For Marcelo Cadillo, the American dream lay in bins filled with tobacco leaves.

Customers from as far as San Francisco flocked to the tiny roll-your-own store he opened in Fremont's Niles district last year. There, they could shred tobacco and roll their own cigarettes using small machines -- for about half of the cost of buying traditional brands sold at stores.

But an unlikely foe has sent the dream up in smoke.

A federal highway bill that President Barack Obama signed this month included a provision that imposed boundaries so stern on tobacco shops like Cadillo's that he immediately closed his store.

"It was heartbreaking," said Cadillo, who taped a copy of the bill to his storefront window. "I felt like I got kicked in the stomach."

The new legislation stretched the definition of tobacco manufacturers to include businesses that use roll-your-own cigarette machines, many of which until then had avoided higher costs and more stringent rules in part by using lower-taxed pipe tobacco, proponents of the law say.

The bill raises taxes and places restrictions on roll-your-own businesses to levels of brand-name manufacturers. One distributor estimates about 10 roll-your-own businesses were operating in Northern California.

The owners of one, in Vallejo, had begun offering roll-your-own machines four months ago in a former video store. They closed down July 6, the day the highway bill passed, the (Vallejo) Times-Herald reported.

Big Tobacco supported the law, but the National Association of Convenience Stores trumpeted the charge.

The association claimed that the inequities between roll-your-own cigarette businesses and traditional brands were "threatening the livelihood of traditional retailers," in addition to "draining federal and state tax revenues and undermining a host of laws intended to regulate cigarettes."

As Corey Fitze, director of government relations for the convenience store group, put it last week, "What do we tell our members who say, 'I'm losing 30 percent of my business to the tobacco shop across the street'?"

The National Association of Convenience Stores represents more than 148,000 stores in the United States, including nearly 13,000 in California.

Convenience stores began feeling the pinch in 2009 as new laws sharply raised the price of roll-your-own tobacco but only slightly increased the cost of pipe tobacco.

That caused sales of pipe tobacco to soar and roll-your-own tobacco to plunge as even the Alcohol and Tobacco Tax and Trade Bureau struggled to find regulatory standards to differentiate between the two tobaccos.

The Government Accountability Office ultimately concluded that roll-your-own shops had started using the lower-taxed products.

"Roll-your-own cigarette machines take advantage of an unintended tax loophole, and that isn't right," Sen. Max Baucus, D-Mont., who sponsored the amendment, told The Wall Street Journal in March.

Cadillo, 31, described his product as "all natural" with no additives. His customers would shred what is called "strip" tobacco -- a leaf that has its mid-stem removed -- and then roll it into cigarettes using machines.

"I've been a smoker forever, and I was trying to figure out a healthier alternative," he said.

Cadillo's store, Natural Leaf Tobacco, had 10 small roll-your-own machines typically used in homes. Those machines cost a fraction of the $30,000 to $35,000 that bigger roll-your-own operations would pay for machines that look like wooden cabinets.

The new bill affects machines of all sizes, however, and Big Tobacco couldn't be happier.

"Philip Morris USA's position on businesses that operate RYO cigarette rolling machines is that they are cigarette manufacturers and should make tax payments, be regulated by the (Food and Drug Administration), and make state settlement payments just like other cigarette manufacturers," Philip Morris USA spokesman David Sutton wrote in an email.

Jude Silva, one of Cadillo's customers, called the legislation upsetting, saying that cigarettes he rolled at Natural Leaf Tobacco were better for him.

"If you want to quit smoking, those are the cigarettes to smoke," Silva said. "For me, it was so healthy. When I smoke Camel Lights now, I feel like vomiting."

Cadillo, who has lived on his own since age 15, said he invested more than $20,000 into his business, which opened late last year. He now hopes to save enough money to start a vintage candy store in the same spot.

"I put myself through college, got a degree and just worked really hard," said Cadillo, who said he graduated from the Art Institute in San Francisco in 2008. "I've always had two, three, four jobs even at a time. I saved up every penny I could to open up my shop, and overnight it was taken from me.

"It hurts."