[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]




 
                     THE DEPARTMENT OF THE TREASURY
                      ALCOHOL AND TOBACCO TAX AND
                              TRADE BUREAU

=======================================================================

                                HEARING

                               before the

                       SUBCOMMITTEE ON OVERSIGHT

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               __________

                              MAY 20, 2008

                               __________

                           Serial No. 110-85

                               __________

         Printed for the use of the Committee on Ways and Means


                  U.S. GOVERNMENT PRINTING OFFICE
58-277                    WASHINGTON : 2011
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing Office, 
http://bookstore.gpo.gov. For more information, contact the GPO Customer Contact Center, U.S. Government Printing Office. Phone 202ï¿½09512ï¿½091800, or 866ï¿½09512ï¿½091800 (toll-free). E-mail, [email protected].  

                      COMMITTEE ON WAYS AND MEANS

                 CHARLES B. RANGEL, New York, Chairman

FORTNEY PETE STARK, California       JIM MCCRERY, Louisiana
SANDER M. LEVIN, Michigan            WALLY HERGER, California
JIM MCDERMOTT, Washington            DAVE CAMP, Michigan
JOHN LEWIS, Georgia                  JIM RAMSTAD, Minnesota
RICHARD E. NEAL, Massachusetts       SAM JOHNSON, Texas
MICHAEL R. MCNULTY, New York         PHIL ENGLISH, Pennsylvania
JOHN S. TANNER, Tennessee            JERRY WELLER, Illinois
XAVIER BECERRA, California           KENNY HULSHOF, Missouri
LLOYD DOGGETT, Texas                 RON LEWIS, Kentucky
EARL POMEROY, North Dakota           KEVIN BRADY, Texas
STEPHANIE TUBBS JONES, Ohio          THOMAS M. REYNOLDS, New York
MIKE THOMPSON, California            PAUL RYAN, Wisconsin
JOHN B. LARSON, Connecticut          ERIC CANTOR, Virginia
RAHM EMANUEL, Illinois               JOHN LINDER, Georgia
EARL BLUMENAUER, Oregon              DEVIN NUNES, California
RON KIND, Wisconsin                  PAT TIBERI, Ohio
BILL PASCRELL JR., New Jersey        JON PORTER, Nevada
SHELLEY BERKLEY, Nevada
JOSEPH CROWLEY, New York
CHRIS VAN HOLLEN, Maryland
KENDRICK MEEK, Florida
ALLYSON Y. SCHWARTZ, Pennsylvania
ARTUR DAVIS, Alabama

             Janice Mays, Chief Counsel and Staff Director

                   Jon Traub, Minority Staff Director

                                 ______

                       Subcommittee on Oversight

                     JOHN LEWIS, Georgia, Chairman

JOHN S. TANNER, Tennessee            JIM RAMSTAD, Minnesota
RICHARD E. NEAL, Massachusetts       ERIC CANTOR, Virginia
XAVIER BECERRA, California           JOHN LINDER, Georgia
STEPHANIE TUBBS JONES, Ohio          DEVIN NUNES, California
RON KIND, Wisconsin                  PAT TIBERI, Ohio
BILL PASCRELL JR., New Jersey
JOSEPH CROWLEY, New York

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
hearing records of the Committee on Ways and Means are also published 
in electronic form. The printed hearing record remains the official 
version. Because electronic submissions are used to prepare both 
printed and electronic versions of the hearing record, the process of 
converting between various electronic formats may introduce 
unintentional errors or omissions. Such occurrences are inherent in the 
current publication process and should diminish as the process is 
further refined.


                            C O N T E N T S

                               __________

                                                                   Page

Advisory of May 13, 2008, announcing the hearing.................     2

                               WITNESSES

The Honorable Lloyd Doggett, a Representative in Congress from 
  the State of Texas.............................................     6
John J. Manfreda, Administrator, Alcohol and Tobacco Tax and 
  Trade Bureau, United States Department of the Treasury.........    24

                       SUBMISSIONS FOR THE RECORD

Authentix, statement.............................................    92
Charles N. Whitaker, statement...................................    94
Consumer Federation of America, statement........................   100
Matthew L. Myers, statement......................................   101
SICPA Product Security, statement................................   104
U.S. Immigration and Customs Enforcement, news release...........   107
Maurice A. John, Sr., statement..................................   109
The Honorable Mike Thompson and George Radanovich, joint letter..   116


                     THE DEPARTMENT OF THE TREASURY
                      ALCOHOL AND TOBACCO TAX AND
                              TRADE BUREAU

                              ----------                              


                         TUESDAY, MAY 20, 2008

             U.S. House of Representatives,
                       Committee on Ways and Means,
                                 Subcommittee on Oversight,
                                                    Washington, DC.

    The Subcommittee met, pursuant to notice, at 10:35 a.m., in 
room 1100, Longworth House Office Building, Hon. John Lewis 
(Chairman of the Subcommittee), presiding.
    [The advisory announcing the hearing follows:]

ADVISORY FROM THE COMMITTEE ON WAYS AND MEANS

                       SUBCOMMITTEE ON OVERSIGHT

                                                CONTACT: (202) 225-5522
FOR IMMEDIATE RELEASE
May 13, 2008
OV-8

                      Lewis Announces a Hearing on

                     the Department of the Treasury

                Alcohol and Tobacco Tax and Trade Bureau

    House Ways and Means Oversight Subcommittee Chairman John Lewis (D-
GA) today announced that the Subcommittee on Oversight will hold a 
hearing on the Department of the Treasury's Alcohol and Tobacco Tax and 
Trade Bureau (TTB). The hearing will take place on Tuesday, May 20, 
2008, at 10:30 a.m., in the main Committee hearing room, 1100 Longworth 
House Office Building.
      
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from invited witnesses only. The 
Honorable Lloyd Doggett, a Representative from the State of Texas, and 
John J. Manfreda, Administrator of TTB, have been invited to testify. 
However, any individual or organization not scheduled for an oral 
appearance may submit a written statement for consideration by the 
Committee and for inclusion in the printed record of the hearing.
      

BACKGROUND:

      
    On January 24, 2003, the Homeland Security Act of 2002 separated 
the functions of the Bureau of Alcohol, Tobacco and Firearms into two 
organizations--TTB and the Bureau of Alcohol, Tobacco, Firearms and 
Explosives (ATF). TTB was established as a new bureau within the 
Department of the Treasury to: (1) collect excise taxes on alcohol, 
tobacco, firearms, and ammunition; (2) regulate alcohol and tobacco 
products; and (3) protect consumers. TTB is the primary Federal 
authority in the regulation of the alcohol and tobacco industries. ATF 
was established as a new bureau within the Department of Justice with 
jurisdiction over firearms enforcement and regulation, arson and 
explosives, and interstate trafficking of cigarettes.
      
    TTB is the third largest tax collection agency in the Federal 
Government with nearly $15 billion in excise taxes collected last year 
from approximately 6,100 businesses. In addition, TTB regulates over 
45,000 alcohol and tobacco business operations. It has approximately 
550 employees and a budget of $93.5 million. The Administration's 
fiscal year 2009 proposed budget for TTB is $96.9 million, an increase 
of 3.6 percent over current levels.
      
    In announcing the hearing, Chairman Lewis said, ``TTB has a broad 
range of responsibilities from tax collection to consumer protection 
and plays a critical role in our economy. I look forward to reviewing 
TTB's operations, including the impact of its separation from ATF. TTB 
must have the resources and authority it needs to protect the public 
and the revenue.''
      

FOCUS OF THE HEARING:

      
    The hearing will review TTB's overall operations on its 5-year 
anniversary. The Subcommittee will examine: (1) TTB's budget and 
workload; (2) enforcement programs and compliance issues related to the 
collection of alcohol, tobacco, firearms, and ammunition excise taxes; 
(3) the immediate and long-term impact of the division of resources and 
responsibilities between TTB and ATF; and (4) administrative and other 
proposals related to TTB's operations.

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      

    Please Note: Any person(s) and/or organization(s) wishing to submit 
comments for the hearing record must follow the appropriate link on the 
hearing page of the Committee website and complete the informational 
forms. From the Committee homepage, http://
waysandmeans.house.gov, select ``110th Congress'' from the menu en- 
titled, ``Committee Hearings'' (http://waysandmeans.house.gov/
Hearings.asp?congress =18). Select the hearing for which you would like 
to submit, and click on the link entitled, ``Click here to provide a 
submission for the record.'' Follow the online instructions, completing 
all informational forms and clicking ``submit'' on the final page. 
ATTACH your submission as a Word or WordPerfect document, in compliance 
with the formatting requirements listed below, by close of business 
Tuesday, June 3, 2008. Finally, please note that due to the change in 
House mail policy, the U.S. Capitol Police will refuse sealed-package 
deliveries to all House Office Buildings. For questions, or if you 
encounter technical problems, please call (202) 225-1721.

      

FORMATTING REQUIREMENTS:

      

    The Committee relies on electronic submissions for printing the 
official hearing record. As always, submissions will be included in the 
record according to the discretion of the Committee. The Committee will 
not alter the content of your submission, but we reserve the right to 
format it according to our guidelines. Any submission provided to the 
Committee by a witness, any supplementary materials submitted for the 
printed record, and any written comments in response to a request for 
written comments must conform to the guidelines listed below. Any 
submission or supplementary item not in compliance with these 
guidelines will not be printed, but will be maintained in the Committee 
files for review and use by the Committee.

      

    1. All submissions and supplementary materials must be provided in 
Word or WordPerfect format and MUST NOT exceed a total of 10 pages, 
including attachments. Witnesses and submitters are advised that the 
Committee relies on electronic submissions for printing the official 
hearing record.

      

    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.

      

    3. All submissions must include a list of all clients, persons, 
and/or organizations on whose behalf the witness appears. A 
supplemental sheet must accompany each submission listing the name, 
company, address, telephone and fax numbers of each witness.

      

    Note: All Committee advisories and news releases are available on 
the World Wide Web at http://waysandmeans.house.gov.

      

    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1721 or 202-226-3411 TDD/TTY in advance of the event (four 
business days notice is requested). Questions with regard to special 
accommodation needs in general (including availability of Committee 
materials in alternative formats) may be directed to the Committee as 
noted above.

                                 

    Chairman LEWIS. Good morning. The hearing is now called to 
order. Today the Subcommittee on Oversight will review the 
operation of the Treasury's Alcohol and Tobacco Tax and Trade 
Bureau. It is the newest agency in the Department of Treasury, 
yet it collects the oldest of our Federal taxes--excise taxes 
on alcohol and tobacco.
    This Subcommittee has not had a full review of TTB in over 
15 years. This hearing is long overdue. TTB plays an important 
role in our government. This agency collects $15 billion in 
excise taxes each year, regulates the alcohol and tobacco 
markets, and protects the public.
    It has been 75 years since the repeal of the Prohibition 
and the demands on TTB are growing. However, its budget has 
not. It has less than 600 employees and no law enforcement 
agents to oversee markets of almost $600 billion.
    This does not count products sold outside the tax system. 
Illegal products threaten our health, our safety and our 
revenue.
    I am concerned that TTB is not getting the respect it 
deserves given its broad and important mission.
    The Subcommittee welcomes Mr. Manfreda and looks forward to 
his testimony.
    [The prepared statement of the Honorable John Lewis 
follows:]

[GRAPHIC] [TIFF OMITTED] T8277A.001


                                 

    Chairman LEWIS. Now I am pleased to recognize my 
distinguished Ranking Member and my dear friend and my brother, 
Mr. Ramstad, for his opening statement.
    Mr. RAMSTAD. Thank you very much, Mr. Chairman. Thank you 
for calling this hearing today. You are a dear friend and I am 
grateful to serve with you.
    It does not seem possible that 5 years have passed since 
the responsibilities of the Bureau of Alcohol, Tobacco and 
Firearms were divided and placed into two different agencies.
    I think we all recognize while the TTB might not be the 
most well known Federal agency, in fact, I bet if you did a 
survey of the 535 Members of Congress, a majority would not 
recognize the initials.
    Nonetheless, as the Chairman pointed out, it is the 
government's third largest collector of revenue, bringing in 
the $15 billion in excise taxes to the Treasury each year.
    It is a very critical agency, just the function of ensuring 
that domestically produced alcohol and tobacco products comply 
with Federal safety requirements is absolutely vital.
    In other countries, we hear stories after stories of 
tainted alcohol and tobacco products. We do not hear of similar 
incidents in our country and that is a testament, I believe, to 
TTB's effectiveness. My hat goes off to the work that you are 
doing.
    I know that your agency works closely with a number of 
Federal and State agencies, and I know Minnesota law 
enforcement has been grateful for your collaboration on a 
number of important cases in our State.
    We are getting a good return, I believe, on our investment 
of taxpayer dollars. Of course, there is always more to be 
done, like with every agency and every organization.
    There still are illegal sales of cigarettes and alcohol. We 
still need to emphasize the enforcement function and certainly, 
a concern of everybody on this Committee is cigarettes and 
alcohol, too common in the hands of minors, certainly a concern 
of all Americans.
    Internet sales. Looking forward to hearing about whether we 
need to change any laws with respect to Internet sales. I know 
they pose special challenges. Also looking to hear from our 
good friend and colleague from Texas, Mr. Doggett, about the 
STOP Act.
    Thanks again, Mr. Chairman, for the opportunity to review 
the budget and the operations of the TTB. I look forward to 
hearing from the witnesses and working together on these 
important issues.
    Thank you and I yield back.
    Chairman LEWIS. Thank you very much, Mr. Ramstad, for your 
statement.
    Now we will hear from our witnesses. I ask that you limit 
your testimony to 5 minutes. Without objection, your entire 
statement will be included in the record.
    It is my great pleasure and delight to introduce or just 
present one of our colleagues, Congressman Lloyd Doggett of 
Texas, a Member of the Committee on Ways and Means.
    Mr. Doggett.

 STATEMENT OF THE HONORABLE LLOYD DOGGETT, A REPRESENTATIVE IN 
                CONGRESS FROM THE STATE OF TEXAS

    Mr. DOGGETT. Thank you, Mr. Chairman, Ranking Member 
Ramstad, and colleagues. I certainly share in the sentiments 
that each of you have just expressed concerning the Bureau.
    While it has a number of responsibilities, I will focus in 
my brief testimony on just one of those, and that is tobacco, 
and specifically H.R. 5689, the Smuggled Tobacco Prevention Act 
or the STOP Act, that I have introduced as a sensible law 
enforcement approach to prevent the smuggling of tobacco.
    Tobacco is the single largest illegally trafficked drug 
product 
on the planet. By reducing tobacco smuggling, I believe we can 
improve public health, collect more government revenue, and 
curb a source that has often been used by organized crime and 
terrorists.
    Tax free black market tobacco is sold at lower prices, 
increasing consumption in tobacco related illness while denying 
much needed government revenue and sometimes financing 
terrorists.
    An estimated 21 billion contraband cigarettes entered the 
U.S. market during one recent year. Almost half of these were 
international product or U.S. product for export coming back 
into the U.S. to evade Federal taxes and State and local taxes, 
and a little more than half represented internal cross-State 
smuggling from low tax States to high tax States.
    The total lost revenue from illegal tobacco has been 
estimated at 2 to $4 billion each year in this country. It is 
not a small problem. Worldwide, there are an estimated 600 
billion elicit cigarettes accounting for a loss of 40 to $50 
billion in government revenue.
    Of course, tax free cheaper tobacco means more nicotine 
addicts. About every 6 seconds, someone in this world dies from 
tobacco. That is why the enactment of this particular 
legislation has been important to public health groups like 
Tobacco Free Kids, which has filed testimony at this hearing, 
and the American Lung Association, which has endorsed the STOP 
Act.
    Last year, when this very Committee was debating in this 
room the proposal to raise tobacco taxes in an effort to end 
the disgrace of so many uninsured children across our country, 
some of our colleagues on the Committee voiced concerns that 
more taxes would only result in more smuggling.
    I believe that their concern was not unreasonable, but I 
believe it is an unreasonable excuse for opposing reasonable 
taxation of tobacco products.
    When smuggling is the problem, law enforcement should be 
given the tools to prevent and control it. That is why the STOP 
Act would take the approach that it does.
    Indeed, World Bank studies have suggested that the 
availability of smuggling is more related to a tolerance for 
smuggling and contraband sales than it is to the level of 
taxation.
    Choosing between raising taxes and reducing tobacco 
smuggling really represents a false choice because we can 
reduce smuggling and recoup needed revenue at the same time.
    Highly profitable tobacco smuggling can be used to advance 
a variety of criminal objectives. I commend our colleague and 
the Ranking Member of the House Committee on Homeland Security, 
Representative Peter King, who recently released a revealing 
report entitled ``Tobacco and Terror, How Cigarette Smuggling 
Is Funding Our Enemies Abroad.''
    In an interview with the Republican Members of the Commit- 
tee on Homeland Security's staff, a convicted tobacco smuggler 
turned confidential informant for the State of New York admits 
``Tobacco smugglers' only fear is losing a load of cigarettes. 
We do not fear law enforcement. They'll pull us over, seize the 
load and maybe we'll get arrested, but most likely we won't. 
Worse case scenario, we go to jail for a couple of months 
before returning to smuggling.
    Think about it. A small fish like me can make $50,000 a 
month working only a few hours each week. The big fish make 
hundreds of thousands a week, most of which goes to the Middle 
East in cash or trade transactions.''
    Among the groups that I have worked with over almost a 
decade is the Federation of Tax Administrators, an association 
of the principal tax and revenue collecting agencies in each of 
the 50 States. They are on the front lines of dealing with 
tobacco and tobacco smuggling.
    I would ask the Committee's consent, I believe they will be 
filing written testimony after the hearing, but to include a 
letter from them and the testimony that Mr. John Colledge 
presented recently to the Judiciary Committee in support of the 
STOP Act.
    [The information follows:]

                WRITTEN REMARKS OF JOHN W. COLLEDGE III
          CONSULTANT, CUSTOM AND TRADE--ANTI-MONEY LAUNDERING
                             SPARKS, NEVADA
                                FOR THE
                 UNITED STATES HOUSE OF REPRESENTATIVES
                       COMMITTEE ON THE JUDICIARY
    SUBCOMMITTEE ON CRIME, TERRORISM, AND HOMELAND SECURITY HEARING
                              MAY 1, 2008

Introduction

    Chairman Scott, it is a pleasure to submit these remarks in support 
of the proposed ``Smuggled Tobacco Prevention Act of 2008.'' I would 
like to provide the Committee with some background on tobacco smuggling 
in the United States and how, I believe, this Act will greatly reduce 
the illicit trade in tobacco as it relates to the United States. My 
opinions are my own, and based upon more than 33 years in law 
enforcement and specifically, more than 20 years experience in 
enforcing U.S. customs laws, with 14 of those years enforcing and 
studying matters directly related to cigarette smuggling and 
transnational organized crime. I will discuss some of the specifics of 
this proposed legislation and provide some background on the illicit 
trade in tobacco.

Background

    The United States has been a source and transshipment country for 
contraband cigarettes for approximately 50 years. I would like to quote 
from the prepared remarks that were submitted to the Senate 
Appropriations Committee in March 2000, by then U.S. Customs 
Commissioner Raymond W. Kelly:
    International cigarette smuggling has grown to a multi-billion 
dollar a year illegal enterprise linked to transnational organized 
crime and international terrorism. Profits from cigarette smuggling 
rival those of narcotic trafficking. The United States plays an 
important role as a source and transshipment country. Additionally, 
large sums of money related to cigarette smuggling flow through U.S. 
financial institutions.\1\
---------------------------------------------------------------------------
    \1\ U.S. Congress, Senate, 2001, Committee on Appropriations, 
Subcommittee on Treasury and General Government, 106th Congress, 2nd 
Session, 30 March 2000, Internet, http://frwebgate. access.gpo.gov/cgi-
bin/getdoc.cgi?dbname=2001_sapp_tre_1&docid=f:62810.wais, accessed: 17 
March 2008.
---------------------------------------------------------------------------
    Since March 2000, the illicit trade in all tobacco products has 
increased dramatically in the United States. The contraband products 
include those smuggled into the United States, those legally 
manufactured domestically and diverted to the illicit market, and those 
illegally manufactured in the United States.
Cigarette Packaging
    Please allow me to briefly describe tobacco packaging so everyone 
can understand the issues:

      Pack = 20 cigarettes (internationally 5, 10, 25 cigarette 
packs exist).
      Carton = 10 Packs, 200 cigarettes.
      Master Case = 10,000 cigarettes (internationally 12,000 
cigarettes).
      40 Foot Container = 1,000 master cases, 10 million 
cigarettes.

Sources of Illicit Tobacco
    Tobacco is a legal commodity that is traded throughout the world, 
but price differences between nations and domestically, between states 
and provinces, have created a demand for contraband tobacco products. 
These cigarettes fall into several categories:

      Cigarettes purchased in nations, states, or provinces 
with low tax rates and smuggled into nations, states, or provinces with 
higher tax rates.
      Counterfeit cigarettes.
      Illicitly manufactured cigarettes.
      Cigarettes fraudulently diverted from Export Warehouses, 
Customs Bonded Warehouses, Foreign and Free Trade Zones.
      Stolen cigarettes, ranging from store burglaries to 
thefts of container-sized shipments in foreign, interstate or 
interprovincial commerce.

Tobacco Smuggling Overview
    Several groups of the Italian Mafia, Russian and Asian organized 
criminal groups, Colombian narco-traffickers are or have been involved 
in tobacco smuggling in Europe, Asia, North and Latin America. Non-
traditional organized criminal groups operating between the United 
States and Canada are currently involved in the contraband trade in 
tobacco, including illicit manufacturing, smuggling, and money 
laundering.
    In addition to producing counterfeit cigarettes, illegally 
manufacturing other cigarettes, and trafficking in contraband 
cigarettes, criminal organizations have used cigarettes as a commodity 
to launder the proceeds of other criminal activity and to facilitate 
various international trade fraud schemes. In Europe, some of these 
trade fraud schemes are known as Value Added Tax (VAT) Carousel 
Fraud.\2\ Cigarettes have been used to launder large cocaine and other 
drug smuggling proceeds in what is known as the Black Market Peso 
Exchange.\3\ Trade Based Money Laundering was described in detail in a 
Financial Action Task Force report that was published in June 2006.\4\ 
These organized crime groups operate through corruption and 
intimidation and are not afraid to use violence to further their 
business goals.
---------------------------------------------------------------------------
    \2\ Europa, Press Room, Press Releases, EU coherent strategy 
against fiscal fraud--Frequently Asked Questions Brussels, 31 May 2006, 
Internet, available from: http://europa.eu/rapid/
pressReleasesAction.do?reference=MEMO/06/221, accessed 28 April 2008.
    \3\ FinCEN, Advisory Issue 12, June 1999, Internet, available from: 
http://www.fincen.gov/advis12.html, accessed: 28 April 2008.
    \4\ Financial Action Task Force on Money Laundering, TRADE BASED 
MONEY LAUNDERING, 23 June 2006, Internet, http://www.fatf-gafi.org/
dataoec/60/25/37038272.pdf, accessed 12 November 2007.
---------------------------------------------------------------------------
    The terrorist organizations referred to in Mr. Kelly's testimony 
were the Real Irish Republican Army (IRA), and the Kurdistan Workers 
Party (PKK). The Real IRA and other factions of the IRA have smuggled 
cigarettes and other commercial products to fund terrorist activity in 
Northern Ireland and the United Kingdom for decades. In the United 
States, we have seen persons linked to Hezbollah convicted of offenses 
related to trafficking in contraband cigarettes in schemes to provide 
material support to terrorism. The PKK was linked to cigarette 
smuggling into Iraq that benefited the family of Saddam Hussein. The 
Real IRA, Hezbollah, and the PKK are internationally recognized as 
terrorist organizations.
    Here are some examples of ongoing or long-term smuggling of tobacco 
products that directly impacted or are currently affecting the United 
States:
Case Studies--North America
    The Saint Regis--Mohawk Reservation or Reserve, also known as the 
Akwasasne, straddles the international border between the United States 
and Canada. In 1997, an organized smuggling group with links to Italian 
and Russian organized crime that operated on the Akwasasne smuggled 
large volumes of cigarettes and liquor into Canada from the United 
States in violation of the laws of both countries. The money laundering 
case was the largest ever in the Northern District of New York and 
involved criminal transactions that totaled more than $687 million.\5\ 
This case resulted in the first guilty plea from a major tobacco 
manufacturer when Northern Brands International, a subsidiary of RJ 
Reynolds Company, pled guilty to violating Customs laws and forfeited 
$10 million and paid a fine of $5 million.\6\
---------------------------------------------------------------------------
    \5\ U.S. Department of Justice, Distinguished Service Commemorative 
Presented to John Colledge United States Customs Service, re: United 
States v. Miller et. al., Syracuse, New York, 30 November 2000.
    \6\ Ibid.
---------------------------------------------------------------------------
    The smuggling activity continued along the border between the 
United States and Canada. The Criminal Intelligence Service Canada 
(CISC), 2005 Annual Report on Organized Crime in Canada, was the most 
recent CISC report to specially address the illicit tobacco trade and 
the role of organized crime in that trade.\7\ The report made reference 
to tobacco products manufactured illegally in the United States, 
packaged in plastic bags, and smuggled to Canada for sale.\8\ The 
plastic bag packaging is a growing trend worldwide, which makes 
tracking and tracing cigarettes even more difficult. The 2004 report 
specifically linked the Hells Angels motorcycle gang and Asian 
organized crime to commodity smuggling conducted by organized crime 
groups operating along the international border between Canada and the 
United States.\9\ The 2003 report listed the origins of illicit tobacco 
products as the United States, South America, Asia and the Middle 
East.\10\
---------------------------------------------------------------------------
    \7\ The Criminal Intelligence Service Canada, 2005 Annual Report on 
Organized Crime in Canada, Ottawa, 20-21, available from: http://
www.cisc.gc.ca/annual_reports/annual_report2005/document/
annual_report_2005_e.pdf, Internet, accessed: 15 January 2008.
    \8\ Ibid.
    \9\ The Criminal Intelligence Service Canada, 2004 Annual Report on 
Organized Crime in Canada, Ottawa, 21, available from: http://
www.cisc.gc.ca/annual_reports/annual_report2004/ document/
cisc_2004_annual_report.pdf, Internet, accessed: 15 January 2008.
    \10\ The Criminal Intelligence Service Canada, 2003 Annual Report 
on Organized Crime in Canada, Ottawa, 19, available from: http://
www.cisc.gc.ca/annual_reports/annual_report2003/ Document/
cisc_annual_report_2003.pdf, accessed: 15 January 2008.
---------------------------------------------------------------------------
    In 2002, a criminal investigation led by U.S. Immigration and 
Customs Enforcement resulted in criminal charges of several people in 
Texas, New York, and California. The group was charged with 
distributing 2,313 master cases of counterfeit cigarettes with a retail 
value of approximately $5.4 million.\11\ The indictment also alleged 
that 5,616 master cases of cigarettes were shipped by the organization 
with a total loss of revenue to the Federal and State Governments of 
approximately $9.2 million.\12\ The following excerpt from the press 
release from the U.S. Attorney's Office for the Western District of 
Texas described the scheme: \13\
---------------------------------------------------------------------------
    \11\ U.S. Department of Justice, U.S. Attorney's Office, Western 
District of Texas, Press Re- 
lease, 11 April 2005, Internet, available from: www.usdoj.gov/usao/txw/
press_releases/2005/ Abraham.sen.pdf, accessed: 28 April 2008.
    \12\ Ibid.
    \13\ Ibid.
---------------------------------------------------------------------------
    The Organization employed different techniques to smuggle and 
introduce into the commerce of the United States contraband and 
counterfeit cigarettes. These included, but were not limited to, the 
manipulation of the Customs in-bond system. The defendants attempted to 
achieve this by making false and fraudulent material statements and 
representations to U.S. Customs authorities by presenting altered and 
falsified documents and by submitting fraudulent ``pedimentos,'' 
Mexican Customs documents.
    These pedimentos reflected that the contraband cigarettes had been 
exported from the United States to Mexico when, in truth, the 
contraband cigarettes had been smuggled and introduced into the 
commerce of the United States. The various documents used by the 
defendants were intended to convince anyone who inspected these 
documents that taxes and duties were not due and owing to U.S. Customs 
authorities, and/or the States of Texas, California and New York, on 
any cigarettes associated with these documents. The Organization 
modified and adapted its smuggling techniques in direct response to any 
measurable success by law enforcement in curtailing its illegal 
activities.
    The investigation revealed that the counterfeit cigarettes were 
shipped in containers on international waters from Asia to the United 
States. It is known that at least two containers of counterfeit 
cigarettes arrived at the port of entry in Long Beach, California. To 
prevent detection by U.S. Customs authorities, the defendants caused 
the shipments of counterfeit cigarettes to be manifested as other 
merchandise, for example ``toys'' and ``plastic goods.'' When the 
counterfeit cigarettes arrived at the port of entry, the members of the 
organization attempted to unload, smuggle and distribute the 
counterfeit cigarettes in the United States.
    Some of the elements in the Doggett bill would have greatly 
assisted in the investigation and prosecution of this and other cases. 
The export bonds, wholesaler's permits, and more uniform record keeping 
may well have prevented this scheme.
Case Study--Europe
    In 1961 the free port in Tangiers, Morocco was closed and the 
cigarette smuggling operations that operated there for a decade were 
moved to the former Yugoslavia and Albania.\14\ This relocation greatly 
benefited the Camorra, an Italian organized crime group from the Naples 
area.\15\ When those states failed in the early 1990s, the Camorra and 
other criminal groups quickly took advantage of the instability in the 
region and again expanded their criminal enterprises in the region.
---------------------------------------------------------------------------
    \14\ Behan, Tom. The Camorra, 43-44, London: Routledge, 1996.
    \15\ Ibid.
---------------------------------------------------------------------------
    In 1999, a report issued by the Italian Anti-Mafia Commission, 
identified Albania as a major transshipment point for cigarettes 
smuggled to Italy and various countries in the Middle East.\16\ Reports 
from multiple sources stated that the Prime Minster of Montenegro at 
that time, Milo Djukanovic, granted smuggling rights to several people 
in exchange for substantial bribes. Djukanovic was implicated in 
cigarette smuggling in testimony in an Italian court by a leading 
figure in Italian cigarette smuggling with links to the Camorra who 
claimed that he personally negotiated cigarette smuggling rights from 
Montenegro with Djukanovic.\17\ Milo Djukanovic was recently re-elected 
as the Prime Minister of Montenegro.
---------------------------------------------------------------------------
    \16\ Center for Public Integrity. Tobacco Companies Linked to 
Criminal Organizations in Cigarette Smuggling, Italy. available from: 
http://www.publicintegrity.org/report.aspx?aid=354; Internet; accessed 
14 January 2008.
    \17\ Ibid.
---------------------------------------------------------------------------
    The Balkans region remains deeply involved in cigarette smuggling 
and criminal investigations into illicit activities dating back into 
the 1990s. In June 2007, a story in the SE Times reported that Italian 
prosecutors were about to charge Milo Djukanovic and others for their 
participation in a criminal enterprise involving cigarette smuggling 
and money laundering from 1994 to 2002.\18\ Also in June 2007, it was 
reported that Serbia's special organized crime prosecutor announced 
that they began an investigation of Mira Markovic, Slobadan Milosevic's 
widow, and her son, Marko Milosevic, for cigarette smuggling between 
1996 and 2001 that reportedly earned them tens of millions of 
Euros.\19\
---------------------------------------------------------------------------
    \18\ SE Times, Italian prosecutors to charge former Montenegrin 
officials with cigarette smuggling, 24 June 2007, Internet, http://
www.balkantimes.com/ocoon/setimes/xhtml/en_GB/features/setimes/
newsbriefs/2007/06/24/nb-04, accessed 10 January 2008.
    \19\ Reuters, Milosevic widow, son in cigarette smuggling probe, 11 
June 2007, Internet, http://www.reuters.com/article/worldNews/
idUSL1181733220070611, accessed 10 January 2008.
---------------------------------------------------------------------------
    The situation in the Balkans impacted not only Europe, but also the 
United States. Some of the smuggled cigarettes were manufactured in the 
United States and proceeds from the illicit activity were laundered in 
the United States. High level government corruption and failed states 
are a cause for concern of all nations.
Unique Serial Numbers and Other Marks
    Historically, law enforcement has lacked the ability to trace 
contraband tobacco products. Invoices frequently described container 
shipments of cigarettes simply as: ``American Made,'' without 
identifying the brand. The shipments were sold several times while the 
cigarettes were in transit, the invoices were faxed or otherwise 
transmitted many times, resulting in critical data being blurred in 
transmission or possibly altered between transmissions. The cigarette 
packages and cartons lacked unique serial numbers that were readable by 
law enforcement authorities. The unique numbers found on master cases 
were often removed by traffickers to hinder law enforcement efforts to 
trace the cigarettes. The requirement of the Doggett bill to mark 
individual packages with unique serial numbers and markings will make 
it easier to distinguish diverted or stolen cigarettes from those 
legally introduced into commerce. The unique serial numbers and high-
tech stamp described in the Doggett bill will significantly aid law 
enforcement authorities in the United States and our international 
partners to track and trace cigarettes that originated in the United 
States. The State of California and the countries of Brazil, Malaysia, 
and Turkey have introduced marking regimes similar to those described 
in the Doggett bill. Canada recently contracted for a comparable 
system. California has publicly reported a reduction in contraband 
trafficking and increased revenue collection with a high-tech stamping 
system, which has paid for itself. The loss of revenue to the United 
States, State and local governments (depending on the State and 
locality) for one 40 foot container of cigarettes can easily exceed 1 
million dollars.
Export Bonds
    For nearly 50 years cigarettes manufactured in the United States 
have been exported to brokers who introduced these cigarettes into the 
black market. The lack of enforcement and financial accountability by 
the exporters fueled this illicit trade. The export bonds required by 
the Doggett bill would force exporters to exercise more due diligence 
in ensuring their products are not smuggled back into the United States 
or into another country.
Wholesale Permits
    It is important that all manufacturers, wholesalers, importers, and 
export warehouse proprietors have an appropriate permit to conduct 
business related to tobacco products. The permits are important in 
ensuring due diligence in the supply chain. A permit system would aid 
law enforcement agencies in their efforts to identify criminal elements 
in the tobacco trade who might seek a permit in the United States to 
smuggle tobacco products into, through or from the United States. The 
information sharing provisions in the Doggett bill would allow the 
exchange of this data with international regulatory and law enforcement 
partners, thus enhancing law enforcement efforts directed at 
transnational organized crime groups.
Control of Manufacturing Equipment
    Increasingly sophisticated equipment is being used in illicit 
cigarette manufacturing in the United States and throughout the world. 
The equipment is used to produce counterfeit and other tobacco 
products. The mechanisms to control the equipment utilized in the 
manufacturing and application of cigarette tax stamps would be an 
important tool in suppressing both the counterfeiting and illicit 
manufacturing of tobacco products and will make it more difficult to 
illicitly manufacture cigarettes. The Doggett bill is not intended to 
control devices that an individual would use to make cigarettes for 
their personal use, but rather that equipment which has commercial 
applications.
Recordkeeping
    The Doggett bill does not call for businesses engaged in the 
tobacco trade to maintain records that they currently do not maintain 
for Federal, State, and local Governments. What the bill requires is 
more specificity in their recordkeeping. In my experience, if the 
businesses maintained records; they contained the vague or non-existent 
references as to country of origin, false or inappropriate harmonized 
tariff schedule classifications, and incomplete information as to the 
parties in the transactions. Given the fraud that has historically been 
associated with the tobacco trade, I do not believe it is not 
unreasonable for the government to mandate accurate record keeping.
Creation of Right of Action for State Tobacco Administrators for 
        Failure To Report
    State tobacco administrators have the primary responsibility for 
the collection of tobacco taxes and in some instances, State sales 
taxes. The changes proposed in the Doggett bill would provide a legal 
remedy for the States to take action in the U.S. District Courts. Given 
the interstate and international nature of the tobacco trade, this is 
often the best venue. In addition, the States have been active, and in 
some cases assumed a leading role in the pursuit of criminal 
organizations involved in the illicit tobacco trade. The Doggett bill 
does not delegate any authority to the States, nor does it infringe on 
tribal sovereignty.
Conclusion
    The overview of the tobacco smuggling schemes in North America and 
the Balkans described in these remarks illustrated three of many long-
term tobacco smuggling scenarios that involved or involve organized 
criminal groups, allegations of high level corruption of national 
governments in the Balkans, issues that directly affect or affected the 
security and the commerce of the United States and our closest friends 
and allies. The criminal activity associated with tobacco smuggling is 
not benign. The criminal and terrorists groups involved in this 
activity are doing so for personal enrichment, funding or laundering 
the proceeds of other criminal activities, or to finance terrorist 
acts.
    Generally speaking, law enforcement in the United States, several 
states and many other nations has been inadequately funded, trained, 
networked with domestic and international partners, conflicted with 
ever-changing priorities, or lack the legal framework to adequately 
address the illicit tobacco trade. Many offenses associated with the 
illicit tobacco trade lack severe penalties associated with drug or 
arms trafficking. Enforcement in the United States and other nations 
did not receive high priority because the crime was looked upon as 
``the other guy's problem'' or the transshipment locations were 
profiting from foreign or free trade zone activity, freight handling, 
and associated financial transactions. Transnational organized crime, 
in any form is not ``the other guy's problem,'' it is the 
responsibility of all nations.
    The ``Smuggled Tobacco Prevention Act of 2008'' will eliminate many 
of these shortcomings in the United States. Thank you for the 
opportunity to appear before the Committee on this important matter.

                                 

    Mr. DOGGETT. The jurisdiction over the STOP Act is divided 
between our Committee and the Judiciary Committee which 
recently had a hearing on it. It was an insightful hearing. 
They deal with Alcohol and Tobacco, ATF, while we deal with 
TTB.
    I am pleased to respond to questions about the STOP Act and 
about its objectives, and just appreciate the fact that the 
Committee is conducting this oversight hearing.
    The STOP Act, which has been offered in various forms for 
almost a decade, is not going to be accepted in its current 
form by the tobacco industry.
    What I am outlining today would be an approach that I hope 
eventually a future Congress will implement, but what I would 
like to do is see us take at least a few commonsense steps this 
session, I hope in a bipartisan fashion, to try to address 
tobacco smuggling and then have the Committee continue 
considering some of the high-tech approaches that other 
governments are using to really get at this problem in the 
future.
    I welcome any questions you might have and thank you for 
this opportunity.
    [The prepared statement of the Honorable Lloyd Doggett 
follows:]

           Prepared Statement of The Honorable Lloyd Doggett,
          a Representative in Congress from the State of Texas

    Chairman Lewis, Ranking Member Ramstad, and colleagues, thank you 
for conducting this oversight hearing and giving me this opportunity to 
discuss legislation pending before our Committee that concerns one of 
the major responsibilities of the Alcohol and Tobacco Tax and Trade 
Bureau. This is H.R. 5689, the Smuggled Tobacco Prevention Act of 2008, 
the STOP Act, a sensible law enforcement approach to prevent the 
smuggling of tobacco.
    Tobacco is the single largest illegally trafficked legal product on 
the planet. By reducing tobacco smuggling, we can improve public 
health, collect more government revenue, and curb a source of funding 
for organized crime and terrorists.
    ``Tax-free'' black-market tobacco is sold at lower prices, 
increasing consumption and tobacco-related illness, while denying much-
needed government revenue and sometimes financing terrorist groups. An 
estimated 21 billion contraband cigarettes entered the U.S. market 
during one recent year; almost half of this represents international 
product or U.S. product for export coming back into the U.S. to evade 
Federal, State and local taxes, and a little more than half represents 
internal cross-State smuggling to evade State and local taxes. Total 
lost revenue from illegal tobacco is estimated at $2-$4 billion each 
year.
    Worldwide, there are an estimated 600 billion illicit cigarettes, 
amounting to a loss of $40-50 billion in government revenue each year. 
And tax free, cheaper tobacco means more nicotine addicts. About every 
6 seconds someone dies from tobacco. That is why enactment of anti-
smuggling legislation is so important to public health groups such as 
Tobacco Free Kids and the American Lung Association, which have 
endorsed the STOP Act.
    Last year, when our Committee approved legislation to raise tobacco 
taxes in an effort to correct the disgrace of so many uninsured 
children across America, some of our colleagues here voiced concern 
that more taxes would only result in more smuggling. That is not an 
unreasonable concern, but it is an unreasonable excuse for opposing 
reasonable taxation of tobacco products. When smuggling is the problem, 
law enforcement should be given the tools to prevent and control it. 
That is what the STOP Act would do. Indeed, World Bank studies have 
shown that the availability of illicit tobacco is linked more closely 
to tolerance for contraband sales than to the level of taxation. 
Choosing between raising tobacco taxes and reducing tobacco smuggling 
represents a false choice because if we give our law enforcement 
officers the tools they need, we reduce smuggling and recoup needed 
revenue.
    Highly profitable tobacco smuggling can be used to advance other 
criminal objectives including support for international terrorist 
organizations. I commend our colleague and Ranking Member of the House 
Committee on Homeland Security, Rep. Peter King, who recently released 
a revealing report entitled ``Tobacco and Terror: How Cigarette 
Smuggling is Funding our Enemies Abroad.'' In an interview with the 
Committee on Homeland Security staff, a convicted tobacco smuggler, 
turned confidential informant for the State of New York admits:
    Tobacco smugglers' only fear is losing a load of cigarettes. We do 
not fear law enforcement. They will pull us over, seize the load, and 
maybe we get arrested; but most likely we do not. Worst case scenario, 
we go to jail for a couple of months before returning to smuggling 
again. Think about it. A small fish like me can make $50,000 a month 
working only a few hours each week. The big fish make hundreds of 
thousands a week, most of which goes to the Middle East in cash or 
trade transactions.
    Among the groups with whom I have worked almost a decade in 
developing the STOP Act is the Federation of Tax Administrators, an 
association of the principal tax and revenue collecting agencies in 
each of the 50 States, the District of Columbia, New York City and 
Puerto Rico. On the front lines of dealing with tobacco and the impact 
of tobacco smuggling across America, the Federation has submitted a 
letter of support for the STOP Act (Appendix A), which along with the 
written testimony that the Federation will be submitting after our 
hearing, I would ask for it to be made a part of our record. These 
administrators conclude that the legislation that I am proposing ``will 
significantly reduce the smuggling of U.S. tobacco products and aid in 
the enforcement of State tobacco tax requirements across the country.''
    We share jurisdiction over these matters with the Judiciary 
Committee, which through its Subcommittee on Crime, Terrorism, and 
Homeland Security held an important hearing on the STOP Act only a few 
weeks ago concerning those of its provisions, which would be 
implemented by ATF, the Bureau of Alcohol, Tobacco, Firearms, and 
Explosives. The portion of the legislation that comes within our 
Committee today is that which concerns the Alcohol and Tobacco Tax and 
Trade Bureau and its responsibilities for collecting the Federal excise 
tax on tobacco products and preventing ineligible persons from entering 
the tobacco industry. I believe that TTB should be given additional 
tools and resources to address this criminal activity.
    As a result of the Judiciary hearing, I have concluded that one 
provision would be better implemented by TTB rather than ATF, as I had 
originally proposed. That is the provision which would ban the sale of 
tobacco product manufacturing equipment to unlicensed persons in order 
to prevent the illegal use of such machinery and reduce the problem of 
illegal manufacturing.
    With such a volume of smuggled tobacco, one of the objectives of 
the STOP Act is to be able to follow tobacco from manufacturer through 
the distribution chain, to be able to determine where particular 
tobacco that is smuggled was made and where it was supposed to be sold 
before it was diverted. Perhaps the best way to do that is to follow 
the example of the State of California and Canada by using state-of-
the-art technology to apply a high-tech stamp during the manufacturing 
process, which cannot be easily counterfeited and which can contain 
complete information about the product to which it is attached. The 
stamp would contain encrypted information readable by a portable 
scanner, enabling enforcement officials to distinguish real tax stamps 
from counterfeits, identify who applied the stamp and initially sold 
the product, and obtain other information useful for tracking, tracing, 
and enforcement purposes.
    Several companies have the capacity to implement such a system, and 
two of them, Authentix and SICPA Secure Ink, are submitting written 
testimony for the record of this hearing and have provided me with 
letters in support of my bill (Appendix B and C). In California, which 
contracted with SICPA, cigarette tax revenue increased by $100 million 
in the first 20 months after these new high-tech tax stamps were 
introduced in 2005. In its testimony for today's hearing, SICPA 
indicates that it has developed similar stamp systems for both Brazil 
and Turkey. My bill allows the Secretary of the Treasury the 
flexibility to develop regulations that allow us to build on what has 
worked, and what can be improved, on the California model and from 
other countries.
    While the STOP Act proposes this approach, it is clear that 
domestic tobacco manufacturers are not yet willing to accept it. While 
considering this requirement for enactment by a future Congress, I 
would ask the Committee to explore other provisions that I have 
advanced to see if we cannot achieve bipartisan agreement on a few 
steps that can be taken now in this Congress to make a difference in 
the battle against tobacco smuggling.
    In addition to the illegal machinery provision that I mentioned, I 
believe that we should at least adopt provisions included in the STOP 
Act similar to those that were overwhelmingly approved by this Congress 
as a part of the Children's Health Insurance legislation that President 
Bush vetoed. These would broaden authority to deny tobacco permits to 
manufacture or import tobacco and would condition permit issuance upon 
compliance with State and Federal laws.
    The STOP Act creates an audit trail, giving law enforcement access 
to information tobacco companies already have, improving law 
enforcement's ability to prevent illegal diversions of tobacco products 
and to identify and prosecute those who take part in this activity. 
Former U.S. Custom's agent John Colledge, with more than 20 years of 
Federal law enforcement service, testified earlier this year that ``The 
unique serial numbers and high-tech stamp described in the Doggett bill 
will significantly aid law enforcement authorities in the U.S. and our 
international partners (Appendix D).''
    Even if we are unable, in this Congress, to offer our law 
enforcement officers the advantages of a high-tech stamp that could be 
made easily available, we should at least require some unique, uniform 
serial number. This would give law enforcement officials access to the 
same information that the tobacco manufacturers already have. This 
measure is about arming our officers--arming them with the knowledge 
they need to fight increasingly sophisticated smugglers.
    I believe that TTB agrees that adding serial numbers to the records 
to be maintained by manufacturers, importers, and wholesalers is a 
simple way to help tighten the audit trail.
    The STOP Act, coupled with well-crafted regulations, will provide 
State and Federal law enforcement, regulatory, and prosecutorial 
agencies with valuable tools to fight tobacco smuggling.
    This year over 150 nations are beginning to negotiate a set of 
rules for a worldwide effort to eliminate the illicit trade of tobacco 
as part of the Framework Convention on Tobacco Control in Geneva, 
Switzerland. The Bush Administration signed the Convention in 2004, but 
unfortunately, we are excluded from any participation in the ongoing 
negotiations on international smuggling and other issues because during 
the last 4 years, President Bush has not even bothered to submit this 
treaty for ratification to the Senate. As the world moves ahead with a 
protocol to keep cheap smuggled cigarettes out of the hands of children 
and profits out of the hands of criminals and terrorists, we should be 
part of the solution, not the problem.
    The benefits of this bill can be measured in deaths and disease 
that are prevented, in enhanced quality of life for those who avoid 
nicotine addiction, and in billions of dollars saved in both lost 
revenue and health care costs. I am eager to work with all Members of 
our Committee in taking meaningful steps to more fully empower law 
enforcement as it is struggling with smuggling.

                                 

    Chairman LEWIS. Thank you very much, Mr. Doggett.
    At this time, I will open it up for questions for Mr. 
Doggett. I ask that each Member follow the 5 minute rule.
    Mr. Doggett, for many years, you have been a leader on the 
need to prevent smuggling. Can you just tell Members of the 
Subcommittee what can TTB do to discourage and prevent 
smuggling now under current law and label authority?
    Mr. DOGGETT. I am not in any way critical of TTB. I think 
they are doing the job within the limits of their legislative 
authority.
    All that I am looking to do is to try to supplement their 
ability to deal with this problem and the same for ATF.
    If you have this evening a State Trooper on one of the 
interstates stop a truck for some traffic violation and they 
look in the back and they find it does not look like it came 
from one of the major cigarette manufacturers but is full of 
cartons of cigarettes, the question is whether or not that 
State Trooper and his superiors will have the information 
available that they need in order to determine where this 
tobacco came from, where it is headed, and whether it is likely 
to be the property of a criminal enterprise.
    The tobacco manufacturers have the ability to trace their 
product now. I would like to be sure that law enforcement at 
TTB and right down to local law enforcement have access to the 
same information.
    While I propose in the STOP Act a high-tech stamp that 
California, Canada, Turkey and Brazil are using, I think if we 
did as little as to just add four words to one of the sections 
concerning maintaining records with serial numbers, that would 
be helpful.
    I proposed in the STOP Act originally that it be done by 
ATF, but after the Judiciary hearing, I think TTB is a better 
place, that we prohibit the sale of tobacco manufacturing 
equipment to those who are not already licensed to manufacture 
tobacco.
    Chairman LEWIS. Mr. Doggett, where would you place a serial 
number? Would it be on each carton or each pack?
    Mr. DOGGETT. I think it would be on each packet of 
cigarettes.
    Chairman LEWIS. Is that feasible?
    Mr. DOGGETT. Let me answer it in two ways. First, I think 
that there is already information the major tobacco 
manufacturers have. They are not a pen and pencil operation. It 
is a high-tech computer operation. I think they already have 
this information and they sometimes make it available 
voluntarily to TTB on request when they get the information.
    What I have proposed that is new and I think is more far 
reaching than certainly this Congress and the industry is ready 
to accept at present is the use of a high-tech stamp.
    California is doing that, and over 20 months of putting 
that high-tech stamp on for sales in California, they say they 
have collected an extra $100 million in State revenue.
    Canada is going to this system, will have it implemented 
within, I believe, the next few months. Brazil and Turkey have 
implemented similar systems.
    I believe that you have testimony that is submitted and any 
letters they have, I would again ask consent to incorporate as 
part of my testimony, from two companies that are involved in 
doing this kind of work already.
    Mr. DOGGETT. They say it can be done fairly quickly, in a 
matter of months, and that it can save millions of dollars.
    We are trying to have a seamless system where you can 
easily tell where this tobacco came from, where was it heading 
when it got diverted, and that is the goal here.
    Chairman LEWIS. Thank you very much. Mr. Ramstad is 
recognized.
    Mr. RAMSTAD. Thank you, Mr. Chairman. Mr. Doggett, thank 
you for your testimony about the STOP Act.
    When you quantify the number of contraband cigarettes 
coming into this country every year at 21 billion, it certainly 
got the attention of everybody, I think, in the room. I again 
appreciate your work in this area.
    Is current state of the law such that manufacturing 
equipment can be sold legally to unlicensed people?
    Mr. DOGGETT. That is my understanding. We would clarify, 
one of these provisions that I say is unlike the high-tech 
stamps, which is not acceptable to the industry, I would think 
that this is a provision that we might be able to reach 
agreement on, that only those licensed through TTB should be 
able to obtain tobacco manufacturing equipment because they are 
the only people that are licensed to use it.
    Mr. RAMSTAD. I was going to ask if there was any empirical 
data to support the efficacy of doing that, and you cited the 
California experience. Can you provide us with a summary of 
that?
    Mr. DOGGETT. Yes, I can. I believe that the testimony 
offered by two companies who provide this kind of service, the 
one in California, I believe, is called SICPA. Its U.S. 
headquarters is based out here in Virginia. They have a system 
that they describe. It is SICPA Secure Ink, I believe it is 
called.
    There is another company called Authentix. They have 
designed various systems. SICPA is providing the service in 
Turkey, in Brazil, in California, and in Canada.
    I believe that looking at the testimony from these two 
companies, it gives you an idea of how the system could 
eventually be implemented, but as I say, I think it is probably 
unrealistic to assume that can be done in the short term, but I 
believe it is worth this Committee's further study for future 
implementation.
    Mr. RAMSTAD. Just one final question, Mr. Chairman. Aside 
from the serial number requirement and the manufacturing 
equipment limit, that is limit on sales to unlicensed or 
restrict sales to unlicensed people, what else comprises the 
STOP Act? Are those the major two elements of the bill?
    Mr. DOGGETT. There are a number of other elements. I would 
like to suggest one other I did not reach yet in my testimony 
that I believe would be important, and that is that when we 
debated the CHIP legislation, there actually were a few 
provisions that were included in that legislation. They were 
not debated or discussed, I believe, in this Committee, that 
Congress passed twice, and as you know, that was vetoed by the 
President.
    Those provisions would broaden authority to deny tobacco 
permits to manufacture or import tobacco and would condition 
issuing a permit to import or manufacture tobacco on compliance 
with State and Federal laws. That is not smuggling, among other 
things. I think that would be a constructive step.
    There are other provisions concerning trying to have a 
seamless distribution system, bonding, reporting, provisions I 
would like to see adopted at some point in the future, unlikely 
to occur this year.
    What I am trying to look for are a few provisions that 
might carry us a few steps forward in the effort against 
smuggling, and then have the Committee to continue to consider 
these others, observe the experience of California, Canada, and 
these other countries, and see if it would not be in our 
interest from a revenue standpoint and from a public health 
standpoint to adopt these provisions eventually.
    Mr. RAMSTAD. Again, I want to thank my friend from Texas 
for your testimony. There are few things more important than 
keeping cigarettes out of the hands of minors especially given 
the nature of nicotine, the addictive nature of nicotine, and 
the damage it causes, lost lives and so many diseases that are 
related.
    Thank you for your work in this area and I yield back, Mr. 
Chairman.
    Mr. DOGGETT. Thank you so much.
    Mr. NEAL [Presiding]. Thank you, Mr. Ramstad.
    Mr. Doggett, first, a word of thanks again as Mr. Ramstad 
has indicated for your leadership on this very issue.
    Do you think it is feasible to implement a high-tech tax 
stamp on each package of cigarettes at the present time?
    Mr. DOGGETT. I believe it is. California did provide the 
leadership on this. They have been in effect since 2005, and 
over the first 20 months, they were able to reduce smuggling 
and the sale of contraband tobacco by about $100 million.
    The Canadian system is being implemented this year. The 
testimony from SICPA refers to the Turkish and Brazilian 
systems, with which I am not as familiar.
    The technology is there. We all know about the use with all 
the problems after 9/11 of high technology to have a system 
that is not perfect on counterfeiting but reduces the 
counterfeiting, and through that stamp, a variety of 
information can be accessed about where it was manufactured, 
when it was manufactured, and where this product was headed.
    That, I think, can be invaluable to not only Federal 
administration through TTB but through State and local 
administration, and that is why the Federation of Tax 
Administrators has joined the public health groups in endorsing 
this, and why Mr. Colledge, who has extensive experience that I 
referred to earlier, testified at the Judiciary Committee and 
felt this was so important to get adopted.
    Mr. NEAL. How does your bill relate to the International 
Framework Convention for Tobacco Control?
    Mr. DOGGETT. That is an important question and I must say a 
rather disappointing one. The United States under the Bush 
Administration participated in the negotiating of a Framework 
Convention with countries around the world to deal with this 
menace of tobacco, a menace that really has the potential, 
according to the World Health Organization, of killing more 
people than a whole series of other maladies put together.
    The principal role, I think, that the United States played 
in those negotiations was try to weaken the Framework 
Convention just as much as it possibly could. Although there 
was some dispute about whether they would sign, then they 
signed the Framework Convention.
    That was 4 years ago. Since that time, President Bush has 
never bothered to submit the Framework Convention to the Senate 
for approval, for ratification.
    The Framework Convention Committee is meeting in Geneva 
this summer to look at this problem of tobacco smuggling and 
what should be done to address it. We will not have a seat at 
the table.
    I believe that the legislation that I propose would be 
consistent with the objectives of the Framework Convention on 
smuggling, only one aspect of the many public health issues 
associated with the international pandemic of nicotine 
addiction, but an important one.
    I hope that next year the treaty is submitted and that we 
can get a seat at the table. This is a big problem. We also 
propose in the STOP Act for more information sharing between 
our government and foreign governments on this problem, and we 
ought to have a seat at a table like the Framework Convention 
to deal with this and other public health issues.
    Mr. NEAL. Thank you. Mr. Nunes is recognized to inquire.
    Mr. NUNES. Thank you, Mr. Chairman.
    Mr. Doggett, thank you for appearing before us. I think we 
can all agree that contraband cigarettes are a huge problem 
that we have in the United States. It was very predictable as 
we have continued both at the Federal and State level to raise 
taxes on cigarettes that it creates a black market, underground 
market.
    In your testimony, you talk a lot about the California 
proposal that was enacted in 1995 with the stamp--I mean in 
2005. I think it is important--you testified that this has been 
an overwhelming success.
    I think there is also evidence on the other side, being 
from California, that this has been a dismal failure to some 
degree. Now, it is very tough to police who is selling 
contraband cigarettes at the actual mini-market level. When 
there are mini-markets on every street corner nowadays, there 
is considerable problems associated with this stamp.
    Within just a month after the stamp was enacted, there was 
already counterfeit stamps on the market.
    I want to know, as we begin to air this out, and I will 
submit some information for the record, and I assume you will 
submit information for the record, and I think it is important 
to have these types of hearings, but we need to make sure that 
with policies like these that we do not end up in the same 
place where we are in California with now counterfeit stamps 
being enacted.
    I do not know if you have any ideas about how we can ensure 
that we do not have the stamp duplicated, and what we can do in 
the future to make sure if your policy is enacted, that we do 
not have a continuing problem with contraband cigarettes.
    Mr. DOGGETT. I welcome any information you have in that 
regard. I know you have some familiarity with your home area.
    I would just say that the comments you have made run 
counter to what Governor Schwarzenegger's Administration has 
said about the success of this program and pointing to the 
additional revenues that have been raised through the program, 
and the fact that other jurisdictions are now looking at it.
    I would again re-emphasize as I said at the beginning, this 
is the first State to do it. I am sure there are some things to 
work out in how it happens. We have as a practical matter at 
least the next year to take a look at how they are doing it and 
see what changes the Canadians make in the California approach, 
as well as to survey, which I have not yet, what experience 
Turkey and Brazil have had, two countries that have been very 
involved with tobacco through the years, but who have adopted 
this kind of system.
    What I would look for now, as I said in my testimony, is 
are there a few areas that might help us address tobacco 
smuggling that could be more or less acceptable to the industry 
and could take us a few steps closer, a few more tools 
available to deal with tobacco smuggling this year.
    We hope we can have a dialog about that.
    Mr. NUNES. Thank you, Mr. Doggett.
    Mr. Chairman, I would like to thank the Committee for 
holding this hearing. I will be submitting some information for 
the record. I think it is important that we air out all these 
issues so we get all the facts on the table before we try to 
proceed making law here in the Nation's Capitol.
    Thank you and I yield back.
    Mr. NEAL. Thank you. Your input is appreciated.
    The gentleman from New Jersey, Mr. Pascrell, is recognized 
to inquire.
    Mr. PASCRELL. Thank you, Mr. Chairman.
    Mr. Doggett, what are the tobacco companies doing to 
counter cigarette racketeering?
    Mr. DOGGETT. It depends on whether it helps or hurts them. 
This Committee has been involved in the past in considering 
legislation which became the law concerning grey marketing 
tobacco.
    That was a situation where I think Philip Morris lost 
control of its own distribution chain and in some cases, 
product that was manufactured by its facilities in other 
countries was being brought back to create a cheaper grey 
market to compete with what Philip Morris made in this country.
    There were changes made a couple of times in the past 
through legislation that had the support of the tobacco 
industry to get that passed.
    On the other hand, there had been numerous situations 
around the world and in the United States where the tobacco 
industry appears to have been complicit in using smuggling 
directly or indirectly to build market share for its product.
    Mr. PASCRELL. How does that work?
    Mr. DOGGETT. One example----
    Mr. PASCRELL. How does that work and what are the positions 
that have been opposed by the cigarette companies?
    Mr. DOGGETT. One way it worked in New York State was that a 
distributor for RJR, who I think is still in prison, was 
involved in using tobacco smuggled through an Indian 
reservation to get into Canada.
    Another way it has worked has been with reference to 
European Commission. Philip Morris, for example, has agreed to 
pay $1 billion to European Commission to settle charges 
concerning the role it played in tobacco smuggling and in other 
related activities in the----
    Mr. PASCRELL. Did they admit to the smuggling, 
participating?
    Mr. DOGGETT. They only agreed to pay $1 billion after they 
were charged with it, which is not a legal admission but I have 
not found them ready to give a billion here or a billion there 
just for the public good.
    Mr. PASCRELL. Were they complicit?
    Mr. DOGGETT. I believe they were and there are other 
examples. I am not focusing just on them. Japan Tobacco, which 
got involved, also has agreed to make payments to the European 
Commission.
    There have been reports, for example, in Colombia, which we 
are very concerned about, in smuggling drugs up here, that a 
few years ago, four out of every five Marlboro's sold in 
Colombia were smuggled into Colombia.
    It is a problem that has occurred around the world, not 
just with American companies, but where it has been in the 
interest to build market share at lower prices in certain 
countries, addicting other people's children to the same kind 
of problem that our children have had.
    Mr. PASCRELL. In your estimation, what would be of great 
productivity here to respond to this great problem? What do the 
cigarette companies oppose that you think would have the 
greatest impact on the problem that you are trying to address? 
What do they oppose?
    Mr. DOGGETT. I think they are certainly not agreeable to 
using the high-tech stamp yet.
    Mr. PASCRELL. Why not? Because of cost?
    Mr. DOGGETT. I believe there is some testimony that they 
filed in the Judiciary Committee that I should think they are 
filing here, that we will have Members raise here, expressing 
their concern about that, about bonding requirements, about 
labeling tobacco as to where it is headed.
    I will let them make all their arguments on that. My 
objective today is to say are there not a few steps, the 
illegal machinery provision, the CHIP provisions, that we might 
take, the unique serial number provision, so that law 
enforcement will know what major tobacco manufacturers already 
know, are there not a few steps that we could come together on 
to advance this.
    Then we can consider the experience Mr. Nunes referred to, 
the experience that I have heard of from California, and see 
how they mesh, and whether over the long haul, using the latest 
state-of-the-art technology, we can have a more seamless 
distribution system for this deadly product.
    Mr. PASCRELL. Thank you. Mr. Chairman, I think the Members 
of the Committee, would profit from seeing either former 
testimony or reports from the Bureau itself, as to the extent 
of participation of cigarette companies in the aspect of 
smuggling and racketeering of cigarettes. I think it would be 
quite astonishing.
    If we could get that, Mr. Chairman, I would appreciate it.
    Mr. NEAL. I think that is a subject for further inquiry for 
sure.
    Mr. PASCRELL. Thank you.
    Mr. NEAL. Thank you, Mr. Pascrell. The gentleman from 
Virginia, Mr. Cantor, is recognized to inquire.
    Mr. CANTOR. Thank you, Mr. Chairman. I want to thank the 
gentleman from Texas for his testimony.
    Obviously, there are many points with which I think some 
Members would disagree with some of the allegations that have 
been made here regarding the tobacco companies' involvement in 
illegal activity and smuggling, et cetera.
    I do think we ought to strive to try to set the record 
straight in any kind of testimony/evidence that we could see to 
try and clear that up. I, for one, am a little bit doubtful 
let's say as to some of the statements that have been made.
    I do know that there has been a concerted effort here in 
Congress to try and put an end to the illegal importation of 
tobacco products. I know in 2000 and then in 2006, Congress 
passed the Imported Cigarette Compliance Act, tightened it up 
in 2006, and frankly dealt with some of the issues the 
gentleman from Texas raises 
here in insisting and requiring that all imported cigarettes 
comply with U.S. health warnings, ingredient disclosure laws, 
and also strengthening prohibitions on the diversion of export 
tobacco for domestic consumption.
    What I think, Mr. Chairman, my question is beyond the sort 
of questions that have been raised about the high-tech stamp 
and whether it can be counterfeited, because I do think those 
questions have been raised, and we ought to take a look at 
that, but what we are really talking about is an allocation of 
resources and priority of how we are going to spend taxpayer 
dollars.
    If Congress has already taken action really on point to 
what you are talking about, trying to limit the pirating, 
trying to limit the illegal importation, why are we not trying 
to enforce those laws? Why are we not using our resources to 
enforce those laws, and frankly go right to the crux of the 
matter, which is these Internet sales that are going on.
    I know that you are a cosponsor of the PACT Act, and there 
are ways for us to try and put a stop to some of these evasion 
techniques that are going on out there, not only evading taxes 
but also promoting the illegal transaction and sale of 
cigarettes.
    Again, I think what I would ask the gentleman from Texas is 
how does the STOP Act do anything other than that which 
Congress has already done? How do you promote what we are 
trying to do by requiring the stamping of a destination during 
the manufacturing process?
    How does that do what we are trying to do instead of 
focusing on what we really should be focusing on, the Internet 
sales of tobacco?
    Mr. DOGGETT. First, we are in agreement that Internet sales 
is one of those areas that has not been adequately addressed in 
any of the prior legislation, and I support that and I believe 
the tobacco industry does, too.
    The legislation to which you refer is the grey marketing 
legislation that I mentioned in my earlier testimony, where 
Philip Morris and I think only Philip Morris was having a 
problem about some of its own product coming back into the 
United States and competing with product that it made here.
    It was focused on grey marketing. It was not focused on 
black marketing. I actually tried--I think that came up in the 
Committee maybe just before you came onto the Committee. I 
tried to get some of these provisions included in that 
legislation unsuccessfully.
    What I want is a seamless system, an audit trail. We have 
all seen those like World War II movies where people are using 
cigarettes as currency. This is in many ways almost like 
currency, and there is laundering that occurs of that currency.
    I want to be able to follow the tobacco from the point of 
manufacture to the ultimate point of use, and have a seamless 
system in that regard.
    I believe that a company like Philip Morris or RJR can 
essentially do that itself, has the information available, and 
by doing something like requiring the serial number to be 
available, which they provide sometimes voluntarily to TTB, to 
do that uniformly I think will help law enforcement.
    I think the high-tech stamp could accomplish a lot of that, 
but just over the short term, why can we not agree on illegal 
machinery, on the provisions that were in the CHIP Act, putting 
the serial number on there, and allowing TTB to share 
information with foreign governments.
    I do not think those are inconsistent or harmful to a 
tobacco industry with which, as you can tell, I disagree very 
strongly, but to a tobacco industry if it does indeed want to 
comply with the law and not be engaged in any kind of illicit 
traffic in tobacco.
    Mr. CANTOR. Thank you so much.
    Mr. NEAL. The gentleman from Ohio, Mr. Tiberi, is 
recognized to inquire.
    Mr. TIBERI. Thank you, Mr. Chairman. Thank you, sir, for 
testifying today.
    For the record, can you tell us a little bit about this 
high-tech stamp that we have been talking about and how it 
works?
    Mr. DOGGETT. Yes. I believe that I would again refer you 
specifically to the testimony of two of the companies that 
compete against each other for providing such a stamp.
    It is a stamp--I am not sure that it can be compared to the 
kind of information we are seeing on passports, as a stamp to 
try to reduce counterfeiting, but it attempts to use a high-
tech stamp that would go on each pack.
    It contains encrypted information that is readable by a 
portable scanner. It enables the enforcement officials to 
distinguish between real tax stamps and counterfeits. They 
identify who applied the stamp, who initially sold the product, 
and obtain other information that can be used in tracking and 
tracing the product for law enforcement purposes.
    I think the two approaches of these companies, and I 
believe there is another company or two who are out there doing 
that that I have not had any contact with, I asked them to 
forward testimony concerning as much of the mechanics while 
protecting any business confidentiality they have, and to 
respond to some of these questions.
    As you will get a chance to review their testimony about 
the different ways they do that, they say it is feasible to do 
this within a matter of months, that they can follow what they 
did in California using this portable scanner. They can do the 
same thing that they are helping Canada do, and have a much 
more seamless system.
    Mr. TIBERI. Do they know or do you happen to know what the 
cost of implementing such an approach would be? Did they 
discuss that with you?
    Mr. DOGGETT. I do not know the precise cost. I believe it 
is important to look at that. I do know the State of California 
says the result has been $100 million in additional revenue.
    Mr. TIBERI. One final thought with respect to the labeling 
issue. If you have a manufacturer that is exporting a 
particular cigarette to Italy and is also exporting that same 
cigarette to France, what would be the benefits of doing that 
to neighboring countries, number one, and number two, what 
impact would that have on the U.S. manufacturer with respect to 
inventory?
    Mr. DOGGETT. You are referring to a requirement that is in 
the STOP Act that I have not discussed yet.
    Mr. TIBERI. Yes.
    Mr. DOGGETT. But is definitely in the Act that requires a 
label as to where this product is going.
    Mr. TIBERI. Correct.
    Mr. DOGGETT. It may be, by the way, if the high-tech stamp 
provision is put in there eventually, that all of that can be 
included in the high-tech stamp, that it can be monitored that 
way rather than a separate stamp.
    I will answer your question first by coming closer to home. 
There is also a requirement in there that if it is going to an 
Indian reservation, we do not make any changes in the laws 
concerning Indian reservations, but if it is destined for an 
Indian reservation, that you put that on there.
    That goes to the heart of some of the concerns that Peter 
King and his staff have raised about the use of Indian 
reservations for what appears to be avoidance of taxes by some 
people in the State of New York.
    As to the France and Italy example, I think maybe the best 
example is a place like Cyprus, Morocco, Bosnia, a small 
country that suddenly has billions of cigarettes going into 
that country. They are clearly not all destined for consumption 
in that country and that country may just be used as a trans-
shipment point to get into other markets.
    That is the purpose, just to try to track the tobacco as to 
where it is going. There may be a way to simplify the process 
from what I currently have in the STOP Act.
    Mr. TIBERI. The STOP Act would still regulate cigarettes 
going to Italy and France as well?
    Mr. DOGGETT. It would require telling us, when you ship 
them, where they are destined for. Are they going to Estonia, 
Bosnia, or are they really destined for some other place.
    Mr. TIBERI. Are any of those countries asking for this 
regulation, to your knowledge?
    Mr. DOGGETT. I am not sure about Bosnia. I believe all of 
the other countries are signatories to the Framework 
Convention, in which smuggling is a key part, and which they 
have already had some preliminary meetings and will meet again 
this Summer in Geneva to try to come up with stronger 
provisions to deal with tobacco struggling.
    They put out a number of papers about how serious and 
growing a problem this is.
    I think all those countries we mentioned, and I know France 
and Italy are participating in the Framework Convention 
negotiations.
    Mr. TIBERI. Thank you. Thank you, Mr. Chairman.
    Mr. NEAL. Thank you. Let me thank Mr. Doggett for his 
testimony this morning, and I would invite you, if you care to, 
Mr. Doggett, to join the Subcommittee for the rest of the 
hearing.
    I also want to welcome Mr. Thompson, the gentleman from 
California, who is a Member of the full Committee on Ways and 
Means as well.
    Mr. DOGGETT. Thank you so much and thank you for the 
insightful questions and comments of all our colleagues.
    Mr. NEAL. I would now like to call the next witness. It is 
now my pleasure to introduce Mr. John Manfreda, the head of 
TTB.
    Mr. Manfreda, would you proceed with testimony, please?

 STATEMENT OF JOHN J. MANFREDA, ADMINISTRATOR, U.S. DEPARTMENT 
   OF THE TREASURY, ALCOHOL AND TOBACCO TAX AND TRADE BUREAU

    Mr. MANFREDA. Mr. Chairman, Congressman Ramstad and the 
distinguished Members of the Subcommittee, my name is John 
Manfreda, and I am the Administrator of the Alcohol and Tobacco 
Tax and Trade Bureau, which is known as TTB.
    I appreciate your interest in our Bureau and appreciate 
today to report on the progress we have made since our creation 
in January 2003.
    In the interest of time, I will be brief, but I request 
that my full statement be made a part of the record.
    Mr. NEAL. So, ordered.
    Mr. MANFREDA. TTB was created in the Department of Treasury 
with the enactment of the Homeland Security Act of 2002, which 
divided the former Bureau of Alcohol, Tobacco and Firearms into 
two new agencies.
    In addition to creating TTB, the Homeland Security Act 
created the Bureau of Alcohol, Tobacco, Firearms and Explosives 
in the Department of Justice.
    Our mandate at TTB is to collect taxes rightfully due and 
to ensure that alcohol beverages are produced, labeled, 
advertised and marketed in accordance with Federal law. Put 
another way, our objectives are to collect the revenue, protect 
the consumer and promote voluntary compliance.
    TTB collects alcohol, tobacco, firearms and ammunition 
excise taxes pursuant to Chapters 51 and 52 and sections 4181 
and 4182 of the Internal Revenue Code of 1986.
    These products generate nearly $15 billion in annual 
Federal excise tax revenues. The excise taxes collected by TTB 
come from more than 6,100 businesses and the taxes are imposed 
and collected at the producer and importer level of operations.
    Members of the regulated industries paying excise taxes are 
distilleries, breweries, bonded wineries, bonded wire cellars, 
manufacturers of cigarette papers and tubes, manufacturers of 
tobacco products, and manufacturers and importers of firearms 
and ammunition.
    About 200 of the largest taxpayers account for 98 percent 
of the annual excise taxes that TTB collects. In fiscal year 
2007, the majority of taxes that TTB collected were from 
tobacco and alcohol, which accounted for roughly 49 percent 
each, with the remaining 2 percent from firearms and 
ammunition.
    In addition to the collection of excise tax, TTB 
administers cover over payments to Puerto Rico and the Virgin 
Islands and also processes drawback claims.
    Federal excise taxes collected on articles produced in 
Puerto Rico and the Virgin Islands and subsequently transported 
and sold in the United States are covered over into the 
treasuries of Puerto Rico and the Virgin Islands. In 2007, TTB 
processed $459 million in cover over payments from rum to 
Puerto Rico and $8 million to the Virgin Islands.
    The alcohol and tobacco taxes are remitted to the 
Department of Treasury's General Fund and the firearms and 
ammunition excise taxes are remitted to the Fish and Wildlife 
Restoration Fund under the provisions of the Pittman-Robertson 
Act 1937.
    In 2007, TTB collected $323 of revenue for every dollar 
spent to administer its tax collection operation. We attribute 
this success to a good working relationship with industry 
members as well as to the lean administrative overhead.
    The commodities that we regulate are lawful in the United 
States. Furthermore, we recognize that these industries have a 
significant economic impact domestically.
    For example, the annual economic impact from the wine, 
distilled spirits, and beer industries is approaching $500 
billion and represents 3 to 4 percent of the Gross National 
Product. This is why we work to reduce delays and regulations 
that impede business, to promote voluntary compliance, and to 
refine our management practices.
    TTB provides assistance to the Office of the United States 
Trade Representative in alcohol beverage and tobacco matters 
within the gambit of the World Trade Organization as well as 
negotiation of bilateral and multilateral free trade agreement 
issues related to wine and spirits.
    We also know from experience that the illicit sale of 
tobacco and alcohol is financially lucrative and a known 
funding source for criminal and terrorist organizations.
    An appropriate regulatory presence provides a deterrent 
against tax evasion schemes, and our efforts to keep ineligible 
persons from entering the alcohol and tobacco industries have 
been more focused since our creation as an independent bureau.
    To ensure that only eligible persons enter into the 
business, TTB conducts criminal, personal and financial 
background checks and interviews prospective industry members.
    Key to collecting all the revenue rightfully due is an 
active field presence.
    When we were created in 2003, TTB was authorized to have 
559 employees but began with only 326. Most of those positions 
were in our headquarters in Washington, D.C., our laboratories 
and our National Revenue Center. At that time, TTB had no field 
offices or CFO operation.
    During the transition phase, we made key strategic 
decisions to make the best use of our limited resources. For 
example, to provide the most efficient and cost effective 
delivery of administrative and financial services, TTB decided 
to contract with the Bureau of Public Debt's Administrative 
Resource Center to handle TTB's accounting, travel, 
procurement, human resources and financial management support 
services. We outsourced IT support services.
    We also embraced 
teleworking, particularly in the field, which has allowed us to 
put our investigators and auditors where they will do the most 
good while saving the cost of unnecessary office space.
    I am particularly committed to maintaining our partnerships 
with industry, other Federal and State agencies, and 
international organizations. By working together, we can meet 
industry and public expectations for a responsive, fair and 
efficient government.
    Once again, thank you for affording me the opportunity to 
report on our progress since our creation and our challenges 
that still face us.
    I appreciate the Subcommittee's interest in TTB and look 
forward to continuing to work with you, and will be happy to 
answer any questions you may have.
    [The prepared statement of John J. Manfreda follows:]

   Prepared Statement of John J. Manfreda, Administrator, Alcohol and
 Tobacco Tax and Trade Bureau, United States Department of the Treasury

Introduction
    Mr. Chairman, Congressman Ramstad, and distinguished Members of the 
Subcommittee, I am pleased to be here today to report on the current 
operations and performance of the Alcohol and Tobacco Tax and Trade 
Bureau (TTB). We greatly appreciate your interest in our Bureau.
    TTB was created within the Department of the Treasury in 2003 as a 
result of the Homeland Security Act of 2002. As a successor of the 
Bureau of Alcohol, Tobacco and Firearms, our mandate is to collect 
taxes owed, and to ensure that alcohol beverages are produced, labeled, 
advertised, and marketed in accordance with Federal law.
    TTB administers Federal tax laws on alcohol, tobacco, firearms, and 
ammunition. Specifically, TTB is charged with the administration of 
Chapters 51 and 52, and sections 4181 and 4182 of the Internal Revenue 
Code of 1986 (IRC), as well as the Federal Alcohol Administration (FAA) 
Act and the Webb-Kenyon Act. Under these authorities, TTB is chiefly 
responsible for: (1) collecting alcohol, tobacco, firearms, and 
ammunition excise taxes, and classifying alcohol and tobacco products 
for excise tax purposes; (2) reviewing applications and issuing permits 
for distilled spirits and wine operations and for tobacco product 
manufacturing, warehousing, importing and exporting operations; (3) 
regulating the production, packaging, and storage of alcohol and 
tobacco products; and (4) ensuring that the labeling and advertising of 
alcohol beverages are not misleading and provide adequate information 
to the consumer. (Attachment A provides a more in-depth discussion of 
TTB's statutory authorities).
    We recognize that the industries we regulate have a significant 
economic impact domestically. For example, the annual economic impact 
from the wine, distilled spirits, and beer industries is approaching 
$500 billion, and represents 3 to 4 percent of the Gross National 
Product.
    When TTB was created in 2003, it was authorized to have 559 
employees, but began with only 326 employees. Most of these positions 
were in our headquarters in Washington, D.C., our laboratories, and our 
National Revenue Center (NRC) in Cincinnati, Ohio. At the time, TTB had 
no field offices or CFO operation. In order to maximize our FTE 
allocations, we established a skeletal internal management staff, and 
contracted with the Bureau of Public Debt Administrative Resource 
Center (BPD ARC) to handle our accounting, travel, procurement, human 
resources and financial management support services. This allowed us to 
concentrate our FTEs on our primary mission.
    Currently, TTB has approximately 150 employees working in our 
headquarters office and 180 employees working at the NRC. The remaining 
employees are located in field offices that have been established in 
several major U.S. cities, and at TTB's laboratory facilities in 
Maryland and California. The primary components that comprise the TTB 
organization include the Administrator, the Assistant Administrators 
for Headquarters Operations, Field Operations, Management/Chief 
Financial Officer, and Information Resources/Chief Information Officer. 
(Attachment B includes TTB organizational chart). TTB reports to the 
Office of Tax Policy in the Department of the Treasury.
    TTB has transitioned its information technology support services 
from the Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF) to 
the private sector. The migration of IT support to the private sector 
includes the hosting of our custom business applications at a 
commercial site and the implementation of our office automation 
applications on our IT infrastructure.
    In the 2007 Partnership for Public Service and Institute for the 
Study of Public Policy Implementation survey, ``The Best Places to Work 
in the Federal Government,'' TTB ranked tenth on its rating of 222 
programs in terms of best places to work, second for its family 
friendly environment, and sixth in strategic management. Human capital 
management remains the highest priority at the Bureau, along with 
fostering an environment of performance excellence and leadership 
continuity. The use of such human capital flexibilities as telework, 
flexible work schedule arrangements, student educational employment 
programs, student loan repayment program, health improvement program 
(which provides employees time for exercise), and performance system 
are the primary factors contributing to TTB's recognition as one of the 
best places to work. TTB's implementation of these initiatives not only 
enhances the recruitment and retention of highly skilled employees, but 
also provides facility cost savings to the Bureau that are invested in 
improved services to stakeholders.
    The financial resources to support TTB core business activities 
under the FY 2009 President's Budget are $99,768,000, including 
$96,900,000 from direct appropriations and an estimate of $2,868,000 in 
offsetting collections, mainly from the Puerto Rico cover-over program.
Mission
    TTB's mission is to collect alcohol, tobacco, firearms, and 
ammunition excise taxes that are rightfully due, to protect the 
consumer of alcohol beverages through compliance programs that are 
based upon education and enforcement to ensure a fair and even 
marketplace; and to assist industry members to understand and comply 
with Federal tax, product, and marketing requirements associated with 
the commodities we regulate. TTB has two primary strategic goals: (1) 
Collect the revenue and (2) Protect the public. These goals are closely 
integrated and the resources attributed to these functions are evenly 
distributed.

I. COLLECT THE REVENUE
    TTB collects alcohol, tobacco, firearms, and ammunition excise 
taxes pursuant to Chapters 51, 52, and sections 4181 and 4182 of the 
IRC. These products generate nearly $15 billion in annual Federal 
excise tax revenues. The excise taxes collected by TTB come from more 
than 6,100 businesses, and these taxes are imposed and collected at the 
producer level of operations. (Note that excise taxes on imported 
products are collected by Customs and Border Protection). Members of 
the regulated industries paying excise taxes are distilleries, 
breweries, bonded wineries, bonded wine cellars, manufacturers of 
cigarette papers and tubes, manufacturers of tobacco products, and 
manufacturers and importers of firearms and ammunition. About 200 of 
the largest taxpayers account for 98 percent of the annual excise tax 
collected. In FY 2007, TTB collected the majority of taxes from tobacco 
(49 percent) and alcohol (49 percent), with the remaining two percent 
from firearms and ammunition. The alcohol and tobacco taxes we collect 
are remitted to the Department of the Treasury General Fund. The 
firearms and ammunition excise taxes we collect are remitted to the 
Fish and Wildlife Restoration Fund under provisions of the Pittman-
Robertson Act of 1937.
    The following table displays the amount of Federal excise taxes TTB 
collected from FY 2003 through FY 2007 by revenue type.


--------------------------------------------------------------------------------------------------------------------------------------------------------
                         Revenue Type                                FY 2003           FY 2004           FY 2005           FY 2006           FY 2007
--------------------------------------------------------------------------------------------------------------------------------------------------------
Alcohol                                                           $6,910,631,000    $6,995,366,000    $7,074,076,000    $7,182,940,000    $7,232,138,000
--------------------------------------------------------------------------------------------------------------------------------------------------------
Tobacco                                                           $7,382,435,000    $7,434,211,000    $7,409,758,000    $7,350,842,000    $7,194,113,000
--------------------------------------------------------------------------------------------------------------------------------------------------------
Firearms
Ammunition                                                          $193,414,000      $216,006,000      $225,818,000      $249,578,000      $287,835,000
Mfg.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Special
Occupational                                                        $103,781,000      $100,562,000       $10,190,000        $2,895,000        $2,808,000
Taxes *
--------------------------------------------------------------------------------------------------------------------------------------------------------
  TOTALS                                                         $14,590,261,000   $14,746,145,000   $14,719,842,000   $14,786,255,000   $14,716,894,000
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Special Occupational Taxes (SOT) were suspended on most alcohol taxpayers, effective July 1, 2005, and repealed for all alcohol taxpayers effective
  July 1, 2008.


    In 2007, TTB collected $323 of revenue for every dollar spent to 
administer its tax-collection operation. TTB attributes this success to 
its professional working relationship with industry members as well as 
its lean administrative overhead. In 2005, TTB underwent a Program 
Assessment and Review Tool (PART) review by the Office of Management 
and Budget and received an effective rating for its Collect the Revenue 
Program.
    In addition to the collection of excise tax, TTB administers cover-
over payments to Puerto Rico and the Virgin Islands, and processes 
excise tax drawback claims. Federal excise taxes collected on articles 
produced in Puerto Rico and the Virgin Islands and subsequently 
transported and sold in the United States are ``covered-over'' (or 
paid) into the treasuries of Puerto Rico and the Virgin Islands. In FY 
2007, TTB processed $459 million in cover-over payments from rum to 
Puerto Rico and $8 million to the Virgin Islands. Also, under current 
law, persons who use non-beverage alcohol in the manufacture of 
medicines, food products, flavors, extracts, or perfume and other non-
potable products may be eligible to claim drawback of most of the 
excise taxes paid on distilled spirits used in their products. In FY 
2007, TTB processed $332 million in such drawback claims.
    One of the reasons we have been so effective in collecting the 
revenue rightfully due is an active field presence. TTB's Office of 
Field Operations conducts audits, investigations, and analyses to 
ensure the fair and uniform enforcement of all applicable laws and 
regulations within our jurisdiction. The staff also works to identify 
gaps in tax payment and any individuals illegally operating outside the 
excise tax system.
    TTB's audit program is based upon a risk approach. We audit those 
taxpayers who, based upon a variety of factors, present the greatest 
risk to the collection of the revenue rightfully due. As a consequence, 
we audit approximately 90 percent of the revenue every three years. We 
also identify other risk factors that indicate likely noncompliance 
with the tax laws and include them in our audit schedule. From FY 2004 
through FY 2007, our auditors and investigators identified 
approximately $25 million in tax, interest, and penalties and saw our 
voluntary compliance increase substantially, as explained in greater 
detail below.
    To resolve our audit and investigative findings, TTB either 
collects the full amount due, or resolves these cases through offers in 
compromise when doubt as to liability or collectability is present, as 
provided under our IRC jurisdiction. Likewise, TTB also resolves some 
of these matters through adverse actions resulting in surrender or 
revocation of the permit under the IRC and FAA Act.
    To maximize our enforcement capabilities, the Office of Field 
Operations reorganized and established a new Trade Analysis and 
Enforcement Division (TAED). TAED provides intelligence analysis for 
the purpose of identifying and developing targets for investigation and 
audit that would most likely reveal compliance violations. The 
intelligence gathered is also used to determine trends and schemes 
utilized to facilitate tax diversion, including tax fraud and evasion, 
and to provide assistance in the investigation of substantive cases. 
Results of all of these activities are fed into a risk model, which 
provides criteria for determining resource expenditures for future 
audits and investigations.
    TTB recently established a Tobacco Laboratory within its Scientific 
Services Division. TAED and the Trade Investigations Division (TID) 
work closely with the Tobacco Laboratory to pursue and collect the tax 
liability on tobacco products. Using state-of-the-art equipment, the 
Tobacco Laboratory analyzes tobacco product samples to assist in tax 
classifications of tobacco products, including cigars, cigarettes, 
roll-your-own tobacco, pipe tobacco, chewing tobacco, and snuff. In FY 
2007, TTB analyzed 157 tobacco product samples for tax classification 
purposes. The Tobacco Laboratory has established collaborative 
partnerships with the Centers for Disease Control and Prevention (CDC) 
and the Canada Border Services Agency (CBSA). In addition, the 
laboratory has become a member of the World Health Organization's 
Tobacco Laboratory Network (TobLabNet), a global tobacco testing 
laboratory network, which extends the laboratory's contact to the 
tobacco enforcement laboratories of more than 100 countries.
Efficient Government
    One of TTB's goals in collecting the revenue is to administer laws 
and regulations in a way that imposes the least burden on the taxpayer. 
TTB does this through various voluntary compliance efforts such as 
implementing electronic government initiatives, engaging in open lines 
of communication, and conducting industry seminars.

      Electronic Government--TTB has recognized the need to 
provide the regulated industries with the option of electronically 
filing tax returns, tax payments, operational reports, and certificates 
of label approval. To this end, TTB has implemented a streamlined and 
automated process for receiving tax returns, operational reports, and 
payments submitted through Pay.gov, which is designed to interface with 
existing TTB business systems. This system reduces paper, manual 
processing, and errors, and speeds up the payment process. In FY 2007, 
98 percent of TTB's tax receipts were collected electronically.

      Informing Taxpayers--An open line of communication with 
the taxpayer is essential in achieving our goal of collecting all the 
revenue due. We keep industry members and the public primarily informed 
through TTB's Web site, www.ttb.gov. In 2007, TTB launched a new e-mail 
subscription service, TTB Updates, which provides visitors to our web 
site the option of subscribing to more than 70 web pages for e-mail 
alerts when content changes. This is an electronic government solution 
called GovDelivery and our customers enthusiastically embraced this 
innovative approach to information dissemination. By September 2007, 
more than 23,000 people subscribed to the updates, with an average 
customer subscribing to about 11 pages.

      Seminars and Other Efforts--TTB has pursued various other 
measures to promote voluntary compliance with the statutes and 
regulations we administer. TTB maintains consistent contact with 
taxpayers, through seminars, communications between industry members 
and our auditors, investigators incident to field visits, and through 
specialists who respond to requests for assistance. For example, in FY 
2007, the Office of Field Operations alone held 17 compliance seminars, 
which were attended by more than 2,100 industry members. These seminars 
offered plain language guidance on how to comply with Federal laws and 
regulations. Since its first year in existence, TTB has seen its 
voluntary compliance rate rise (measured in the number of timely and 
accurate tax payments made) from 80 percent in 2003 to more than 86 
percent in 2006. We have also made efforts to simplify our regulations 
to make them clearer and easier to understand.

II. PROTECT THE PUBLIC

    TTB's second key strategic goal is to protect the public and 
prevent consumer deception. TTB has implemented this mission by 
ensuring the integrity of: (1) regulated industries, (2) alcohol 
beverage products, and (3) the alcohol beverage marketplace.

    Integrity of the Regulated Industries--TTB is committed to ensure 
the integrity of the regulated industries, in which the goal is to keep 
ineligible persons from entering the alcohol and tobacco industries. 
The illicit sale of tobacco and alcohol is financially lucrative, and a 
known funding source for criminal and terrorist enterprises. To ensure 
that only eligible persons enter into the business, TTB conducts 
background checks and in-depth interviews on all new applicants. In FY 
2007, TTB issued 5,285 original and 22,336 amended permits.
    Of these permit applications in FY 2007, TTB investigators 
conducted nearly 630 investigations of applicants to verify that they 
were qualified to operate under the applicable statutes. As a result of 
these screening and investigation efforts, an annual average of 10 
percent of all original applications referred for investigation are 
either denied or withdrawn.

    Integrity of Alcohol Beverage Products--Under the FAA Act, 
importers and bottlers of beverage alcohol are required to obtain 
certificates of label approval (COLAs), or a COLA-exemption approval, 
for most alcohol beverages prior to their introduction into interstate 
commerce. The intent is to prevent consumer deception and to ensure 
that the label on an alcohol beverage product provides the consumer 
with adequate information as to the identity and quality of the 
product. In FY 2003 TTB's Advertising, Labeling and Formulation 
Division (ALFD) processed more than 100,000 COLA applications, and by 
FY 2007 that number had risen to over 125,000 applications annually. Of 
these applications, 22 percent were rejected, returned for correction, 
withdrawn, or surrendered. Fifty-one percent of these FY 2007 
applications were received through COLAs Online, an electronic system 
that allows alcohol industry members to submit label application 
information online, saving considerable time and money in making and 
processing applications.
    TTB performs field investigations to verify the integrity of the 
product to ensure the accuracy of claims made on an alcoholic product's 
label, based on supporting records. For example, the investigation may 
include on-site review of production and bottling records (such as 
viticulture sourcing documents in the case of wine products), varietal 
traces, and review of production records to ensure they match approved 
formulas.
    Other key TTB functions that ensure the integrity of alcohol 
beverage products include:

    Formulas for Domestic Alcohol Products--TTB examines formulas for 
domestic wine, distilled spirits, and malt beverages and pre-import 
applications filed by alcohol importers to determine the proper 
identification of the product and to ensure that products are 
manufactured in accordance with Federal laws and regulations (as well 
as for tax-classification purposes).

    Laboratory Support--TTB's Scientific Services Division's (SSD) 
laboratories conduct analyses of alcohol beverage products to ensure 
compliance with approved formulas and established standards of 
identity. In FY 2007, SSD analyzed more than 2,000 beverage alcohol 
samples for product integrity, pre-import analysis and other purposes.

    Alcohol Beverage Sampling Program--TTB has recently expanded its 
Alcohol Beverage Sampling Program (ABSP) to include a statistically 
valid sampling model. In the new ABSP pilot program, TTB will collect 
samples of alcohol beverage products from the marketplace, and review 
their labels and conduct laboratory analyses. The purpose is to 
determine if the labels accurately describe the products that are in 
the bottles and are otherwise in compliance with our regulations. We 
will then take enforcement actions as appropriate.

    Contamination and Consumer Complaints--As part of its mission to 
Protect the Public, TTB responds to contamination incidents and 
consumer complaints of mislabeled products. In these instances, we 
obtain samples of the product in order to conduct a lab analysis, and 
if appropriate, notify the producer to identify the extent of the 
problem. We take appropriate measures to ensure that the product does 
not present a threat to the consumer.

    Integrity of the Alcohol Beverage Marketplace--TTB conducts 
investigations of unlawful trade practices to ensure that the alcohol 
beverage marketplace is free from anticompetitive practices that allow 
undue supplier influence over retailer purchasing decisions.
    In addition, to ensure the integrity of the marketplace, we monitor 
written or oral advertisements or other statements used to induce sales 
of alcohol beverage products. The purpose is to prevent false or 
misleading claims, which may deceive the consumer.
    TTB's International Trade Division (ITD) works to protect the 
integrity of the alcohol beverage marketplace by educating foreign 
governments about the laws and regulations that TTB administers 
regarding the importation of alcohol. In addition, ITD has participated 
in the negotiation and formation of the following recent international 
trade agreements:

    Agreement on Mutual Acceptance of Oenological Practices and 
Agreement on Requirements for Wine Labelling--The World Wine Trade 
Group (WWTG) is an informal group of wine producing countries, 
comprised of Argentina, Australia, Canada, Chile, New Zealand, South 
Africa, and the United States to facilitate the international trade in 
wine. The group accounts for around 27 percent of world wine exports. 
In 2007, the United States exported $208 million in wine to its WWTG 
counterparts.
    The WWTG has negotiated two agreements. The first is the Agreement 
on Mutual Acceptance of Oenological Practices, which recognizes common 
winemaking practices. The second agreement is the Agreement on 
Requirements for Wine Labeling, which recognizes the different 
regulatory requirements for placement of information on wine labels.

    United States/European Community Wine Agreement--In 2006, the 
United States and the European Community (EC) signed the first phase of 
an Agreement on Trade in Wine, which provides for the recognition of 
existing current winemaking practices, as well as a consultative 
process for accepting new winemaking practices. The Agreement also 
provides for the simplification of certification requirements for U.S. 
wine exported to the European Community. U.S. and EC negotiators are 
currently meeting to establish a second phase of the agreement as 
provided for in the current accord. In 2007, the United States exported 
$458 million in wine to the European Community.

    United States/Mexico Trade in Tequila Agreement--In 2006, the 
United States and Mexico signed an agreement that ensures the 
continuation of trade in Tequila without additional restrictions from 
Mexico.

Cooperation With Other Federal and State Agencies and Other 
        Organizations
    TTB partners with Federal and State agencies and other 
organizations to maintain the proper level of oversight to collect the 
revenue and to protect the public.

    Other Federal Agencies--TTB works along with Customs Border 
Protection (CBP) in administering our jurisdiction with respect to 
imported products. Specifically, CBP ensures that importers have a 
valid permit as required under current law, that taxes on imported 
products are paid, and that alcohol beverages carry labels that TTB has 
approved prior to removal into domestic commerce. TTB also works with 
CBP in the development of its integrated International Trade Data 
System (ITDS), in order to facilitate verification of the authenticity 
of commercial goods being shipped into U.S. ports. TTB will use ITDS to 
identify and pursue persons who are importing without a permit and 
otherwise acting out of compliance with our jurisdiction. Where we 
discover smuggled alcohol, tobacco, or firearms, our policy is to refer 
these matters to CBP, Immigrations and Customs Enforcement and ATF, and 
work with them to enforce our respective jurisdictions. In addition, 
TTB and ATF have a Memorandum of Understanding (MOU) to provide access 
to the information essential for the accomplishment of our missions.
    TTB works with the Food and Drug Administration (FDA) for expert 
advice on health and safety issues related to alcohol beverages. For 
example, we contact FDA when we encounter potentially adulterated 
alcohol beverages (as determined under the Federal Food, Drug and 
Cosmetic Act) so that we can take appropriate enforcement action under 
our statutes. TTB and FDA have an MOU to coordinate responses in regard 
to contaminated alcohol beverages. Likewise, we have worked with the 
FDA on our proposed rulemaking concerning the labeling of allergens on 
alcohol beverages.
    TTB and the U.S. Department of Agriculture (USDA) share in the 
regulatory control of alcohol products that bear an organic claim on 
their labeling. TTB and the USDA have an MOU to allow for a timely 
concurrent review of alcohol beverage labels that bear an organic 
claim. In addition, TTB has assisted USDA in its administration of the 
Fair and Equitable Tobacco Reform Act by providing information related 
to tobacco products removed subject to tax by manufacturers and 
importers.
    In addition, TTB provides assistance to the Office of the United 
States Trade Representative (USTR) in alcohol beverage and tobacco 
matters within the ambit of the World Trade Organization, as well as in 
the negotiation of bilateral and multilateral free trade agreement 
issues related to wine and spirits.
    Finally, TTB and the Federal Trade Commission (FTC) have cross-
jurisdictional authority in the area of beverage alcohol advertising. 
TTB has worked with FTC on several occasions in response to complaints 
about alcohol advertisements.

    States--TTB has executed agreements with most State agencies 
responsible for alcohol and tobacco taxes for the purpose of sharing of 
tax information. TTB also consults with States to provide background 
information on permit applicants prior to the issuance of tobacco 
permits. We also work closely with States on matters involving our 
common jurisdiction.

    Other Contacts--TTB also consults with other organizations for the 
purpose of understanding the industries, to gain intelligence on 
unlawful activities and to effectuate an enforcement scheme that 
fulfills our responsibilities without undue interference in our 
respective operations. For example, we consult with the Federation of 
Tax Administrators and the National Association of Attorneys General, 
the National Conference of State Liquor Administrators, and the 
National Association of Beverage Control Administrators.

Significant Issues and Accomplishments
    Establishment of an MOU with China's AQSIQ--On December 11, 2007, 
TTB signed an MOU with China's General Administration of Quality 
Supervision, Inspection and Quarantine (AQSIQ), to protect the public 
and to establish a consistent channel for information exchange on 
imported and exported alcohol and tobacco products. The MOU establishes 
a consultative process to strengthen cooperation in the administration 
of import and export alcohol and tobacco regulations and compliance 
determinations. In addition, the MOU establishes processes to provide 
for the exchange of information with regard to the identity and quality 
of imported and exported alcohol and tobacco products.

    New Regulations for Distilled Spirits Plants Operations--On May 8, 
2008, TTB published a notice of proposed rulemaking (NPRM) in the 
Federal Register that proposes to amend our primary body of regulations 
governing distilled spirits plants--27 CFR part 19. These regulations 
have not been updated since 1980 and therefore do not reflect current 
industry innovations and practices.

    Cigar and Cigarette Rulemaking--In FY 2007, TTB published Notice 
No. 65, Tax Classification of Cigars and Cigarettes, which proposes 
changes to the regulations that govern the classification and labeling 
of cigars and cigarettes for Federal excise tax purposes under the IRC. 
These proposed regulatory changes address TTB's concerns regarding the 
adequacy of the current regulatory standards for distinguishing between 
cigars and cigarettes. The proposals clarify the application of 
existing statutory definitions and update and codify administrative 
policy in order to provide clearer and more objective tobacco product 
classification criteria. The clarifications contained in the NPRM are 
intended to reduce possible revenue losses through the 
misclassification of cigarettes as little cigars. We are currently 
analyzing the comments we received in response to this NPRM.

    Fuel Ethanol--A major challenge facing TTB is the accelerated 
growth of alcohol fuel production. In 2005, total U.S. production of 
alcohol for fuel use was approximately four billion gallons, and in 
2006 it was nearly five billion gallons. Current capacity is nearly 
seven billion gallons per year, and plants under construction will make 
an additional five billion gallons annually. Most alcohol fuel 
production comes from fewer than 150 large plants, but hundreds of 
smaller plants have applied for TTB permits in each of the last four 
fiscal years. Near the end of last year, TTB had 1,567 active alcohol 
fuel plants. From October 2007 through March 2008, TTB received 197 new 
applications for alcohol fuel plants. With the number of new permittees 
dramatically increasing, TTB is using resources to ensure this 
industry's compliance with the laws and regulations. This growth is 
expected to continue.

    American Viticultural Program--American viticultural areas (AVAs) 
are designated as such under the authority granted in section 105(e) of 
the FAA Act to prescribe regulations concerning the labeling and 
bottling of alcohol beverages. An AVA is a delimited grape-growing 
region that is known to the public by a specific name and has 
distinguishing geographical features from its surrounding areas. By 
using an AVA name on a wine label, a wine producer may identify for the 
consumer the specific geographical area from which the grapes used in 
the wine originated.
    TTB administers the AVA Program and, since TTB's inception in 2003, 
has approved 43 petitions to create or expand AVAs, and is currently 
processing 22 others. The petitions we have received since 2003 for 
establishing or expanding AVAs have involved grape-growing regions in 
the States of California, Idaho, Illinois, Indiana, Iowa, Minnesota, 
New Jersey, New York, North Carolina, Oregon, Pennsylvania, Texas, 
Washington, and Wisconsin.
    In November 2007, TTB published proposed revisions to our 
regulations covering the approval of AVAs. The general purpose of these 
proposed changes was to maintain the integrity of the program, and 
specific proposals were made to: (1) clarify the petition submission 
and review process; (2) clarify the standards for approving AVA; and 
(3) establish a rule that recognizes both a new AVA and an existing 
winery's brand label(s) that might be the same as the proposed AVA but 
outside of the proposed AVA boundaries, by ``grandfathering'' existing 
longstanding label use for wines that would not meet the AVA 
appellation standard. Regarding the last proposal, TTB simultaneously 
published an NPRM regarding the establishment of a specific 
viticultural area, and that rulemaking included a similar proposal 
intended to minimize the adverse economic impact on an existing brand 
label holder. In response to this NPRM, TTB received 183 detailed 
comments and approximately 1,170 form-letter and postcard comments. We 
are carefully analyzing the comments.

    Alcohol Products Labeling--On July 31, 2007, TTB published Notice 
No. 73, Labeling and Advertising of Wines, Distilled Spirits, and Malt 
Beverages, to amend its regulations to require a statement of alcohol 
content, expressed as a percentage of alcohol by volume, on all alcohol 
beverage product labels. This NPRM also proposes to amend the labeling 
regulations to require a Serving Facts panel, which would include a 
statement of calorie, carbohydrate, fat, and protein content. The 
proposals would also allow industry members to disclose on the Serving 
Facts panel the number of U.S. fluid ounces of pure alcohol (ethyl 
alcohol) per serving as part of the statement of alcohol content 
referred to above. The proposed new regulations would also specify 
reference serving sizes for wine, distilled spirits, and malt beverages 
based on the amount of that beverage customarily consumed as a single 
serving. The NPRM proposes to make these new requirements mandatory 
three years after the date of publication of a final rule.
    The comment period on Notice No. 73 closed on January 27, 2008. TTB 
received approximately 800 comments on Notice No. 73, and we are 
currently in the process of reviewing these comments.

    Allergen Labeling--On July 26, 2006, TTB published T.D. TTB-53 
setting forth interim regulations allowing voluntary labeling of major 
food allergens used in the production of alcohol beverage products. 
Under the interim regulations, producers, bottlers, and importers of 
wines, distilled spirits, and malt beverages may declare on a product 
label the presence of milk, eggs, fish, Crustacean shellfish, tree 
nuts, wheat, peanuts, and soybeans, as well as ingredients that contain 
protein derived from these foods, if any of those substances or 
ingredients were used in the production of the alcohol beverage. Once a 
producer decides to engage in allergen labeling, the interim 
regulations require the listing of all allergens used in production and 
specify how that labeling must be carried out. The interim regulations 
also set forth a petition procedure whereby a producer may obtain an 
exemption from the labeling for a particular allergen. On the same 
date, TTB published Notice No. 62, which proposes to make mandatory the 
voluntary allergen labeling regime.
    These efforts stem from the passage of the Food Allergen Labeling 
and Consumer Protection Act of 2004, which amended the Food, Drug and 
Cosmetic Act by the inclusion of major food allergen labeling standards 
for products subject to that Act. The House Committee Report (H.R. Rep. 
No. 608, 108th Cong., 2d Sess., at 3 (2004)) accompanying the Act noted 
that the Committee expected TTB to issue regulations on allergen 
labeling for beverage alcohol products, and to work in cooperation with 
the FDA in this regard.

    TTB Import Safety Measures--An Interagency Working Group on Import 
Safety was established in July of 2007 to conduct a thorough review of 
U.S. import safety practices and to determine where improvements could 
be made. As a result of TTB's involvement in the Working Group, where 
it served as a Treasury representative, we devised a number of 
recommendations meant to highlight the importance of import safety and 
work towards preventing and minimizing potential safety concerns. Of 
the eight recommendations, TTB has already implemented three: (1) 
implementation of a statistically valid alcohol beverage sampling 
program; (2) enhancing information-sharing with counterpart regulators 
in foreign countries; and (3) advising importers and producers to be 
vigilant about product safety. TTB is continuing efforts to implement 
the remaining recommendations.

    Laboratory Accomplishments--In 2007, two TTB laboratories obtained 
ISO 17025 accreditation from the American Association for Laboratory 
Accreditation (A2LA), an accreditation body in the United States. ISO 
is a non-governmental organization that promotes the development of 
standardized methods to facilitate the international exchange of goods 
and services.
    In 2006, TTB opened a new compliance laboratory in Walnut Creek, 
California. This laboratory provides support to TTB through routine 
product integrity testing, monitoring the regulatory compliance of both 
beverage and non-beverage alcohol products, and onsite and online 
technical assistance to regulated industries, TTB investigators, and 
auditors. Laboratory personnel test samples collected by TTB field 
personnel from on-site investigations and audits to determine if the 
products are in compliance with the correct tax class and standard of 
identity.

    Mission Impact on Trade--TTB has been instrumental in helping 
domestic producers overcome foreign trade barriers based on the 
expertise of our laboratory to verify that domestic products (destined 
for export) comply with U.S. requirements. For example, when the 
European Union (EU) proposed setting a limit on the presence of 
Ochratoxin-A, a naturally occurring toxin in wines obtained from 
certain grape harvests, TTB provided an advanced screening process that 
demonstrated U.S. wines met the EU's standards, and were properly 
labeled as wine. In addition, in November 2005, German customs 
officials detained a bulk shipment of Rose Cabernet Sauvignon because 
they claimed that it was mislabeled. TTB assisted in U.S. Government 
efforts to respond to German concerns. Eventually the European 
Commission determined that the wine was properly labeled as Cabernet 
Sauvignon and entitled to be sold in Germany pursuant to the United 
States/European Community Wine Agreement. In June 2006, the shipment 
was released for sale.

    TTB Tightens IT Security and Tests Continuity of Operations 
Procedures (COOP)--The protection of sensitive data has become a high 
priority for all Federal agencies. To minimize the risk of such a 
breach, TTB encrypts the hard drives of all employees' computers. All 
data stored on TTB computers are both password protected and encrypted, 
providing maximum privacy for all sensitive TTB and industry data. This 
encryption provides the most aggressive level of protection for 
personally identifiable information (PII), minimizing risk to Bureau 
personnel and our regulated industry members. As an additional security 
measure, TTB uses two-factor authentication for remote access to TTB 
resources. TTB also encrypts auxiliary/portable devices.
    In FY 2007, we tested the reliability of our IT Infrastructure. The 
Bureau continued to operate through seven planned and unplanned power 
outages at our major data centers in Cincinnati, Ohio, and Washington, 
D.C. The data center monitoring and alerting equipment, robust backup 
power supplies, and personnel recall procedures were put to the test 
during each of the power outages. Equipment was restored with minimal 
damage and TTB productivity was uninterrupted. TTB's disaster recovery 
and COOP procedures were also tested when the TTB Headquarters building 
was flooded, during which the data center and several network wiring 
closets were covered with water. All TTB IT operations were up and 
running just four hours after the flooding incident occurred. Personnel 
could work remotely from their homes in the days following the incident 
and Bureau operations continued normally.

    TTB Expo--In June 2008, TTB will hold a new educational event 
called TTB Expo 2008. While TTB staff have an excellent reputation for 
holding industry-specific seminars, this event will be on a much larger 
scale than anything we have attempted in the past. The Expo, which will 
span two full days, will be comprised of over 40 different educational 
seminars presented by TTB and other Federal and State representatives 
and is designed as a unique way to educate people about how to comply 
with the myriad laws, regulations, and policies affecting the alcohol, 
tobacco, and firearms and ammunition industries. Also, 16 exhibition 
booths will be open throughout the Expo, allowing attendees to spend 
one-on-one time with TTB experts and to obtain guidance and informative 
brochures regarding TTB regulations and requirements. Our goal in 
hosting this event is to ``build bridges'' between government and 
regulated industry members and to establish an ongoing and open dialog. 
Attendees of TTB Expo 2008 will have the opportunity to meet the TTB 
employees who process their tax returns and other TTB forms and to have 
all their questions answered by subject-matter experts. The Expo is 
open to all TTB regulated industry members as well as to persons 
interested in entering one of those businesses.
Conclusion
    I appreciate the Subcommittee's interest in TTB and the opportunity 
you have afforded me to report on our progress since the Bureau's 
creation and on the challenges that still face us. I look forward to 
continuing to work with the Subcommittee as we strive to meet industry 
and public expectations for responsive, fair, and efficient government. 
I will be happy to answer any questions that you may have.

                              Attachment A
                       TTB's STATUTORY AUTHORITY

    TTB is responsible for overseeing a comprehensive scheme of 
statutory provisions with respect to the regulation of alcohol, 
tobacco, firearms and ammunition under the Internal Revenue Code of 
1986 (IRC), as well as additional authorities under the Federal Alcohol 
Administration Act (FAA Act) and the Webb-Kenyon Act.
    Chapter 51 of the IRC contains the excise tax provisions relating 
to alcohol and the authorized operations of the various segments of the 
alcohol industry, including manufacturers of nonbeverage products, as 
well as tax-free and denatured alcohol. Specifically, TTB oversees the 
qualification and operation of distilleries, wineries, breweries, and 
industrial alcohol producers and users. TTB administers the tax 
classification of alcohol products and the collection of excise taxes 
on these products. TTB also administers the production, packaging, 
bottling, labeling, and storage requirements related to alcohol 
products under the IRC.
    With respect to tobacco, TTB administers chapter 52 of the IRC, 
relating to the manufacture, importation, exportation, and distribution 
of tobacco products. Specifically, TTB qualifies and issues permits for 
tobacco product manufacturers and importers, and export warehouses, and 
oversees their operations. TTB classifies various classes of tobacco 
products for tax purposes, and collects the tax on such tobacco 
products, as provided under the statute and implementing regulations.
    Under the FAA Act, TTB is responsible for regulating the authorized 
operations, labeling, advertising, and trade practices for those 
engaged in the alcohol-beverage industry. The FAA Act requires a permit 
for all persons engaged in the business as a producer (other than 
breweries), importer, or wholesaler of alcohol beverages, and provides 
for the suspension and revocation of those permits upon failure to 
comply with the laws relating to alcohol. The permit system ensures the 
integrity of the industry by preventing persons who are not likely to 
operate in accordance with the law from entering the trade.
    The FAA Act also requires approved certificates of label approval 
(or exemptions from label approval) for most alcohol beverages bottled 
or sold in the United States. This labeling requirement, along with 
related advertising provisions, ensures that consumers are provided 
with adequate and non-misleading information about the alcohol 
beverages they purchase. In addition, the FAA Act contains trade 
practice provisions, which regulate such practices as exclusive 
outlets, tied house arrangements, commercial bribery, and consignment 
sales. These provisions are intended to ensure fair dealing within the 
industry and to protect the consumer by prohibiting sales arrangements 
that result from anti-competitive practices.
    In addition to the FAA Act and the IRC, TTB also administers the 
Webb-Kenyon Act, 27 U.S.C. section 122, which prohibits the shipment of 
alcohol beverages into a State in violation of its laws. This law was 
amended in 2000 to give States the authority to seek injunctive relief 
in Federal District Courts to enjoin shipments of alcohol in violation 
of State law. TTB also enforces the Alcohol Beverage Labeling Act, 
which requires that the Government Warning Statement appear on all 
products for sale or distribution in the United States.
    Finally, TTB administers the excise tax on firearms and ammunition 
under IRC sections 4181 and 4182. Here the IRC imposes taxes on the 
sale or use of firearms and ammunition by the manufacturer, producer, 
or importer. Tax is imposed on the sale or use at the rates of 10 
percent on pistols and revolvers and 11 percent on firearms (other than 
pistols and revolvers) and shells and cartridges. The Pittmann-
Robertson Wildlife Restoration Act of 1937 requires that an amount of 
all of the revenue collected under section 4181 (firearms, shells, and 
cartridges) and section 4161(b) (bows and arrows) be covered into the 
Fish and Wildlife Restoration Fund, hunter safety programs, and 
maintenance of public target ranges for execution of programs.

                                 

    Mr. NEAL. Thank you for your testimony, Mr. Manfreda.
    Can you tell the Committee what the size of the markets for 
products manufactured and sold completely outside our tax 
system are?
    Mr. MANFREDA. Sir, I do not have any fixed data on that. I 
can give you studies that we have read but I do not know the 
validity of those studies.
    Just recently, we have formed a Trade Analysis and 
Enforcement Division. It is an intelligence function within our 
Office of Field Operations to actually gather that kind of data 
and formulate a base strategy to deal with sources or 
operations outside the legal system.
    Mr. NEAL. What other agencies do you work with to try to 
collect those taxes?
    Mr. MANFREDA. We work with the ATF. We work with Customs 
and Border Protection. We work very well with ICE. Between 2007 
and today, we have developed over 108 enforcement cases in the 
works. Included in the agencies that we work with are many 
State agencies for the illegal importation, unlawful 
manufacturing or moonshining operations where we partner with 
the States to help facilitate stopping the manufacturing of 
moonshine.
    Mr. NEAL. Thank you. Now I would like to recognize the 
gentleman from Minnesota, my friend, Mr. Ramstad, to inquire.
    Mr. RAMSTAD. I thank my friend. Thank you, Mr. Chairman. 
Thank you, Mr. Manfreda, for your stewardship at the TTB as 
well as for your testimony today.
    Given the explosion, and I do not think that is hyperbolic 
to call it an explosion of the Internet, Internet sales must 
represent special challenges to your agency. I am speaking in 
terms of collecting the excise taxes that are owed as well as 
ensuring the safety of the products.
    Do you agree with that and how are you addressing those 
challenges?
    Mr. MANFREDA. Sir, they are a big challenge to us. Probably 
prevalent the most in acquiring compliance with international 
Internet sites. I think such sites are used to facilitate entry 
of smuggled or non-tax paid cigarettes into this country 
through those types of sales.
    Domestically, we are finding that for the most part 
domestic sales that are occurring from lawful manufacturers are 
going out with the Federal excise tax paid. However, one area 
where there is non-compliance is with Indian reservations.
    Mr. RAMSTAD. I do not want you to be in a position of 
having to reveal, not that you would, any undercover 
operations, but can you tell us if you have an unit that 
concentrates on sales over the Internet?
    Mr. MANFREDA. We do not have a specific unit. We are 
without law enforcement agents. To the extent we find leads 
with this type of activity, we have to work with other sister 
agencies, either IRS, the ATF, or Customs and Border 
Protection.
    Mr. RAMSTAD. I certainly understand that collaborative 
relationship. I was alluding to finding the leads. I know you 
do not have the law enforcement function per se.
    The other question I wanted to ask, you mentioned in your 
testimony the cooperative relationship that TTB has with other 
Federal agencies, and I cited it in my opening statement, 
including the FTC, the Federal Trade Commission.
    I understand the Senate is considering language in the FTC 
authorization bill regarding alcohol advertising and so-called 
slotting fees. Are these not areas that have traditionally been 
under the TTB jurisdiction?
    The reason I ask is that we certainly want cooperation and 
collaboration, not duplication among Federal agencies.
    Mr. MANFREDA. Absolutely, sir. In the advertising arena, we 
have worked well over the years with the Federal Trade 
Commission. Generally, when we have issues, they will defer to 
us with areas of alcohol and tobacco.
    The slotting fee issue is not really new to us, not from a 
point that we regulate it. Slotting fees are illegal in the 
liquor industry period. Under the Federal Alcohol 
Administration Act, they have been considered an illegal 
activity since 1992 in our regulations.
    From the point of view of looking into that, we already 
have the knowledge and the experience to deal with slotting 
fees in the alcohol beverage industry, and that would be 
duplication in our mind.
    Mr. RAMSTAD. Vis-a-vis the Senate bill, you are not 
concerned about possible duplication?
    Mr. MANFREDA. It would appear there could be duplication, 
if they are looking at what are slotting fees and what is the 
history of it in the liquor industry. We already have all that 
information and the experience in enforcing our laws and 
regulations with respect to that activity.
    Mr. RAMSTAD. That would be my thought as well. I think that 
is a caveat for us on this side of the Capitol.
    Again, I thank you, Mr. Manfreda. I have no further 
questions and yield back.
    Mr. MANFREDA. Thank you.
    Chairman LEWIS [Presiding]. Mr. Pascrell.
    Mr. PASCRELL. Thank you, Mr. Chairman.
    Administrator Manfreda, is the TTB aware that some 
shipments mainly from Internet based sales of alcohol are 
shipped outside the regulatory framework of some States? I 
think you are aware of that; correct?
    Mr. MANFREDA. Yes, sir.
    Mr. PASCRELL. I have in front of me a list of things that 
have been conducted by various watchdogs and ask unanimous 
consent that this list be submitted into the record, Mr. 
Chairman.
    Chairman LEWIS. Without objection.
    Mr. PASCRELL. This list demonstrates that businesses who 
sell alcohol online to consumers often ship directly to 
consumers in violation of State law, even to minors.
    Is the TTB aware that certain of these shipments also reach 
minors? Are you aware of that, Administrator Manfreda?
    Mr. MANFREDA. Sir, we have read about that.
    Mr. PASCRELL. You are not aware of the list I have in my 
hand documenting such activities? Are you telling me that your 
department does not know about this?
    Mr. MANFREDA. Sales to minors does occur through Internet 
sales; yes, sir. I am aware of that. I do not know what is on 
your list.
    Mr. PASCRELL. When direct shipments of alcohol reach 
minors, would you not agree this is a significant public policy 
concern?
    Mr. MANFREDA. Yes, sir.
    Mr. PASCRELL. What is the TTB doing to 
combat the online sales of alcohol to minors and what kinds of 
resources are needed for you to ensure that kids are not 
purchasing alcohol on the Internet?
    I want you to take your time to answer that, please. I 
would appreciate it.
    Mr. MANFREDA. Basically, direct sales of alcohol products, 
if they are being sold from a retailer to individuals, does not 
run into our jurisdictions that we have control over.
    We have control when a particular entity who is doing 
Internet sales changes their status by selling to another 
entity that will sell for retail sale.
    For the most part, these direct sales are violating State 
laws. In the year 2001, we published an industry circular where 
we basically said that sales that are sold by permitees in 
violation of State laws violate the Webb-Kenyon Act.
    We have limited resources able to throw at this problem, so 
what we basically did is we prioritized the need, the Federal 
interest need, given our limited resources to deal with these 
problems across the board and said in those types of 
transactions, if the chief law enforcement officer of the State 
or their attorney general asks us for help in dealing with 
these problems, we will look into the matter and decide whether 
or not to take action against the per- mitee's permit for 
violating the Webb-Kenyon Act under our laws.
    That is what we have been doing with that issue.
    Mr. PASCRELL. Administrator Manfreda, this could be a form 
of interstate commerce if you are going across State lines. It 
would seem to me that the Federal Government does have 
jurisdiction, that you need to look into this, and we would 
like to know what resources you need to implement what I 
believe should be Federal oversight.
    There are different laws, as you know better than I do in 
each State, and some stricter than others.
    It would seem to me that we need to get a handle on 
alcohol, particularly going across State lines and being sold 
to minors. What you are saying really in essence is that the 
Federal Government--this is not our jurisdiction. We rely on 
the State law in terms of jurisdiction here, unless I am 
misinterpreting what you said.
    Mr. MANFREDA. We are saying that basically these are 
violations of State law.
    Mr. PASCRELL. There is no violation on Federal law if you 
are shipping alcohol across State lines to juveniles?
    Mr. MANFREDA. Not under the laws we enforce.
    Mr. PASCRELL. Mr. Chairman, I would take note of that and I 
think we need to do something about that. Not to give you more 
work, but to give you more resources to do what you should be 
responsible for.
    Mr. MANFREDA. Sir, I absolutely agree with you as far as 
this is a serious problem and does need to be addressed.
    Mr. PASCRELL. I am glad that you admitted that it is a 
serious problem. Thank you. Thank you, Mr. Chairman.
    Chairman LEWIS. Mr. Nunes.
    Mr. NUNES. Thank you, Mr. Chairman.
    Mr. Manfreda, you have already testified that you are aware 
of these illegal sales of alcohol going to minors. Obviously, 
you have been contacted by the States on these issues.
    This is kind of along the questioning that was just asked, 
but if you have appropriate resources, what can TTB do to 
enforce these laws? Is there anything that is being done today 
to combat this?
    Mr. MANFREDA. We have been contacted by States but only in 
two instances, to my knowledge, and each of those instances 
involved just six bottles being sold over the Internet.
    Mr. NUNES. What type of alcohol was that?
    Mr. MANFREDA. I would rather not say. I am not even sure. I 
can get that for the Committee.
    In those two instances, one, we contacted the permitee that 
was involved, and it was a mistake and they said they would 
never do it again and so far, they have not.
    In the second situation, it was something that was so de 
minimis that we did not pursue it.
    What we can do, sales in violation of State law is a Webb-
Kenyon Act violation. We administer the Webb-Kenyon Act. Under 
the FAA Act, we have the ability to suspend or revoke a permit 
if one violates one of the conditions of your basic permit.
    From a technical point of view, we have the ability to 
suspend or revoke a permit for violations of State law when 
they rise to the level where we would take action under the 
Webb-Kenyon Act.
    Mr. NUNES. I know you are doing all you can. I want to 
switch the line of questioning to the food poisoning issues 
that you referred to in your testimony. I assume you are aware 
of the poisoned vodka that got out in Moscow and killed several 
hundred people, I believe.
    There are several initiatives that the Congress has under 
consideration regarding imported food products.
    Can you describe the processes, procedures and permit 
requirements that the Tax and Trade Bureau already has in place 
for beverage alcohol products to ensure that these products 
both imported and domestically produced are safe from 
contamination?
    Mr. MANFREDA. Yes, sir. I would start with saying that 
every importer must be permitted under the Federal Alcohol 
Administration Act. When we issue those permits, we do 
background checks and we look at a person's financial standing, 
trade connections and business experience to decide whether or 
not he is likely to comply with Federal law. Really, only 
eligible people are given permits to import. That is the first 
control.
    The second control is that we require what we call 
certificates of label approval for every alcoholic beverage 
before it can be removed from Customs' custody or into the 
domestic commerce of this country, removed by a bottler of such 
products.
    That is basically what you see on every alcohol beverage 
bottle. It identifies what is in that bottle.
    In a lot of cases with imports, we require pre-import 
samples, where we are able to identify what is going to be 
coming in from the sample.
    From that point of view, we are able to do screening of 
those kinds of products and if we find it does not match up 
with what they say it is, we deny the certificate of label 
approval and it never gets to come into the country.
    We have also initiated a market basket testing program 
where our investigators go out and from all levels of the 
distribution chain pull product samples and send it to our lab 
to identify basically that it is what is said on the label. It 
is verified from our scientific analysis back in our labs. We 
do that routinely.
    Through 2005 to 2007, we actually analyzed 209 bottles for 
pesticide contamination. When we pull a bottle, out of those, 
42 of them were domestic and 167 were foreign. All 42 of the 
domestic proved to be fine with no pesticide contamination, and 
out of the 167, there were 38 bottles that contained 
pesticides.
    When we get a hit like that, we immediately go to EPA who 
identifies to us just what pesticides are authorized and which 
ones are not, and if it is authorized, we look to the Food and 
Drug Administration to determine whether the levels are 
acceptable.
    In this case, there were six that had hits of unauthorized 
pesticides, but after talking with FDA, it was determined that 
the levels which they were at did not raise any health issue or 
concern.
    We then would notify an importer to say this should not 
come back into this country again and we verify it at later 
dates to make sure the product is free of the pesticides.
    Mr. NUNES. Thank you, Mr. Manfreda, for your testimony. I 
know you have a very difficult job.
    Mr. Chairman, I have some news articles that I would like 
to submit for the record.
    Chairman LEWIS. Without objection.
    [The information follows:]

    [GRAPHIC] [TIFF OMITTED] T8277A.002
    

    [GRAPHIC] [TIFF OMITTED] T8277A.003
    

    [GRAPHIC] [TIFF OMITTED] T8277A.004
    

    [GRAPHIC] [TIFF OMITTED] T8277A.005
    

    [GRAPHIC] [TIFF OMITTED] T8277A.006
    

    [GRAPHIC] [TIFF OMITTED] T8277A.007
    

    [GRAPHIC] [TIFF OMITTED] T8277A.008
    

    [GRAPHIC] [TIFF OMITTED] T8277A.009
    

    [GRAPHIC] [TIFF OMITTED] T8277A.010
    

    [GRAPHIC] [TIFF OMITTED] T8277A.011
    

    [GRAPHIC] [TIFF OMITTED] T8277A.012
    

    [GRAPHIC] [TIFF OMITTED] T8277A.013
    

    [GRAPHIC] [TIFF OMITTED] T8277A.014
    

    [GRAPHIC] [TIFF OMITTED] T8277A.015
    

    [GRAPHIC] [TIFF OMITTED] T8277A.016
    

    [GRAPHIC] [TIFF OMITTED] T8277A.017
    

                                 

    Mr. NUNES. Thank you, Mr. Chairman. I yield back.
    Chairman LEWIS. Thank you. Mr. Becerra.
    Mr. BECERRA. Thank you, Mr. Chairman.
    Administrator Manfreda, thank you very much for being with 
us. Let me concentrate my questions on some of the budgetary 
matters that you have. Now that you have split up, we have this 
new agency that was created, ATF went its way, you went your 
way.
    I have some concerns. You mentioned something astounding. 
For every dollar you have to use to collect revenues, excise 
taxes, you collect $323. I dare say that you are probably one 
of the most efficient Federal agencies when it comes to 
generating revenues that are due to the Federal Government so 
that we can do all the work that we need to, national defense, 
education, health care.
    I would think that we would want to make sure that if there 
is a dollar that should be collected, we would give you the 
resources to collect that, since you collect $323 for every 
dollar you collect.
    My understanding is never once in your 5 years of existence 
have you been given money by the Administration for 
enforcement, to hire your own enforcement agents. I know you 
have requested--TTB has requested money in your budget for 
enforcement agents but you have never been given the money.
    If we were to get you money for enforcement agents, could 
you make use of those enforcement agents?
    Mr. MANFREDA. Absolutely, sir. We have all the criminal 
jurisdictions under the Internal Revenue Code and the Federal 
Alcohol Administration Act to enforce. This is not duplicated 
by any other Federal agency. ATF has only tobacco jurisdiction 
with regard to the Contraband Cigarette Trafficking Act, which 
is a prime area where there is diversion and failure to pay 
State taxes.
    For our purposes, we would need agents not only to enforce 
our criminal laws, but also to assist us in seizures, 
forfeitures and detention issues that arise in enforcing the 
laws which we administer; yes, sir.
    Mr. BECERRA. Your agency collects something around $15 
billion?
    Mr. MANFREDA. Yes, sir.
    Mr. BECERRA. In excise taxes that are owed by these various 
enterprises. You have never been given the authority to hire 
enforcement agents to do the enforcement work or given money to 
hire the enforcement agents for the work that you are under law 
prescribed to do, and I know you have established a division to 
study the issue of collecting some of this contraband product 
that is out there, because there is probably billions more that 
we could collect in excise taxes if we could get a grip on what 
is out there being sold in the black market.
    I am not sure I understand why this Administration would 
not want to give you the resources. My understanding is that 
your $15 billion in excise taxes that you have collected, that 
has been pretty constant for the last 5 years; right?
    Mr. MANFREDA. Yes, sir.
    Mr. BECERRA. Would you say to me that over the last 5 years 
the consumption of alcohol, alcoholic beverages, and tobacco 
has remained constant?
    Mr. MANFREDA. Pretty much.
    Mr. BECERRA. There has been no increase?
    Mr. MANFREDA. There has probably been decreases in tobacco.
    Mr. BECERRA. In alcoholic beverages?
    Mr. MANFREDA. Alcohol has grown in certain market areas and 
in others, it has decreased.
    Mr. BECERRA. There is a very good chance that over the last 
5 years, had you had the resources, where there has been an 
increase in consumption, which means therefore there should be 
an increase in taxes generated, that had you had the 
enforcement capability, you might have been able to pursue 
those areas where perhaps we have not had the highest degree of 
compliance?
    Mr. MANFREDA. I would say that agents would assist us in 
enforcing those areas which are problematic to us.
    Mr. BECERRA. Do you have any reports yet from this new 
division that was created to study the issue of contraband 
products?
    Mr. MANFREDA. They are pretty much in their infancy, but we 
have the people hired for those positions and they are starting 
to collect data.
    Mr. BECERRA. Can you please report to us on an ongoing 
basis on where you are with that? Obviously, I think Members in 
this Committee would be very interested in trying to help you 
move to a point where we are just not assessing the sale of 
contraband but we are trying to make sure that we deal with it 
so that it can be in an open market, not in a black market.
    Mr. MANFREDA. Okay; yes, sir.
    Mr. BECERRA. One last area of inquiry. I know my colleague, 
Mr. Thompson, will get into this more. I will just ask one 
question. If there is a second round for follow up questions, I 
will try to get into it more deeply.
    I have a concern. My understanding is in reading some of 
the information about wines and other products that more and 
more Americans are into the issue of organic products and 
trying to make sure that we stay as healthy as possible.
    I know some wines are labeled as organic wines, which in 
essence means they do not use certain pesticides for the 
growing of those grapes that are used to make that wine.
    You all did some investigative work and you found that of 
12 wines that you inspected, 10 contained pesticides. Of those 
12 that you randomly selected, that is an 83 percent non-
compliance rate by those wine growers in labeling, in mis-
labeling their wines as organic.
    I am not sure if that is the rule or if that is the 
exception with regard to how these vintners are labeling their 
wines, mis-labeling them as organic.
    I hope to be able to pursue that line of questioning with 
you perhaps in the future to find out what you are doing to 
make sure that the American public is not being deceived by 
people who are trying to peddle certain products as organic 
when in fact they are not, and what we are doing to try to make 
sure that does not happen.
    Mr. MANFREDA. Certainly, sir.
    Mr. BECERRA. Appreciate that. Thank you, Mr. Chairman.
    Chairman LEWIS. Mr. Tanner is recognized for inquiry.
    Mr. TANNER. Thank you, Mr. Chairman. Thank you for being 
here. Where are you on the rules on definition of little cigars 
versus cigarettes, and the FTC, and for lack of a better term, 
putting in the FTC re-authorization in the Senate about alcohol 
regulation and so forth, could you comment on that, 
particularly as it regards the sale of beer?
    Mr. MANFREDA. Certainly, sir. Regarding your first 
question, we are in rulemaking on the little cigar versus 
cigarette issue. As you know, under the Internal Revenue Code, 
the definitions for ``cigar'' kicks you out, and it says a 
cigar is any tobacco leaf which is wrapped in paper containing 
tobacco except that which is a cigarette. You have to flip into 
the cigarette. The cigarette is any leaf tobacco wrapped in 
tobacco paper because of its appearance, its labeling, its 
packaging, filter, is likely to be sold or offered for sale as 
a cigarette.
    It is a very subjective determination. We went into 
rulemaking with a hope to take away the very subjective nature 
of that determination and to make it more scientific. We 
thought we had come up with a very good notice of proposed rule 
making to air.
    As a result of the public comments, we found that our rule 
was not that good. It did have some issues and problems. We are 
now working with our own scientists and other scientists in 
different agencies to come up with probably a better platform 
to re-air this and get comment on it.
    It was really more clarifying so we can give better 
guidance. Right now, with that kind of standard, it is very 
subjective. I think if we can rely on science, it takes that 
subjectivity and makes it a much more objective determination. 
We are working on that, sir. We are right in the middle of 
that.
    The FTC, we think that is duplication of effort, especially 
in the area of slotting fees. Slotting fees have been an 
illegal activity in the alcohol industry for as far back as I 
can remember. If any agency has information on slotting fees, 
we have it, especially with regard to the alcohol beverage 
industry. We would think it is duplicative.
    Mr. TANNER. Thank you.
    Chairman LEWIS. Thank you, Mr. Tanner. Mr. Doggett is now 
recognized for his questions.
    Mr. DOGGETT. Thank you, Mr. Chairman. Thank you for your 
testimony. As I was beginning mine earlier, I believe you and I 
first talked about almost 10 years ago when I was preparing the 
first draft of what is now the STOP Act, just to seek technical 
expertise of you and your colleagues about how the Act would 
work and fit with the kind of work that you do at the agency.
    That was at a time when Treasury Secretary Larry Summers 
was publicly expressing a great deal of concern about tobacco 
smuggling. I realize through the intervening 10 years, you are 
now serving in a new Administration, and I thank you for the 
efforts that you are making.
    My questions are not directed toward seeking endorsement, 
which I know is not forthcoming from the Administration to the 
STOP Act, but I would like to just ask you a few specifics 
along the lines of what I was saying to my colleagues.
    Are there any steps that could be taken now, modest, that 
would be consistent with the work that you are doing? Let me 
ask you just a couple of specifics.
    As I understand it, currently on any cigarette pack, you 
would have one of three identifiers. You would either have a 
slip on there that was a permit number of the factory. You 
would have the manufacturer's name and some piece of 
information that the manufacturer chooses to put on there, or 
you would have the manufacturer's name and city and State of 
factory for the product.
    Is that basically the current regime?
    Mr. MANFREDA. Yes, sir.
    Mr. DOGGETT. My question to you is would it be helpful to 
the agency to have a standardized serial number, so that you 
may be able to get that sometimes voluntarily from the industry 
in a particular investigation, but so you would know from the 
outset the serial number and could trace back the information 
on the product?
    Mr. MANFREDA. I would say that could be helpful to us. 
Currently, if you are looking at a specific individual pack in 
a retail outlet, there is no apparent indicia on the package to 
show that taxes have been paid.
    We do not really have the capability of tracing that 
package all the way back to the manufacturer. From that point 
of view, a serial number may help.
    I would say we had serial numbers on alcoholic beverages up 
to about 1982. They were basically done away with because it 
became a security issue and a compliance issue with maintaining 
the integrity of those serial numbers that were on the liquor 
bottles.
    Mr. DOGGETT. We need to be mindful of that experience, but 
basically having the serial number on there could be an aid to 
law enforcement?
    Mr. MANFREDA. Yes.
    Mr. DOGGETT. Currently, is there anything to prevent me 
from going out and buying tobacco manufacturing machinery?
    Mr. MANFREDA. None whatsoever, sir.
    Mr. DOGGETT. Would it also be consistent with the efforts 
of the agency to make clear that just as you must have a permit 
to manufacture tobacco, that tobacco manufacturing equipment 
cannot be or should not be sold to those who lack such a 
permit?
    Mr. MANFREDA. I have no problem with that.
    Mr. DOGGETT. I referenced some of the provisions that 
Congress passed twice last year in the children's health 
insurance program. Those were provisions that would broaden the 
authority of TTB with reference to issuance of permits or the 
ability to revoke permits if there was a violation of State or 
Federal law.
    Would that be consistent with----
    Mr. MANFREDA. Sir, that would be very helpful. Under 
current law, under the Internal Revenue Code, if you look at 
the provisions controlling revocation and suspension, we are 
basically limited to anybody that violates the Internal Revenue 
Code provisions and the regs thereunder.
    There are limiting factors to revocation. If we expand it 
to allow for suspension or revocation based on a violation of 
the Contraband Cigarette Trafficking Act and other statutes, 
Jenkins Act, that could be very helpful. They would be the type 
of individuals that you do not want in the business.
    Mr. DOGGETT. Right. People that are really not legitimate 
distributors, wholesalers, manufacturers of tobacco. Those 
legitimate interests ought to have a concern for seeing that 
these people are not involved.
    You find situations where you have good reason to believe 
there has been a violation of a law, but you are powerless to 
do anything about it because it is not within your 
jurisdiction?
    Mr. MANFREDA. With existing permitees. If we have an 
applicant that has violations, the criteria is because of your 
business standing, financial standing and trade connections, 
you are not likely to comply, in that arena, we could say based 
on these other convictions, you are not likely to comply, so 
under that scenario, we could do something.
    It sounds odd to have the authority with respect to 
application but not have it with respect to suspension or 
revocation.
    Mr. DOGGETT. Thank you very much.
    Chairman LEWIS. Mr. Thompson is now recognized for his 
questions.
    Mr. THOMPSON. Thank you very much, Mr. Chairman.
    Mr. Manfreda, thank you for being here. I want to say that 
John and I go back a long ways. We have worked together on a 
lot of things and have a good relationship. I consider him a 
friend.
    Mr. Manfreda, your agency is proposing two new rules that I 
think are both wrong and, if adopted, are going to bring great 
harm to the wine industry and they trouble me a great deal.
    The Congress prohibited misleading wine labels when they 
passed the Federal Alcohol Administration Act, and your agency 
was charged with enforcing that law, as you mentioned in your 
opening testimony.
    In 1986, your agency concluded, and I will quote, ``A 
geographic brand name of viticulture significance on a wine 
label indicates to consumers the origins of that wine.'' That 
means where those grapes are grown.
    In your own manual, and I have a copy of it here, and 
without objection, Mr. Chairman, I would like to submit this to 
the record.
    Chairman LEWIS. Without objection.
    [The information follows:]

    [GRAPHIC] [TIFF OMITTED] T8277A.018
    

    [GRAPHIC] [TIFF OMITTED] T8277A.019
    

    [GRAPHIC] [TIFF OMITTED] T8277A.020
    

    [GRAPHIC] [TIFF OMITTED] T8277A.021
    

    [GRAPHIC] [TIFF OMITTED] T8277A.022
    

                                 

    Mr. THOMPSON. Your manual provides public guidance 
regarding geographic brand names, what is allowed or what is 
not allowed under the law and under the regulations.
    I would like to quote from this also. It states and I quote 
``If the brand name includes the names of a geographic area 
that actually exists and is described in at least two reference 
materials as a grape growing area, the wine cannot be labeled 
with such a brand name.''
    I do not want them included, Mr. Chairman, but I would like 
unanimous consent to get the citations from these reference 
books included in the record. There are about 15 of them here, 
Mr. Chairman, that do in fact speak directly to the proposed 
rule.
    Chairman LEWIS. Without objection, you just want the 
citation?
    Mr. THOMPSON. Just the citations.
    Chairman LEWIS. Without objection.
    Mr. THOMPSON. They also go on to say that new brand names, 
``new'' being after July 7, 1986, cannot be labeled with such a 
name also. I would like these put in the record and also while 
we are at it, I have a letter from about 57 Members, I think 17 
from this Committee, opposed to that, and also a letter and 
statement from the Napa Valley Vintners opposing this as well.
    Chairman LEWIS. Without objection.
    [The information follows:]

    [GRAPHIC] [TIFF OMITTED] T8277A.023
    

    [GRAPHIC] [TIFF OMITTED] T8277A.024
    

    [GRAPHIC] [TIFF OMITTED] T8277A.025
    

    [GRAPHIC] [TIFF OMITTED] T8277A.026
    

    [GRAPHIC] [TIFF OMITTED] T8277A.027
    

    [GRAPHIC] [TIFF OMITTED] T8277A.028
    

    [GRAPHIC] [TIFF OMITTED] T8277A.029
    

    [GRAPHIC] [TIFF OMITTED] T8277A.030
    

    [GRAPHIC] [TIFF OMITTED] T8277A.031
    

    [GRAPHIC] [TIFF OMITTED] T8277A.032
    

    [GRAPHIC] [TIFF OMITTED] T8277A.033
    

    [GRAPHIC] [TIFF OMITTED] T8277A.034
    

    [GRAPHIC] [TIFF OMITTED] T8277A.035
    

    [GRAPHIC] [TIFF OMITTED] T8277A.036
    

    [GRAPHIC] [TIFF OMITTED] T8277A.037
    

    [GRAPHIC] [TIFF OMITTED] T8277A.038
    

    [GRAPHIC] [TIFF OMITTED] T8277A.039
    

    [GRAPHIC] [TIFF OMITTED] T8277A.040
    

                                 

    Mr. THOMPSON. Mr. Manfreda, I have a couple of questions on 
this issue that I would like to ask you. If a vintner submitted 
an application today with a Calistoga brand name on the label, 
would that label be approved under these standards?
    Mr. MANFREDA. Which standards?
    Mr. THOMPSON. Your standards.
    Mr. MANFREDA. Yes, they would, currently.
    Mr. THOMPSON. You would in fact approve a label with the 
name ``Calistoga'' on it?
    Mr. MANFREDA. Yes, sir, because we are now in rulemaking on 
that point. We probably would approve it subject to an advisory 
that this matter and the use of the word ``Calistoga'' is 
subject to rulemaking and your ability to continue to use that 
may be subject to termination.
    Mr. THOMPSON. Your manual states specifically that it 
cannot be done.
    Mr. MANFREDA. That manual, sir, is purely a guidance 
document. If you look at the regulations which control this 
particular issue, under 4.39(i), this regulation specifically 
states as determined by a TTB official.
    From our knowledge, there was no determination made at the 
time, in 1998 when we started approving the Calistoga label, 
that such term had viticultural significance.
    Mr. THOMPSON. Mr. Manfreda, the Federal Government, when 
they passed the Federal Alcohol Administration Act, prohibited 
misleading wine labels. How in the world can you sit here and 
tell me that a wine label with a geographic destination would 
in fact be approved unless, of course, you can come back 
somehow and explain how that fruit comes from that specific 
area?
    Mr. MANFREDA. Our laws basically say you cannot use a brand 
name of geographical significance or viticultural significance, 
and basically, that is determined by the agency.
    Calistoga has not been officially determined to be----
    Mr. THOMPSON. That is not what your rule says. As a matter 
of fact, it gives an example of the Virgin River Valley 
Serenade white wine, and it states ``Virgin River Valley is the 
name of a geographic area that actually exists and is described 
in at least two reference materials as a grape growing area. 
Therefore, the wine cannot meet the appalachia of origin 
requirements for the geographic area named in the brand name.''
    Mr. MANFREDA. Again, that is a guidance document and it 
does not address Calistoga specifically. In fact, from our 
historical files----
    Mr. THOMPSON. There are 15 references right here. You sat 
through the very, very tough hearings in the eighties on this 
issue. You were at the hearings in my district. In those 
hearings, one of the leading viticulturers in the world, and 
sadly to say, just passed away this weekend, Robert Mondavi, 
but he testified before that hearing that since 1937, ``I've 
been crushing grapes in the Napa Valley. These grapes have come 
from the various areas of Napa County, Caymus, Yountville, 
Oakville, St. Helena, Calistoga. The wines have their own 
characteristics from each of these areas.''
    This is something that you know personally, with personal 
experience.
    Mr. MANFREDA. Sir, that is the whole function of the 
rulemaking, to air this issue entirely to give people the 
ability to comment. If you remember, this rulemaking involves 
the application of the regulation that is already on the books 
that basically says a geographical brand name that is the name 
that has been in existence after 1986 does not fall within the 
grandfather clause of 4.39(i).
    What we were trying to do here is see whether or not there 
are other approaches to this particular labeling issue other 
than terminating somebody's right to use a brand name that they 
have been using for over 12 years.
    Mr. THOMPSON. You are mixing questions now. There is this 
very specific provision in the law, a revocation provision, 
that allows you to remove that if someone does in fact have a 
label that is not legitimate and not proper, and that 
revocation provision is probably what should be used in this 
particular case.
    Mr. MANFREDA. I know that exists there, but we are still in 
rulemaking. It would be premature to pre-determine the outcome 
of this before the rulemaking finishes.
    Mr. THOMPSON. You told me in my office when we talked about 
this that there may be some way to deal with this by placing a 
disclaimer on the Calistoga label, that in fact the grapes were 
not from Calistoga.
    If that were to happen, how would a consumer know that the 
wine is not from Calistoga?
    Mr. MANFREDA. If the disclaimer specifically said the 
grapes were not----
    Mr. THOMPSON. On the wine bottle.
    Mr. MANFREDA. Right in the same----
    Mr. THOMPSON. What about the consumer who buys his or her 
wine in a restaurant off a wine list, sees it advertised and 
somehow draws the conclusion that it is from Calistoga, or in a 
wine review or for sale in a catalog or on the Internet?
    Mr. MANFREDA. I think that is a very good point. You are 
going to the limitations of our jurisdiction over advertising 
materials. To the extent it would constitute advertising by an 
industry member, our rules can address that to make sure if the 
brand name is used, you have an appropriate disclaimer also 
present. We can cover it to the extent that we have 
jurisdiction over it, and for those areas we cannot reach, it 
is no more different than other issues that could come up and 
be treated similarly in those respected forums.
    Mr. THOMPSON. Mr. Chairman, thank you for your indulgence, 
if I could, just one more question.
    The label in question, Calistoga Cellars, has never applied 
to register its wine brand as a trademark with the U.S. Patent 
and Trademark Office. If it had, it would have been refused 
registration on the brand on the basis that it was deceptive 
because consumers associate the term ``Calistoga'' with the 
wine.
    This is the holding of the PTO in the case of trademark 
applications to register similar marks, Calistoga Ranch and 
Calistoga Estate Vineyards for wine.
    How do you justify TTB's protecting Calistoga Cellars when 
this position is in direct conflict with the government's lead 
agency on trademark matters?
    Mr. MANFREDA. Sir, I will have to defer to the PTO. I am 
not familiar with their rules or regulations. I am familiar 
with what we are doing and what we are doing is trying to 
determine whether or not a label with a disclaimer would be not 
misleading to the consumer with regard to claiming Calistoga 
where the real source of the grapes are shown.
    Mr. THOMPSON. There are other ways to deal with that, and 
we have talked about some of them. One would be a grace period 
whereby the label in question could start sourcing its grapes 
from the Calistoga area which the label is trying to mislead 
consumers to believe their wine is from. It could be like a 5 
year period to get those grapes, and as you know, the Calistoga 
folks said they would get them, the fruit, to do this.
    This is an important issue. This has been litigated and 
litigated and litigated. The California Supreme Court found 
that the issue that you are trying to protect, the 
businessperson who has this label, does not lose anything if 
they are required to have fruit in their wine that the label 
leads consumers to believe is in the wine, and it went all the 
way to the California Supreme Court and twice, it was refused 
certiorari at the U.S. Supreme Court.
    There is plenty of legal ground to hang your hat on, and I 
would just strongly advise you to consider these things and 
consider the harm that is going to be done to an industry that 
across the board has benefited not only the industry but the 
consumers and the Treasury with this success.
    We are trying to fix something here that is not broken.
    Thank you, Mr. Chairman, for your patience.
    Chairman LEWIS. I thank the gentleman from California, Mr. 
Thompson.
    Mr. Manfreda, I am sorry I missed your testimony but I read 
it. I just have one question. You mentioned that you conduct 
background checks when you review alcohol and tobacco permits. 
How do you conduct criminal background checks without access to 
law enforcement databases? What do you look at to be sure there 
is no criminal record?
    Mr. MANFREDA. Yes, sir. With our separation and split to a 
separate bureau, when we were part of ATF, we could use their 
law enforcement function to do NCIC checks. We had been advised 
by Justice in late 2005 and the beginning of 2006 that they did 
not consider us a law enforcement agency under their statute.
    As a result of that, what it has caused us to do is use 
commercial databases, like Lexis-Nexis, Choice, different 
commercial databases to look at the background of individuals.
    We also know that 28 States run fingerprinting for their 
permitees, and we always ask the States that are involved 
whether or not they have derogatory information on the 
individual that has applied for a Federal permit.
    In addition, especially in the tobacco area because of 
ATF's CCT jurisdiction, we refer matters to them to find out if 
they have any adverse information regarding the individual.
    That is what we have been doing to date. We do our own 
investigative work regarding the applicant as well.
    Chairman LEWIS. Mr. Manfreda, I want to thank you for your 
time and being so patient. I thank you for your responding to 
the Members and for your testimony. The Subcommittee 
appreciates your views.
    Is there any other business to come before the 
Subcommittee?
    Mr. THOMPSON. Only one round?
    Chairman LEWIS. Only one round? I think you had two, Mr. 
Thompson. You had two in one.
    There being no further business, the hearing is now 
adjourned. Thank you very much.
    [Whereupon, at 12:09 p.m., the hearing was adjourned.]
    [Questions submitted by the Members to the Witnesses 
follow:]
    [Questions from Mr. Cantor to Mr. Manfreda and Responses 
from Mr. Manfreda follow:]

[GRAPHIC] [TIFF OMITTED] T8277A.041


[GRAPHIC] [TIFF OMITTED] T8277A.042


[GRAPHIC] [TIFF OMITTED] T8277A.043



                                 

    [Submissions for the Record follow:]

                         Statement of Authentix

    Members of the Oversight Subcommittee of the U.S. House Ways and 
Means Committee, the Department of The Treasury's Alcohol and Tobacco 
Tax and Trade Bureau, Federal cigarette tax collection efforts are an 
important revenue generator for the U.S Government and the TTB is to be 
commended on its five year anniversary. However, there is more that 
could be done to efficiently and effectively collect Federal cigarette 
taxes. A high-tech Federal tax stamp for cigarettes harnessing new 
technologies such as digital stamping would provide the most effective 
method for Federal cigarette tax collection. Along with increased 
efficiency of tax collection, a Federal tax stamping program would help 
eliminate the ability of organized crime to highjack our economy 
through cigarette smuggling, diversion and counterfeiting. Authentix 
has harnessed nano-scale engineering and top-notch training programs to 
enable governments across the world such as India, Kenya, South Africa 
and Guyana to recoup billions of dollars in lost excise tax revenue 
over the course of the past 5 years.
    As a global leader in excise tax recovery, the situation in the 
U.S. is a growing program with billions of dollars at stake at the 
Federal level. These precious tax dollars that provide our Nation with 
funds for schools, hospitals, roads, and defense are being high jacked 
by very sophisticated organized global crime rings.
A Snapshot of the Illegal Cigarette Problem
    Some other sources put the total loss at over $1 Billion. The 
global trade in illicit cigarettes is estimate to represent over 10% of 
cigarettes sold globally--about 600 BILLION cigarettes.\1\ Each year, 
the illicit tobacco trade potentially represents up to $US 50 billion 
worth of losses to governments worldwide.\2\
---------------------------------------------------------------------------
    \1\ ``How Big Was the Global Illicit Tobacco Trade Problem in 
2006?'' Framework Convention Alliance (FCA). June, 2007.
    \2\ Ibid.
---------------------------------------------------------------------------
    We all know, illicit trade in tobacco products significantly 
contributes to death and disease caused by tobacco consumption and to 
the rise in tobacco consumption by making cigarettes ``cheaper, more 
accessible and more difficult to regulate.'' \3\ As taxes in many 
States have climbed, so has the illicit cigarette trade. The Bureau of 
Alcohol, Tobacco, Firearms and Explosives estimates they made 35 
arrests for tobacco trafficking in 2003 and 162 such arrests in 
2005.\4\ More than 700 new investigations have been opened in the past 
5 years, according to Phillip Awe, the chief tobacco enforcer of the 
ATF.\5\ As recent media articles have pointed out, the Bureau of 
Alcohol, Tobacco, Firearms and Explosives have found that Russian, 
Armenian, Ukranian, Chinese, Taiwanese, and Middle Eastern (mainly 
Pakistani, Lebanese and Syrian) organized crime groups are highly 
involved in the trafficking of contraband and counterfeit cigarettes 
and counterfeit tax stamps for profit.\6\
---------------------------------------------------------------------------
    \3\ ``WHO takes aim at tobacco smuggling with new pact.'' Reuters. 
Feb. 15, 2008.
    \4\ ``With Taxes on the Rise, Cigarette Smuggling Likely to 
Increase,'' Associated Press. April 11, 2008.
    \5\ Cigarette Trafficking Grows as Taxes Climb. The Heartland 
Institute, Budget & Tax News. June 1, 2006.
    \6\ ``Illicit Cigarette Trafficking and the Funding of Terrorism.'' 
William Billingslea. ATF. The Police Chief Magazine. February 2004.
---------------------------------------------------------------------------
Examples of Illegal Cigarette Trafficking Schemes
    Smuggling occurs in a variety of ways, including counterfeit and 
``grey'' products, illegally manufactured, counterfeit tax stamps, 
Internet and postal schemes, theft, and smuggling across borders and 
into ports.
The Impact
    As Mr. William Billingslea of the ATF states, ``It's hard to 
exaggerate the harm caused by smuggling and counterfeiting. Governments 
miss out on tax revenue, legitimate manufacturers suffer lost sales and 
damage to their reputations, and consumers end up with inferior 
products. What's more, the profits from smuggling and counterfeiting 
provide seed money for other illegal activities such as organized crime 
and terrorism.'' \7\
---------------------------------------------------------------------------
    \7\ The Counterfeit Trail. Tobacco Reporter magazine blog. February 
2008.
---------------------------------------------------------------------------
What's Being Done Isn't Enough

      In the U.S., States rely on tobacco stamping technologies 
from the 1950's to protect tobacco tax revenues. These stamps have 
limited security and tracking features which makes it much easier for 
counterfeiters and smugglers to foil the tax recovery system in place.

    Unlike many countries such as Canada, Malaysia and The Czech 
Republic, the U.S. currently does not have a Federal tax stamp and has 
no way of protecting our precious excise tax dollars. This is a great 
risk every day. There is legislation afoot, H.R. 5689, that is calling 
of the mandate of a digital tax stamp for cigarettes sold in the U.S.
    H.R. 5689's mandate for a digital stamp follows best practices of 
many other countries from around the world that have implemented a 
``country'' or Federal tax stamp and additionally ensures we, as a 
Nation, are using the best readily available technology such as a 
digital platform to ensure smugglers and organized crime can't 
counterfeit stamps like they do now. As shown in the picture below, 
here are a few examples from Russia, Poland, and The Czech Republic.
    Some will say digital technology is immature and we should stay 
with the status quo. We would argue, and so would countries from around 
the world, as well as many of our Fortune 500 clients, that indeed the 
technology does exist and has enabled our clients to recover over $5 
billion in lost revenues in the last 5 years.
    The Authentix Digital Tax Stamp Solution is customizable to fit 
customer needs. The solution can authenticate, serialize and track 
cigarette packs as they move from distributors' warehouses throughout 
the supply chain.
    A high-tech digital printed on demand Federal tax stamp would be a 
leapfrog advance from current countries practices and would 
significantly reduce the ability of criminals to get smuggled and 
counterfeit product into our country and thus reduce the ability of 
foreign operatives to highjack our valuable tax dollars.

ABOUT THE SOLUTION
Authentix Offers a Better Solution
    Authentix offers a digital tax stamp solution that enables 
governments to collect tobacco tax revenues effectively and track the 
status of legally issued tax stamps electronically. By using digitally 
printed on-demand stamps with remote and field verification capability, 
this solution ensures a high level of security and data integrity, 
accurate and customizable reporting and makes it much easier for 
governments to recover lost tobacco tax dollars.
    The Authentix Excise Tax Stamp Management System is a web based 
application. New users will be registered after they file an online 
request and complete an electronic application. The request will be 
directed to Authentix to verify completeness and will be forwarded to 
appropriate tax collection authorities for disposition. The applicant 
will be automatically notified; via e-mail, phone or fax, once a 
decision is made to approve, reject or when additional information is 
required. Authentix will act upon the request based on the decision 
made by the authorities. This process can take as little as few minutes 
or several days depending on the protocol set by the authorities for 
the review process.
    Properly registered manufacturers will have access to their account 
through a secure web portal. Upon logging in on the system the 
manufacturer will be able to review status of pending orders, initiate 
new orders or otherwise manage his/her account The process of ordering 
new stamps will as simple as filling in and configuring an online order 
request form and specifying information about type of stamp required, 
stamp denomination, etc.
    Individually serialized stamps will be delivered to manufacturers 
in singulated stacks for application on cigarette packs. Most cigarette 
manufacturing equipment has the capability to apply the stamps before 
cellophane wrapping is applied to the cigarette packs. Information 
about tax stamps used can be collected from the manufacturing/assembly 
line. This data will be aggregated and shall be forwarded to Authentix 
through a secure portal for archives and future investigations.
    Only authorized revenue collection agency personnel will have 
access to this information. The system will provide full search and 
indexing capability to assist investigations for validating tax stamps 
as they are intercepted in the field (at distribution centers or at 
retail stores). Authentix will provide all required instruments for 
authenticating stamps and validating stamp IDs.
    Authentix offers secure web-enabled architecture using HTTPS (128 
bit SSL) and proprietary encryption technologies to facilitate exchange 
of information throughout the platform. Users are able to securely 
login using a standard web browser. Once access is granted by the 
firewalls, transaction processing layer will interact with various 
databases to respond to queries. All available databases (Reports, 
Audit, Stamps, Transaction and Notification) are physically isolated 
and protected behind a secondary firewall.
    We recommend a phased deployment, by geography or by brands.
    Carlyle Senior Advisor, Charles Rossotti, who from 1997 to 2002 
served as Commissioner of Internal Revenue Service believes, ``In 
particular, Authentix' Excise Tax Recovery Programs provide government 
authorities with the ability to effectively authenticate and track 
goods to ensure tax revenues are optimized rather than lost altogether, 
a major problem, for example, in tobacco and oil and gas industries. I 
look forward to working with the Authentix team to further expand the 
company's global client base.''
    The Authentix solution enables law enforcement authorities to 
authenticate the digital stamps and verify the embedded information on 
the stamps in the field via simple-to-use and secure handheld 
instruments.

    Authentix digital tax stamp with multi-layered security features 
and track and trace technology.
Authentix Advantages

      Multiple layers of security features leveraging nano-
scale technology, tamper resistance and intaglio printing.
      Can track each stamp as applied and distributed.
      Delivers a digitally encrypted, counterfeit-resistant tax 
stamp.
      Each stamp carries a unique serialized identification 
code.

Conclusion
    Authentix once again thanks the Committee on Ways and Means 
Oversight Subcommittee Department of The Treasury's Alcohol and Tobacco 
Tax and Trade Bureau for making valiant efforts to keep tobacco taxes 
from and urges the adoption of a more efficient way of monitoring, 
tracking and authenticating tobacco sales so they provide the maxium 
amount of Federal tax dollars.
About Authentix
    Authentix is a trusted partner of Governments and Brand Owners 
Worldwide.
    Authentix provides authentication solutions to the oil and gas, 
consumer goods, tobacco, spirits, banknote and agrochemical industries. 
Our client list includes Fortune 500 companies and governments across 
the globe. In the past 5 years, Authentix has helped our clients 
recover over $5 billion in lost revenues.
    For more information, please contact Authentix at 
www.authentix.com.

                                 
                    Statement of Charles N. Whitaker

    Altria Client Services Inc. submits this written statement on 
behalf of Philip Morris USA Inc.\1\ (``PM USA''), a leading domestic 
manufacturer of cigarettes.
---------------------------------------------------------------------------
    \1\ PM USA is a wholly-owned subsidiary of Altria Group Inc. This 
submission also reflects the views of Altria Group subsidiaries John 
Middleton Co. and Philip Morris Duty Free, Inc.
---------------------------------------------------------------------------
    PM USA commends the Subcommittee for holding a hearing on the 
important work of the Alcohol and Tobacco Tax and Trade Bureau 
(``TTB'') and, more specifically, the topic of contraband tobacco 
products. As the Subcommittee is aware, the illegal sale of cigarettes 
and other tobacco products results in a variety of harms:

      It can result in lost tax revenues to Federal, State and 
local governments.
      It can undermine efforts to prevent youth access to 
cigarettes.
      It can be used by those engaged in contraband trafficking 
as a source of income to support other criminal activity.
      It can take business away from law-abiding wholesalers 
and retailers who fully comply with all applicable laws and thereby 
find themselves at a competitive disadvantage.
      It can result in substantial, unexpected tax bills for 
some consumers who purchase cigarettes falsely advertised as ``tax 
free'' over the Internet.
      And all of these harms can damage the integrity of PM 
USA's brands and undermine confidence in the distribution channels 
through which we intend our products to be distributed and sold to 
adult consumers.

    Law enforcement agencies, State and Federal legislators, PM USA, 
and other private parties have focused considerable effort in recent 
years on curbing the illegal sales of tobacco products in the United 
States. PM USA supports effective and appropriate measures to combat 
illegal sales. Among its many efforts on this issue, PM USA has 
advocated--and continues to advocate--for well-designed legislation at 
both the Federal and State level that would reduce illegal sales. In 
particular:

      PM USA supported the enactment of the Imported Cigarette 
Compliance Act (``ICCA'') in 2000;
      PM USA supported amendments strengthening the ICCA in 
2006;
      PM USA supported legislation in 2006 strengthening the 
Contraband Cigarette Trafficking Act (``CCTA''); and
      PM USA supports the enactment of model anti-contraband 
legislation at the State level.

    In addition, PM USA supports the Prevent All Cigarette Trafficking 
Act (``PACT Act''), H.R. 4081. With the PACT Act, a bill that enjoys a 
broad base of support, Congress is presented with a vital opportunity 
to make real progress on illegal Internet sales of cigarettes and 
smokeless tobacco, a form of illegal sales that has not been adequately 
addressed at the Federal level. As explained more fully below, the PACT 
Act would significantly strengthen Federal laws governing the sale of 
such products over the Internet.
    The Subcommittee heard testimony on May 20, 2008 on another anti-
contraband bill, H.R. 5689, the Smuggled Tobacco Prevention Act (``STOP 
Act''). While PM USA supports a range of State and Federal legislative 
efforts designed to combat contraband and other forms of illegal sales, 
we do not support the STOP Act because we do not believe the STOP Act 
is reasonable, prudent, or likely to be effective in addressing 
contraband.
H.R. 5689--The STOP Act
    The main provisions of the STOP Act are either not practical or 
unlikely to produce meaningful benefits. To begin with, many of the 
STOP Act's provisions seek to address the prevention of a specific 
subset of contraband--namely, illegal imports--that has already been 
the subject of significant Congressional action since the STOP Act was 
originally introduced in 1999. The current version of the STOP Act, 
which is essentially the same as the 1999 bill, does not appear to 
recognize these developments.
    Illegal imports consist of products that are either manufactured 
abroad and illegally imported into the United States, or products that 
are manufactured in the United States and intended for export but that 
are illegally diverted into U.S. commerce. Recognizing the importance 
of this issue, Congress enacted the Imported Cigarette Compliance Act 
(ICCA) in 2000, making it illegal to import cigarettes bearing a U.S. 
trademark without the trademark owner's consent. The ICCA also requires 
that all imported cigarettes comply with U.S. health warnings and 
ingredient disclosure laws, and it strengthens prohibitions on the 
diversion into domestic commerce of cigarettes intended for export from 
the United States.\2\ In 2006, Congress then strengthened both the ICCA 
and the Contraband Cigarette Trafficking Act (``CCTA'').\3\ PM USA 
supported each of these actions by Congress, and then reinforced these 
legislative efforts with private actions of its own filed against 
illegal importers.\4\
---------------------------------------------------------------------------
    \2\ 19 U.S.C. Sec. Sec. 1681 et seq; 26 U.S.C. Sec. Sec. 5754, 
5761(c).
    \3\ The Tax Relief and Health Care Act of 2006 was enacted December 
20, 2006. It amended the ICCA to, among other things, confirm that 
delivery sales of cigarettes (Internet or mail order sales) cannot 
qualify as personal use quantities and thus are not exempt from the 
importation requirements of the ICCA. It also extended the ICCA to 
smokeless tobacco products and authorized the States to seize 
cigarettes imported in violations of the ICCA. The USA Patriot 
Improvement and Reauthorization Act was enacted March 9, 2006. It 
amended the CCTA to, among other things, lower the threshold number of 
cigarettes that would constitute a violation from 60,000 (300 cartons) 
to 10,000 (50 cartons), authorize the Attorney General to promulgate 
regulations requiring that reports be filed by delivery sellers (other 
than tribal governments) for sales of cigarettes in quantities over 
10,000 during a 1-month period, expand the Attorney General's authority 
to require recordkeeping by persons who ship or sell more than 10,000 
cigarettes in a single transaction, extend the CCTA to cover smokeless 
tobacco products, and create certain enforcement rights for State and 
local governments and for private parties.
    \4\ PM USA has filed a number of actions against importers and 
sellers of illegally imported cigarettes that bear PM USA's trademarks. 
In one of its largest illegal import cases, PM USA filed an action 
against Otamedia Limited, then the largest Internet seller of illegally 
imported cigarettes to consumers in the United States. The lawsuit 
resulted in the closure of several international web sites that among 
them had imported more than 500,000 cartons of illegally imported 
cigarettes per month. The court permanently enjoined Otamedia from 
engaging in the sale of illegally imported cigarettes bearing PM USA 
trademarks into the United States, and ultimately awarded the 
defendant's key domain name, as well as $173 million in damages, to PM 
USA. See Philip Morris USA Inc. v. Otamedia Limited, 2005 U.S. Dist. 
LEXIS 1259 (S.D.N.Y. Jan. 28, 2005).
---------------------------------------------------------------------------
    As a result of all of these efforts, we have seen a decline in 
recent years in the incidence of illegally imported cigarettes that 
appear in the United States. Today, illegal cigarettes originating from 
overseas appears to be mostly counterfeit product, as to which the STOP 
Act provisions would not have any substantial effect.\5\
---------------------------------------------------------------------------
    \5\ According to a 2004 GAO report, Customs and Border Patrol and 
Immigration and Customs Enforcement seized 1.7 million counterfeit 
cigarettes compared to only 225,000 genuine cigarettes during 2003. 
Prior to 2000, the number of illegal genuine cigarettes seized far 
exceeded counterfeits. See Cigarette Smuggling: Federal Law Enforcement 
Efforts and Seizures Increasing, GAO Report to the Chairman and Ranking 
Minority Member, Committee on Government Reform, House of 
Representatives (May 2004) at 21.
---------------------------------------------------------------------------
The STOP Act Would Impose Burdensome, Unworkable Requirements that are 
        Unnecessary Given Existing Laws Prohibiting Illegal Imports
    Against this backdrop, many of the STOP Act's major provisions 
would impose a series of burdensome requirements apparently intended to 
address the same illegal import issue that was the principal motivation 
behind the enactment and later strengthening of the ICCA.
    Export Markings. The STOP Act's export marking provisions require 
the inclusion of certain information on each pack of cigarettes or 
other tobacco products intended for export, including a designation, in 
both English and the appropriate foreign language, of the country of 
final destination. It is not clear what purpose this requirement is 
intended to serve. To the extent that these export markings are 
intended to allow law enforcement agents or consumers to distinguish 
legitimate domestic product from illegally imported product, such 
markings are simply unnecessary. Under current Federal law, tobacco 
products intended for export already must bear unique markings on the 
pack, thus making it readily apparent on the face of the pack that it 
is not intended for sale within the United States.\6\
---------------------------------------------------------------------------
    \6\ Before removal from the factory, every package of tobacco 
products must be labeled with the words ``Tax Exempt. For use outside 
U.S.'' or ``U.S. Tax-exempt. For use outside U.S.,'' except where a 
stamp, sticker or notice, required by foreign country or U.S. 
possession that identifies such country or possession, is imprinted or 
affixed to the package. 26 U.S.C. Sec. 5704(b); 27 C.F.R. Sec. 44.185.
---------------------------------------------------------------------------
    In addition to the dubious benefit of such markings, there are 
practical and cost implications. In the context of duty-free sales, 
particularly at international airports, it is not even clear how this 
requirement would operate. Manufacturers do not know at the time of 
manufacturing and packaging what the country of destination will be for 
individual purchasers of duty-free product. Thus, presumably 
manufacturers would have to produce separate inventories with separate 
packaging for every country to which a duty-free customer might travel, 
and would have to distribute these potentially hundreds of separate 
inventories to the duty free businesses. Even if that were possible, 
the requirement as it applies to the duty free shops is unclear. For 
the duty free shop, does the requirement mean that it may sell only 
product that is labeled with the traveler's country of citizenship? Or 
is it the country of immediate destination? Or, still a third 
possibility, the country in which the traveler intends to consume the 
product? In short, this requirement raises a series of questions even 
as to basic feasibility.
    Import Markings. The STOP Act also creates new labeling 
requirements for imported tobacco products. Such products must carry a 
unique serial number identifying the manufacturer and importer, the 
location and date of importation, and any other information the 
Secretary may require. These labeling requirements raise logistical 
concerns for importers who would be required to print the importation 
date and location on every package. Importers could not comply with 
such requirements because the information is not available at the time 
of manufacturing when the package printing occurs, and the importers 
themselves have no ability to print information on packages of 
individual tobacco products after they are manufactured, wrapped in 
cellophane and packaged into cartons and cases.
Many of the STOP Act's Requirements for Domestic Tobacco Sales Impose 
        Significant and Unnecessary Burdens with No Clear Benefit
    Other provisions of the STOP Act aimed at sales of domestic tobacco 
products would impose significant and unnecessary burdens on law-
abiding participants in the tobacco distribution chain without clear 
evidence that such burdens will produce meaningful benefits.
    Federal Encrypted Tax Stamp. The STOP Act would require the 
implementation of a new Federal tax stamping system, one that would in 
particular mandate manufacturers to apply an encrypted tax stamp on 
each package of cigarettes and other tobacco products.
    The anticipated benefits of this new and elaborate Federal tax 
stamp system are not clear. Tax avoidance is primarily a State excise 
tax issue, and for that reason tax stamping at the State level is an 
important component of the overall solution to addressing contraband 
cigarettes. Because excise tax rates vary from State to State, it is 
important that each State require that cigarettes distributed for sale 
in the State carry indicia (in the form of a tax stamp) of tax payment 
and of the intended location (State and/or locality) of sale. The 
Federal excise tax rate, by contrast, is uniform throughout the United 
States, and approximately 90% of it is paid by the several large 
manufacturers that produce most of the product sold for distribution. 
While there is evidence that Federal tax avoidance does occur--for 
example, with some products manufactured by some Native American 
entities--the preferable approach is not to impose a new tax stamping 
system on all manufacturers, but rather to emphasize targeted law 
enforcement efforts, which can be highly successful in promoting 
compliance at the Federal level.
    In addition, the STOP Act in particular proposes the use of a tax 
stamp that would be ``encrypted'' with information such as the identity 
of the first purchaser from the manufacturer, that is, the wholesaler 
or distributor. Because diversion of tobacco products often occurs in 
the distribution chain many layers below the wholesaler, it is not 
clear what benefits this requirement is intended to have. Nevertheless, 
this requirement is not feasible in any event. One of the producers of 
this technology has described the practical limitations that impact any 
proposal to require manufacturers to embed the identities of downstream 
purchasers in a stamp that is applied at the point of manufacturing.\7\ 
Manufacturers simply do not know the identity of the first or 
subsequent purchasers until well after the tax stamping would occur.
---------------------------------------------------------------------------
    \7\ See Letter to Rep. Doggett from David Moxam, Authentix 
(``Cigarettes are manufactured on highly automated high speed packaging 
lines. In order to make the economy of scale work, cigarette 
manufacturers mass produce any given cigarette brand based on forecasts 
and without specific knowledge of end users (retail stores) demand. 
Therefore the information about when a package of cigarettes is 
purchased and by which retailer is not available at the time of 
manufacturing the cigarette packs.'')
---------------------------------------------------------------------------
    It is worth noting, furthermore, that all but three States require 
tax stamps,\8\ and the States that require a tax stamp use serialized 
tax stamps, except California (California uses an encrypted tax stamp). 
The serialized tax stamp already enables law enforcement agents to 
trace an individual pack back to the wholesaler who stamped and sold 
the product. These tax stamps also have security features that enable 
law enforcement agents to immediately discern genuine from counterfeit 
stamps, using technology that is in widespread use today.
---------------------------------------------------------------------------
    \8\ Only North Carolina, South Carolina and North Dakota do not 
require a State tax stamp.
---------------------------------------------------------------------------
    It is not clear the extent to which the STOP Act contemplates 
additional information to be contained on or in the stamp beyond a 
serial number and identity of the wholesaler. However, the delegation 
of authority that the STOP Act confers on the Secretary of Treasury to 
require the serial number to contain ``additional information'' could 
result in further requirements of uncertain law enforcement value, but 
that could impose serious burdens on participants in the distribution 
chain. Indeed, a number of sections of the STOP Act empower the 
Department of Treasury to create new or additional requirements other 
than those specified in the bill, which raises a concern as to the 
limits of the Department's power to add, through regulatory action, 
requirements that would compound the burdens of this legislation.
    Burdens on Federal Agencies. It should also be noted that the 
provisions of the STOP Act would create new and substantial burdens on 
Federal agencies, thus potentially diverting resources from more 
effective anti-contraband efforts. The Federal tax stamp system under 
the STOP Act, for example, would entail establishing a new and 
extensive tax stamping regime at the Federal level, one that would 
require a range of new activities for the Department of Treasury and 
the TTB, including negotiating and overseeing the printing and 
distribution of tax stamps and the many other tasks that would be 
necessary to create from scratch and then administer a nationwide 
Federal tax stamp system. These substantial burdens on Federal agencies 
would be imposed without any clear law enforcement benefits, or at 
least without any benefits that could not be achieved more efficiently 
and effectively by working within existing State and Federal laws or by 
enacting alternative legislation, such as the PACT Act. In short, 
existing State stamping and licensing requirements, the requirements of 
the model State anti-contraband bill that PM USA supports, and the PACT 
Act, provide a more effective set of solutions to the problem of 
illegal trade of tobacco products.
PM USA Supports Legislative Solutions Other than the STOP Act to 
        Address Illegal Tobacco Sales
    PM USA believes that progress can more effectively be made by 
focusing attention on other legislative solutions, such as the PACT 
Act, which has been the subject of years of negotiation and drafting 
and has earned broad support among wholesalers, retailers, law 
enforcement agencies, and others.
H.R. 4081--The PACT Act
    In contrast to the STOP Act, the PACT Act addresses a number of 
gaps in Federal law and provides an effective, workable regulatory 
scheme that comprehensively addresses a current and significant 
contraband problem: Internet sales of cigarettes and smokeless tobacco.
    The PACT Act would regulate ``remote'' or ``delivery'' sales of 
cigarettes and smokeless tobacco products--i.e., sales, like those over 
the Internet, in which there is no face-to-face interaction between the 
seller and the consumer and where the products are delivered to the 
consumer by mail, common carrier or other delivery service. The gaps in 
Federal law include the absence of any age-verification requirements 
for cigarettes or smokeless products sold via the Internet or other 
remote methods, and the absence of effective measures to prevent 
delivery sellers of such products from evading excise and other State 
or local taxes. By closing these gaps, the PACT Act would give Federal 
and State authorities tools they need to take effective action against 
those who are exploiting the Internet and other remote sale methods. 
The PACT Act is the product of a long process of discussion and 
negotiation, and it has broad support. It strikes the appropriate 
balance between the needs of law enforcement and the legitimate 
interests of affected parties, and it should therefore be enacted.
    There is little doubt that the current remote sale of cigarettes by 
Internet and other remote sellers is a problem with many adverse 
consequences. To understand these issues more clearly, it is important 
to first understand how remote sellers of cigarettes operate in today's 
marketplace.\9\ Remote sellers of cigarettes are typically located in 
States with low cigarette excise taxes, in other countries, or on 
Native American reservations in which access to untaxed cigarettes is 
possible. Once these sellers obtain supplies of untaxed or low-taxed 
cigarettes, they are then able to sell the cigarettes over the Internet 
or by mail or telephone order to consumers in higher-tax jurisdictions, 
without paying the taxes or other amounts lawfully owed to the States 
and localities in which the consumers are located. Given the 
substantial excise tax disparities that exist between some States, 
remote sellers are able to create and then exploit an enormous and 
unfair competitive advantage over cigarette wholesalers and retailers 
who pay State and local taxes.\10\ Indeed, the current business models 
of most cigarette remote sellers appear to be based on the non-payment 
of State and local taxes.
---------------------------------------------------------------------------
    \9\ The PACT Act refers to remote sales and remote sellers as 
``delivery sales'' and ``delivery sellers.''
    \10\ In fiscal year 2000, the weighted average State cigarette 
excise tax was 41.2 cents per pack. (Bill Orzechowski & Rob Walker, The 
Tax Burden on Tobacco, vol. 42 (February 2008) (funded in part by PM 
USA)). Today it is more than double that at $1.05. (Internal PM USA 
data).
---------------------------------------------------------------------------
    This is not an isolated or minor problem. The percentage of total 
Internet sales of cigarettes originating with domestic Internet sites--
that is, sites located within the United States--has increased over the 
past few years. Based on PM USA's most recent analysis, the five 
largest websites--and seven of the top ten--are located in the United 
States. Against this backdrop, remote sales cause a range of harms 
across a variety of issues, including:

      The States lose substantial tax revenues.\11\ For 
example, the New York State Department of Health estimated that the 
revenue losses to New York from Internet and telephone sales during 
2006 were between $28 million and $33 million.\12\ California estimates 
that it lost $190 million in tobacco taxes as a result of Internet 
sales in 2005.\13\
---------------------------------------------------------------------------
    \11\ In addition to causing tax losses to the States, Internet and 
other remote sales are often made without the deposit of the escrow 
amounts required on sales of cigarettes made by manufacturers who are 
not participating manufacturers under the Master Settlement Agreement.
    \12\ New York State Department of Health, Fourth Annual Independent 
Evaluation of New York's Tobacco Control Program, August 2007 at 2-18 
and 2-19.
    \13\ Patrick Fleenor, California Schemin': Cigarette Tax Evasion 
and Crime in the Golden State, Tax Foundation Special Report, Oct. 
2006, at 6-7.
---------------------------------------------------------------------------
      Remote sales can undercut State laws intended to prevent 
youth access to cigarettes and other tobacco products. With remote 
sales, the transaction does not occur on a face-to-face basis, but 
rather between a purchaser in one State and a seller that is typically 
located outside of that State, often beyond the State's practical 
ability to regulate the seller's conduct. A State's ability to impose 
requirements on remote sales into that State can be limited, 
furthermore, by both legal and practical considerations. A recent 
illustration of the limits of States' ability to take comprehensive 
action in this area is the U.S. Supreme Court's decision in Rowe v. New 
Hampshire Motor Transport Association, in which the Court struck down 
elements of Maine's remote sales law. The Court concluded that certain 
aspects of that law--including the age-verification requirement it 
imposed on remote sales--were preempted by the Federal Aviation 
Administration Authorization Act.\14\
---------------------------------------------------------------------------
    \14\ 128 S. Ct. 989 (2008). Justice Ginsburg highlighted in her 
concurrence the need for Congressional action in light of these limits 
on States' power. ``State measures to prevent youth access to tobacco . 
. . are increasingly thwarted by the ease with which tobacco products 
can be purchased through the Internet. . . . The FAAAA's broad 
preemption provisions, the Court holds, bar States from adopting [a] 
sensible enforcement strategy. . . . Now alerted to the problem, 
Congress has the capacity to act with care and dispatch to provide an 
effective solution. Id. at 998.
---------------------------------------------------------------------------
      Legitimate businesses are unfairly disadvantaged. The 
wholesalers and retailers who sell cigarettes in compliance with all 
applicable State excise tax and age-verification laws often operate on 
low margins. These law-abiding sellers are finding it increasingly 
difficult to compete with Internet and other remote sellers, who evade 
such laws to undercut market prices offered by legitimate wholesalers 
and retailers--prices that reflect the full cost of goods, including 
all taxes owed in the jurisdiction in which the cigarettes are 
delivered.

Existing Federal Law Has Gaps That Make it Inadequate To Effectively 
        Deal With the Problems Created by Internet Sales
    Existing Federal law, namely the Jenkins Act, 15 U.S.C. 
Sec. Sec. 375 et seq, imposes limited regulatory requirements that were 
originally designed to prevent bootlegging of cigarettes. The Jenkins 
Act was enacted almost 60 years ago, long before the development of the 
modern infrastructures available today (most notably the Internet) that 
enable millions of consumers to purchase goods from businesses located 
in other States and countries without leaving their homes. The Jenkins 
Act's limited regulatory requirements have been overtaken by these 
developments, and are thus inadequate to today's needs.
    For example, the Jenkins Act does not require the Internet or 
remote seller to pay applicable taxes on cigarettes shipped into a 
State, but rather only requires the seller to file reports to assist 
the State authorities in collecting taxes from the consumer. This is an 
inefficient and expensive way to collect the taxes and creates 
potentially unfair hardships for some possibly unsuspecting consumers. 
Moreover, the Jenkins Act does not require Internet or other remote 
sellers to comply with age-verification and other measures enacted by 
the States into which they are shipping cigarettes. In addition, 
violations of the Jenkins Act are punishable today only as 
misdemeanors, making it less likely that Federal prosecutors will 
invest their limited resources into prosecuting Internet and other 
remote sellers who violate that law's requirements.
The PACT Act Addresses These Gaps in Current Federal Law
    The PACT Act amends existing Federal law in key respects in order 
to address the gaps in those laws and to provide workable and effective 
regulations governing Internet and other remote sales. Among other 
things, the PACT Act:

      Enhances existing Jenkins Act provisions. The PACT Act 
directly addresses problems with the current law in a number of ways.
      First, it expands the amount of information that must be 
reported by Internet and other remote sellers of cigarettes and 
smokeless tobacco and requires that the monthly reports be provided not 
only to the State taxing authorities but also to the United States 
Attorney General and to local and tribal governments that tax 
cigarettes.\15\
---------------------------------------------------------------------------
    \15\ The PACT Act also requires the Attorney General of the United 
States to compile and publish a list of remote sellers who have not 
complied with the registration or other requirements of the Jenkins Act 
and prohibits the delivery of packages from non-compliers except in 
narrow circumstances. PACT Act, sec. 2.
---------------------------------------------------------------------------
      Second, the PACT Act gives State, local and tribal 
authorities the right to bring a Federal cause of action in the United 
States district courts to enforce the Jenkins Act (including the new 
remote sale rules described below). These provisions give the 
authorities with the greatest incentives to enforce the Jenkins Act 
important information and legal remedies they need.
      Third, the PACT Act expressly provides cigarette 
manufacturers or importers holding Federal permits with a cause of 
action to enjoin violations of the Jenkins Act.\16\
---------------------------------------------------------------------------
    \16\ This cause of action for Federal permit holders would not 
apply against State, local and tribal governments.
---------------------------------------------------------------------------
      Fourth, the PACT Act makes violations of the Jenkins Act 
a felony, thus providing a more powerful deterrent to illegal conduct, 
and increasing the incentive for Federal prosecutors to invest their 
limited resources in cases involving Jenkins Act enforcement.\17\
---------------------------------------------------------------------------
    \17\ These criminal provisions would not apply to State, local or 
tribal governments. A common carrier or independent delivery service 
also will not be guilty of a felony unless a higher standard of proof 
is met. PACT Act, sec. 2.
---------------------------------------------------------------------------
      In addition, the PACT Act clarifies that the Jenkins Act 
covers remote sales originating on Native American reservations.
      Requires payment of State and local excise taxes on 
remote sales. Currently, no Federal law requires remote sellers to 
remit State excise taxes to the States in which delivery takes place. 
The PACT Act corrects this situation, by making Internet sellers 
clearly responsible for paying taxes to the State into which they are 
engaging in delivery sales. This change will prevent Internet and other 
remote sellers who do not collect taxes from unfairly competing with 
cigarette sellers who properly collect taxes, and from misleading 
consumers into believing they have no tax liability when purchasing 
these products on the Internet. This change will also assist States in 
collecting taxes, given the potential legal impediments faced by States 
when they attempt to collect taxes from out-of-State or foreign 
Internet sellers.
      Regulates delivery methods generally. Currently no 
Federal law regulates the delivery methods or the procedures for the 
delivery of remote sale cigarettes to consumers. The PACT Act expands 
current Federal law and provides for Federal regulation of remote sales 
of cigarettes, and specifically includes age-verification and shipping 
requirements. As Federal law, the PACT Act would not be subject to a 
preemption challenge such as in the Rowe case challenging Maine's laws.
      Makes cigarettes nonmailable and imposes reasonable 
requirements on common carriers. Currently, Federal law allows the use 
of the U.S. mails for remote sales of cigarettes and smokeless tobacco 
products. The PACT Act makes these products generally nonmailable via 
the U.S. Postal Service, consistent with the current treatment of other 
age-restricted products such as alcoholic beverages.\18\ The PACT Act 
permits the shipment of cigarettes and smokeless tobacco by common 
carriers or other delivery services as long as the shipping, age-
verification and other remote sales requirements outlined above are 
met.\19\
---------------------------------------------------------------------------
    \18\ The PACT Act includes an exception for items mailed to or 
within Hawaii or Alaska. PACT Act, sec. 3.
    \19\ Federal legislation is necessary to effect this change as it 
is well-established that State laws cannot regulate what items the 
Postal Service carries or the terms on which it carries such items. 
See, e.g., N.Y. State Motor Truck Ass'n v. Pataki, 2004 WL 2937803, *10 
(S.D.N.Y. Dec. 17, 2004) (``The State lacks the authority to regulate 
the Postal Service''). Congress, however, has plenary authority to 
regulate what can or cannot be carried by the U.S. mails.
---------------------------------------------------------------------------
      Gives the Bureau of Alcohol, Tobacco, Firearms and 
Explosives (ATFE) authority to inspect records and inventories of 
remote sellers. The PACT Act expressly gives ATFE the right to inspect 
the records and inventories of cigarette remote sellers. This provision 
of the PACT Act will help the ATFE identify both noncompliant sellers 
and noncompliant common carriers.

PM USA Supports the PACT Act
    For the above reasons, PM USA strongly supports the PACT Act. This 
legislation will significantly strengthen Federal laws prohibiting 
illegal or tax-evading remote sales of cigarettes and smokeless tobacco 
products. This legislation will also benefit law enforcement by 
enhancing tools that can be used to identify, investigate, and 
prosecute remote sellers who evade the system of laws that govern the 
payment of taxes on these products.

                                 
              Statement of Consumer Federation of America

    Consumer Federation of America commends you for holding a hearing 
on the overall operations of the Alcohol and Tobacco Tax and Trade 
Bureau (TTB).\1\ It is critical that Congress provide oversight of 
Federal agencies to be sure that they are properly serving the public 
and carrying out the intent of Congress.
---------------------------------------------------------------------------
    \1\ Consumer Federation of America is a nonprofit association of 
over 300 organizations, with a combined membership of over 50 million 
Americans. Member organizations include local, State, and national 
consumer advocacy groups, senior citizen associations, consumer 
cooperatives, trade unions and anti-hunger and food safety 
organizations. Since its founding in 1968, CFA has worked to advance 
the interest of American consumers through research, education and 
advocacy.
---------------------------------------------------------------------------
    As you consider the operations and role of the TTB, I wanted to 
alert you to a statement made by a representative of the TTB in April 
regarding the Agency's mission. When asked about an alcohol labeling 
proposal before the Agency, TTB spokesman Art Resnick told a reporter 
that ``We don't have a public health mandate.'' \2\ This flies in the 
face of Congressional intent and public expectation. Overconsumption of 
alcohol is a serious public health problem and the TTB should be part 
of the solution, not merely an idle bystander.
---------------------------------------------------------------------------
    \2\ Zwilich T, ``Groups Rip Watered-Down Alcohol Labels.'' WebMD 
Medical News, April 22, 2008, http://www.webmd.com/news/20080422/
groups-rip-watered-down-alcohol-labels.
---------------------------------------------------------------------------
    Congress clearly expanded the mission of the TTB to include public 
health when it required a government warning label on alcoholic 
beverages in 1988. Section 202 of the Federal Alcohol Administration 
Act (27 U.S.C. 213) states, in part:

          ``The Congress finds that the American public should be 
        informed about the health hazards that may result from the 
        consumption or abuse of alcoholic beverages, and has determined 
        that it would be beneficial to provide a clear, nonconfusing 
        reminder of such hazards. . . . It is therefore the policy of 
        the Congress, and the purpose of this subchapter, to exercise 
        the full reach of the Federal Government's constitutional 
        powers in order to establish a comprehensive Federal program, 
        in connection with the manufacture and sale of alcoholic 
        beverages in or affecting interstate commerce, to deal with the 
        provision of warning or other information with respect to any 
        relationship between the consumption or abuse of alcoholic 
        beverages and health. . . .''

    This is a clear indication that Congress expects the mission of the 
TTB to include public health.
    The TTB obviously wants to shirk this public health mission. This 
is most readily apparent in its proposed rule on labeling of alcoholic 
beverages, released in July 2007. The Agency agreed to include some 
basic information on its proposed Alcohol Facts label. Incredibly, 
however, the TTB did not propose to include information about alcohol 
content per serving on its proposed label, the most relevant 
information for consumers of alcoholic beverages. The Agency also did 
not see fit to include the Dietary Guidelines advice on moderate 
drinking, missing a perfect public health opportunity to educate 
consumers about the importance of safe and healthy alcohol consumption.
    In Mr. Resnick's comment and the Agency's proposal on alcohol 
beverage labeling, the TTB is flaunting its disregard for the intent of 
Congress that the Agency's mission include protecting the public 
health. We urge you to impress upon the TTB the importance of this 
mission and encourage the Agency to carry out this mission as it 
fulfills its duties.

                                 
                     Statement of Matthew L. Myers

    In connection with this hearing on the activities of the Alcohol 
and Tobacco Tax and Trade Bureau (TTB), I would like to highlight for 
the Committee the serious problem of tobacco tax evasion and contraband 
trafficking in tobacco products and the related enforcement efforts of 
TTB and other Federal agencies. In that regard, we are very fortunate 
that a Member of the Ways and Means Committee, Representative Doggett, 
has introduced the Smuggled Tobacco Prevention Act (H.R. 5689), also 
known as the STOP Act, which is legislation to address the problem of 
smuggling and contraband trafficking of tobacco products. I strongly 
urge the Committee's support for this important legislation.
    Existing Federal laws do not do enough to prevent and reduce 
contraband trafficking and other tobacco tax evasion. Current Federal 
law fails to create the kind of closed system of legal sales and 
deliveries among legal, licensed entities that is needed to make the 
diversion of legal tobacco products into illegal markets much more 
difficult. Current Federal law fails to establish the kind of record 
keeping and other tracking and tracing requirements and capabilities 
needed to identify such illegal diversions when they occur and 
facilitate related enforcement efforts. In addition, Federal law fails 
to establish the kinds of markings on tobacco products to make it easy 
to distinguish between legal tobacco products and counterfeit and 
smuggled versions.
    Representative Doggett's STOP Act would correct each of these 
deficiencies in current Federal law, enabling TTB and other relevant 
Federal agencies to work together to sharply reduce the amount of 
tobacco tax evasion and other contraband trafficking in tobacco 
products that currently occurs.
    Let me explain why the Campaign for Tobacco-Free Kids and other 
public health organizations--such as the American Cancer Society, the 
American Lung Association, and the American Heart Association--strongly 
support the passage of the STOP Act as an effective way to promote 
public health, reduce tobacco use, and help shrink the unnecessary 
harms and costs caused by tobacco use.
    As the Members of this Committee are well aware, tobacco product 
smuggling and tax evasion are criminal activities that reduce 
government revenues and hurt honest businesses. That is reason enough 
to want to minimize the problem. But tobacco product smuggling and tax 
evasion also have serious public health consequences.
    Counterfeit and smuggled cigarettes and other cigarettes sold free 
of applicable Federal or State taxes are offered to consumers at prices 
far lower than the prices charged by lawful tobacco product retailers. 
The sales of these illegally tax-free products undermine ongoing State 
and local efforts to reduce tobacco use by increasing tobacco tax 
rates. Studies show, for example, that every 10 percent increase in 
real cigarette prices will reduce overall use by approximately 3 or 4 
percent and reduce the number of youth smokers by 6 or 7 percent. The 
corollary has also been proven true--decreases in cigarette prices--in 
this case from illegal cigarettes--increase tobacco use. The 
availability of cheap cigarettes therefore increases overall tobacco 
use, thereby leading to higher levels of tobacco-caused disease, deaths 
and costs. By reducing the easy access to contraband tobacco products 
and other tobacco products on which taxes have not been paid, these 
bills will assist in the effort to reduce tobacco use and its harms, 
especially among youth and lower-income persons.
    Another key public health problem from contraband tobacco product 
trafficking is sales to kids. Black market vendors and other illegal 
sellers are much more likely to sell to underage buyers than legally 
operating retailers.
    The sale of contraband tobacco products and other tobacco products 
on which no taxes have been paid also hurts public health by reducing 
the amount of government tobacco tax revenues available to fund tobacco 
prevention programs and other public health initiatives.
    This problem is exacerbated by the fact that contraband cigarette 
trafficking can also reduce the annual tobacco settlement payments to 
the States. Those settlement payments are supposed to be adjusted 
downward based on actual U.S. cigarette consumption declines--but the 
MSA formulas are based solely on changes to legal cigarette sales. 
Accordingly, when smokers shift from legal to illegal cigarettes, 
consumption does not actually decline, but the MSA payments to the 
States do.
    The illegal sale of tobacco products also opens the door to the 
sale of tobacco products that do not have the required health warnings, 
do not comply with State ``fire-safe'' laws to make cigarettes less 
likely to cause fires, and that contain levels of pesticides or other 
contaminants that legally manufactured cigarettes using legally grown 
domestic tobacco cannot contain. In addition, if the pending FDA 
tobacco product legislation (H.R. 1108) becomes law, FDA will likely 
issue product standards for cigarettes and other tobacco products 
designed to make them less harmful, and contraband versions could 
violate those product standards.
    There is another public health reason to institute effective 
measures to minimize tobacco product smuggling and tax evasion. As 
mentioned earlier, tobacco tax increases are an especially effective 
way to increase tobacco product prices and, consequently, reduce 
tobacco use and its many harms and costs. The tobacco industry and its 
allies regularly argue against any significant tobacco tax increases, 
claiming they will drive more smokers to illegal cigarettes. The proper 
response to this argument is not to forego new tobacco tax increases 
and the public health benefits they produce, but to increase and 
improve government efforts to bring criminal contraband tobacco 
trafficking organizations to justice.
    For all these reasons, minimizing tobacco product smuggling and tax 
evasion is not only good fiscal policy and good anti-crime policy but 
is also good public health policy.
    Fortunately, the STOP Act demonstrates that there are measures that 
can be quickly implemented to prevent and reduce contraband tobacco 
product trafficking and put the related criminal organizations out of 
business.
    The STOP Act (H.R. 5689) is the latest version of legislation that 
was introduced in prior Congresses and has undergone continuous 
improvement. Among other things, it takes advantage of the lessons 
learned from growing efforts worldwide to address the problem of 
cigarette and other tobacco product smuggling that crosses 
international borders and the problem of counterfeit tobacco products 
and counterfeit tax stamps.
    The common sense principles behind the STOP Act are simple and 
effective:

      Make sure that it is difficult for illegal vendors to 
sell counterfeit tobacco products or make or sell counterfeit tax 
stamps and easy for enforcement officials and others to distinguish 
legal from illegal tobacco products. The STOP Act does that by 
requiring clear markings on tobacco product packages that identify the 
manufacturer and show where the products may be legally sold. The 
legislation requires new, readily available high-tech tax stamps that 
establish legality and cannot be effectively counterfeited, and it 
includes provisions to keep tobacco product manufacturing and tax-
stamping machinery from getting into the hands of counterfeiters.
      Make it easier to track and trace tobacco products as 
they are transported from one business to another so that diversion to 
illegal distribution channels is more difficult and easier to spot. The 
STOP Act requires reasonable reporting and recordkeeping requirements 
by businesses throughout the distribution and delivery chain; adds 
tobacco product distributors into the Federal permit system that now 
applies to manufacturers, exporters and importers (creating a closed 
system of authorized legal businesses that can sell and deliver tobacco 
products to each other); provides for encrypted information on the 
high-tech tax stamps to identify not only the entities applying the tax 
stamp but also subsequent recipients; and establishes a system of 
export bonds to ensure that the tobacco products actually end up in 
legal markets where they are reportedly destined.
      Prohibit transactions that serve only to supply 
contraband trafficking. The STOP Act blocks sales of tobacco products 
that exceed the amount needed for personal use. For example, the bill 
stops the sale of more than 5,000 cigarettes (250 packs) to any single 
retail customer at any one time. Those kinds of large retail sales are 
needed only by those engaged in illegal smuggling and re-sales, and 
this bill would stop them.
      Untie the hands of Federal enforcement officials. To help 
enforcement efforts, the legislation creates more extensive Federal 
jurisdiction over contraband trafficking. The STOP Act makes the 
definition of contraband tobacco product clearer and more 
comprehensive. It includes all tobacco products for the first time, and 
would also enable Federal enforcement officials to stop and prosecute 
any contraband trafficking of more than 2,000 cigarettes (rather than 
the current jurisdictional minimum of 10,000 cigarettes).
      Protect citizens who report criminal trafficking acts. 
The STOP Act does that by providing new whistleblower protections for 
civic minded workers who witness contraband trafficking activity while 
on the job.
      Establish strong new financial incentives for good 
behavior and appropriately large financial disincentives for bad 
behavior. Rep. Doggett's legislation establishes new export bond 
requirements that would penalize exporters for allowing their shipments 
to be diverted from the reported legal destinations; provides clearer 
standards for proper behavior; establishes clearer descriptions of 
wrongful acts, and subjects lawbreakers to higher fines and penalties.

    These examples of some of the key measures in the STOP Act provide 
a quick overview of this comprehensive and carefully thought-out 
legislation. By doing all these things, the STOP Act would make it much 
easier for TTB to accomplish its goal of collecting all Federal tobacco 
taxes that are legally owed on all the tobacco products consumed in 
this country.
    Once passed into law, we believe the STOP Act will reduce 
contraband trafficking both within the United States and across its 
borders. Indeed, the STOP Act offers a model that the world's nations 
could follow both in the current development of the Illicit Trade 
Protocol of the Framework Convention on Tobacco Control (FCTC)--which 
the United States has signed but not yet ratified--and in subsequent 
efforts by individual countries to comply with the FCTC by passing 
their own stronger and more comprehensive national laws.
    Some concerns have been raised over the STOP Act's tax stamping 
provision, but they primarily reflect misunderstandings about how the 
bill would work and the viability of currently available technologies. 
More specifically, some cigarette companies have complained that it is 
not technologically feasible to establish a Federal tax stamp for 
cigarettes. Their complaint ignores the fact that high-tech national 
tax stamps already exist in other countries (e.g., Brazil) and in one 
U.S. State (California). In addition, at least two major companies in 
the United States--SICPA and Authentix--already offer comprehensive 
digital tax stamping technologies and systems that could quickly be put 
into effect. While opponents have asked about the cost of establishing 
a new Federal cigarette tax stamp, high-tech tax stamps would bring in 
substantial new Federal revenues by stopping counterfeit sales and 
other contraband tobacco product trafficking--and that new revenue 
would be far greater than the cost of the new system. California is an 
excellent example. When California implemented its own high-tech tax 
stamping system, revenues from cigarette taxes increased roughly $100 
million dollars over the next twenty months despite no increase in the 
cigarette tax rate.
    The only other major issue raised about the STOP Act to date has 
been a concern among some Indian Tribes that the Act might in some way 
weaken existing Tribal sovereignty rights. The STOP Act should be 
Tribal sovereignty neutral, and we believe that it is. Further, we 
understand that Representative Doggett is committed to ensuring that 
his bill is interpreted and applied that way, either by making whatever 
changes might be necessary or through appropriate legislative history.
    Passing the STOP Act would not only cap current tobacco product 
smuggling and tax evasion, preventing it from getting any larger in the 
United States, but would also make the problem much smaller. These 
measures would increase the costs and reduce the profits from smuggling 
and tobacco-product related tax evasion. They would also close down 
lucrative opportunities for criminal and terrorist organizations. They 
would protect honest businesses from illegal competition, and they 
would increase public revenues at all levels of government.
    As described above, passing the STOP Act would also work directly 
to improve public health by helping to reduce tobacco use and the 
horrible toll it takes on our country.
    Thank you for this opportunity to submit this testimony for the 
Committee's consideration. If any Members or staff have any questions 
about my testimony or would like any additional information, they can 
contact me or any of the staff at the Campaign for Tobacco-Free Kids.

                                 
                  Statement of SICPA Product Security

    Chairman Lewis, Ranking Member Ramstad, and other Committee 
Members, we thank you for the opportunity to provide testimony for the 
printed record of this hearing. The information we provide we hope will 
answer possible questions on the feasibility of a Federal cigarette tax 
stamping system as proposed by Congressman Lloyd Doggett in H.R. 5689, 
the Smuggled Tobacco Prevention Act (the ``STOP Act'') as he testifies 
before your Committee today.
    SICPA supports implementation of a Federal high-tech tax stamp 
system. Our experience has proven that a Federal system is feasible and 
successful in preventing counterfeiting and diversion while protecting 
government revenues and public safety.
    SICPA offers support of the STOP Act based on our experience with 
tobacco stamping systems. Founded in 1927, SICPA is a trusted advisor 
to governments, central banks and brand owners providing security inks 
and integrated systems for anti-counterfeiting.
Feasibility of a Federal Stamping System
    It is currently feasible to use digital tax stamp technology to 
establish a Federal tax stamp or other tax-payment indicia for 
cigarettes. SICPA has experience in operating such systems in contracts 
with the Federal Governments in Brazil and Turkey and was recently 
awarded the contract for such a system in Canada. Provided the 
appropriate systems are in place, the following information could be 
read from the stamp by portable scanning devices in real-time at the 
point of inspection:

    a.
       The denominated value of the stamp, meter impression or indicia.
    b.
       A unique serial number or tracking code.
    c.
       The name and address of the person purchasing (and, if 
different, of the person affixing) the stamp, meter impression, or 
indicia.
    d.
       The date the stamp, meter impression or indicia was purchased, 
when it was affixed and the brand to which it was affixed.
    e.
       The name and address of the person purchasing or otherwise 
receiving the tobacco product from the person who affixes the tax 
stamp, meter impression, or indicia and the date of such purchase or 
transfer.

    SICPA systems worldwide have been customized with particular 
proprietary inks for visual authentication and encrypted with data 
similar to and beyond the desired items above that were priorities for 
Congressman Doggett.
SICPATRACE Solution
    SICPA has designed our tax stamp solution with several key 
attributes:

      To provide overt and advanced covert deterrence against 
stamp counterfeiting.
      To provide secure stamp manufacturing and distribution 
processes.
      To minimize impact of the new program on key players 
(Federal Government, State governments, manufacturers, distributors) 
while enhancing their ability to control and monitor the program.
      To provide information technology to facilitate the 
ordering, distribution, authorization, audit, reconciliation and 
reporting of tax stamp application.
      To provide tools for to authenticate the tax stamps using 
individual features designed for each user group (enforcement, 
manufacturers, consumers, etc.)

    Implementation of a Federal system would likely be carried out in a 
similar fashion to systems used in other Federal Government programs. 
Typically, a Federal stamp is produced in a secure environment under 
very strict production procedures to ensure full accountability for all 
stamps produced. Stamps are shipped to manufacturers where they are 
applied to packs prior to cellophane wrapping. All the recognized 
providers of cigarette packing equipment lines have tax stamp 
application modules available that they can readily install on 
cigarette manufacturers current lines. As stamps are applied to packs, 
the digital stamp is read thereby recording the stamp affixing and the 
brand to which it was applied. Subsequently the stamp can be read as it 
is packaged in a carton and case. As cases are shipped the unique 
numbers of the cases (and therefore the cartons and packs contained 
therein) are used to reference the destinations and each subsequent 
change in the chain of custody. In the U.S., such a system could be 
adopted without interfering with the rights of the States to apply 
their own State tax stamp as their current practices dictate.
    High-tech tax stamps are extremely difficult to counterfeit and 
improve upon the current stamping systems based on old technology. 
Adapting technology used to protect documents of value (e.g. currency, 
transit tickets, passports, etc.) the technical sophistication of 
SICPA's proposed tax stamp will protect existing tax revenue from 
erosion due to counterfeiting while increasing revenues. The proposed 
approach would use layered security combining overt and covert 
counterfeit deterrent features in the printed design of the tax stamp. 
This approach provides multiple hurdles for counterfeiters and a ready 
ability to change or adjust individual features--enabling the governing 
body to stay ahead of counterfeiters without having to redesign the 
entire stamp every time a threat is discovered. The SICPA stamp design 
has built in flexibility to allow cost effective incremental features 
to be incorporated over time to continually improve counterfeit 
protection. While each feature is individually secure, the combination 
of overt, covert and machine readable security features provides a 
significant barrier of protection. Although copies of stamps will be 
attempted we provide sufficient sophisticated elements that they are 
virtually counterfeit proof.
Costs and Implementation
    In the absence of detailed information on the number of 
manufacturers, number of manufacturing lines, separate locations, 
shipping and delivery methods, number of scanners required, etc., it is 
premature for us to provide an estimated timetable for implementation 
or approximate costs. In Turkey, the Federal system was implemented in 
6 months and in Brazil it was completed in 8 months; the Federal system 
in Canada is planned to take 6 months. In all cases the requirements 
differ to some extent but give an indication of the time requirement. 
In the State of California, SICPA was awarded a contract in August 
2004, and full implementation of the SICPATRACE system began January 
2005. By June 30th, 2005, the system was fully operational in the 
State, but this system only covered licensed distributors. Stamp costs 
will also vary substantially dependent on what is also to be provided 
by way of stamp content, equipment, information systems and other 
services, and therefore the indicative price range is very broad from 
$4.00 to $30.00 per thousand.
    We respectfully decline to speculate on the amount of increased 
cigarette tax revenues the Federal Government would be likely to obtain 
from the introduction of a stamping system, with or without a tax 
increase. In the State of California, $125 million in revenues were 
recovered in the first 20 months of the SICPATRACE system. It had been 
estimated that nearly $292 million was lost annually in the State. It 
is arguable that with any tax increase, the opportunity for 
counterfeiters becomes more lucrative and a digital stamp becomes more 
necessary.
    The stamping of other tobacco products (OTP) is feasible using a 
similar stamp to that recommended for cigarettes. However, given the 
variety of products in terms of size, shape, packaging materials, etc., 
different machines may be required for different manufacturing 
environments but the principles remain the same as for cigarette packs. 
Again, due to limited information on the scope of such a system, we 
respectfully decline providing estimated cost information at this time.
SICPA Systems: Proven Tobacco Stamping Success
    In order to provide additional information on the feasibility of a 
national system for Federal stamping, we include two case studies of 
our stamping systems on Federal levels which have been implemented with 
much success. Additionally, SICPA has been awarded the contract for 
Federal cigarette stamping in Canada, to be implemented following 
further negotiations with the Canada Revenue Agency. We hope this 
information will be helpful in determining how a Federal system in the 
U.S. could be established.
BRAZIL
    SICPA is currently managing secure, nationwide tax stamp programs 
for Brazil. The program in Brazil provides fiscal stamps on packs that 
account for some 5.3 billion cigarettes per year. Elements of the 
system in Brazil include:

      Overt and covert security features for the fiscal stamp.
      Data Management System (DMS) to control national 
cigarette production, which will be integrated with the government's 
taxation system.
      Coding activation systems incorporated into the 
production lines at 152 manufacturer locations.
      Use of invisible SICPADATA codes for product 
authentication, production control and track and trace.
      Supply and installation of hardware and software for 
track and trace and codification of the ``intelligent tax stamp'' with 
an overt security element.
      Technical support and ongoing training of technical 
personnel necessary for the fulfilment of the scope of this contract.

Turkey: TURKTRACE
    Turkey has become the first country in the world to implement a 
single technology to monitor all excisable tobacco, alcohol and beer 
products--more than seven billion packaged items per year. The product 
tracking system required the installation of non-intrusive automatic 
tracking units onto manufacturers' packing and filling lines for 
product monitoring and transmission of the relevant information to a 
central data management system. To handle the monitoring of imported 
products, dedicated facilities have been set-up close to customs points 
at Istanbul, Izmir and Mersin.
    The reach of this tracking system is broad and extensive:

      137 tobacco packing lines at 8 sites, applying 6 billion 
security stamps per year.
      50 filling lines for alcohol products at 39 sites, 
applying 140 million security stamps per year.
      24 filling lines for beer at 9 sites, applying 1 billion 
security codes per year.

Conclusion
    SICPA applauds the efforts of lawmakers who have brought the issue 
of contraband cigarettes to national prominence. It is increasingly 
apparent that the safeguards currently in place against counterfeiting 
are not enough. By moving to an encrypted stamp system, the U.S. 
Government will protect legitimate tax revenue and protect national 
security. We have seen the success of such systems and trust that it is 
feasible in the U.S. We also believe such a system should complement, 
not hinder the efforts of individual States to control their own 
stamping programs, whether encrypted or not. We strongly believe that a 
Federal stamping system and a State stamping system are not mutually 
exclusive. Any Federal system should not undermine the efforts of an 
individual State to secure and monitor their own tax revenues.
    SICPA thanks you for the opportunity to provide this additional 
information in support of a Federal stamping system. SICPA remains 
available as a resource for further information on system 
implementation and continues to encourage efforts against counterfeit 
and diverted products.

                                 

[GRAPHIC] [TIFF OMITTED] T8277A.044


[GRAPHIC] [TIFF OMITTED] T8277A.045


                                 

[GRAPHIC] [TIFF OMITTED] T8277A.046


[GRAPHIC] [TIFF OMITTED] T8277A.047


[GRAPHIC] [TIFF OMITTED] T8277A.048


[GRAPHIC] [TIFF OMITTED] T8277A.049


[GRAPHIC] [TIFF OMITTED] T8277A.050


[GRAPHIC] [TIFF OMITTED] T8277A.051


[GRAPHIC] [TIFF OMITTED] T8277A.052


                                 

[GRAPHIC] [TIFF OMITTED] T8277A.053


[GRAPHIC] [TIFF OMITTED] T8277A.054

                                 
