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

[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

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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
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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:

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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\
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\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.
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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.
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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\
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\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.
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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\
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\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.
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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.
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\14\ Behan, Tom. The Camorra, 43-44, London: Routledge, 1996.
\15\ Ibid.
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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.
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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.
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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.
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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.
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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.'')
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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.
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\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).
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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\
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\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.
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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\
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\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\
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\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.
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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\
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\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.
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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.

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