manufacturer’s or importer’s sale price dropped to $189 per 

thousand. According to Treasury officials, since large cigar federal excise 

taxes increased by a minimum of 155 percent, and the federal excise tax 

is included in the sale price, large cigar manufacturer’s and importer’s 

sale prices were expected to increase, not decrease. 
 

Page 36 GAO-12-475 Tobacco Taxes 

When the Tobacco Control Act amended the Food, Drug, and Cosmetic 

Act in June 2009, it granted FDA immediate regulatory authority over four 

tobacco products, including cigarettes and roll-your-own tobacco, but did 

not specify authority over pipe tobacco and small and large cigars.40

According to the law, FDA has the authority to deem by regulation any 

other tobacco products, including pipe tobacco and small and large 

cigars, to be subject to the tobacco provisions in Chapter IX of the Food, 

Drug, and Cosmetic Act.41 Deeming additional products to be subject to 

these tobacco provisions of the Food, Drug, and Cosmetic Act requires 

FDA to go through the process of developing and issuing a regulation 

(known as the rulemaking process). 

Because FDA does not currently regulate pipe tobacco and small and 

large cigars, these products are not subject to the tobacco product 

provisions in Chapter IX of the Food, Drug, and Cosmetic Act or 

regulations that FDA has issued since June 2009 to implement the 

Tobacco Control Act. Some of act’s provisions and key FDA regulations 

address, for example, (1) the use of characterizing flavors, (2) the sale 

and distribution of tobacco products, and (3) the requirements for new 

health warnings depicting negative health consequences of smoking: 

 Ban on the use of characterizing flavors: FDA implemented a ban on 

cigarettes with characterizing flavors in September 2009 (with the 

 

40The Food, Drug, and Cosmetic Act and the IRC each maintain their own definitions of 

tobacco products, including the smoking tobacco products discussed in this report. The 

laws and implementing regulations of the Food, Drug, and Cosmetic Act utilize the 

definitions found at 21 U.S.C. § 387. The laws and implementing regulations of the IRC 

utilize the definitions found at 26 U.S.C. § 5702. These statutes have slightly different 

definitions for cigarettes and roll-your-own tobacco. The IRC's definition of a cigar is 

slightly different from the Food, Drug, and Cosmetic Act's definition of a little cigar. In 

addition, while the IRC defines pipe tobacco, the Food, Drug, and Cosmetic Act does not. 

41Pub. L. No. 111-31, § 101(b). The law states that “[t]obacco products ... shall be 

regulated by the Secretary [of Health and Human Services] under this chapter ...” and that 

“[t]his chapter shall apply to all cigarettes, cigarette tobacco, roll-your-own tobacco, and 

smokeless tobacco and to any other tobacco products that the Secretary by regulation 

deems to be subject to this chapter.” 

FDA Currently 

Regulates Cigarettes 

and Roll-Your-Own 

Tobacco but Not Pipe 

Tobacco and Cigars 
 

Page 37 GAO-12-475 Tobacco Taxes 

exception of tobacco or menthol).42 However, pipe tobacco and small 

and large cigars—some of which look similar to cigarettes (see fig. 

1)—are available in multiple flavors because this Tobacco Control Act 

provision does not apply to these products. Smokers can make rollyour-own cigarettes with flavored pipe tobacco and buy cigars in 

candy, berry, fruit, or other flavors. According to the U.S. Surgeon 

General, the growing popularity of cigars among younger adults 

(those under the age of 30) appears to be linked to the marketing of 

flavored tobacco products, including cigars, that might be expected to 

be attractive to youth.43

 Restrictions on the sale and distribution of cigarettes and smokeless 

tobacco to protect children and adolescents:44 Pipe tobacco and small 

and large cigars are not subject to FDA’s rule containing numerous 

youth access and marketing restrictions that was issued in March 

2010.45 One restriction generally prohibits the sale and distribution of 

individual cigarettes or packs containing fewer than 20 cigarettes.46 In 

contrast, cigars can be sold individually, and filtered cigars are often 

sold in packs containing fewer than 20. A second restriction generally 

 

4221 U.S.C. § 387g. The law states that “a cigarette or any of its component parts 

(including the tobacco, filter, or paper) shall not contain, as a constituent (including a 

smoke constituent) or additive, an artificial or natural flavor (other than tobacco or 

menthol) or an herb or spice, including strawberry, grape, orange, clove, cinnamon, 

pineapple, vanilla, coconut, licorice, cocoa, chocolate, cherry, or coffee, that is a 

characterizing flavor of the tobacco product or tobacco smoke.” On April 4, 2012, the 

World Trade Organization (WTO) Appellate Body issued a report finding that this 

restriction is inconsistent with the United States’ WTO obligations. Unless the Dispute 

Settlement Body rejects the report by consensus, the United States has 30 days from the 

time the report is adopted to state its intention regarding the implementation of the 

recommendations of the Appellate Body. 

43U.S. Department of Health and Human Services, Preventing Tobacco Use Among Youth 

and Young Adults: A Report of the Surgeon General (Atlanta, GA: U.S. Department of 

Health and Human Services, Centers for Disease Control and Prevention, National Center 

for Chronic Disease Prevention and Health Promotion, Office on Smoking and Health, 

2012). 

4475 Fed. Reg. 13,225 (Mar. 19, 2010) (codified in 21 C.F.R. pt. 1140).These restrictions 

apply to roll-your-own tobacco, and the rule stipulates that the definition of a cigarette 

“[i]ncludes tobacco, in any form, that is functional in the product, which, because of its 

appearance, the type of tobacco used in the filler, or its packaging and labeling, is likely to 

be offered to, or purchased by, consumers as a cigarette or as roll-your-own tobacco.” 

4521 C.F.R. pt. 1140. 

4621 C.F.R. § 1140.14. 
 

Page 38 GAO-12-475 Tobacco Taxes 

requires that retail sales of cigarettes and smokeless tobacco be 

conducted in a direct, face-to-face exchange.47 This restriction does 

not apply to pipe tobacco and cigars, and these products are sold on 

the Internet. A third restriction bans brand-name sponsorship of 

sporting and cultural events by manufacturers, distributors, or retailers 

of cigarettes and smokeless tobacco48 and does not currently apply to 

pipe tobacco and cigars. A cigar company recently signed a multiyear 

sponsorship deal for a major collegiate sporting event, but the deal 

was canceled due to public pressure, as has been reported in the 

press.49

 Requirements for new health warnings depicting negative health 

consequences of smoking: Pipe tobacco and cigar packs are not 

subject to FDA’s rule that requires each cigarette pack and 

advertisement to bear one of nine new textual warning statements 

accompanied by color graphics, issued in June 2011.50 According to 

the law, the new warnings must cover the top half of the front and 

back of cigarette packs and at least 20 percent of cigarette 

advertisements and must contain color graphics depicting the 

negative health consequences of smoking.51 FDA selected nine color 

 

4721 C.F.R. § 1140.14. An exception is made for vending machines and self-service 

displays that are located in facilities where no person under the age of 18 is present, or 

permitted to enter, at any time. 

4821 C.F.R. § 1140.34. The regulation does not ban a manufacturer, distributor, or retailer 

from sponsoring sporting and cultural events in the name of the corporation that 

manufactures the tobacco product, provided that, among other things, the corporate name 

does not include any brand name used for any brand of cigarettes or smokeless tobacco. 

49In December 2011, the parent company of Camacho Cigars, according to a company 

press release, signed a 3-year sponsorship deal with the Orange Bowl Committee, a 

nonprofit organization that stages an annual football game and the supporting Orange 

Bowl Festival in South Florida. The press release stated that under the sponsorship 

agreement, Camacho Cigars intended to have a substantial presence at Sun Life Stadium 

in Miami Gardens, FL, with cigar lounges for football fans and a special Camacho Club 

Lounge at the Orange Bowl Game Day Fan Zone, the largest pregame event. News 

organizations reported that the Camacho Cigars logo had been featured on the official 

Orange Bowl website until the sponsorship agreement was canceled in response to 

appeals from three U.S. senators and public health groups urging the Orange Bowl 

Committee to call off the deal that promoted tobacco use. 

50Most cigar packs and some individual cigars sold in the United States are required to 

display a Surgeon General warning as the result of an agreement reached in 2000 

between the Federal Trade Commission and seven largest cigar companies. There are no 

federal requirements for pipe tobacco packages to display a Surgeon General warning. 

51Pub. L. No. 111-31, § 201. 
 

Page 39 GAO-12-475 Tobacco Taxes 

graphic health warning messages after reviewing relevant scientific 

literature, 1,700 public comments, and the results of its experimental 

18,000-person study to assess the effectiveness of the warnings. 

While the Tobacco Control Act mandates that the warnings take effect 

no later than 15 months after FDA issues regulations, that is, by 

September 2012, pending litigation may impact implementation.52

FDA indicated its interest in deeming additional tobacco products to be 

subject to the agency’s tobacco product authorities in the four recent 

issues of the U.S. government’s semiannual regulatory agenda.53 In the 

spring and fall 2010 agendas, FDA announced that it planned to issue a 

proposed rule that would deem cigars to be subject to the provisions of 

the Food, Drug, and Cosmetic Act.54 In the spring and fall 2011 agendas, 

FDA announced that it planned to broaden the proposed rule’s scope to 

encompass all products that meet the statutory definition of “tobacco 

product”55 under Chapter IX of the Food, Drug, and Cosmetic Act.56 The 

fall 2011 announcement, the most recent, indicated that the proposed rule 

would be issued in December 2011; however, FDA had not issued the 

proposed rule as of March 2012, and FDA officials told us that developing 

the rule is taking longer than they expected. 

A typical rulemaking process consists of three basic phases—initiation of 

rulemaking actions, development of proposed rules, and development of 

 

52In August 2011, several tobacco companies filed a lawsuit to stop FDA from 

implementing the new warning requirements. In February 2012, the U.S. District Court for 

the District of Columbia granted the plaintiff’s motion for summary judgment and ordered a 

permanent injunction to halt FDA from enforcing the rule until 15 months after resolution of 

the plaintiff’s claim on the merits. As of March 2012, the case is on appeal before the U.S. 

Court of Appeals for the District of Columbia Circuit. 

53The semiannual agenda, also known as unified agenda, summarizes the rules and 

proposed rules that each federal agency expects to issue. 

5475 Fed. Reg. 21,791 (Apr. 26, 2010) and 75 Fed. Reg. 79,771 (Dec. 10, 2010). 

55Section 201(rr)(1) of the Food, Drug, and Cosmetic Act defines the term “tobacco 

product” as any product made or derived from tobacco that is intended for human 

consumption, including any component, part, or accessory of a tobacco product (except 

for raw materials other than tobacco used in manufacturing a component, part, or 

accessory of a tobacco product). By comparison, according to the IRC, “‘[t]obacco 

products’ means cigars, cigarettes, smokeless tobacco, pipe tobacco, and roll-your-own 

tobacco.” 

5676 Fed. Reg. 40,052 (July 7, 2011) and 77 Fed. Reg. 7,946 (Feb. 13, 2012). 
 

Page 40 GAO-12-475 Tobacco Taxes 

final rules—and involves internal review by the rulemaking agency, 

external review by the Office of Management and Budget, and public 

comments on proposed rules (fig. 16). In developing the proposed rule 

deeming additional products, including pipe tobacco and cigars, to be 

subject to the agency’s regulatory authority, FDA is in the second phase 

of the process. FDA officials told us that, as of March 2012, the proposed 

rule was undergoing review by the agency and the Department of Health 

and Human Services and that FDA had not yet submitted the proposed 

rule to the Office of Management and Budget. In a 2009 report on the 

federal rulemaking process, we found—based on an analysis of 16 rules 

at different federal agencies, including FDA—that the average time 

needed to initiate, develop, and complete a rulemaking was about 4 

years, with considerable variation among agencies and rules.57

 

57The time needed to complete the 16 rules ranged from 1 to 14 years. One of the 

recommendations we made in the report was that FDA routinely track major milestones for 

significant rules in its rulemaking process. See GAO, Federal Rulemaking: Improvements 

Needed to Monitoring and Evaluation of Rules Development as Well as to the 

Transparency of OMB Regulatory Reviews, GAO-09-205 (Washington, D.C.: Apr. 20, 

2009). 

However, FDA does not generally track rulemaking milestones during the early phases of 

rule development, that is, before the agency prepares proposed rules for publication in the 

Federal Register. FDA informed us that it takes several actions to track major milestones, 

such as maintaining the Federal Register Document Tracking System database to track 

the progress of all its Federal Register documents through the agency’s rule development 

and clearance process and holding monthly and quarterly meetings where senior agency 

officials discuss major milestones in the rulemaking process for potentially significant 

regulations. 
 

Page 41 GAO-12-475 Tobacco Taxes 

Figure 16: Basic Phases in FDA’s Rulemaking Process 

FDA will be able to exercise authority over the deemed products once the 

rulemaking process is completed and the final rule is published in the 

Federal Register. At that time, the deemed products will be subject to the 

provisions of Chapter IX the Food, Drug, and Cosmetic Act that are 

applicable to tobacco products in general. Examples of such provisions 

include a requirement for annual registration with FDA of establishments 

engaged in the manufacture of tobacco products, payment of user fees by 

manufacturers and importers of specified classes of tobacco products, as 

well as restrictions and penalties for misbranded products. However, if 

FDA decides to expand the scope of its existing regulations applicable to 

cigarettes and roll-your-own tobacco to encompass the deemed products, 

it will have to amend those regulations through the rulemaking process. 

For example, FDA would have to amend its rule covering the sale and 

distribution restrictions for cigarettes and smokeless tobacco in order to 

make it applicable to the deemed products. 

Federal legislation has aimed to discourage tobacco use and raise 

revenues by increasing excise taxes on tobacco products. In 2009, 

Congress passed CHIPRA, which increased taxation on all smoking 

tobacco products, but by different levels for pipe tobacco and for large 

cigars. Also in 2009, Congress passed the Tobacco Control Act, which 

gave FDA immediate regulatory authority over four tobacco products, 

including cigarettes and roll-your-own tobacco, but did not specify 

authority over pipe tobacco and small and large cigars. 

Conclusions 
 

Page 42 GAO-12-475 Tobacco Taxes 

In equalizing the federal excise tax rates on small cigars and roll-yourown tobacco with the tax rate on cigarettes, CHIPRA was responding to 

concerns that these products were increasingly used as substitutes to 

factory-made cigarettes. However, by introducing large tax disparities 

between cigarettes, roll-your-own tobacco, and small cigars, on the one 

hand, and pipe tobacco and large cigars, on the other, CHIPRA has 

contributed to the substitution of higher-taxed tobacco products with 

lower-taxed products. Sales of the lower-taxed pipe tobacco and large 

cigars saw significant growth following CHIPRA, as manufacturers and 

consumers sought to take advantage of lower-taxed products. We 

estimate that this tax avoidance has resulted in between approximately 

$615 million and $1.1 billion in lost federal revenue since 2009. 

Treasury has not succeeded in addressing the continued tax avoidance 

behavior reflected in the market shifts to pipe tobacco and to large cigars. 

In the absence of legislative changes, Treasury has limited options for 

effective action. First, roll-your-own and pipe tobacco are similar and, in 

some cases, may be substitutable products, and the IRC lacks specificity 

on how they should be distinguished based on physical characteristics. 

Treasury is currently considering and analyzing various proposals to more 

clearly and objectively differentiate the two products based on their 

physical characteristics. However, the lack of consensus on which 

characteristics or criteria truly define and differentiate roll-your-own from 

pipe tobacco reveals the complexity and difficulty in attempting to develop 

standards and tests to distinguish the products from each other. In 

addition, there is the concern that products could easily be manipulated to 

negate any newly established standards or tests. 

Because small and large cigars are distinguished in the IRC only by 

weight, and because many small cigars already weighed at or close to the 

3 pounds per thousand threshold for classification as large cigars, many 

small cigar manufacturers were able to legally shift to the lower-taxed 

large cigar category with minimal changes to their products. In addition, 

the large cigar tax structure, which consists of an ad valorem tax rate up 

to a maximum rate, is complex and creates an incentive to lower the 

manufacturer’s or importer’s sale price to avoid paying higher federal 

excise taxes. 

FDA, which implements the Tobacco Control Act, currently regulates 

cigarettes and roll-your-own tobacco but does not regulate pipe tobacco 

and small and large cigars. These regulatory disparities make pipe 

tobacco and small and large cigars more accessible and attractive to 

current and potential smokers. While FDA announced its intent to issue a 
 

Page 43 GAO-12-475 Tobacco Taxes 

proposed rule that would subject additional products, including pipe 

tobacco and small and large cigars, to its regulation, it had not issued the 

proposed rule as of March 2012. 

Disparities in tax rates on smoking tobacco products have negative 

revenue implications because they create incentives for manufacturers 

and consumers to substitute higher-taxed products with lower-taxed 

products. In light of that fact, as Congress continues its oversight of 

CHIPRA and Tobacco Control Act implementation, it should consider 

modifying tobacco tax rates to eliminate significant tax differentials 

between similar products. Specifically, Congress should consider 

equalizing tax rates on roll-your-own and pipe tobacco and, in 

consultation with Treasury, also consider options for reducing tax 

avoidance due to tax differentials between small and large cigars. 

We provided a draft of this report to the Secretary of the Treasury and the 

Secretary of Health and Human Services for their review and comment. 

We received technical comments from Treasury and the U.S. Department 

of Health and Human Services, which we have incorporated in the report 

as appropriate. We also received written comments from Treasury, which 

are reprinted in appendix IV. 

Treasury generally agreed with our overall conclusion that CHIPRA’s 

introduction of large tax disparities between similar products contributed 

to the substitution of higher-taxed tobacco products with lower-taxed 

products. Treasury also agreed with our observation concerning 

modifying tobacco tax rates to eliminate significant tax differentials 

between similar products, which is consistent with our Matter for 

Congressional Consideration. 

Treasury noted our use of the term “revenue losses” and commented that 

our estimates did not pertain to actual losses of revenues but rather were 

estimates of revenue increases that would be realized if Congress were 

to change the law to eliminate the tax disparities or had the market shifts 

due to the disparities not occurred. We state in the report that our 

analysis does not incorporate the hypothetical case of equal tax rates 

among smoking products; rather, we estimate the revenues Treasury 

would have collected under current law—but in the absence of the market 

shifts from higher-taxed products to lower-taxed products. The difference 

between the revenues collected under current law and our estimate of the 

Matter for 

Congressional 

Consideration 

Agency Comments 

and Our Evaluation 
 

Page 44 GAO-12-475 Tobacco Taxes 

higher revenues that would have been due in the absence of the market 

shifts is what we refer to as “revenue losses.” 

In response to Treasury’s comment about the use of this term, we note 

that Treasury’s Alcohol and Tobacco Tax and Trade Bureau developed its 

own estimates of what it termed revenue losses stemming from the 

market shifts involving these products, and we discuss these estimates in 

our report. In addition, the Alcohol and Tobacco Tax and Trade Bureau’s 

2011 Annual Report uses the term revenue losses when estimating the 

effect of the market shifts since CHIPRA. Appendix I contains a more 

detailed discussion of our methodology for developing our estimates. 

We are sending copies of this report to the appropriate congressional 

committees and to the Secretaries of Health and Human Services and 

Treasury, and other interested parties. This report also is available at no 

charge on the GAO website at http://www.gao.gov. 

If you or your staff members have any questions about this report, please 

contact me at (202) 512-3149 or gootnickd@gao.gov. Contact points for 

our Offices of Congressional Relations and Public Affairs may be found 

on the last page of this report. Individuals who made key contributions to 

this report are listed in appendix V. 

David Gootnick 

Director, International Affairs and Trade 
Appendix I: Objectives, Scope, and 

Methodology 

Page 45 GAO-12-475 Tobacco Taxes 

The Family Smoking Prevention and Tobacco Control Act (Pub. L. No. 

111-31) directed GAO to report on various aspects of cross-border and 

illicit trade in tobacco products, including the effects of differing tax rates 

applicable to tobacco products.1

 In accordance with our agreement with 

Senate Committee on Health, Education, Labor, and Pensions and House 

Energy and Commerce Committee staff, this report provides information 

on the federal revenue effects of differing tax rates applicable to tobacco 

products. Our objectives for this report are to (1) review the market shifts 

among smoking tobacco products since the Children’s Health Insurance 

Program Reauthorization Act (CHIPRA) of 2009 went into effect on April 

1, 2009; (2) examine the impact of these market shifts on federal revenue 

and the Department of the Treasury’s (Treasury) actions to respond; and 

(3) describe differences in regulation of various smoking tobacco products 

by the Food and Drug Administration (FDA). Our review includes smoking 

tobacco products that are subject to federal excise tax: cigarettes and 

four other tobacco products—roll-your-own tobacco (sometimes called 

RYO), pipe tobacco, small cigars, and large cigars.2

 However, in 

analyzing the market shifts among these products, we focused solely on 

the four smoking tobacco products other than cigarettes. 

To address the three objectives in this study, we reviewed documents 

and interviewed agency officials from Treasury’s Alcohol and Tobacco 

Tax and Trade Bureau, FDA, and the Centers for Disease Control and 

Prevention, as well as tobacco industry members, representatives of 

public health and other nongovernmental organizations, and academics 

to obtain information on tobacco legislation and regulations, tobacco 

product sales trends, and consumption patterns. Tobacco industry 

members that we spoke with included industry associations and individual 

companies. We identified and contacted 15 pipe tobacco manufacturers 

to ask about their companies’ actions in response to the CHIPRA tax 

changes, and 3 of the manufacturers agreed to speak with us. We also 

reviewed studies analyzing the relationship between tobacco tax 

 

1

Responding to this mandate, in March 2011, we issued a first report on illicit tobacco 

trade and schemes, GAO-11-313. 

2

Smokeless tobacco products that are subject to federal excise taxes, such as chewing 

tobacco and snuff, were outside the scope of this review. “Processed tobacco” is not 

subject to federal excise tax and is defined in the Internal Revenue Code of 1986 by what 

it is not: processed tobacco does not include the farming or growing of tobacco or the 

handling of tobacco solely for sale, shipment, or delivery to a manufacturer of tobacco 

products or processed tobacco. 

Appendix I: Objectives, Scope, and 

Methodology 
Appendix I: Objectives, Scope, and 

Methodology 

Page 46 GAO-12-475 Tobacco Taxes 

increases and smoking, including among youth. We also collected data 

from Treasury, the Bureau of Labor Statistics, and the Department of 

Agriculture and determined that they were sufficiently reliable for our 

purposes. 

We analyzed Treasury removals data3

 to identify sales trends across the 

different tobacco products before and after CHIPRA took effect. In 

addition, we collected and analyzed price data and data on federal excise 

tax rates for roll-your-own tobacco, pipe tobacco, small cigars, and large 

cigars, as well as the federal tax revenue generated from their sale. We 

estimated what the effect on federal tax revenue collection would have 

been if the market shifts resulting from substitution of higher-taxed 

products with lower-taxed products had not occurred once CHIPRA’s 

higher tax rates went into effect. In this report, we refer to this estimated 

effect on federal tax revenue collection as revenue losses. Our analysis 

takes into account the expected fall in quantity demanded due to the price 

increases resulting from the higher federal excise tax rates that CHIPRA 

imposed on these smoking tobacco products. 

To estimate federal tax revenue losses due to market shifts after 

CHIPRA, we analyzed Treasury’s monthly sales and revenue data from 

fiscal year 2001 through fiscal year 2011 for roll-your-own and pipe 

tobacco and for small and large cigars. Our analysis compares the actual 

tobacco tax revenue collected by Treasury with a counterfactual scenario. 

Our counterfactual model draws from one used by Dr. Frank Chaloupka, 

an economist who has investigated the effect of prices and taxes on 

tobacco consumption in numerous publications. In particular, we follow 

the methodology used in a paper from January 2011 in which Dr. 

Chaloupka calculates the effect of raising cigarette taxes in the state of 

Illinois.4

 This methodology projects the effect of a future tax increase 

based on the historic sales trend, the amount of the tax, and the effect of 

 

3

As used in this report, for smoking tobacco products, “removals” means the amount 

removed for distribution in the United States from the factory or released from customs, as 

measured in pounds for roll-your-own and pipe tobacco or in the number of sticks for 

cigarettes and small and large cigars. 26 U.S.C § 5702(j). In this report, we consider 

removals to be equivalent to sales and use the term sales. 

4

For a detailed explanation of this methodology, see Frank Chaloupka and Jidong Huang, 

“A Significant Cigarette Tax Rate Increase in Illinois Would Produce a Large, Sustained 

Increase in State Tobacco Tax Revenues” (Chicago, IL: University of Illinois at Chicago, 

Jan. 3, 2011, working paper). 
Appendix I: Objectives, Scope, and 

Methodology 

Page 47 GAO-12-475 Tobacco Taxes 

a price increase on projected sales (that is, price elasticity of demand).5

Our counterfactual model, then, projects post-CHIPRA sales of roll-yourown and pipe tobacco and small and large cigars according to the historic 

sales trends for these products, adjusted downward to account for the fall 

in demand due to the higher post-CHIPRA tax component of the price.6

To calculate the impact on demand due to the higher taxes on these 

products, we included high and low estimates for price elasticity. Based 

on our interviews with experts and a review of the relevant literature,7

 we 

assumed that the price elasticity for the smoking tobacco products in our 

analysis ranges from -0.6 to -0.3, which set, respectively, the low and 

high boundaries of the estimated revenue losses.8

Our analysis does not incorporate the hypothetical case of equal tax rates 

among smoking tobacco products; rather, we estimate the revenues that 

Treasury would have collected in the absence of the market’s substitution 

of higher-taxed products with lower-taxed products. An analysis that 

projected the impact of equal tax rates across all smoking tobacco 

products would necessarily produce a much higher estimate of lost tax 

revenues. We did not attempt to develop such a model, however, 

because doing so was beyond the scope of our analysis. The reliability of 

any such model would depend on the assumptions made, particularly with 

regard to large cigars—the only tobacco product for which excise taxes 

are calculated as a percentage of price. Compared with determining the 

tax on all other tobacco products, according to Treasury, determining the 

tax on large cigars is extremely complex. Modeling hypothetical 

consumption trends for smoking tobacco products after equalizing tax 

 

5

Economic theory states that when the price of a product increases, the quantity 

demanded for the product will decrease at a rate that is computed from the underlying 

demand curve. 

6

Hence, it is assumed that the actual change in revenue is based on the new tax 

differential. If changes in sales were due to other market forces, such as changes in the 

prices of other products or changing demand, this would cause our estimates to be over or 

under stated. 

7

For an extensive literature review of tobacco price elasticity studies, see Qiang Li, The 

Effects of Cigarette Price and Tax on Smokers and Government Revenue. Unpublished 

doctoral dissertation (Buffalo, NY: The State University of New York, 2007). 

8

In our counterfactual scenario, a lower decrease in demand results in a higher estimate 

of revenue losses. A price elasticity of -0.6 means that when prices go up by 10 percent, 

demand will decrease by 6 percent; a price elasticity of -0.3 for the same price increase 

means that demand will decrease by 3 percent. 
Appendix I: Objectives, Scope, and 

Methodology 

Page 48 GAO-12-475 Tobacco Taxes 

rates on them would require a complex set of assumptions not 

necessarily grounded in reliable data. 

We used data from two sources to build our counterfactual model 

projecting post-CHIPRA sales of roll-your-own and pipe tobacco and 

small and large cigars. The first source is Treasury’s data from fiscal year 

2001 through fiscal year 2011 on smoking tobacco product tax revenues 

and removals (the amount of tobacco removed for sale from the factory or 

released from customs). The second data source is tobacco products 

price data from the Bureau of Labor Statistics, which it uses to calculate 

the Consumer Price Index for tobacco products. The Bureau of Labor 

Statistics data contain retail price information collected each month 

throughout the country; the prices include the cost of production, markup, 

and excise taxes from federal, state, and local governments—shipping, 

handling, sales tax, and fuel surcharges have been removed from the 

data.9

For roll-your-own and pipe tobacco and for small and large cigars, we 

calculated an average taxable manufacturer’s or importer’s sale price for 

the year before CHIPRA was enacted. We then estimated the postCHIPRA price by adding the corresponding post-CHIPRA tax to the preCHIPRA price.10 Thus, our counterfactual model includes only the effect 

of CHIPRA on tax revenue. 

To calculate the average taxable manufacturer’s or importer’s sale price 

for large cigars, we used Treasury’s revenue data and removals data. 

Treasury collects revenue data for cigars but does not collect separate 

revenue data for small and large cigars. However, Treasury’s removals 

data are separated by small and large cigars, reporting the number of 

sticks removed for sale from the factory or released from customs. After 

CHIPRA, small cigars are taxed at $50.33 per thousand sticks, whereas 

large cigars are taxed at 52.75 percent of the manufacturer’s or importer’s 

price up to a maximum tax rate per thousand sticks. We calculated small 

 

9

The price data for cigars, pipe tobacco, and roll-your-own tobacco are subsets of the 

sample used to calculate the Consumer Price Index for Tobacco products other than 

cigarettes. The Bureau of Labor Statistics cautioned that these data be interpreted with 

care because they do not meet its standard publication criteria. 

10Using an average post-CHIPRA price from the Bureau of Labor Statistics would be 

misleading as it would include increases in state and local taxes and would artificially 

inflate the effect of CHIPRA on prices. 
Appendix I: Objectives, Scope, and 

Methodology 

Page 49 GAO-12-475 Tobacco Taxes 

cigar revenue by multiplying the number of sticks reported in Treasury’s 

removals data in each month by the tax rate. We then calculated large 

cigar revenues by subtracting small cigar revenues from total cigar 

revenues. Once we had calculated the large cigar revenues, we 

estimated the average tax paid by dividing the large cigar revenues by the 

number of large cigar sticks reported in the removals data for each month 

and calculating the average price. From March 2007 through March 2009, 

the average large cigar tax collected was 4.3 cents per stick. These 

figures corroborate Treasury’s statement that a majority of manufacturers 

were paying the maximum rate. CHIPRA raised this maximum rate from 

4.8 cents to 40 cents per stick. We estimated that the average taxable 

manufacturer’s or importer’s sale price before CHIPRA was 20.65 cents. 

Hence, the average tax paid after CHIPRA using the new tax rate should 

be 10.9 cents per cigar, and this is the number we used to estimate postCHIPRA tax revenues in our counterfactual model. Treasury does not 

maintain records of the manufacturers’ and importers’ sale prices of large 

cigars where the manufacturer or importer paid the maximum rate, 

thereby making it impossible to determine the magnitude of 

underestimation in our model caused by the maximum rate. 

To describe FDA’s regulation of tobacco products under Chapter IX of the 

Food, Drug, and Cosmetic Act, we examined FDA’s regulatory actions 

and announcements and interviewed officials from FDA’s Center for 

Tobacco Products, including the Offices of Compliance and Enforcement, 

Policy, Regulations, and Science. 

We conducted this performance audit from March 2011 to April 2012 in 

accordance with generally accepted government auditing standards. 

Those standards require that we plan and perform the audit to obtain 

sufficient, appropriate evidence to provide a reasonable basis for our 

findings and conclusions based on our audit objectives. We believe that 

the evidence obtained provides a reasonable basis for our findings and 

conclusions based on our audit objectives. 
Appendix II: Sales of Smoking Tobacco 

Products in the United States, Fiscal Years 

2001-2011 

Page 50 GAO-12-475 Tobacco Taxes 

Treasury’s data on taxable removals (sales) show that the decline in 

cigarette sales in the last decade has been partially offset by the 

combined growth in sales of roll-your-own tobacco, pipe tobacco, small 

cigars, and large cigars.1

 Table 5 provides annual sales data for 

cigarettes, roll-your-own tobacco, pipe tobacco, small cigars, and large 

cigars from fiscal year 2001 through fiscal year 2011. Figure 17 uses the 

same data to depict the concomitant decline in cigarette sales and growth 

in combined sales of the other four smoking tobacco products. 

From fiscal year 2001 through fiscal year 2011, sales of the smoking 

tobacco products—cigarettes, roll-your-own tobacco, pipe tobacco, small 

cigars, and large cigars—in the United States decreased by about 26 

percent. Sales of cigarettes, which continue to dominate the market, 

declined by 30 percent from about 414 billion sticks in fiscal year 2001 to 

about 289 billion sticks in 2011. However, combined sales of roll-yourown tobacco, pipe tobacco, small cigars, and large cigars increased by 

131 percent during the same period from about 12 billion sticks or 

cigarette stick equivalents (for roll-your-own and pipe tobacco) in fiscal 

year 2001 to about 29 billion sticks or cigarette stick equivalents. The 

share of these four products grew from 3 percent of the smoking tobacco 

market in fiscal year 2001 to 9 percent in fiscal year 2011. 

 

1

As used in this report, for smoking tobacco products, “removals” means the amount 

removed for distribution in the United States from the factory or released from customs, as 

measured in pounds for roll-your-own and pipe tobacco or in the number of sticks for 

cigarettes and small and large cigars. 26 U.S.C. (§ 5702(j). In this report, we consider 

removals to be equivalent to sales and use the term sales. 

Appendix II: Sales of Smoking Tobacco 

Products in the United States, Fiscal Years 

2001-2011 
Appendix II: Sales of Smoking Tobacco 

Products in the United States, Fiscal Years 

2001-2011 

Page 51 GAO-12-475 Tobacco Taxes 

Table 5: U.S. Sales of Cigarettes and Other Smoking Tobacco Products, Fiscal Years 2001-2011 (in Billions of Sticks) 

 Other smoking tobacco products 

Fiscal year Cigarettes 

Roll-your-own 

tobaccoa Pipe tobaccoa Small cigars Large cigars Subtotalb 

Totalb for cigarettes 

and other smoking 

tobacco products

2001 414.17 4.33 2.42 2.18 3.50 12.42 426.60

2002 406.59 4.74 2.35 2.26 3.70 13.05 419.61

2003 376.14 6.02 2.13 2.28 3.95 14.38 390.52

2004 372.24 6.02 1.96 2.49 4.17 14.64 386.88

2005 367.23 7.16 1.79 3.45 4.39 16.78 384.01

2006 363.01 8.10 1.77 4.15 4.54 18.56 381.58

2007 356.05 8.37 1.58 4.58 4.57 19.10 375.15

2008 337.64 9.68 1.55 5.34 4.76 21.33 358.98

2009 316.40 7.96 4.31 3.35 6.88 22.50 338.90

2010c 296.23 3.03 10.25 0.91 9.88 24.07 320.29

2011 288.50 2.56 15.02 0.80 10.27 28.65 317.14

Source: Treasury. 

a

The roll-your-own tobacco and pipe tobacco cigarette stick equivalent is based on the weight of 

0.0325 ounces. of tobacco per cigarette stick using the Master Settlement Agreement conversion 

rate. 

b

The subtotal and total may not add up due to rounding. 

c

2010 is the first full fiscal year following April 1, 2009, when the new federal excise tax rates on 

tobacco products resulting from CHIPRA took effect. 
Appendix II: Sales of Smoking Tobacco 

Products in the United States, Fiscal Years 

2001-2011 

Page 52 GAO-12-475 Tobacco Taxes 

Figure 17: U.S. Sales of Cigarettes and Other Smoking Tobacco Products, Fiscal 

Years 2001-2011 

a

The roll-your-own tobacco and pipe tobacco cigarette stick equivalent is based on the weight of 

0.0325 ounces. of tobacco per cigarette stick using the Master Settlement Agreement conversion 

rate. 
Appendix III: Summary of Treasury’s Proposed 

Rulemaking Actions to Distinguish between 

Roll-Your-Own and Pipe Tobacco 

Page 53 GAO-12-475 Tobacco Taxes 

Treasury published a temporary rule and request for public comments in 

June 2009 that outlined new labeling and packaging requirements for rollyour-own and pipe tobacco to more clearly differentiate the two products 

on those bases. Treasury also noted the need for additional rulemaking 

on other standards and methods to differentiate the products. In response 

to its June 2009 rulemaking notice, industry members proposed 

standards to distinguish between roll-your-own and pipe tobacco based 

on physical characteristics. For example, Treasury received comments 

setting forth certain criteria for distinguishing between the products based 

on whether the product met a certain number of factors, including 

moisture content; cut width; percentage of weight consisting of reducing 

sugars; and percentage of weight consisting of flavoring, casing, or other 

nontobacco content. 

In July 2010, Treasury published an advance notice of proposed 

rulemaking issuing a request for public comments on these and other 

standards proposed by commenters to differentiate between roll-your-own 

and pipe tobacco. The industry members’ comments responding to 

Treasury’s 2010 request highlighted the complexity and difficulties in 

developing objective standards based on physical characteristics that 

clearly differentiate the two tobacco products. Industry members 

disagreed on the number of criteria that should be used and the specific 

thresholds for differentiating between the products. For example, while 

some industry members generally agreed that pipe tobacco traditionally 

has had a thicker cut and greater moisture content than roll-your-own 

tobacco, they disagreed on the specific cut width or moisture content that 

defines pipe tobacco. Some comments noted that the physical 

characteristics of the two products overlap greatly, emphasizing the 

numerous types of roll-your-own and pipe tobacco products on the market 

and various manufacturing methods, all of which make it difficult to 

develop concrete definitions that clearly differentiate between the two 

products. Other comments emphasized the challenges of conducting 

tests to distinguish the two products as, for example, test results can be 

influenced by factors such as the age of the sample used and the 

temperature of the facility, potentially creating different results on tests of 

the same tobacco products. Some industry members also proposed that 

Treasury take into consideration the preexisting or established pipe 

tobacco brands prior to CHIPRA and continue to classify them as pipe 

tobacco through a grandfathering clause, regardless of how the tobacco 

might fare in any tests based on objective standards. Other industry 

members disagreed, however, stating that a grandfathering clause would 

favor existing companies, reduce competition, and give some companies 

Appendix III: Summary of Treasury’s 

Proposed Rulemaking Actions to Distinguish 

between Roll-Your-Own and Pipe Tobacco 
Appendix III: Summary of Treasury’s Proposed 

Rulemaking Actions to Distinguish between 

Roll-Your-Own and Pipe Tobacco 

Page 54 GAO-12-475 Tobacco Taxes 

the opportunity to introduce misclassified pipe tobacco into the market 

without accountability. 

Other industry members expressed concerns that the proposed standards 

could easily be manipulated by consumers. For example, the tobacco cut 

width standard for pipe tobacco could be compromised by a consumer 

using a blender or coffee grinder to obtain a smaller width for use in 

cigarettes. Additionally, the moisture content standard could also prove to 

be ineffective because end users could dry out the moister pipe tobacco 

for use in cigarettes. 

After the initial public comment period closed in September 2010, 

Treasury did not issue a subsequent rulemaking on clarifying standards. 

Treasury said it received an additional proposal after the close of the 

comment period and, as a result, issued a second advance notice of 

proposed rulemaking in August 2011 reopening the period for receiving 

comments on the standards proposed by commenters, including the new 

proposal. Treasury received a number of additional comments, many by 

the same companies that commented on the earlier notices, and the 

comments continued to reflect significant differences within the industry 

on standards that define and distinguish roll-your-own tobacco from pipe 

tobacco. This second comment period closed in October 2011, and 

Treasury has not issued a subsequent rulemaking as of March 2012. 

Within the 2011 notice, Treasury also published the results of the 

preliminary analysis conducted by its laboratory on a sample of roll-yourown and pipe tobacco products. For this analysis, Treasury purchased a 

sample of products labeled as roll-your-own and pipe tobacco from local 

retail vendors in Maryland. These samples were purchased just prior to 

the CHIPRA tax increases going into effect. Treasury officials 

emphasized that their sample was not a representative market sample 

and thus not generalizable. Treasury officials stated that the purpose of 

the preliminary analysis was to investigate what could be learned about 

the initial proposed standards rather than to complete a definitive test 

differentiating the products or attempting to determine whether the 

products were roll-your-own or pipe tobacco, as they were labeled. 

Treasury tested for several of the proposed standards, including total 

reducing sugars and moisture content. Treasury’s results, in some cases, 

appeared to show a lack of a clear distinction between the roll-your-own 

and pipe tobacco samples. 
Appendix IV: Comments from the Department 

of the Treasury 

Page 55 GAO-12-475 Tobacco Taxes 

Appendix IV: Comments from the 

Department of the Treasury 
Appendix IV: Comments from the Department 

of the Treasury 

Page 56 GAO-12-475 Tobacco Taxes 
Appendix V: GAO Contact and Staff 

Acknowledgments 

Page 57 GAO-12-475 Tobacco Taxes 

David Gootnick (202) 512-3149 or gootnickd@gao.gov

In addition to the individual named above, Christine Broderick, Assistant 

Director; Sada Aksartova; Pedro Almoguera; David Dayton; Etana 

Finkler; Jeremy Latimer; Grace Lui; and Alana Miller made key 

contributions to this report. In addition, Barbara El Osta, Joyce Evans, 

Marc Molino, Theresa Perkins, Jena Sinkfield, and Cynthia S. Taylor 

provided technical assistance. 

Appendix V: GAO Contact and Staff 

Acknowledgments 

GAO Contact 

Staff 

Acknowledgments 

(320838)
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