[Federal Register Volume 61, Number 13 (Friday, January 19, 1996)]
[Rules and Regulations]
[Pages 1492-1509]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-467]




[[Page 1491]]

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Part IV





Department of Health and Human Services





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45 CFR Part 96



Tobacco Regulation for Substance Abuse Prevention and Treatment Block 
Grants; Final Rule

  Federal Register / Vol. 61, No. 13 / Friday, January 19, 1996 / Rules 
and Regulations  

[[Page 1492]]


DEPARTMENT OF HEALTH AND HUMAN SERVICES

45 CFR Part 96

RIN 0930-AA01


Tobacco Regulation for Substance Abuse Prevention and Treatment 
Block Grants

AGENCY: Substance Abuse and Mental Health Services Administration, HHS.

ACTION: Final rule.

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SUMMARY: On August 26, 1993, the Department of Health and Human 
Services (HHS) published a Notice of Proposed Rulemaking (NPRM) to 
implement section 1926 of the Public Health Service (PHS) Act regarding 
the sale and distribution of tobacco products to individuals under the 
age of 18. The Secretary requested comments on the NPRM and gave 60 
days for individuals to submit their written comments to the 
Department. The Secretary has considered the comments received during 
the open comment period and is issuing the final regulation in light of 
those comments.

EFFECTIVE DATE: February 20, 1996.

FOR FURTHER INFORMATION CONTACT: Prakash L. Grover, Acting Director, 
Division of State Prevention Systems, Center for Substance Abuse 
Prevention (CSAP), Rockwall II Building, 9th Floor, 5600 Fishers Lane, 
Rockville, MD 20857, telephone (301) 443-7942.

SUPPLEMENTARY INFORMATION: The Department is finalizing the rule 
entitled ``Substance Abuse Prevention and Treatment Block Grants: Sale 
or Distribution of Tobacco Products to Individuals Under 18 Years of 
Age,'' which was published as a NPRM in the Federal Register on August 
26, 1993 (58 FR 55156). The final rule is developed in accordance with 
section 1926 of the PHS Act, 42 U.S.C. 300x-26, as amended.

Relationship to proposed Food and Drug Regulations Restricting the Sale 
and Distribution of Tobacco Products

    On August 10, 1995, President Clinton announced the issuance of 
proposed ``Regulations Restricting the Sale and Distribution of 
Cigarettes and Smokeless Tobacco Products to Protect Children and 
Adolescents'' by the Food and Drug Administration (FDA) (60 FR 41314, 
Aug. 11, 1995). If promulgated, these regulations would restrict 
minors' access to nicotine-containing tobacco products and would reduce 
the amount of positive imagery that makes these products attractive to 
young people. The basis for FDA's tentative conclusion establishing its 
jurisdiction over these tobacco products is set forth in the FDA NPRM's 
accompanying proposed jurisdictional analysis. (Federal Register, 
Volume 60, No. 155, page 41453, August 11, 1995).
    The final rule being issued today will complement and be consistent 
with any rule that FDA promulgates, when and if FDA does so. While this 
final rule is directed to the States and the FDA proposal focuses on 
the tobacco industry and retailers, they are both designed to help 
address the serious public health problem caused by young people's use 
of and addiction to nicotine-containing tobacco products. By 
approaching this public health problem from different perspectives, 
these actions together would help achieve the President's goal of 
reducing the number of young people who use tobacco products.
    The regulatory approaches reflect major differences in the 
statutory authorities of the respective agencies. In addition to 
requiring States to have in effect laws which prohibit the sale of 
tobacco products to minors as a condition of receipt of a grant, this 
rule requires that States enforce such laws, and meet certain 
negotiated rates of compliance so as not to suffer a reduction in block 
grant allotments as prescribed by law. On the other hand, the FDA 
proposal addresses the conduct of tobacco manufacturers, distributors, 
and retailers. The FDA proposal seeks to reduce young people's use of 
tobacco by placing certain restrictions on the sale, distribution, 
advertising, and promotion of tobacco products to minors. Thus, these 
two regulatory actions both address the need to reduce minors' access 
to tobacco products, and the FDA proposal further attempts, through its 
advertising provisions, to reduce the powerful appeal of tobacco 
products to children and adolescents.

Background on the Notice of Proposed Rulemaking and Summary of 
Responses to Public Comment

A. Notice of Proposed Rulemaking

    The NPRM proposed regulations to implement section 1926 of the PHS 
Act. Section 1926 provides that ``the Secretary may not make a 
[Substance Abuse Prevention and Treatment block] grant to a State for 
the first applicable fiscal year and all subsequent fiscal years unless 
the State has in effect a law prohibiting any manufacturer, retailer or 
distributor of tobacco products from selling or distributing such 
products to any individual under the age of 18.'' According to section 
1926(a)(2), States are to have such laws in place for receipt of FY 
1994 Substance Abuse Prevention and Treatment (SAPT) Block Grant funds 
unless a State's legislature does not convene a regular session in FY 
1993 or 1994, in which case a State must have such a law in place for 
receipt of FY 1995 funds. The Secretary proposed to implement this 
statutory provision by requiring States to have in place a law that 
prohibits the sale or distribution of any tobacco product to 
individuals under the age of 18 (minors) through any sales or 
distribution outlet. This would include sales or distribution from any 
location which sells at retail or otherwise distributes tobacco 
products to consumers, including locations that sell such products 
over-the-counter or through vending machines. Beyond this, the 
Secretary did not propose specifying the provisions of the States' 
laws.
    Section 1926(b) of the PHS Act requires States, as a condition of 
receipt of a grant, to enforce such laws ``in a manner that can 
reasonably be expected to reduce the extent to which tobacco products 
are available to individuals under the age of 18.'' In enforcing such 
laws, section 1926(b)(2)(A) requires the States to conduct random, 
unannounced inspections. The NPRM proposed a regulation to require 
States to have ``well-designed procedures'' in place for reducing the 
likelihood or prevalence of violations. Examples of such procedures 
were provided in the regulation. The Secretary also proposed that the 
State, at a minimum, enforce the law using both random and targeted 
unannounced inspections of both over-the-counter and vending machine 
outlets. It was proposed that the random, unannounced inspections be 
conducted annually and be conducted in such a way as to ensure a 
scientifically sound estimate of the success of enforcement actions 
being taken throughout the State.
    Section 1926(b)(2)(B) of the PHS Act requires the States to 
annually submit to the Secretary a report describing the strategies and 
activities carried out by the State to enforce such law during the 
fiscal year for which the State is seeking the grant, and the extent of 
success the State has achieved in reducing the availability of tobacco 
products to minors. The NPRM essentially requested this information. As 
part of such information, the NPRM proposed, among other things, to 
require States to report on the results of the unannounced inspections 
and to provide a detailed description of how the unannounced 
inspections were conducted and the methods used to identify outlets to 
be inspected.

[[Page 1493]]

    Section 1926(c) of the PHS Act requires the Secretary to determine 
whether the State has maintained compliance with the enforcement 
requirements of the statute. If the Secretary determines that a State 
has not maintained such compliance, the Secretary is required to 
decrease the Block Grant from 10 to 40 percent depending on the fiscal 
year involved. In determining enforcement compliance, the Secretary 
proposed the following: the State must demonstrate that its random, 
unannounced inspections were conducted in a scientifically sound manner 
and the data submitted by the State in the annual report must show that 
the percentage of the retailers or distributors involved in the random, 
unannounced inspections making illegal sales does not exceed 50 percent 
during the first applicable fiscal year, 40 percent in the second 
applicable fiscal year, 30 percent in the third applicable fiscal year 
and 20 percent in the fourth applicable fiscal year and subsequent 
fiscal years. If a State does not maintain material compliance with the 
above-mentioned criteria, the Secretary, in extraordinary 
circumstances, may consider a number of other factors such as a 
scientifically sound survey indicating that the State is making 
significant progress toward reducing use of tobacco products by minors.

B. Public Comment and Department's Response

    During the 60-day comment period that ended on October 26, 1993, 
the Department received 354 letters providing comments on the NPRM. 
These comments spanned a wide range of concerns and issues. They 
presented a complex mix of support for and opposition to the 
Department's proposal. The preamble sections below summarize these 
views and provide the Department's responses to them.
General Comments
    Numerous commenters, including State agencies, State legislators 
and Governors, claimed the NPRM was redundant and unnecessary. They 
argued that States currently have laws in place that prohibit the sale 
of tobacco to minors, and they felt the Department was forcing the 
States to create redundant laws.
    This regulation does not require redundant or duplicate laws at the 
State level; rather it requires that States have in effect a law 
providing that it is unlawful for any manufacturer, retailer or 
distributor to sell or distribute tobacco products to individuals under 
the age of 18. In the event that a State does not have such a law in 
place, one is required if the State wishes to receive an SAPT Block 
Grant. At the time of passage of section 1926 of the PHS Act, the 
majority of States had laws in place that complied with the requirement 
of section 1926(a).
    Many commenters raised concerns about the short timeframe within 
which the regulation was to be implemented. These concerns primarily 
centered on the time it would take to develop an inspection sampling 
frame and to design and conduct inspections. The Department recognizes 
the difficulties States may face in complying with these requirements 
and enforcing their laws sufficiently to reduce the extent to which 
tobacco products are available to individuals under the age of 18, as 
required by section 1926. As discussed later in this preamble, States 
will be provided time to develop an effective inspection system.
    Some commenters argued that the Department was not allowing 
retailers and States time to demonstrate the success of industry or 
other State programs designed to restrict youth access. The Department 
notes that the statute specifically requires that, for most States, 
enforcement of their laws must occur in FY 1994 and that States must 
enforce their laws in a manner that can reasonably be expected to 
reduce the extent to which tobacco products are available to minors. 
Section 1926 also requires States to conduct random, unannounced 
inspections. The Department cannot, therefore, delay the implementation 
of these statutory provisions.
    Several commenters argued that the Department should place 
responsibility on minors for complying with this law rather than 
targeting retailers with such responsibility. Other commenters took the 
opposing view and cautioned against requiring penalties against minors 
for purchasing tobacco products.
    The statute does not give the authority to the Department to 
require laws prohibiting the purchase of tobacco products by minors nor 
to regulate the conduct of retailers. However, States are required 
under section 1922 of the PHS Act to develop primary prevention 
activities to reduce tobacco use by minors in keeping with 45 CFR 
96.125. The Preventive Health and Health Services Block Grant, sections 
1901, et seq., of the PHS Act, administered by the Centers for Disease 
Control and Prevention (CDC) also provides assistance to States to 
implement strategies to prevent tobacco use among all populations, 
including minors. These prevention strategies targeted to minors will 
serve to reinforce the enforcement strategies required by section 1926.
Definitions
    A number of commenters believed that, by specifically including 
vending machines in the definition of a retail outlet and by requiring 
a separate reporting requirement, the Department was proposing more 
stringent enforcement requirements on outlets than are required by the 
law. In addition, many commenters from State agencies argued that most 
States do not have legislation in place with regard to controls on 
vending machines and, therefore, that they would have difficulty 
complying with the regulation if it included vending machines as a type 
of outlet.
    The Department defines ``outlet'' as ``any location which sells at 
retail or otherwise distributes tobacco products to consumers including 
(but not limited to) locations that sell such products over-the-counter 
or through vending machines.'' The Department is requiring States to 
have laws in place during the first applicable fiscal year which make 
it illegal for a manufacturer, retailer, or distributor of tobacco 
products to sell or distribute any such products to an individual under 
the age of 18 through any sales or distribution outlet, including over-
the-counter and vending machine sales. The Department believes that 
this construction of section 1926 of the PHS Act, i.e., covering 
vending machines, reasonably carries out the intent of Congress, and 
the Department believes that, if only over-the-counter sales were 
prohibited, minors would purchase tobacco products from vending 
machines as access to over-the-counter tobacco products becomes more 
difficult.
    With respect to timing, we point out that States have now had 
several years since enactment of section 1926 and publication of our 
proposed rule, to pass necessary legislation and to take other steps to 
begin effective enforcement of their laws against sale and distribution 
to minors.
Random Unannounced Inspections
    Many commenters suggested that the Department require States to use 
``sting'' operations, in which minors would attempt to purchase tobacco 
products, either over-the-counter or from a vending machine, as the 
most efficient and effective method of carrying out such inspections. 
The NPRM gave the States flexibility in implementing the requirement 
for random, unannounced inspections, and it did not require ``stings.'' 
The Department sees no reason at this time to change that policy. While 


[[Page 1494]]
there is considerable literature supporting the use of ``stings'' as an 
efficient and effective method of carrying out such inspections, there 
is no conclusive research to suggest that it is the only viable method 
that could be developed. Furthermore, the Department strongly supports 
giving States flexibility in devising methods to use in enforcing their 
laws.
    However, the Department wants States to know that it does not know 
of any other valid alternative methods. Despite the NPRM's request for 
suggestions for alternative methods, and the many comments received 
opposing the use of ``stings,'' the Department has not identified 
evidence of any other workable or valid method of random, unannounced 
inspections for determining illegal sales. Moreover, the regulation's 
compliance level is based on the ``sting'' methodology, and the 
Department would need an empirical basis for converting results from 
one enforcement method to another to assess compliance.
    In the light of these issues, the Department considered a range of 
options to protect both the States and the integrity of the program, 
including modifying the regulation to provide for formal approval by 
HHS of any alternative method. Another option would have been to 
specify in some detail either the methodology the Department would find 
acceptable or to define such terms as ``unannounced.'' Ultimately, the 
Department decided to leave the matter open and flexible, relying on 
the good judgment of State officials. The Department does, however, 
strongly urge any State that contemplates using an alternative method 
to work with the Department in advance of implementation to show that 
the method validly measures compliance through random, unannounced 
inspections, and to ensure that the inspection approach will produce 
the data necessary to determine that the State meets the compliance 
target.
    Another large group of commenters opposed the use of minors in 
conducting compliance inspections because they feared that inspectors 
would attempt to entrap retailers by inspecting at busy times during 
the day, by attempting to purchase when the seller is distracted, by 
pressuring the seller, or by using individuals as decoys who do not 
look like minors. A number of commenters expressed concern that a child 
may not be sufficiently mature to understand undercover procedures and 
inadvertently entrap a retailer.
    The Department is aware that entrapment may be a potential problem 
for retailers. Since the implementation of random, unannounced 
inspections is a State responsibility that is required by statute for 
receipt of an SAPT Block Grant, the Department expects States, if they 
choose to have minors participate in inspections, to develop procedures 
to address (and thereby avoid) these concerns and to educate officials 
regarding permissible and impermissible activities.
    Many commenters argued that using minors in inspections could have 
a detrimental impact on minors participating in such operations (e.g., 
danger, exploitation). Among the fears expressed was the possibility of 
repercussions, in the event that the minor is discovered in his/her 
undercover role. Additionally, these commenters believed that 
undercover work is inherently dangerous and only to be undertaken by 
trained law enforcement officers. It was also feared that a child would 
be asked to take the witness stand and have to undergo cross 
examination.
    The Department believes that the use of minors in inspections is 
very effective in gathering data and believes these inspections will 
show that proper training and adult supervision can reduce any 
potential risk of negative consequences toward youth. The Department 
does, however, expect States to provide all of the necessary 
precautions to safeguard the youth participants.
    Commenters who favored requiring inspections involving the use of 
minors suggested the following guidelines: (a) minors should be 
supervised by adults, (b) minors should not be used in outlets they 
frequent or in their neighborhood so they may not be confronted later, 
(c) minors should not be involved in any confrontation with the 
retailer and, therefore, such confrontation should be made after the 
youth has left the store, and (d) minors should be 2-3 years younger in 
age and appearance than the legal age for purchase of tobacco products. 
Many commenters also suggested that minors be supervised by the State 
or an organization under contract to the State and that they be granted 
immunity from any State prohibition on the purchase of tobacco by 
minors.
    Following publication of this rule, the Center for Substance Abuse 
Prevention (CSAP) will provide to States technical assistance and 
further guidance on state-of-the-art inspection processes, including 
guidelines, training and technical assistance, on which CSAP and CDC 
are collaborating. Comments on the NPRM are being considered in the 
development of these guidelines, training and technical assistance.
    Several commenters urged the Department to make the inspection 
requirements more stringent. The Department believes that the 
inspection requirement as stated is sufficiently stringent to achieve 
the goals of section 1926 without imposing an undue burden on the 
States. Variations among States dictate the need for some flexibility 
in the design and conduct of the random, unannounced inspections.
    A few of the Single State Agencies for alcohol and other drug (AOD) 
abuse prevention and treatment (SSAs) and some alcohol and other drug 
abuse providers that commented on the NPRM believed their involvement 
with the tobacco enforcement tasks of the law would hurt their position 
with the very citizens they aim to serve. They believed that clients 
would fear or avoid accessing services, because the providers would 
also be enforcing the laws.
    First, it should be noted that section 1926 does not require that 
the inspections be performed by the SSAs or by the providers they 
contract with to provide AOD services. The required inspections may 
well be carried out by, or under the direction of, other agencies of 
State government. Moreover, even if SSAs do enforce the provision, the 
Department does not believe that they will drive away their target 
population or client base by implementing random, unannounced 
inspections. These inspections are not directed at individuals who 
purchase the tobacco products, rather at those who sell or distribute 
the products to youth. Neither the required law nor this regulation 
requires penalties against an individual for violating tobacco access 
laws. The Department feels that a client's perception of risk or fear 
of reprisal will be negligible and that AOD prevention and treatment 
providers will not be negatively impacted.
    Comments were also received regarding the use of private entities 
performing inspections. The issue of State responsibility and 
accountability was raised regarding inspections conducted by private 
entities. Opponents raised concerns about ``vigilantism,'' since they 
believed that such inspections would be motivated by an anti-tobacco 
agenda and would be subjected to no formal accountability requirements. 
Supporters of the use of private entities to inspect outlets viewed 
such inspections as an assurance that individual citizens have the 
right to independently evaluate the State's progress. They argued that 
the public has the right to be involved in 

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inspections and feared any limitation on that right.
    The Department does not require or prohibit the use of independent 
contractors or other type of organization to perform inspections of 
outlets for the State. It is the States' responsibility to demonstrate 
to the Department that random, unannounced inspections have been 
conducted in a fair, consistent, unbiased, planned manner that will 
provide useful data on the sale or distribution of tobacco products to 
minors.
    Commenters offered numerous recommendations on alternate strategies 
for inspecting outlets. One commenter suggested using ``random 
inspections'' for scientific measures, ``routine inspections'' for 
compliance checks, and ``targeted inspections'' for enforcement of 
previous violators. Other recommendations included routine, pre-
announced inspections and the inspection of outlet-sponsored ``give-a-
way'' programs, as already specified by the NPRM.
    While the Department believes that these suggested strategies are 
helpful, in the interest of providing States with appropriate 
flexibility, the Department will not prescribe how random, unannounced 
inspections are to be performed. Such approaches have been noted and 
may be included in further guidelines and training provided by the 
Department to inform States on all the options available to them in 
effectively carrying out these requirements.
    Commenters argued that the targeted inspections required in the 
proposed regulation imply States' knowledge of prior violations and 
that such information does not currently exist and cannot be tested for 
in the first year. Others argued that targeted inspections exceed the 
intent of the law. Still others argued that targeted inspections should 
be required.
    The Department has reviewed the proposed requirement for 
inspections targeted at outlets with previous violations. The 
Department believes that each State should have the flexibility to 
enforce its laws in a manner that can reasonably be expected to reduce 
availability of tobacco products to minors in light of that State's own 
unique circumstances. Therefore, we are not requiring that States 
conduct targeted inspections. States are reminded, however, that 
targeted inspections are an appropriate method of controlling youth 
access to tobacco products and may be considered by the Secretary in 
making a determination when a State is not found to be in substantial 
compliance with the State's negotiated inspection failure rate, which 
is discussed in more detail below.
Other Well-Designed Procedures
    Many commenters argued that the proposed requirement for ``other 
well-designed procedures'' was excessive. Many commenters perceived the 
NPRM's requirement for ``other, well-designed procedures'' as forcing 
States to enact additional laws as a condition of funding, and thus 
exceeding the scope of the statute, congressional intent and 
Departmental discretion under the statute. Commenters further stated 
that existing laws and procedures are sufficient and that this 
requirement would necessitate new legislation that would interfere or 
conflict with existing laws.
    Commenters representing SSAs claimed they would not be able to 
initiate ``other well-designed procedures'' in time to adequately 
comply with the regulation, especially since State legislatures meet 
briefly, or not at all, this year. Examples of procedures considered 
problematic and time-consuming to implement include licensing, controls 
on vending machines, and excise taxes. They believed that each of these 
procedures is a highly charged political issue and not easily passed 
legislatively. Some States argued that, given their need to enact 
enforcement legislation and the strength of the tobacco industry's 
opposition to such initiatives, they would need to receive an extension 
from the Department for compliance.
    Many other commenters requested that the final rule mandate 
specific procedures (suggested strategies and examples found in the 
Preamble and the Model Law that was appended to it) rather than allow 
the flexibility provided in the NPRM. They stressed the need for a more 
stringent approach to the requirement and recommended that a wide range 
of mandates be included in the regulation, such as:
    1. A tobacco sales or distribution licensing system;
    2. A graduated schedule of penalties for violations;
    3. A ban on vending machines;
    4. Elimination of all vending machines in locations where minors 
have access; and
    5. An updated version of the Model Law.
    The Department has been persuaded by public comment to allow the 
States flexibility to determine which strategies are most appropriate 
for meeting the compliance target and enforcement requirements of the 
law and the regulation. To require ``other well-designed procedures'' 
at this time could, we believe, create unnecessary legislative 
obstacles for States, making it more difficult , not less, to achieve 
the goal of reducing the use of tobacco by youth. It would be 
counterproductive to the goal of increasing State enforcement 
activities if the final regulation were to require States to take 
additional legislative action to strengthen State tobacco control laws. 
We continue to believe that the adoption of ``other well designed 
procedures'' would enhance the effectiveness of State programs to 
curtail youth access to tobacco. However, during the initial phase of 
implementing this statute, State enforcement efforts will be more 
effective if States can devote time to the development of effective 
enforcement mechanisms without the additional burden of seeking 
legislative changes in State law. Therefore, the Department has 
eliminated the requirement of ``other well-designed procedures'' from 
the final rule.
    The Department notes that the FDA's proposed regulations include 
several of the ``other well-designed procedures'' suggested in the 
preamble of the NPRM for this rule as well as other restrictions 
suggested by commenters (e.g., the elimination of vending machine sales 
and the prohibition of the sale of single cigarettes). The FDA proposal 
would not be directed toward affecting State laws. Rather, FDA proposes 
to affect the conduct of manufactures, distributors and retailers of 
tobacco products, a potentially effective and important means of 
reducing the numbers of children and adolescents who use and become 
addicted to tobacco products.
    States should also be aware that, as part of each SAPT application, 
they are required to report what they have done to enforce the law 
during the previous fiscal year and what they intend to do during the 
fiscal year for which they are applying for funds. As discussed later, 
the Secretary may, in extraordinary circumstances, consider a number of 
factors other than the results of the random, unannounced inspections 
in determining compliance. One factor to be considered is the extent of 
the activities the State is carrying out in enforcing the law. 
Certainly, the suggestions in the preamble for the NPRM and the 
recommendations offered by commenters on the NPRM are viable ways that 
the States can enforce the provision.
    States are reminded, however, that the Governor must assure the 
Department that the State will enforce its statute in a manner that 
will reasonably reduce the availability of tobacco products to minors. 
If a State fails to meet the negotiated compliance target as outlined 

[[Page 1496]]
in this regulation and discussed below, the Department may seek 
additional information from such State before the Department will award 
the State a Block Grant. This information must be sufficient to provide 
reasonable assurance to the Department that the State will enforce its 
law, consistent with section 1926 of the PHS Act and the regulations.
    Many comments focused attention on specific procedures that a State 
might implement and which were perceived by many as required. First, 
numerous commenters opposed the use of a licensing system for 
retailers. Some commenters opposed the NPRM's example of State 
licensing fees as a method of paying for the enforcement of this 
regulation, arguing that fees will hurt profits and lead to a loss of 
jobs. Commenters feared the regulatory nature of a licensing system, as 
States would be able to threaten retailers with suspension or 
revocation of their licenses for illegal sales of tobacco products by 
their employees. The licensing power, it is argued, could also be used 
to prohibit sales clerks under the age of 18 from handling tobacco 
products. Commenters also feared that a licensing system would allow 
regulators to pursue a broad anti-tobacco agenda. Finally, commenters 
believed that retailers would not be able to design and implement 
programs to comply with State and Federal substance abuse laws. Thus, 
they argued, a new, complex licensing program is not needed in order to 
limit the sale of tobacco products to minors. In contrast, many other 
commenters supported a licensing mechanism for the sale of tobacco. 
Some recommended a system with a graduated schedule of penalties for 
illegal sales, culminating in the loss of license.
    The proposed regulation and Model Law explained how a licensing 
system could be used to enforce the States' laws effectively, with 
licensure fees and civil penalties funding both the random, unannounced 
inspections and other administrative costs. The Department did not, 
however, require a licensing system in the NPRM, and is not requiring 
one in the final rule. The Department believes, however, that a 
licensing system offers States an efficient method of identifying the 
total population of outlets for inspections and enforcement and that 
licensure fees can be a source of funds to pay for enforcement 
activities.
    A small number of commenters recommended that the Department 
require either the elimination of tobacco vending machines or the 
elimination of vending machines in areas to which minors have access. 
They opposed the use of locking devices on vending machines because 
they believed such devices are ineffective. Other commenters supported 
using locking devices.
    Bans and restrictions on vending machines and locking devices are 
viable options for States to consider in reducing tobacco sales to 
minors, but again, under this regulation the Department intends to 
allow States flexibility in the strategies they use to enforce tobacco 
control laws.
    Several commenters opposed the Department's suggestion that States 
publish the names of, and boycott, outlets that have sold tobacco to 
individuals under the age of 18. They believed this is outside of the 
Department's authority and that such a suggestion should be removed 
from the regulation. Commenters argued that boycotts do not take into 
account attempts made by individual retailers to comply with the law.
    The regulation does not require that States publicize the names or 
boycott outlets violating the law. However, studies have shown that 
these approaches can be effective in reducing violations (e.g., 
Turrisi, R.; Jaccard, J.; ``Cognitive and Attitudinal Factors in the 
Analysis of Alternatives to Drunk Driving,'' Journal of Studies on 
Alcohol 53(5) p. 405-414, 1992) and, therefore, are options a State may 
want to consider.
    A number of commenters requested the elimination of the ``Model 
Law'' from the NPRM, arguing that, since the NPRM is a Federal document 
that ties compliance to funding, examples and suggestions were viewed 
as legal demands. Topics in the Model Law that received considerable 
comment included registration/licensure fees, suspension and revocation 
of licenses, licensure of outlets under common ownership, and graduated 
penalties against violators of the law.
    The Model Law is not a required element of the regulation. The 
Department published both the Model law and the Inspector General's 
report with the NPRM to provide the public with further information 
regarding its position on the issue of youth access to tobacco products 
and to foster discussion at the State level about various legislative 
strategies for ensuring the enforcement of tobacco access laws. These 
documents will not be published with this final rule but will continue 
to be made available.
    Commenters gave considerable attention to the issue of restricting 
local jurisdictions from passing more stringent statutes. They 
recommended that the Department require States to permit local 
governments to enact and enforce, as strong or stronger, local tobacco 
control laws to supplement the State's enforcement activities. Some 
commenters on this issue requested that the Department recommend a 
decrease in funding to any State that limits the power of local 
governments, as the Federal requirements should be seen as a minimum 
standard for tobacco access and control.
    Many States currently preempt localities in enforcing or 
implementing some forms of tobacco control activities. However, as 
noted in the NPRM, the Federal statute and regulation are minimum 
requirements to which the States are held. In no way should they be 
considered as limiting, or requiring States to limit, the powers of 
local governments to enact or enforce tobacco control laws. As shown in 
the DHHS Inspector General's report (``Youth Access to Tobacco,'' 
Office of the Inspector General, U.S. Department of Health and Human 
Services, OEI-01-92-00880, page 7, August 1992), the majority of minors 
laws and enforcement efforts regarding the sale of tobacco have taken 
place at the local level. The Department encourages States to allow 
localities the flexibility to enact stricter laws or to more rigorously 
enforce tobacco control laws. However, in the interest of allowing 
States flexibility in implementing the law, the Department will neither 
prohibit the States from preempting, nor require them to preempt, local 
initiatives on youth access to tobacco products.
    Some commenters representing a variety of interest groups argued 
that State AOD agencies do not have the authority to enforce the law, 
nor should they be involved in the enforcement of this law. Commenters 
also argued that law enforcement agencies are stretched so thinly that 
they would not be able to provide the needed support. Effective 
enforcement would, they suggested, require the creation of a large, 
costly, ``bureaucratic,'' State-wide authority, which they believe is 
contradictory to the AOD agencies' mission.
    The Department does not specify which agency within the State is to 
be responsible for implementing the law. Enforcement of the law may be 
done by enforcement agencies, SSAs, private entities, or a combination 
of these and other organizations. The Department expects the Governor 
of each State to designate the most appropriate agency to assume lead 
responsibility for implementing these requirements.
    It is, however, appropriate for the SSA to work with other State 
agencies to ensure that tobacco access laws are 

[[Page 1497]]
enforced at the State level, as well as to work closely with State 
legislators and law enforcement entities to ensure that youth access 
and enforcement laws are being met. Each State will have to consider 
the relative resources and capabilities of its various State entities 
and make a determination as to the most appropriate enforcement agency. 
So as to provide the Department with sufficient information on the 
strategies to implement the law, the Department in its final rule 
requires that each State report in future applications on the agency or 
agencies designated by the Governor to be responsible for implementing 
the requirements of Section 1926.
Annual Reporting
    A few commenters recommended that the Department establish stronger 
inspection requirements (e.g., three levels of inspection, more clear 
requirements for performing inspections, fewer inspection violations 
before the Department reduces funding, and the creation of a system of 
penalties against outlets), and that the States be required in their 
application materials to describe these activities in detail.
    The Department is confident that the inspection process as outlined 
in the final rule is sufficient for determining whether the States are 
complying with the regulation. States on their own may choose to 
implement more stringent inspections and if they do, States are to 
explain what they have done in their application. In carrying out more 
stringent inspections, however, States should make sure that they can 
provide the information the Secretary requires in this regulation in 
order to make a determination of compliance.
    Many commenters recommended greater specificity in the reporting 
requirements being made by the Department. The Department does not 
agree. The Department is requiring the States to provide information 
sufficient to meet the requirements of the regulation and no more. To 
require that States submit additional information, even though that 
information is not necessary for determining the completeness of the 
application or compliance with the criteria established in this 
regulation, would put an undue burden on the States.
    Several commenters disagreed with the requirement for separate 
reporting for over-the-counter and vending machine sales in the annual 
report. They argued that it is excessive and implies a separate 
compliance target for over-the-counter and vending machine sales.
    The Department believes that the commenters misunderstood the 
reporting requirements at issue. It should be noted that the Department 
is basing compliance on the aggregate results of both over-the-counter 
and vending machine inspections. The separate reporting requirements 
permit a better analysis of the results, and they allow the Secretary, 
in extraordinary circumstances, to consider the make-up of the outlets 
inspected in determining compliance, if the State does not meet the 
performance target as negotiated with the State. Of course, if the 
proposed FDA regulations' prohibition of vending machine sales goes 
into effect, we will revise our reporting forms to reflect this change. 
In the event a State prohibits vending machine sales of tobacco, the 
State will not have to include nonexistent vending machines in its 
sample or enter any data for vending machines.
Public Comment
    There were several comments on the requirement that public comment 
shall be obtained and considered by the State prior to its submission 
of a report to the Secretary; most such comments were in favor. Those 
that disagreed were concerned about the burden thus represented and the 
timelines for reporting.
    Section 1941 of the PHS Act requires States to offer the public an 
opportunity for comment on the State SAPT plan. In addition to this 
requirement, the final rule requires each State to submit for public 
comment the elements of the SAPT Block Grant report that relate to 
implementing this regulation. The Department does not believe that this 
is an excessive burden on the States nor that it will create any 
unnecessary delay in the submission of applications, since the States 
can send this portion of the report out for public comment at the same 
time, and in the same way, as they send the plan.
Scientifically Sound Sampling Frame and Design
    Many comments were received regarding the requirement for a 
scientifically sound estimate based on an adequate sample design of the 
inspection effort. The majority of the commenters disagreed with this 
requirement. Both those who agreed with the requirement and those who 
disagreed were concerned about the States' ability to carry out this 
requirement without greater specificity, time and funding. Many of the 
commenters believed for these reasons that the sampling requirement is 
not fair, is unrealistic or is confusing. Many of the commenters 
recommended that the States either be given more time to develop 
scientifically sound estimates of success, be given more flexibility, 
or that the requirement be eliminated.
    A few commenters made specific suggestions as to how to improve the 
guidance on sample design, including mandating inspections that would 
assure adequate representation of the universe, and requiring that the 
sample represent the ethnicity, gender and age distributions of the 
community in which the purchases are made.
    The Department believes that it is necessary for the States to 
conduct probability samples of outlets to be inspected so that the 
Department has a reliable measure of how the law is being enforced 
throughout the individual States. The Department does not believe the 
States should be permitted to focus their efforts on locations that are 
unlikely to have a substantial population of underage persons. A 
requirement to draw a probability sample also will ensure that the 
States select outlets accessible to youth. The Department is available 
to provide technical assistance, training and guidelines with regard to 
the development of the sample designs.
    Some commenters believe that the requirement for a scientifically 
sound sampling frame and design implies State enactment of licensure 
laws to provide a sampling base, since the regulation does not provide 
a clear design for a scientifically sound sampling frame.
    The Department believes there are a variety of methods whereby a 
State may develop a sound sampling design in the absence of a licensing 
or formal registration system. At the outset, it should be noted that, 
sample designs will vary by State. States with complete centralized 
license lists can use these lists in developing a sampling frame. Other 
States can utilize commercial business lists that can be purchased from 
a variety of sources. These lists may not be as complete as license 
lists (particularly for small businesses and street vendors), in 
reflecting the total universe of tobacco outlets in the State, and, 
therefore, States may have to supplement them. Other options, which are 
not as desirable and may have to be supplemented include area sampling, 
community sampling, or sampling from Bureau of Alcohol, Tobacco, and 
Firearms (BATF) tax rolls.
    It should be noted that the Department views an outlet as any 
``location'' which sells or distributes tobacco products. The 
Department will consider for sampling purposes multiple sales points 
within one location to be a single outlet. For example, a motel that 

[[Page 1498]]
has a shop that sells tobacco products over the counter, and has 
several vending machines which also sell tobacco products, would be 
considered one location.
Oversampling
    Some commenters were concerned about the requirement that the 
distribution of inspection sites reflect the distribution of minors in 
the States, and that inspections be conducted at times when, or 
locations where, minors are more likely to purchase, (e.g., near 
schools, in malls, movie theaters, etc.). This requirement is viewed as 
complicating the process of determining and collecting baseline and 
effectiveness data and increasing the overall costs of performing 
inspections. The Department does not wish to put unnecessary obstacles 
in the paths of states wishing to achieve the compliance goal of the 
regulation and reduce illegal tobacco sales to minors. The Department 
believes there are many ways States can ensure that the inspections are 
conducted in such a way as to ensure an appropriate probability sample 
of outlets which are accessible to youth and is revising the regulation 
to reflect this change.
Timeframe
    Numerous commenters argued that the Department is not allowing 
States adequate time to comply with the law and the proposed 
regulation, specifically with required inspections, reporting, and 
implementation of ``other well-designed procedures.'' Although many 
commenters believed that compliance with the inspection percentage 
targets is attainable, many claimed the Department is not accounting 
for the lead time necessary for a State to make the required 
legislative changes and to establish inspection sampling designs and 
systems.
    The Department agrees that additional time is needed by States to 
implement an inspection process and to make the legislative and 
procedural changes that may be necessary for effective enforcement of 
their youth access laws. The Department is, therefore, revising the 
regulation so that for the first and second applicable fiscal years, 
the State must, at a minimum, conduct annually a reasonable number of 
random, unannounced inspections of outlets to ensure compliance with 
the law and plan and begin to implement any other actions which the 
State believes are necessary to enforce the law.
    For the third applicable fiscal year and all subsequent fiscal 
years, the States are to conduct annual, random, unannounced 
inspections of both over-the-counter and vending machine outlets. These 
random, unannounced inspections are to cover a range of outlets (not 
preselected on the basis of prior violations) to measure overall levels 
of compliance as well as to identify violations. Random, unannounced 
inspections are to be conducted in such a way as to conform to commonly 
accepted statistical standards and confidence levels.
    Implementation of the negotiated percentage targets will not begin 
until the fourth applicable fiscal year as discussed in the next 
section. The Department expects that while some States will quickly 
achieve the Healthy People 2000 objective for retail enforcement, 
others will have greater success in reaching this goal if given 
additional time to design and initiate enforcement of their 
statutes.\1\ Further, the Department believes that this compliance 
schedule accommodates the needs of States for a reasonable period of 
time to organize their enforcement activities.

    \1\ U.S. Department of Health and Human Services, Public Health 
Service, Healthy People 2000: Midcourse Review and 1995 Revisions, 
DHHS Publication No. 017-001-00526-6 (Washington, D.C.: U.S. 
Government Printing Office, 1995), p. 173. Services and Protection 
Objective 3.13 proposes to ``enact in 50 States and the District of 
Columbia laws prohibiting the sale and distribution of tobacco 
products to youth younger than age 18. Enforce these laws so that 
the buy rate in compliance checks conducted in all 50 States and the 
District of Columbia is no higher than 20 percent.''
---------------------------------------------------------------------------

Compliance
    Some commenters believed that the Department had exceeded its 
authority in establishing performance criteria and suggested that the 
Department only require that States make a good faith effort to enforce 
the laws. Several other commenters suggested that the standards should 
be based on State-specific baselines, while several others suggested 
the standards should disallow State-specific measures and develop 
national standards. Several commenters believed that the States are 
being held accountable for a Federal approach, that the standards do 
not take into consideration the variance among States and do not 
recognize their differences.
    The Department continues to believe that the national objective 
should be to substantially reduce illegal sales of tobacco products to 
minors, and we believe that all States can make significant progress in 
reducing illegal tobacco sales if reasonable actions are taken to 
enforce each State's statute. We recognize that enforcement of existing 
State statutes cannot, in isolation, achieve the President's goal for 
significantly reducing the initiation of tobacco use by children and 
adolescents. Meaningful enforcement of State laws does, however, 
constitute an important step in reducing the availability of tobacco to 
children and youth.
    After considering the circumstances that now exist in the States, 
we believe that achieving a 20 percent failure rate in the random, 
unannounced inspections required by the statute is a reasonable 
objective towards which States should strive. State enforcement of 
access laws can significantly reduce tobacco use by children. We are, 
however, convinced that the best results that can be obtained under 
this regulation will be achieved by allowing States flexibility in 
designing enforcement strategies to reach the 20 percent goal for 
retail enforcement recommended in Healthy People 2000. Therefore, the 
Department is establishing a 20 percent failure rate as a performance 
objective that States should achieve within several years, subject to 
some variation in schedule. After carefully considering the public 
comment on this issue, the Department now believes that establishing a 
flexible schedule that is adapted to the needs of individual States for 
the uniform schedule proposed in the NPRM strengthens the regulation. 
Tailoring the timetable to the circumstances of the States enables the 
Secretary to establish quicker schedules for those States which have 
already made substantial progress in enforcing their statutes. Somewhat 
longer periods of time are more appropriate for the States that have 
further to go. Providing these States additional time in the initial 
phase of implementing their enforcement activities will increase the 
chance that they will succeed in achieving the goals rather than fail.
    To ensure that States are working toward meeting and exceeding that 
objective, but allow some variation in time to achieve it, the 
Secretary will negotiate annually with each State an interim 
performance objective the State should meet each year. It is our 
expectation that all States will reach and surpass the performance 
objective of 20 percent within several years. The target level 
negotiated with each State should demonstrate each State's commitment 
to furthering the ultimate goal of reducing tobacco use by underage 
youth, reasonably reducing the availability of tobacco products to 
minors and showing immediate and sustained progress toward meeting the 
20 percent performance objective.

[[Page 1499]]

    The results of the random, unannounced inspections in the third 
applicable fiscal year (which are to be conducted in such a way as to 
provide a probability sample of outlets that youth are likely to 
frequent) will serve as the base line. State specific maximum failure 
rates will be negotiated for the first time for applications for the 
fourth applicable fiscal year which for most States is FY 1997. States 
are encouraged to complete their inspections for the third and all 
subsequent applicable fiscal years in time to permit negotiations for 
the next fiscal year's application.
    Comments on the compliance standards (allowable rate of inspection 
violations) were mixed. A large number of commenters requested that the 
compliance standards be made more stringent. They provided several 
suggestions on how the standards could be strengthened, particularly in 
the fourth year and beyond (either five percent or ten percent failure 
rates).
    Several commenters suggested that the Department eliminate the 
compliance standards, stating that they are too stringent, arbitrary or 
prescriptive. A few stated that the standards will serve as a 
disincentive to accurate enforcement and reporting. A few commented 
that the standards will be impossible to evaluate. Some expressed 
concern that this approach could result in enforcement by the 
Department rather than by the States.
    Several commenters argued that the States are being held 
accountable for compliance standards founded on faulty premises 
established by precursor studies conducted at the local level, and that 
the resulting reduction in the failure rate of random, unannounced 
inspections cannot be applied to the State level. Further, they argued 
that the reduction in the number of inspection failures resulted from 
public education and notification of inspection efforts.
    The goal of the statute is to reduce the extent to which tobacco 
products are available to minors, which is critical to reducing tobacco 
use among minors. The Department believes to achieve a meaningful 
reduction in illegal tobacco sales to minors there must be a measurable 
performance objective. As discussed below, the Department has selected 
20 percent as the appropriate objective.
    The Department has decided, however, based on the comments received 
that a more effective and efficient program will result from 
eliminating the one-size-fits-all standards proposed in the NPRM that 
would establish a uniform schedule of annual failure rate reductions 
from 50 to 40 to 30 to 20 percent. In its place, the Secretary will 
negotiate a strategy with each State for achieving the performance 
objective over a period of several years. The Department believes this 
approach offers States the flexibility needed to achieve the objective. 
We would hope, of course, that when each state achieves the 20 percent 
performance objective, they would continue to seek even lower levels, 
eventually eliminating illegal sales to minors.
    With regard to setting the performance objective at 20 percent, 
while there has been little experience with State level enforcement 
and, therefore, no studies to document appropriate expectations for 
State-wide inspections, the Department believes that the local studies 
do provide a reasonable starting point. Several studies in which 
unannounced inspections were used to measure access by minors to 
tobacco products show a significant reduction in the availability of 
such products when enforcement is strengthened. These studies reflect a 
sales rate of tobacco products to minors of 24 percent to 39 percent 
within one to two years of such enforcement efforts (see studies cited 
in NPRM, 58 FR 45157). Other studies have shown that moderate 
enforcement efforts such as officially sponsored ``stings'' and 
citations led to levels of illegal sales of close to zero percent (see 
discussion in economic analysis, below). These studies suggest that 
States using reasonable enforcement measures should be able to reduce 
illicit sales of tobacco products to minors to 20 percent or below over 
a relatively short period of time. Under the final rule, that time 
period will be negotiated with each State.
    The Department will also work to assist States by supporting 
research and providing technical assistance helpful in determining the 
type of enforcement measures and control strategies that are most 
effective. This information will be helpful to States in improving 
their enforcement measures and further reducing their failure rates.
    Many commenters expressed concern that all retailers were being 
held accountable for the mistakes of a few and that the sampling frame 
would only result in a suggested or ``estimated'' overall compliance 
level against which penalties would be determined. They were concerned 
about the use of a sample to ``estimate'' overall compliance.
    It appears that these commenters misunderstood the Department's 
intent. The penalties prescribed by section 1926(c) of the PHS Act are 
applied to the State by means of a reduction in the amount of the SAPT 
Block Grant funds they receive. The penalties are not applied to 
retailers.
Secretary's Discretion
    Several commenters expressed concern regarding the discretion given 
to the Secretary in determining compliance in extraordinary 
circumstances. They feared that such discretion will ultimately 
undermine the intent of the regulation. A number of commenters raised 
issues regarding cases in which a State does not meet the compliance 
criteria. A large number thought that the term ``substantial'' should 
be deleted because it undermined the Department's ability to carry out 
the penalties stipulated in the law. From the alternative perspective, 
a few commenters believed that the significant efforts, activities and 
progress of the States should be considered by the Secretary in making 
a compliance determination. A few thought a waiver should be given only 
after a public hearing. Lastly, there were a few commenters who 
suggested that the Department require enactment of one or more of the 
``other procedures'' cited in the NPRM in the event that either a State 
is found out of compliance after the first year, or that waivers not be 
applied, in the event that the State failed to enact the recommended 
``other well-designed procedures.'' The regulation permits the 
Secretary to, in extraordinary circumstances, consider other factors in 
determining compliance with the regulation, in the event that the State 
fails to adequately comply with the requirements. As indicated these 
will only be considered in extraordinary circumstances. In these 
instances, the Department will review a number of factors including 
appropriate survey data indicating that, in the previous year, 
significant progress has been made toward reducing the use of tobacco 
products by minors. It will be the responsibility of the State to 
explain the extraordinary circumstance and to provide the information 
for the Secretary to consider.
    Moreover, the Department reminds the States that the Secretary, in 
extraordinary circumstances, may consider other well-designed 
procedures, in addition to the overall success a State achieves in 
reducing the availability of tobacco products to minors, in making a 
determination regarding a State which does not meet its negotiated 
goal. The Department recognizes that some States may implement other 
approaches, along with their inspection system, which may effectively 
reduce youth access and use 

[[Page 1500]]
of tobacco products. The Secretary may also consider the State's 
efforts with respect to targeted inspections and enforcement measures 
toward those outlets known to be selling or distributing tobacco 
products to minors.
    The Department notes that this discretion would be used in only 
extraordinary circumstances, and a State must clearly document the 
information that it wishes the Secretary to consider in determining 
whether to exercise that discretion. The Department believes that 
allowing the Secretary to take other factors into consideration, in 
extraordinary circumstances, will not undermine the intent of the law 
which is to reduce youth access to tobacco products.
Compliance Penalties
    Several commenters expressed concern about the reduction in the 
Block Grant allotment for non-compliance. They considered the reduction 
to be punitive, unfair and too prescriptive. They further stated that 
the reduction would weaken or harm the alcohol and other drug abuse 
prevention and treatment systems. Lastly, they expressed concern that 
the State AOD agencies have no control over the situation since they 
are neither responsible for tobacco programs nor for law enforcement.
    The Department appreciates the concerns expressed regarding the 
potential reduction in the Block Grant allotment and the negative 
impact of such a reduction on the alcohol and other drug abuse 
prevention and treatment systems. However, the Department also 
recognizes the importance of strong incentives for meeting the 
performance objective and notes that the reduction in allotment for 
non-compliance is legislated and not subject to change through the 
regulatory process.
Funding
    Many commenters opposed this regulation with the argument that it 
imposes an unfunded mandate upon States from the Federal Government, in 
contradiction of the Administration's policies on unfunded mandates.
    Commenters representing a wide variety of groups had serious 
concerns about how to fund the overall implementation of Sec. 1926, 
especially the random, unannounced inspections. Many opposed the 
regulation, fearing they would be forced to pay for enforcement, such 
as merchants who believed that they would bear the cost of implementing 
and enforcing this regulation through licensing fees and penalties. 
State agencies believed they would be forced to shoulder the costs by 
diverting funds away from AOD prevention, treatment and other law 
enforcement activities. They claimed that alcohol and other drug abuse 
programs and violence programs would have to be cut, in order to pay 
for the enforcement of tobacco laws. Government representatives 
believed that taxes would have to be raised or licensure fees enacted 
to comply with the regulation. Several argued that Block Grant funds, 
or Federal funds from another source, should be used to pay for the 
cost of complying with this requirement.
    Many commenters objected to the restriction on the use of the Block 
Grant program funds. Many commenters also argued that the five percent 
allotment for administrative expenses is already too small for current 
administrative costs of the Block Grant, without factoring in tobacco 
law enforcement. They feared that tobacco law enforcement would force 
AOD programs to be cut, and that some States would not be able to 
comply. Others argued that youth access should be considered a 
prevention activity and, therefore, the Block Grant program funds 
should be used to fund the enforcement.
    Many expressed concern that the sampling frame requirement is 
costly, time-consuming, and labor-intensive. Commenters additionally 
argued that the cost involved for the enforcement of this law may 
result in a shift of resources out of needed, publicly accepted alcohol 
and other drug abuse prevention, treatment and enforcement activities 
into tobacco enforcement. They argued that social services and law 
enforcement are often housed in agencies other than those administering 
the SAPT Block Grant, giving them no inherent stake in complying with 
the regulation, especially since the cost for enforcement is expected 
to be high.
    The Department recognizes the difficult funding decisions and the 
need to balance competing program priorities which States will face in 
order to implement this law. Inspections and enforcement are, however, 
requirements of the law, requirements that the Department cannot waive.
    The Department wishes to explain the availability of Federal Block 
Grant funding for implementation of these statutory requirements. 
States may use funds from the Centers for Disease Control and 
Prevention's Preventive Health and Health Services Block Grant (42 
U.S.C. 300w, et seq.), for sample design, inspection and other 
enforcement purposes, as funds from this block grant are available to 
assist States in conducting activities consistent with making progress 
toward achieving the objectives established by the Secretary for the 
health status of the Nation's population for the year 2000.\2\

    \2\ Section 1904(a)(1)(A) of the Public Health Service Act (42 
U.S.C. 300w-3) authorizes the use of Preventive Health and Health 
Services Block Grant funds for ``Activities consistent with making 
progress toward achieving the objectives established by the 
Secretary for the health status of the population of the United 
States for the year 2000. See also Healthy People 2000: Midcourse 
Review and 1995 Revisions, DHHS Publication No. (PHS), pp. 35-39.
---------------------------------------------------------------------------

    States may also use funds from the primary prevention setaside of 
their SAPT Block Grant allotment, under 45 CFR 96.124(b)(1), to fund 
their sample design and inspection costs. States may not, however, use 
funds from the SAPT Block Grant to pay for other activities. To allow 
States to use SAPT Block Grant funds for such activities as court 
costs, for example, could significantly reduce the amount of funds 
available for substance abuse services.
Other Comments
    The Department, in numerous instances in the NPRM, requested input 
and suggestions from commenters on feasible, objective, cost-effective 
approaches to enforcement of the law and compliance with the 
regulation. Commenters provided the Department with a large number of 
recommendations, in the following categories:
(1) Control of Tobacco Products
    a. States should eliminate all forms of free distribution (samples, 
coupon redemption, etc.);
    b. States should require all tobacco products to be kept behind the 
counter at outlets;
    c. States should ban the sale of single cigarettes;
    d. States should use locking devices on vending machines;
    e. States should not use locking devices on vending machines; and
    f. States should require that all tobacco products to be kept 
locked behind the counter.
(2) Educational Activities
    a. States should provide public information and education campaigns 
on the prohibition of sales and distribution of tobacco; and
    b. States should offer prevention and education activities.
(3) Procedural Activities
    a. States should detail procedures for retailers to comply with the 
law (signs notifying public of law, request for ID, etc.);

[[Page 1501]]

    b. Outlets should check the identification of all tobacco 
purchasers; and
    c. Outlets should check State-issued identifications.
(4) Assessment/Survey Activities
    a. States should base local assessments on the cost of sting 
operations;
    b. States should base local assessments on passive observations of 
apparent age of purchasers; and
    c. States should use self-report data from minors via survey 
questions about their success at purchasing tobacco products.
(5) Punitive Activities
    a. States should allow for community action taken against 
violators;
    b. States should increase fines for violations;
    c. States should not punish minors for violating the law; and
    d. States should punish minors for violating the law.
    Although this regulation will not require that States implement 
such activities, States may wish to review this list of suggestions as 
possible activities or approaches to reduce the likelihood of 
violations of the law, as well as to reduce the use of tobacco products 
by children and youth.

Economic Impact

    Executive Order 12866 requires the Department to analyze the costs 
and benefits of any regulation that is likely to have an economic 
impact of $100 million or more or meet other thresholds specified in 
the Order. In this assessment, the Department is to pay particular 
attention to the consistency of the regulatory action with the 
statutory mandate, and to avoiding interference with State, local, and 
tribal governments in the exercise of their governmental functions 
(Sec. 6(a) of the Order). In addition, as required by the Regulatory 
Flexibility Act, the Department prepares a Regulatory Flexibility 
Analysis for any regulation that is likely to have a ``significant'' 
economic impact on a ``substantial number'' of small entities, and 
analyze alternatives that may lessen impact on them. In the preamble to 
the proposed rule, the Department estimated compliance costs at about 
$50 million for States and up to $100 million for private business, and 
benefits at potentially billions of dollars a year. In the analysis 
that follows, the Department has summarized the original analysis, 
responded to comments on it, and incorporated additional information, 
including a discussion of the use of Block Grant funds to pay for the 
sample design and inspection requirements of this statute. Together 
with the remainder of the preamble, this assessment constitutes 
compliance with each of these legal requirements. This rule was 
reviewed by OMB pursuant to Executive Order 12866 as an economically 
significant regulatory action.
    The FDA has independently estimated the effects of its proposal 
(drawing both on original analysis and substantial additional 
information), and the economic analysis and background information 
provided in its NPRM are presented in considerably greater depth than 
that presented here. The conclusions in both analyses are broadly 
consistent.
    The Centers for Disease Control and Prevention (CDC) estimates that 
at present approximately 1 million underage youth and children become 
regular smokers each year. A major cause is ready, illegal access to 
tobacco products. Three-fourths or more of all outlets sell illegally 
to minors, due in part to insufficient enforcement efforts, which 
encourage a scoff-law attitude among merchants. A recent study 
(``Design of Inspection Surveys for Vendor Compliance with Restrictions 
on Tobacco Sales to Minors,'' April 1994, prepared by Rick L. Williams 
et al. of the Batelle Corporation) estimates that 73 per cent of all 
over-the-counter outlets and 96 per cent of all vending machine outlets 
sell tobacco products to minors.
    The Department believes that aggressive and consistent enforcement 
efforts by States are likely to reduce substantially illegal tobacco 
sales. However, in the absence of tobacco control measures reducing 
availability and the allure of tobacco products to youth, State 
enforcement activities may not be fully effective. In addition, even 
the most successful enforcement activities may lead to partially 
offsetting tactics by youth, such as older youth legally buying 
cigarettes and reselling or giving them to younger youth. In such an 
event, the actual impact of more effective State enforcement may not 
achieve maximum progress in meeting the goal of reducing the use of 
tobacco products by youth and children. Furthermore, the volume of 
illegal sales is likely to vary depending on the number and location of 
stores which continue to sell illegally. If, for example, the 
proportion of outlets selling to minors were to be reduced by two-
thirds, and there are three outlets located within a two block area, it 
is likely that youth would have access to tobacco at one of these three 
outlets. Although the effect on the number of outlets selling tobacco 
to youth may be substantial, the inconvenience to youth might be so 
small as to reduce illegal sales only slightly. Thus, the potential 
range of outcomes under serious enforcement may vary in the extent to 
which it affects the prevalence of youth smoking.
    Estimates of annual spending on cigarettes by youth range from 
about $500 million to over $1.5 billion. (See consumption estimates by 
DiFranza, J and Tye, J, ``Who Profits from Tobacco Sales to Children?'' 
JAMA, 263:20 (1990): 2784-2787; and Cummings, K.M. et al., ``The 
Illegal Sale of Cigarettes to U.S. Minors: Estimates by State'' 
American Journal of Public Health 84:2 (1994): 300-302.) Whereas the 
original economic analysis used the higher estimate, this analysis 
relies on the lower figure presented in the more recent study. Thus, as 
little as a 20 percent total reduction in sales would have an economic 
effect of $100 million.
    In light of the penalty provision contained in the statute, States 
will have a strong incentive to reduce the level of illegal sales. The 
outcome, however, will depend on the nature and extent of the 
enforcement actions taken by the States and, if the FDA proposed 
restrictions on access and appeal were made final, the synergistic 
effect such efforts would have when combined with such additional 
control measures, and with any supplemental tobacco control measures 
the States may adopt.
    In addition to overall reductions in tobacco sales, enforcement of 
the law will affect the retail market. The money which would have been 
spent on tobacco products will be spent on other goods and services. An 
equivalent amount may be spent in the same stores which sell tobacco 
products. However, in some instances (e.g., sales from free-standing 
vending machines) it is not clear that alternative products will raise 
the same volume of revenue for a specific store. Therefore, the statute 
and the final rule may have a significant effect on some small 
businesses that currently sell tobacco products to minors.
    In this analysis, the Department focuses mainly on cigarette sales, 
which account for the overwhelming majority of tobacco product sales to 
youth. Almost all of the analysis is, however, equally applicable to 
snuff and chewing tobacco.

Magnitude of Effects

    For purposes of the analysis, the Department assumes that States 
will take significant actions to reduce the number of outlets selling 
tobacco products illegally, achieving a rate of 

[[Page 1502]]
illegal sales below 20 percent within five years. Since about three-
fourths of all retail stores and almost all vending machine outlets now 
sell to minors, a State could suffer a serious financial penalty if it 
failed to bring the great majority of these outlets into compliance 
within the specified periods. Based on limited data, the Department is 
aware that some localities have been highly successful in reducing 
failure rates to relatively low levels. For example, the Department is 
aware of one community--Woodbridge, Illinois--that used a variety of 
control methods to reach a failure rate of less than 5 percent. While 
State compliance results may not typically reflect the actual rate of 
sales to minors, cigarette use by youth decreased by half in this same 
community, despite the availability of outlets selling illegally in 
adjoining areas. In another community--Everett, Washington--a similar 
youth access effort had smaller effects on tobacco use. Unfortunately, 
there is no scientific basis on which to make a definitive statewide or 
national projection, absent a history of far stronger enforcement 
efforts by States and across a wider range of communities.
    The Department expects that actual violation levels in most States, 
after successful implementation of State enforcement programs, will be 
driven lower than the percentage compliance targets to be negotiated 
for the short run. The Department does not know, however, what level of 
compliance the States will achieve on average, or precisely how that 
level will translate into reductions in youth smoking. It is probable, 
however, that the reduction in tobacco use by youth and children would 
be much less than the reduction in illegal sales measured by the 
State's failure rate. In the original economic analysis the Department 
suggested that a one-third to two-thirds reduction in smoking might be 
possible through improved enforcement. The Department now believes that 
a significantly lower estimate is more realistic given the 
uncertainties implicit in varying levels of State enforcement and the 
absence of meaningful controls on tobacco advertising and promotion.
    The economic analysis in FDA's proposed regulations implicitly 
considered the impact of State programs in concluding that ``if 
aggressively implemented and supported by both industry and public 
sector entities, comprehensive programs designed to discourage youthful 
tobacco consumption could reasonably achieve the Healthy People 2000 
goal of halting the onset of smoking for at least half, or 500,000, of 
the 1,000,000 youngsters who presently start to smoke each year.'' \3\ 
However, in the absence of adequate empirical data, FDA could not 
determine the independent contribution of each proposed restriction. 
Similarly, in view of the substantial uncertainty regarding future 
State enforcement efforts, the potential for offsetting industry 
promotional tactics, and the willingness of older youth to purchase 
tobacco products for younger youth, the Department is unable to make a 
precise quantitative estimate of the impact of this regulation on youth 
smoking rates. The Department expects, however, that any plausible 
estimate would exceed one-tenth, but fall short of one-third. 
Nevertheless, the analysis below demonstrates that even very modest 
declines in the rate of adolescent smoking, much smaller than those 
reasonably anticipated, would yield substantial health benefits among 
adults.

    \3\ Federal Register, Vol. 60, No. 155, August 11, 1995, p. 
41362.

[[Page 1503]]

---------------------------------------------------------------------------

    A reduction in teen smoking implies a considerable reduction in 
adult smoking, over time. Since approximately 70 percent of adult daily 
smokers became daily cigarette smokers by age 18, a substantial number 
of the youth deterred from smoking by this regulation would become 
nonsmoking adults. Moreover, this effect would be over and above the 
effects of smoking cessation programs, education, family pressures, and 
other public and private influences on the prevalence of smoking. While 
the Department estimates a probable reduction in cigarette sales of 
millions of dollars a year in the near term, this reduction would 
translate into an annual multi-billion dollar effect over the long run, 
as each cohort of non-smoking youth ages into non-smoking adults. FDA 
calculated the benefits of tobacco regulation by conservatively 
assuming that only one-half of the teenagers deterred from smoking 
would remain nonsmokers as adults.\4\ That analysis, which was largely 
based on data from the American Cancer Society's Cancer Prevention 
Study II, implies that reducing the number of smoking youth by as 
little as 1 percent would prevent 1,200 future smoking-related deaths, 
gaining over 18,000 life-years, among each year's cohort of teenagers 
who would otherwise begin to smoke. As the projected results are 
proportional to the assumed effectiveness rate, this model also 
indicates that a 5 percent reduction in youth smoking would prevent 
6,000 premature deaths, a 10 percent reduction 12,000 premature deaths 
and a 20 percent reduction 24,000 premature deaths among that teenage 
cohort. The Department believes these projections are plausible and is 
convinced that even very small decreases in youth tobacco consumption 
would yield substantial health improvements.

    \4\ Ibid., p. 41360.
---------------------------------------------------------------------------

Benefit Estimates

    The benefits of the regulation lie primarily in reducing the costs 
of the adverse health effects resulting from tobacco use. The CDC 
estimated smoking-attributable medical costs at $50 billion in 1993. 
The Office of Technology Assessment counted both medical costs and lost 
earnings to calculate $68 billion worth of smoking-related costs in 
1990. For its assessment of future regulatory consequences, FDA relied 
on incidence-based costs of smoking, calculated over the lifetime of 
each year's new cohort of potential smokers. This methodology, which is 
described fully in the FDA economic analysis, derived values for 
reduced medical costs and lost wages from several earlier economic 
studies, particularly T.A. Hodgson, ``Cigarette Smoking and Lifetime 
Medical Expenditures,'' The Milbank Quarterly, vol. 70, No. 1, p. 91, 
1992, and D.P. Rice et al. ``The Economic Costs of the Health Effects 
of Smoking, 1984, The Milbank Quarterly, vol. 64, No. 4, p. 526, 1986. 
In addition, FDA considered various economic analyses to support its 
use of a $2.5 million willingness-to-pay estimate to represent each 
smoking-related fatality averted. (Most notably Fisher, A. et al., 
``The Value of Reducing Risks of Death: A Note on New Evidence,'' 
Journal of Policy Analysis and Management, vol. 8, No. 1, pp. 88-100, 
1989; and Viscusi, W.K., ``Fatal Tradeoffs: Public and Private 
Responsibilities for Risk,'' Oxford University Press, p. 24, 1992.)
    As explained above, the Department now believes that the 
uncertainty surrounding the forthcoming responses from State 
enforcement agencies, industry suppliers, and adolescent users of 
tobacco products does not allow a precise quantitative forecast of the 
independent effect of this rule on adolescent tobacco use. 
Nevertheless, application of the benefits valuation methodology 
summarized above and described fully in the FDA analysis, demonstrates 
that even if this regulation were to achieve effectiveness rates for 
less than the one-tenth to one-third level believed plausible, the 
value of the realized benefits would reach hundreds of millions, if not 
billions of dollars per year. Table 1 displays these potential 
projections using prevent value discount rates of both 3 and 7 percent, 
respectively.

BILLING CODE 4160-20-M

[[Page 1504]]
[GRAPHIC][TIFF OMITTED]TR19JA96.008



BILLING CODE 4160-20-C

[[Page 1505]]

    An alternative benefits valuation methodology was presented in the 
economic analysis for the proposed rule. That analysis relied on the 
work of a Rand Corporation study (Manning, W.G. et al., ``The Taxes of 
Sin--Do Smokers and Drinkers Pay Their Way?'' JAMA, pages 1604-1609, 
March 17, 1989, Vol. 261, No. 11), which estimated the 1986 net present 
value cost to society of smoking by comparing the excess costs of 
services used by smokers (i.e. employer and taxpayer share of excess 
medical bills, sick leave and group life insurance subsidies, lost 
taxes, fatalities from passive smoking, and smoking-related fires) to 
the taxes and premiums paid by smokers. The best estimate was a 
``present value'' (discounted) cost of $0.39 per pack, under the 
assumption of a 5 percent discount rate applied to future costs. 
However, the study made no allowance for the cost of low-birthweight 
infants and as the Department found in the NPRM, these costs would add 
at least an additional 15 cents a pack.\5\ Thus, the Department 
estimated that the net external costs born by non-smokers in 1989 
exceeded 50 cents for every pack of cigarettes sold.

    \5\ Federal Register, Vol. 58, No. 164, August 26, 1993, p. 
45159.
---------------------------------------------------------------------------

    The Department now believes that this methodology was very 
conservative for valuing the benefits of smoking reductions, because it 
did not quantify the future benefits that would result from the 
expected reduction in adult smoking, and omitted all costs borne by the 
smokers themselves. Nevertheless, if this methodology were revised to 
assume that just one-half of the youth prevented from smoking were also 
to refrain as adults, it would predict that even a 5 percent reduction 
in the youth smoking rate would result in a savings of about $200 
million annually to the rest of society. (According to Manning, the 
average smoker consumes roughly 16,300 packs over a lifetime; 25,000 
fewer smokers  x  $.50  x  16,300 packs = $204,000,000).\6\ 
Accordingly, a 10 percent reduction in youth smoking doubles this 
estimate and a 25 percent reduction raises it to $1 billion annually. 
Thus, despite the omission of all costs borne by the addicted smoker, 
this methodology confirms that even relative small reductions in 
adolescent tobacco use would generate substantial societal benefits.

    \6\ Manning, W.G., et al., ``The Costs of Poor Health Habits, A 
Rand Study'', Harvard University Press, Cambridge. 1991, p. 76.
---------------------------------------------------------------------------

Costs

    The primary costs of complying with this regulation lie in the 
costs of inspection and enforcement. The Department does not have good 
data on the costs of enforcement because little research has been done 
in this area to measure costs. However, the Department does not believe 
these costs need to be substantial in relationship to other costs of 
State and local law enforcement, or to other duties faced by retail 
business.
    The Department assumed, for purposes of analyzing costs, that the 
costs necessary to carry out the Model Law recommended by the 
Department represent the upper end of possible enforcement costs. In 
this scenario, a licensing apparatus must be set up, stores notified of 
their obligations, hearing procedures developed, a sampling design and 
procedure developed, both random and targeted inspections organized, 
fines levied, and the like. Even if an average State were to piggyback 
this system on top of an alcohol licensing and enforcement system, it 
could require a staff of one or two dozen people and an annual budget 
of approximately one million dollars. Across all jurisdictions, this 
implies costs on the order of $50 million for an effective enforcement 
effort. This includes all enforcement costs, including sampling and 
inspections.
    In response to widespread concerns about inspections, and in 
particular to the problems of designing a sampling frame from which to 
select outlets to be inspected, the Department has developed additional 
information on these issues. It used information from the Batelle 
report and from cost projections of implementing a State-wide 
inspection system completed by CSAP's National Center for the 
Advancement of Prevention (``Estimating The Cost of Inspections under 
the Synar Amendment,'' July 1994). They analyzed the availability of 
data, and optimum design, for conducting random, unannounced 
inspections. It was concluded that in most States the most cost-
effective sampling method would rely on licensing or commercial 
business lists, use cluster sampling rather than random sampling, and 
cover 300-400 outlets in the smallest half of the States and about 600 
outlets in the larger States. Furthermore, it was concluded that on 
average, it would cost approximately $290,000 per State for an average 
State to develop a sampling design and conduct inspections, or about 
$17 million a year nationally. Some customers argued that the cost of 
inspections would be far lower, but these commenters did not include 
sampling design and selection costs.
    This new estimate is broadly consistent with the original estimate 
that the total cost of all sampling, inspection, enforcement, and 
administrative costs would be about $50 million a year nationally if 
Model Law approaches were generally adopted. It may turn out that 
States are able to enforce their laws using relatively inexpensive 
approaches (as discussed below) in which case this $17 million estimate 
for the sampling and inspection functions may comprise the great 
majority of total costs, and the national total be closer to $25 
million than to $50 million.
    Regardless of what costs eventually are incurred, the Department 
believes that the cost of implementing this regulation should be shared 
by the Department and the States and therefore encourages States to use 
funds from the CDC's Preventive Health and Health Services Block Grant 
(42 U.S.C. 300w, et seq.), and from the Primary Prevention setaside of 
their SAPT Block Grants as explained earlier in this preamble. 
Alternatively, States could adopt a self-financing licensing and civil 
money penalty system or decide to raise tobacco taxes or use general 
fund revenues. Thus, States have a wide range of financing mechanisms 
available to defray their costs.
    A number of commenters raised concern over the cost of using the 
criminal justice system--police and courts--to deal with illegal sales. 
The Department agrees that this would be very costly, not only in 
dollar terms, but also in displacing important crime-fighting 
activities. The Department does not recommend that States use the 
criminal justice system as a primary means of enforcement; instead, a 
system of civil money penalties and fines would almost certainly be 
more cost-effective.
    The Department also originally estimated that retailers would incur 
costs on the order of $50 to $100 million annually for such functions 
as training staff to prevent sales to minors, with the lower range 
reflecting present enforcement activities. The public comments did not 
suggest that this estimate was flawed. However, the FDA proposed 
regulation's economic analysis explored retailer costs in more depth, 
focusing on training, and time needed to conduct identification checks 
on purchasers. The FDA concluded that total costs to retailers would be 
about $50 million annually. Accordingly, this estimate is used in this 
final Regulatory Impact Analysis.

[[Page 1506]]


Comparison of Benefits to Costs

    Based on the estimates above, the Department expects that after the 
several year period necessary for all or virtually all States to meet 
and exceed the 20 percent performance objective, net annual enforcement 
costs on the order of $100 million will generate annual social benefits 
that exceed hundreds of millions and potentially billions of dollars 
annually.
    Because the Department was unable to make a precise quantitative 
estimate of the effectiveness of this regulation on youth smoking 
rates, it has further compared the costs and benefits using the FDA 
methodology assuming that much lower percentages of those deterred from 
smoking as youths remain nonsmokers as adults (the original analysis in 
Table 1 assumed that 50% of those deterred as youths would remain 
nonsmokers as adults). Using the original 3% discount rate, youth 
deterrence rates of \1/3\, \1/5\ and \1/10\ will yield net benefits 
even if only 1% of those deterred as youths remain nonsmokers as 
adults. At the \1/20\ and \1/100\ youth deterrence rates, net benefits 
are still realized if 2% and 9% of those deterred as youths remain 
nonsmokers as adults, respectively. The results using a 7% discount 
rate are slightly higher. Youth deterrence rates of \1/3\, \1/5\, \1/
10\, \1/20\, and \1/100\ would yield net benefits if 1%, 2%, 3%, 6% and 
28% of those deterred as youths remain nonsmokers as adults, 
respectively.

Distributional and Transitional Effects

    The Department's cost estimates deal with the ultimate effects of 
smoking reductions and activities directed toward reductions. There are 
additional economic consequences which are not part of these 
calculations but which are of concern.
    First, the Department believes there will be negligible adverse 
effects on the great majority of retail outlets. It is true that stores 
that currently sell tobacco products to minors will lose sales in the 
short run. These sales may or may not be offset by increases in sales 
of other items. However, with the single exception of vending machines 
(discussed below), the effect on most outlets will be small. There are 
approximately 1\1/2\ million retail sales outlets in the United States, 
and up to two-thirds of these sell tobacco products. (FDA estimates 
about one-half.) On average, tobacco products represent 5 percent of 
total sales in those outlets that sell tobacco. Thus, even if this rule 
were to achieve a one-third reduction in smoking by underage youth, the 
roughly $170 million near term annual shortfall (\1/3\ of $500 million) 
represents less than one-tenth of 1 percent of total sales in stores 
selling tobacco products. As is standard practice in estimating the 
economic effects of regulation, the Department assumes that there will 
be no loss to the economy resulting from a youth not spending $2 for a 
pack of cigarettes because the money will be spent on some other good 
or service. Considering that in many if not all cases the money not 
spent on tobacco will be spent on other products in the same stores, 
the negative economic effects on sales, costs, and profits will be 
negligible.
    Second, the Department expects significant drops in vending-machine 
sales of tobacco products because of the actions that will have to be 
taken to prevent sales to minors from these devices. The Batelle report 
(Williams et al. estimates that about 96 percent of vending outlets 
sell cigarettes to minors. For the youngest minors, they are often the 
only easy sources of purchase. A study for the vending machine industry 
shows that only 23 percent of smoking youth now use vending machines 
often or occasionally (Response Research, Inc., ``Findings for the 
Study of Teenage Cigarette Smoking and Purchasing Behavior,'' June/July 
1989). However, in the future this percentage would rise greatly--
perhaps close to 100 percent--if enforcement eliminated other sources 
of illegal sales but left vending machines available to youth. Based on 
the research data, the Department would expect that States will face 
significant challenges in complying with the new law unless they impose 
strict controls on tobacco vending machines in locations accessible to 
minors.
    In the original Regulatory Impact Analysis we estimated that 
perhaps 1,000 vending machine companies would face a loss of sales 
averaging about 7% of non-tax revenue. Since then, later data indicate 
that the economic effects will be significantly less. A long term trend 
towards decreased use of vending machines for cigarette sales has 
accelerated. According to the ``1994 State of the Industry Report'' in 
Automatic Merchandiser, August, 1994, both the projected number of 
cigarette vending machines and operator revenues from these machines 
fell by about one-fourth from 1992 to 1993 alone. According to the same 
source, cigarette sales are now only about 3.4% of operator revenues. 
Thus, the potential loss is only about half of that projected in the 
1992 proposed Regulatory Impact Analysis even assuming complete 
elimination of vending machine sales.
    A large number of commenters argued that the proposed rule 
represented an unfunded mandate. The Department agrees that the statute 
creates a financial burden for the States, albeit a burden that is very 
small as compared to unfunded mandates in areas such as pollution 
control and as compared to State expenditures taken as a whole. In 
response to these concerns, the Department has taken several actions. 
As stated earlier in this preamble, the Department is allowing States 
flexibility in designing enforcement strategies to reach the 20 percent 
goal for retail enforcement. In addition, States may, in implementing 
this regulation, use funds from the CDC's Preventive Health and Health 
Services Block Grant (42 U.S.C. 300w, et seq). States may also use 
funds from the primary prevention setaside of their SAPT Block Grant 
allotment under 45 CFR 124(b)(1) for sample design and inspection costs 
of complying with this regulation. States may not, however, use any 
funds from the SAPT Block Grant for any other activities related to the 
enforcement of their State laws. To allow States to use SAPT Block 
Grant funds for such activities as court costs, for example, could 
significantly reduce the amount of funds available for substance abuse 
prevention and treatment activities.
    There is another cost to States in addition to costs required by 
this statute. Approximately 18 percent of the cost of a pack of 
cigarettes goes to pay State taxes. Tobacco tax losses will be offset 
in part by sales taxes on alternative goods purchased with the same 
dollars, but the net effect still could be a revenue loss because 
excise taxes on tobacco are higher than taxes on other consumer 
products. In its proposed regulations, the FDA estimated that a 50 
percent reduction in the rate of tobacco consumption by youth would 
cause a gradual reduction in State cigarette excise tax revenues, from 
$31 million in the first year to $252 million in the tenth year. As 
discussed above, the result of the SAMHSA rule would be significantly 
smaller and any future lost tax revenues would diminish accordingly. To 
put this amount in perspective, total State and local government 
revenues from all sources exceed a trillion dollars a year, thousands 
of times this potential loss. Nonetheless, State enforcement programs 
involve a considerable fiscal effect that arises unavoidably if States 
enforce their own laws effectively and deter the illicit sale of 
tobacco products to minors.

[[Page 1507]]


Additional Alternatives

    In the proposed rule the Department requested comment on several 
aspects of the proposed regulations. One alternative the Department 
considered was the application of a more stringent standard on the 
States, such as zero tolerance of illegal sales. However, the 
Department believes that risking an error which would force us to take 
vitally needed alcohol and drug-treatment funds from a State despite a 
serious enforcement effort is too dangerous at present. Hence, on an 
interim basis, and until the Department and the States gain some 
experience from serious State-wide efforts at enforcement, the 
Department will not require States to achieve this level of compliance 
at this time.
    Second, the Department considered specifying particular enforcement 
measures that States must take, such as requiring that stores illegally 
selling to minors lose a license to sell tobacco products, or requiring 
local communities to enforce sales bans directly. However, the same 
uncertainty that would make a near 100 percent compliance objective 
imprudent until we have more information appears to make imposing 
uniform processes on all States unwise.
    Third, the Department considered more stringent approaches to 
compliance measurement. As indicated above, random, unannounced 
inspections are a low-cost and highly effective method of determining 
which outlets violate the law. The Department considered requiring 
States to conduct a minimum number of inspections using youth, such as 
one inspection annually at 50 percent of all sales outlets. However, 
the Department decided that it would be premature to force a particular 
standard upon all States.

Paperwork Reduction Act

    This final rule contains collections of information that are 
subject to review by the Office of Management and Budget (OMB) under 
the Paperwork Reduction Act of 1995 (Pub. L. 104-13). The title, 
description, and respondent description of the information collection 
are shown below with an estimate of the annual reporting burden. 
Included in the estimate is the time for reviewing instructions, 
searching existing data sources, gathering and maintaining the data 
needed, and completing and reviewing the collection of information. 
Estimates for FY 1995 and FY 1996 and thereafter are presented 
separately because the reporting requirements differ for these time 
periods.
    Title: Minors' Access to Tobacco--45 CFR 96.130--FINAL RULE
    Description: Data to be reported is required by 42 U.S.C. 300x-26 
and will be used by the Secretary to evaluate State compliance with the 
statute, and the publish special analytic studies from time to time.
    Description of respondents: State or local governments.
    Estimated Annual Reporting Burden:

----------------------------------------------------------------------------------------------------------------
                                                                            Number of                           
                                                               Number of    responses    Hours per   Total hours
                                                              respondents    per year     response              
----------------------------------------------------------------------------------------------------------------
                           FY 1995                                                                              
Annual Report:                                                                                                  
    96.122(f)...............................................            7            1            0        \1\ 0
    96.130(e) (1-3).........................................           52            1           10      \2\ 520
                         State Plan                                                                             
    96.122(g)(21)...........................................            0            0            0        \3\ 0
    96.130(e) (4, 5)........................................           59            1           14      \4\ 826
                                                                                                                
                                                             ---------------------------------------------------
      Total.................................................  ...........  ...........  ...........        1,346
                   FY 1996 and Thereafter                                                                       
Annual Report:                                                                                                  
    96.130(e) (1-3).........................................           59            1           10          590
State Plan:                                                                                                     
    96.122(g) (21)..........................................            0            0            0        \3\ 0
    96.130(e) (4, 5)........................................           59            1           14          826
                                                             ---------------------------------------------------
      Total.................................................  ...........  ...........  ...........        1,416
----------------------------------------------------------------------------------------------------------------
\1\ This section describes reporting requirements for the first applicable fiscal year. For seven States, FY    
  1995 is the first applicable fiscal year. States are required to provide a copy of the statute enacting the   
  law and are asked to provide a description of the previous year's activities, if they so desire. No burden is 
  associated with these requests.                                                                               
\2\ This is the burden associated with completing the annual report narrative and Form 06B as requested in the  
  SAPT Block Grant Application instructions and format.                                                         
\3\ This section duplicates the information collection language in section 96.130(e). The burden is claimed     
  under 96.130(e).                                                                                              
\4\ This is the burden associated with completing the State Plan narrative as requested in the SAPT Block Grant 
  Application instructions and format.                                                                          

    Under the Paperwork Reduction Act of 1995, agencies are required to 
provide 60-day notice in the Federal Register and solicit public 
comment before a collection of information requirement is submitted to 
the Office of Management and Budget (OMB) for review and approval. In 
order to fairly evaluate whether an information collection should be 
approved by OMB, section 3506(c)(2)(A) of the Paperwork Reduction Act 
of 1995 requires that we solicit comment on the following issues:
     Whether the information collection is necessary and useful 
to carry out the proper functions of the agency;
     The accuracy of the agency's estimate of the information 
collection burden;
     The quality, utility, and clarity of the information to be 
collected; and
     Recommendations to minimize the information collection 
burden on the affected public, including automated collection 
techniques.
    Therefore, we are soliciting public comment on each of these issues 
for the information collection requirements. Comments regarding this 
burden estimate or any other aspect of this collection of information, 
including suggestions for reducing burden, may be sent to the agency 
official whose name appears in the For Further Information Contact 
section above, and to Deborah Trunzo, Office of Applied Studies/SAMHSA, 
Room 16-105 Parklawn, 

[[Page 1508]]
5600 Fishers Lane, Rockville, MD 20857.
    We received no public comments on the estimated public reporting 
burden, and it remains the same as that contained in the proposed rule. 
We do not believe material changes made in this rule should change this 
burden.

Lists of Subjects in 45 CFR Part 96

    Alcohol abuse, Alcoholism, Drug abuse, Tobacco.

    For the reasons set out in the preamble, 45 CFR part 96 is amended 
as set forth below.

    Dated: December 15, 1995.
Donna E. Shalala,
Secretary.

PART 96--BLOCK GRANTS

    1. The authority citation for 45 CFR Part 96, subpart L continues 
to read as follows:

    Authority: 42 U.S.C. 330x-21 to 300x-35 and 300x-51 to 330x-64.


Sec. 96.122   Application content and procedures.

    2. Section 96.122 is amended by adding paragraph (f)(6), 
redesignating paragraphs (g)(21) and (g)(22) and (g)(23) respectively 
and adding a new paragraph (g)(21) to read as follows:
* * * * *
    (f) * * *
    (6) For the first applicable fiscal year for which the State is 
applying for a grant, a copy of the statute enacting the law as 
described in Sec. 96.130(b) and, if the State desires, a description of 
the activities undertaken during the previous fiscal year to enforce 
any law against the sale or distribution of tobacco products to minors 
that may have existed; and for subsequent fiscal years for which the 
State is applying for a grant, the annual report as required by 
Sec. 96.130(e) and any amendment to the law described in 
Sec. 96.130(b).
* * * * *
    (g) * * *
    (21) a description of the strategies to be utilized by the State 
for enforcing the law required by section 96.130(b);
* * * * *


Sec. 96.123   [Amended]

    3. Section 96.123 is amended to add paragraph (a)(5) to read as 
follows:
    (a) * * *
* * * * *
    (5) The State has a law in effect making it illegal to sell or 
distribute tobacco products to minors as provided in Sec. 96.130(b), 
will conduct annual, unannounced inspections as prescribed in 
Sec. 96.130, and will enforce such law in a manner that can reasonably 
be expected to reduce the extent to which tobacco products are 
available to individuals under the age of 18;
* * * * *
    4. Section 96.130 is added to read as follows:


Sec. 96.130   State law regarding sale of tobacco products to 
individuals under age of 18.

    (a) For purposes of this section, the term ``first applicable 
fiscal year'' means fiscal year 1994, except in the case of any State 
described in section 1926(a)(2) of the PHS Act, in which case ``first 
applicable fiscal year'' means fiscal year 1995. The term ``outlet'' is 
any location which sells at retail or otherwise distributes tobacco 
products to consumers including (but not limited to) locations that 
sell such products over-the-counter or through vending machines.
    (b) The Secretary may make a grant to a State only if the State, 
for the first applicable fiscal year and subsequent fiscal years, has 
in effect a law providing that it is unlawful for any manufacturer, 
retailer, or distributor of tobacco products to sell or distribute any 
such product to any individual under age 18 through any sales or 
distribution outlet, including over-the-counter and vending machine 
sales.
    (c) For the first and second applicable fiscal years, the State 
shall, at a minimum, conduct annually a reasonable number of random, 
unannounced inspections of outlets to ensure compliance with the law 
and plan and begin to implement any other actions which the State 
believes are necessary to enforce the law.
    (d) For the third and subsequent fiscal years, the States shall do 
the following:
    (1) The State shall conduct annual, random, unannounced inspections 
of both over-the-counter and vending machine outlets. The random 
inspections shall cover a range of outlets (not preselected on the 
basis of prior violations) to measure overall levels of compliance as 
well as to identify violations.
    (2) Random, unannounced inspections shall be conducted annually to 
ensure compliance with the law and shall be conducted in such a way as 
to provide a probability sample of outlets. The sample must reflect the 
distribution of the population under age 18 throughout the State and 
the distribution of the outlets throughout the State accessible to 
youth.
    (e) The State shall annually submit to the Secretary with its 
application a report which shall include the following:
    (1) a detailed description of the State's activities to enforce the 
law required in paragraph (b) of this section during the fiscal year 
preceding the fiscal year for which that State is seeking the grant;
    (2) a detailed description regarding the overall success the State 
has achieved during the previous fiscal year in reducing the 
availability of tobacco products to individuals under the age of 18, 
including the results of the unannounced inspections as provided by 
paragraph (d) of this section for which the results of over-the-counter 
and vending machine outlet inspections shall be reported separately;
    (3) a detailed description of how the unannounced inspections were 
conducted and the methods used to identify outlets;
    (4) the strategies to be utilized by the State for enforcing such 
law during the fiscal year for which the grant is sought; and
    (5) the identity of the agency or agencies designated by the 
Governor to be responsible for the implementation of the requirements 
of section 1926 of the PHS Act.
    (f) Beginning in the second applicable fiscal year, the annual 
report required under paragraph (e) of this section shall be made 
public within the State, along with the State plan as provided in 
section 1941 of the PHS Act.
    (g) Beginning with applications for the fourth applicable fiscal 
year and all subsequent fiscal years, the Secretary will negotiate with 
the State, as part of the State's plan, the interim performance target 
the State will meet for that fiscal year and in subsequent years will 
seek evidence of progress toward achieving or surpassing a performance 
objective in which the inspection failure rate would be no more than 
20% within several years.
    (h) Beginning with the second applicable fiscal year and all 
subsequent fiscal years, the Secretary shall make a determination, 
before making a Block Grant to a State for that fiscal year, whether 
the State reasonably enforced its law in the previous fiscal year 
pursuant to this section. In making this determination, the Secretary 
will consider the following factors:
    (1) During the first and second applicable fiscal years, the State 
must conduct the activities prescribed in paragraph (c) of this 
section.
    (2) During the third applicable fiscal year, the State must conduct 
random, unannounced inspections in accordance with paragraph (d) of 
this section.
    (3) During the fourth and all subsequent applicable fiscal years, 
the State must do the following:

[[Page 1509]]

    (i) conduct random, unannounced inspections in accordance with 
paragraph (d); and
    (ii) except as provided by paragraph (h)(4) of this section, the 
State must be in substantial compliance with the target negotiated with 
the Secretary under paragraph (g) of this section for that fiscal year.
    (4) If a State has not substantially complied with the target as 
prescribed under paragraph (h)(3)(ii) of this section for any fiscal 
year, the Secretary, in extraordinary circumstances, may consider a 
number of factors, including survey data showing that the State is 
making significant progress toward reducing use of tobacco products by 
children and youth, data showing that the State has progressively 
decreased the availability of tobacco products to minors, the 
composition of the outlets inspected as to whether they were over-the-
counter or vending machine outlets, and the State's plan for improving 
the enforcement of the law in the next fiscal year.
    (i) If, after notice to the State and an opportunity for a hearing, 
the Secretary determines under paragraph (h) of this section that the 
State has not maintained compliance, the Secretary will reduce the 
amount of the allotment in such amounts as is required by section 
1926(c) of the PHS Act.
    (j) States may not use the Block Grant to fund the enforcement of 
their statute, except that they may expend funds from the primary 
prevention setaside of their Block Grant allotment under 45 CFR 
96.124(b)(1) for carrying out the administrative aspects of the 
requirements such as the development of the sample design and the 
conducting of the inspections.

[FR Doc. 96-467 Filed 1-18-96; 8:45 am]
BILLING CODE 4160-20-M