[Federal Register Volume 68, Number 56 (Monday, March 24, 2003)]
[Proposed Rules]
[Pages 14292-14303]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-6855]



[[Page 14291]]

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Part III





Department of the Treasury





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Alcohol and Tobacco Tax and Trade Bureau



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27 CFR Parts 7 and 25



Flavored Malt Beverages and Related Proposals (2001R-136P); Proposed 
Rule

  Federal Register / Vol. 68, No. 56 / Monday, March 24, 2003 / 
Proposed Rules  

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DEPARTMENT OF THE TREASURY

Alcohol and Tobacco Tax and Trade Bureau

27 CFR Parts 7 and 25

[Notice No. 4]
RIN 1512-AC11


Flavored Malt Beverages and Related Proposals (2001R-136P)

AGENCY: Alcohol and Tobacco Tax and Trade Bureau (TTB), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Department of the Treasury and its Alcohol and Tobacco Tax 
and Trade Bureau are proposing changes to the beer and malt beverage 
regulations related to the production, taxation, composition, labeling, 
and advertising of alcohol beverages marketed as ``flavored malt 
beverages.'' We are proposing these changes in response to the numerous 
questions raised by the States and others concerning these alcohol 
beverages.
    The proposed regulation permits the addition of flavorings and 
other materials containing alcohol to malt beverage products only if 
the alcohol from such materials constitutes less than 0.5% by volume of 
the finished product. This document solicits comments on other 
approaches, including one requiring that a majority of a product's 
alcohol derives from fermentation at the brewery and also seeks comment 
on the amount of time necessary to comply with the proposed standards.
    By proposing these changes, we seek to ensure that flavored malt 
beverages comply with the requirements of the Internal Revenue Code of 
1986 with respect to their composition, premise where produced, 
appropriate tax rate, and system of distribution. We also wish to 
ensure the proper classification of these alcohol beverages under the 
Federal Alcohol Administration Act so that their labeling and 
advertising conform to the applicable requirements of the Act and to 
ensure consumers are adequately informed, and not misled, as to the 
identity of these products. We believe the proposed changes will 
clarify the status of flavored malt beverages under these two Federal 
statutes and will provide guidance to the State regulatory and tax 
agencies that oversee their taxation and distribution.

DATES: Written comments must be received by June 23, 2003.

ADDRESSES: Send written comments to: Chief, Regulations and Procedures 
Division, Alcohol and Tobacco Tax and Trade Bureau, P.O. Box 50221, 
Washington, DC 20091-0221 (Attn: Notice No. 4). See the Public 
Participation section of this notice for alternative means of 
commenting.
    Copies of this document and the written comments received will be 
available for public inspection by appointment at the ATF Reference 
Library, Room 6480, 650 Massachusetts Avenue, NW., Washington, DC 
20226; telephone 202-927-7890. Copies of this document and of the 
comments received will also be posted on the TTB Web site at http://www.ttb.gov. See the Public Participation section of this notice for 
further details.

FOR FURTHER INFORMATION CONTACT: Charles N. Bacon, Alcohol and Tobacco 
Tax and Trade Bureau, Regulations and Procedures Division, 10 Causeway 
Street, Room 701, Boston, MA 02222; telephone 617-557-1323.

SUPPLEMENTARY INFORMATION:

Table of Contents

Notes to Readers
    A. ATF-TTB Transition
    B. Use of Plain Language
I. Background Information
    A. What Are Flavored Malt Beverages?
    B. What Is Our Authority to Regulate Beer and Breweries?
    C. What Is Our Authority to Regulate Malt Beverages?
    D. What Is Our Authority to Regulate Distilled Spirits?
    E. Why Are We Concerned with the Production, Labeling, and 
Taxation of Flavored Malt Beverages?
II. Alcohol Beverage Production
    A. Fermentation
    B. IRC Definition of Beer
    C. What Are Nonbeverage Distilled Spirits?
    D. How Are Flavored Malt Beverages Different than Other Malt 
Beverages?
III. Flavored Malt Beverages Study
    A. What Was the Study's Intent?
    B. What Were the Study's Findings?
    C. What Conclusions Have We Drawn from this Study?
IV. Establishing a Standard for Added Alcohol
    A. ATF Ruling 96-1
    B. Standard for Added Alcohol and Alcohol From Fermentation
    C. What is the Significance of 0.5% Alcohol by Volume?
V. Proposed Rule Language for Beer
    A. Proposal for Alcohol Flavors in Beer
    B. Comments Sought on Beer Definition
VI. Proposed Standards for Flavored Malt Beverages
    A. How Does the Presence of Alcohol Flavors Affect Malt 
Beverages?
    B. Proposal for Alcohol Flavors in Malt Beverages
VII. Proposed Alcohol Content Labeling Statement for Flavored Malt 
Beverages
    A. Differentiation of Flavored Malt Beverages from other Alcohol 
and Nonalcohol Beverages
    B. Alcohol Content Statement on Brand Label
    C. Form of Alcohol Content Statement and Tolerances
    D. Effect of State Law
    E. Discussion of Alcohol Content Labeling for All Malt Beverages
VIII. Use of Distilled Spirits Terms in Malt Beverage Labeling and 
Advertising
    A. Background
    B. ATF Ruling 2002-2
    C. Proposal for Labeling and Advertising
IX. Filing Formulas for Fermented Beverages
    A. Current Statement of Process Requirement
    B. Regulatory Proposal for Filing a Formula
    C. Comments Sought on Formula Proposal
X. Samples
XI. Formulas and Samples for Imported Malt Beverages
XII. Public Participation
    A. Comments Requested
    B. What Is a Comment?
    C. How May I Submit Comments?
    D. How Does TTB Use the Comments?
    E. May I Review Comments Received?
    F. Will TTB Keep My Comments Confidential?
XIII. Regulatory Analyses and Notices
    A. Does the Paperwork Reduction Act Apply to this Proposed Rule?
    B. Does the Regulatory Flexibility Act Apply to this Proposed 
Rule?
    C. Is this a Significant Regulatory Action as Defined by 
Executive Order 12866?
XIV. Drafting Information
XV. List of Subjects
XVI. The Proposed Rule

Notes to Readers

A. ATF-TTB Transition

    Effective January 24, 2003, the Homeland Security Act of 2002 
(Public Law 107-296, 116 Stat. 2135 (2002)) divided the Bureau of 
Alcohol, Tobacco and Firearms (ATF) into two new agencies, the Alcohol 
and Tobacco Tax and Trade Bureau (TTB) in the Department of the 
Treasury and the Bureau of Alcohol, Tobacco, Firearms, and Explosives 
in the Department of Justice. The regulation and taxation of alcohol 
beverages remains a function of the Department of the Treasury and is 
the responsibility of TTB. References to the former ATF and the new TTB 
in this document reflect the time frame, before or after January 24, 
2003.\1\
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    \1\ The new Bureau of Alcohol, Tobacco, Firearms, and Explosives 
continues to use the ``ATF'' abbreviation and continues to provide 
some support services to TTB. References to the ``ATF Reference 
Library'' in this document are to the new bureau's library, which 
currently supports TTB.
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B. Use of Plain Language

    In this document, ``we,'' ``our,'' and ``us'' refers to the 
Department of the Treasury and/or the Alcohol and Tobacco Tax and Trade 
Bureau (TTB). ``You,'' ``your,'' and similar words refer to members of 
the alcohol beverage

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industry and others to whom TTB regulations apply.

I. Background Information

A. What Are Flavored Malt Beverages?

    In recent years, flavored malt beverages have become increasingly 
popular and have gained greater market share. These products differ 
from traditional malt beverages and beer in several respects. Flavored 
malt beverages exhibit little or no traditional beer or malt beverage 
character. Their flavor is derived primarily from added flavors rather 
than from malt and other materials used in fermentation. Flavored malt 
beverages are marketed in traditional beer-type bottles and cans, and 
their alcohol content is similar to most traditional malt beverages--in 
the 4 to 6% alcohol by volume range.
    Although flavored malt beverages are produced at breweries, their 
method of production differs significantly from the production of other 
malt beverages or beer. In producing flavored malt beverages, brewers 
brew a fermented base of beer from malt and other brewing material. 
Brewers then treat this base using a variety of processes in order to 
remove malt beverage character from the base; i.e., they remove the 
color, bitterness, and taste that are generally associated with beer, 
ale, porter, stout, and other malt beverages. This leaves a base 
product to which brewers add various flavors, which typically contain 
distilled spirits, to achieve the desired taste profile and alcohol 
level.
    Although the alcohol content of flavored malt beverages is similar 
to that of most traditional malt beverages, the alcohol in many of them 
is derived primarily from the distilled spirits component of the added 
flavors rather than from the fermentation of malt and other materials. 
In some cases, as much as 99% of the alcohol in the finished flavored 
malt beverage product comes from added flavorings containing distilled 
spirits and not from fermentation in the brewery. Because these alcohol 
beverages begin with a base of fermented beer, they are made at 
breweries, taxpaid at the rate applicable to beer, and distributed to 
the alcohol beverage market through beer and malt beverage wholesalers.
    Flavored malt beverages are sold under many proprietary names and 
include alcohol beverages such as alcoholic lemonades, alcoholic colas, 
cooler-type products, and other flavored alcohol beverages. In the last 
two years, brewers have partnered with distilled spirits producers in 
order to label flavored malt beverages using prominent distilled 
spirits brand names. Published statistics for calendar year 2001 
indicate that flavored malt beverages constitute as much as 5% of the 
overall U.S. malt beverage market, or as much as 10 million barrels (of 
31 gallons each) of the overall malt beverage market of approximately 
200 million barrels.

B. What Is Our Authority To Regulate Beer and Breweries?

    Beer is a taxed under the Internal Revenue Code of 1986 (IRC). The 
IRC both defines beer and imposes a Federal excise tax on beer removed 
from a brewery, or imported into the United States, for consumption or 
sale. Section 5052(a) IRC defines ``beer'' as:

    * * * beer, ale, porter, stout, and other similar fermented 
beverages (including sake or similar products) of any name or 
description containing one-half of 1 percent or more of alcohol by 
volume, brewed or produced from malt, wholly or in part, or from any 
substitute therefor.

This statutory definition of beer is restated in our regulations in 27 
CFR part 25, Beer.
    This definition of beer originated in the internal revenue act 
passed by Congress in 1862 to help finance the Civil War and has 
remained essentially unchanged to the present day. (See Sec.  50 of the 
Act of July 1, 1862, 12 Stat. 432, 450.) TTB and its predecessor 
agencies have long relied on this statutory definition in collecting 
the Federal excise tax on beer. Under IRC section 5051, the current 
excise tax on beer is $18 per barrel of 31 gallons, with certain 
exceptions for qualified small domestic brewers.
    The IRC also governs the establishment and bonding of breweries. 
IRC section 5401 requires a brewer to give notice to the Secretary of 
the Treasury and file a bond with the Secretary prior to commencing 
business at a brewery. TTB and its predecessor bureaus have long 
regulated the establishment and operation of breweries under these 
statutory provisions.

C. What Is Our Authority to Regulate Malt Beverages?

    The Federal Alcohol Administration Act (FAA Act), 27 U.S.C. 211, 
defines a ``malt beverage'' as:

    * * * a beverage made by the alcoholic fermentation of an 
infusion or decoction, or combination of both, in potable brewing 
water, of malted barley with hops, or their parts, or their 
products, and with or without other malted cereals, and with or 
without the addition of unmalted or prepared cereals, other 
carbohydrates or products prepared therefrom, and with or without 
the addition of carbon dioxide, and with or without other wholesome 
products suitable for human food consumption.

This definition also appears in our regulations in 27 CFR part 7, 
Labeling and Advertising of Malt Beverages.
    The FAA Act gives the Secretary of the Treasury or his designate 
authority to issue regulations providing the public with information 
about the identity and quality of malt beverages, and to prevent 
deception in the labeling and advertising of malt beverages. The FAA 
Act also requires that persons engaged in the business of wholesaling 
or importing malt beverages obtain permits. In addition, it requires 
bottlers or importers of malt beverages to obtain certificates of label 
approval prior to introducing malt beverages into interstate or foreign 
commerce. Regulations implementing these FAA Act provisions appear in 
27 CFR part 7, Labeling and Advertising of Malt Beverages.

D. What Is Our Authority To Regulate Distilled Spirits?

    Since the early days of the Republic, Congress has levied, and the 
Treasury Department has collected, taxes on distilled spirits. Today, 
under provisions of the IRC that define and tax distilled spirits, TTB 
regulates the production, labeling, and taxpayment of distilled 
spirits. Under other provisions of the IRC, we also oversee the 
qualification and operation of distilled spirits plants (DSPs).
    IRC section 5002(a)(8) defines ``distilled spirits'' as:

    * * * that substance known as ethyl alcohol, ethanol, or spirits 
of wine in any form (including all dilutions and mixtures thereof 
from whatever source or by whatever process produced).

    IRC section 5001 imposes Federal excise tax on distilled spirits at 
the rate of $13.50 per proof gallon. A proof gallon is one liquid 
gallon containing 50% alcohol by volume (100 proof) at 60[deg] F.

    The FAA Act, at 27 U.S.C. 211(a)(5), defines distilled spirits 
similarly as:
    * * * ethyl alcohol, hydrated oxide of ethyl, spirits of wine, 
whiskey, rum, brandy, gin, and other distilled spirits, including 
all dilutions and mixtures thereof, for non-industrial use.

The FAA Act also gives us the authority to prescribe labeling and 
advertising regulations for distilled spirits.
    The FAA Act requires distillers, blenders, bottlers, wholesalers, 
and importers of distilled spirits to obtain basic permits. It further 
requires these persons to obtain certificates of label approval for 
labels on bottles of distilled

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spirits prior to bottling or releasing bottled distilled spirits from 
customs custody. Regulations implementing these FAA Act provisions 
appear in 27 CFR Part 5, Labeling and Advertising of Distilled Spirits.

E. Why Are We Concerned With the Production, Labeling, and Taxation of 
Flavored Malt Beverages?

    This proposed rulemaking addresses the question: ``Should certain 
products currently marketed as flavored malt beverages be classified as 
malt beverages or distilled spirits under the FAA Act and the Internal 
Revenue Code?'' The answer to this question affects the rate of tax 
applicable to them, the premises where they may be produced, the way 
they are labeled, advertised, marketed, and the distribution system by 
which they are sold to retailers and consumers. Further, their 
classification as malt beverages or as distilled spirits may affect 
State oversight and control of these alcohol beverages.
    State regulatory and taxation agencies have expressed concern about 
flavored malt beverages and have requested that we take action to 
clarify their status as either malt beverages or distilled spirits. 
Moreover, through our own examination of these products, we believe 
that, because of their present formulations, many beverages currently 
marketed as flavored malt beverages should not be so classified.
    This notice proposes significant changes in our regulations issued 
under both the IRC and the FAA Act.

II. Alcohol Beverage Production

A. Fermentation

    Fermentation is the process by which yeast converts sugar into 
alcohol and carbon dioxide. Both the definition of ``beer'' under IRC 
section 5052 and ``malt beverage'' under Sec.  211 of the FAA Act focus 
on fermentation as the source of the alcohol in these products.

B. IRC Definition of Beer

    Under the Internal Revenue Code, ``fermentation'' is the 
determining criteria for defining beer. In 1869, the Commissioner of 
Internal Revenue ruled that the term ``substitute for malt'' within 
this definition includes other fermentable substances such as rice, 
grain of any kind other than malt, sugar, bran, and glucose. In re-
enacting the Internal Revenue Code in 1954, Congress specifically 
included sake, a fermented rice-based beverage, and products similar to 
sake within the definition of beer for production and taxation 
purposes. This specific inclusion shows that, while sake and similar 
products do not resemble beer, ale, porter or stout, Congress intended 
that such products are to be considered fermented products and taxed at 
the beer rate. In all cases, the IRC definition of beer hinges 
``fermentation.''

C. What Are Nonbeverage Distilled Spirits?

    Distilled spirits have thousands of nonbeverage and industrial 
uses. Distilled spirits are used in solvents, medicines, flavor 
manufacture, pharmaceutical products, cleaning products, food products, 
fuels, ink, and many other ordinary items. Generally, the IRC does not 
require payment of the excise tax, or it permits rebate of most of the 
excise tax, when distilled spirits are used for nonbeverage or 
industrial purposes.
    Under IRC Sec.  5131, a person may use taxpaid distilled spirits in 
the manufacture of medicines, medicinal preparations, food products, 
flavors, flavoring extracts, or perfume.
    The excise tax treatment of distilled spirits used in 
``nonbeverage'' products is different because these products are 
``unfit for beverage use;'' i.e., an ordinary person would not consume 
these products for beverage purposes. This criterion does not, however, 
require that nonbeverage products be poisonous or harmful if consumed, 
and, indeed, nonbeverage products deemed ``unfit for beverage use'' are 
often used to produce food and beverage products intended for human 
consumption.

D. How Are Flavored Malt Beverages Different Than Other Malt Beverages?

    Flavored malt beverages are produced at breweries and taxpaid as 
beer. However, as previously stated, most flavored malt beverages 
differ from traditional brewery products:
    [sbull] The beer base is treated to remove taste, aroma, 
bitterness, and extracts, leaving a base;
    [sbull] Their taste is derived from added flavors rather than from 
fermentation of malt and other fermentable materials;
    [sbull] They have low carbonation;
    [sbull] They are clear in color, or their color is derived from 
added flavoring or coloring materials;
    [sbull] Their alcohol content is derived in large part from the 
distilled spirits contained in the added flavoring materials, rather 
than from the fermentation of malt and other materials.

    The last characteristic not only sets flavored malt beverages apart 
from other malt beverages, but also raises the question of whether they 
should be classified as beer or as distilled spirits.

III. Flavored Malt Beverages Study

A. What Was the Study's Intent?

    In order to address the question of the classification of flavored 
malt beverages, we examined the formulation of 114 alcohol beverage 
products labeled and marketed as flavored malt beverages. The intent of 
this study was to find out how these products are produced, what 
ingredients are used, and where the alcohol in them is derived. This 
study did not examine malt beverages that are labeled and marketed as 
flavored beers, flavored ales, and so forth since these types of malt 
beverages typically have the character of malt beverages and their 
alcohol is derived primarily from fermentation.


    Please note: Since this study examined individual formulas and 
production batch records furnished by brewers, it contains 
confidential, proprietary information that is protected from 
unauthorized disclosure under IRC sections 6103 and 7213, and under 
the Trade Secrets Act, 18 U.S.C. 1905. Thus, by law, we cannot 
furnish this study to the public, either on request or under the 
Freedom of Information Act, without pervasive redactions.

B. What Were the Study's Findings?

    For each flavored malt beverage, we examined batch records to 
determine: (1) The amount of alcohol derived from alcohol flavors added 
during production, (2) the amount of alcohol derived from fermented 
material produced at the brewery, and (3) the volume of beer base 
present in the flavored malt beverage. For the 114 different flavored 
malt beverages studied, we found the following:

    Table 1.--Alcohol Derived from Added Alcohol Flavoring Materials
------------------------------------------------------------------------
                                                              Number of
                                                               Flavored
   Alcohol percentage derived  from added alcohol flavors        Malt
                                                              Beverages
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0-25.......................................................            4
26-50......................................................            0
51-75......................................................            5
76-100.....................................................          105
============================================================
------------------------------------------------------------------------


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    Table 2.--Volume of Beer Base Present in Flavored Malt Beverages
------------------------------------------------------------------------
                                                              Number of
 Volume of flavored malt  beverage derived from  fermented     Flavored
                    beer base  (Percent)                         Malt
                                                              Beverages
------------------------------------------------------------------------
0-25.......................................................           95
26-50......................................................            4
51-75......................................................            1
76-100.....................................................           14
------------------------------------------------------------------------

C. What Conclusions Have We Drawn From this Study?

    It is clear from the study's findings that the great majority of 
the alcohol in most flavored malt beverages is not derived from 
fermentation of malt and grain. Instead, it is very clear that most of 
these products' alcohol is derived from distilled spirits contained in 
added alcohol flavorings. We found that over 75% of the alcohol in most 
of the flavored malt beverages studied is derived from alcohol 
flavoring materials, and that in some cases, this figure rose to more 
than 99%. In contrast, the alcohol derived from flavorings constitutes 
less than 25% of the overall alcohol in only 4 of the 114 products 
studied.
    A second finding from this study is that most flavored malt 
beverages contain very little actual beer. Only 15 out of the 114 
flavored malt beverages studied contain as much as 50% by volume 
fermented beer; the remainder of their volume consists of flavors, 
water, and other ingredients. Two of the flavored malt beverages 
studied contain only 1% fermented beer by volume.

IV. Establishing a Standard for Added Alcohol

A. ATF Ruling 96-1

    As noted in Reader's Note ``A'' above, references to ATF refer to 
the agency as it existed in the Department of the Treasury before 
January 24, 2003. Please note that while the former ATF issued this 
ruling, it remains in effect and all references to ATF in the ruling 
should be considered references to TTB. See the Homeland Security Act 
of 2002, Public Law 107-296, section 1912 (November 24, 2002). This 
ruling may be accessed on the TTB Web site at: http://www.ttb.gov/alcohol/info/revrule/revrulex.htm.
    For many years, ATF and its predecessors have allowed brewers to 
use alcohol flavoring ingredients when producing malt beverages. In 
fact, ATF recognized this practice in 1996 by issuing Ruling 96-1 (ATF 
Quarterly Bulletin 1996-1, p. 49). For malt beverages in excess of 6% 
alcohol by volume (alc/vol), the ruling establishes that a maximum of 
1.5% alc/vol may be derived from alcohol flavoring materials. The 
ruling does not establish a limit on alcohol derived from flavoring 
materials for malt beverages under 6% alc/vol. Ruling 96-1 also states 
that ATF would initiate future rulemaking to consider the prohibition, 
restriction, or limitation on the use of flavor materials containing 
alcohol at any stage in the production of malt beverages, but that 
``pending completion of rulemaking, ATF will allow the continued 
production or importation of fermented beverages which contain alcohol 
not solely the result of fermentation at the brewery * * * .''

B. Standard for Added Alcohol and Alcohol From Fermentation

    Neither the IRC nor the FAA Act provides a clear statement as to 
how much, if any, of a beer's or a malt beverage's overall alcohol 
content may come from added flavors or other alcohol-containing 
materials or, conversely, how much of their alcohol content must result 
from fermentation at the brewery. While neither statute sanctions the 
direct addition of distilled spirits or other alcohol to beer or malt 
beverages, we and our predecessors have long allowed flavors, including 
flavors containing alcohol, to be added to these products. For example, 
flavors may be added to beer to provide a particular flavor character.
    Many States have urged us to define flavored malt beverages and 
establish regulatory limits on the addition of alcohol to beer and malt 
beverages through the use of flavors. In the absence of such a Federal 
definition and regulation, several States have said that they will 
develop their own definitions for flavored malt beverages.
    We believe that the definition of ``beer'' in the IRC, which refers 
to beer, ale, porter, stout, and ``other similar fermented beverages,'' 
requires that a product must derive a substantial portion of its 
alcohol from fermentation at a brewery since the definition does not 
contemplate a product that derives most of its alcohol content from 
distilled spirits. As our study shows, very few products currently 
marketed as flavored malt beverages meet this standard.
    We also believe that a similar standard should apply to the 
definition of ``malt beverage'' under the FAA Act, which defines a malt 
beverage as a product made from the fermentation of malted barley with 
hops. While the definition in the Act allows for the addition to malt 
beverages of ``other wholesome food products'' such as flavors, we do 
not believe that Congress intended for such added materials to be a 
malt beverage's dominant ingredient or source of most of its alcohol 
content.
    For these reasons, the Treasury Department and TTB propose to 
delineate how much of the alcohol content of a beer or malt beverage 
must be derived from fermentation at the brewery, and how much of the 
product's alcohol content may be derived from alcohol added through the 
use of flavors and other ingredients containing alcohol.

C. What Is the Significance of 0.5% Alcohol by Volume?

    The Department of the Treasury and TTB consider one-half of one 
percent alcohol by volume (0.5% alc/vol) to be the dividing point 
between an alcohol beverage subject to internal revenue tax and a 
beverage containing alcohol that is not subject to tax as an alcohol 
beverage. This dividing point is recognized in IRC Sec.  5052, which 
defines beer as containing one-half percent alcohol or more by volume. 
While the IRC does not establish an alcohol content threshold for wine 
or distilled spirits, TTB regulations at 27 CFR 24.10 use the same 
threshold, 0.5% alc/vol, as the distinction between a taxable wine and 
a beverage that is not subject to tax as wine on removal from a winery. 
In sum, the Treasury Department and its alcohol taxation agencies have 
historically used the 0.5% alcohol by volume threshold as a dividing 
line between alcohol products subject to one type of taxation or 
another.
    The presence of alcohol in many beverage products is widespread, 
from juice, soft drinks, and soda, to cereal beverages made by brewers. 
For soft drinks and some other beverages, the small amount of alcohol 
present is usually derived from the use of flavoring materials 
containing distilled spirits. However, where the alcohol content in 
such a beverage product reaches 0.5% alc/vol, the product would be 
subject to the internal revenue excise tax for distilled spirits 
products. Such beverage products containing as much as 0.5% alc/vol 
clearly meet the statutory definition of distilled spirits.
    In the absence of specific statutory language stating otherwise, we 
believe that IRC Sec.  5052 supports a regulation classifying any beer 
or malt beverage product containing 0.5% or more alcohol by volume that 
is derived from distilled spirits, or from distilled spirits in the 
form of flavors or other materials, as a distilled spirits product. 
Under our proposed rule, such products would be taxed and classified as 
distilled spirits.

[[Page 14296]]

    We welcome comments on other limits that may be appropriate for the 
addition of alcohol through flavoring or other materials to beer or 
malt beverage products. For example, we believe that IRC section 5052 
also would support the issuance of a regulation requiring that a beer 
or malt beverage product must directly derive a majority of the alcohol 
in a product taxed as beer from fermentation. In other words, less than 
50% of the alcohol in a beer or malt beverage could come from alcohol 
added through flavoring or other materials. We would also welcome 
comments relating to the affect of our proposed regulation on the 
viability of products currently on the market. We are particularly 
interested in comments addressing whether products on the market could 
be made currently under our proposed standard, or if not, on the time 
required to implement such a standard.

V. Proposed Rule Language for Beer

A. Proposal for Alcohol Flavors in Beer

    The Treasury Department and TTB propose to establish a new 
production standard for beer in their regulations issued under the IRC. 
Under proposed 27 CFR 25.15, to be taxed as ``beer'' a product must 
contain less than 0.5% alc/vol derived from added materials, including 
flavorings, that contain distilled spirits. An alcohol beverage 
containing 0.5% or more alc/vol derived from distilled spirits in 
flavors or other materials will be considered distilled spirits. Such 
an alcohol beverage must be produced at a distilled spirits plant, must 
be taxpaid at the rate applicable to distilled spirits products, must 
be labeled and advertised as a distilled spirits specialty, and must be 
distributed by persons holding basic permits as wholesalers of 
distilled spirits.

B. Comments Sought on Beer Definition

    We request comments on this proposed standard for beer. 
Specifically, we solicit any studies, laboratory trials, or other 
empirical data that may exist for added alcohol in flavored malt 
beverages. We seek comments on how adoption of this proposed added 
alcohol standard would affect taste, shelf life, stability, or other 
characteristics of these products.
    We also seek comments on whether production practices are available 
to produce flavored malt beverages with the desired product profile and 
still comply with the proposed standard. Finally, we seek comments on 
whether another standard, such as a standard requiring that a minimum 
of 51% of the alcohol in a malt beverage be derived from fermentation 
at the brewery, would be more appropriate for these products. Any 
suggestions or comments for differing added alcohol standards should be 
backed with data, facts, or studies to support the suggestion. We also 
encourage you to provide any other useful information or opinions on 
this issue.
    Since any standard applied would be a substantial change from 
existing regulations and policy, we also seek comment on the amount of 
time required to comply with any new rule that limits the amount of 
alcohol that may be added to products taxed as beer. Comment should be 
directed toward the amount of time necessary to develop and implement 
new formulas for these products, and possible costs involved.

VI. Proposed Standards for Flavored Malt Beverages

A. How Does the Presence of Alcohol Flavors Affect Malt Beverages?

    The FAA Act definition of ``malt beverage'' was intended to cover 
all products made by brewers at the time of the FAA Act's enactment in 
1935. This definition requires that a malt beverage be made from the 
fermentation of malted barley with hops, with or without the addition 
of ``other wholesome food products.'' For years brewers have used many 
substances including starches, sugars, honey, fruits, flavors 
(including those containing alcohol), colors, and adjuncts to aid in 
fermentation, clarification, and preservation of malt beverages. 
Federal alcohol regulation and tax agencies, including the former ATF 
and the new TTB, have allowed these ingredients in malt beverage 
products.
    Federal administrators of the FAA Act have seldom examined the 
question of what constitutes ``wholesome food products'' other than to 
state that the substances added to malt beverages must be sanctioned as 
safe for food use by the Food and Drug Administration and have some 
intended purpose in the production of a malt beverage. We and our 
predecessors have considered flavorings containing distilled spirits to 
be wholesome food products and have allowed their use in producing malt 
beverages.
    The extensive use of flavors containing distilled spirits 
introduces a significant amount of distilled spirits into a malt 
beverage. Adding alcohol or distilled spirits in this fashion reduces 
the need to use fermented malt in the production of a malt beverage in 
order to acquire alcohol content. When carried to extremes, the result 
is a product in which much of its alcohol content comes from added 
flavorings rather than from fermentation at a brewery and a product in 
which less than half of its overall volume is a result of fermentation.
    We believe that the definition of flavored malt beverages in the 
FAA Act supports limiting the amount of alcohol in the beverage that is 
not ``made by the alcoholic fermentation * * * of malted barley with 
hops * * *.'' Further, we believe that to label a beverage that derives 
most of its alcohol content from added alcohol flavors as a malt 
beverage is inherently misleading since consumers would expect that 
malt beverages derive a significant portion of their alcohol content 
from fermentation of barley malt and other ingredients at the brewery.

B. Proposal for Alcohol Flavors in Malt Beverages

    Thus, the Department of the Treasury and TTB propose to adopt a 
standard for malt beverages that limits the alcohol content derived 
from alcohol flavorings and other materials to less than one-half of 
one percent alcohol by volume (0.5% alc/vol). We propose to add a new 
section, Sec.  7.11, Standards for malt beverages, that specifies this 
limit. We welcome comments on this proposed standard and on other 
possible standards, which are consistent with the FAA Act definition of 
malt beverage, such as requiring that the alcohol content of a malt 
beverage be ``predominantly;'' i.e.; at least 51%, derived from 
fermentation at the brewery. We further seek comments on the time 
required to implement any such added alcohol standard for malt 
beverages.

VII. Proposed Alcohol Content Labeling Statement for Flavored Malt 
Beverages

A. Differentiation of Flavored Malt Beverages From Other Alcohol and 
Nonalcohol Beverages

    Due to the unique character of these new types of flavored malt 
beverages many consumers have limited experience with them. At the same 
time, due to their label appearance and the use of the brand names of 
well-known distilled spirits, we believe that consumers are likely to 
be confused as to their actual alcohol content. We believe that 
consumers are likely to assume that some flavored malt beverages are 
high in alcohol content like the distilled spirits whose brand names 
they bear. Likewise, while other brands of flavored malt beverages are 
not labeled with distilled spirits brand names, their labeling or 
packaging,

[[Page 14297]]

which often resembles that of nonalcoholic new age beverages such as 
juices, sodas, bottled water, and energy drinks, is likely to confuse 
consumers as to their identity as alcohol products.
    Because of the likely consumer confusion over the actual alcohol 
content, or range of alcohol, in flavored malt beverages, we believe 
that a mandatory requirement to label these products with their alcohol 
content will provide substantial consumer benefit. We believe labeling 
flavored malt beverages with their alcohol content will help consumers 
identify them as malt beverages and will help consumers to understand 
that their alcohol content is similar to that of traditional malt 
beverages. Alcohol content labeling would also help draw attention to 
any flavored malt beverages that might lie outside the customary 4 to 
6% alcohol by volume range for malt beverages. For example, if a 
flavored malt beverage contains 10% alc/vol, alcohol content labeling 
would inform consumers about this important distinction.
    Since there is no regulatory provision in part 7 that uniquely 
identifies flavored malt beverages, we propose that mandatory alcohol 
content labeling apply to any malt beverage that contains alcohol from 
a source other than from fermentation at a brewery. For example if a 
brewer adds a flavoring containing alcohol to a malt beverage, whether 
it is labeled as a flavored malt beverage, a flavored beer or ale, or a 
specialty malt beverage product, the requirement to display alcohol 
content on the label would apply.

B. Alcohol Content Statement on Brand Label

    Beyond simply requiring the alcohol content to be displayed on 
labels of flavored malt beverages, we believe additional benefit 
accrues to consumers when it appears on the brand label. Since the 
brand label is the most prominent label, and is the principal display 
panel on the package, consumers are more likely to read information, 
including alcohol content information, displayed on the brand label as 
opposed to information appearing on the back label. Thus, we propose to 
amend Sec.  7.22(a) to require that you list the alcohol content of a 
flavored malt beverage on its brand label. This proposed requirement 
differs from that for alcohol content labeling for other malt beverages 
since, under Sec.  7.22(b), the alcohol content statement may appear on 
any label.

C. Form of Alcohol Content Statement and Tolerances

    We propose no changes to the form of the alcohol content statement 
or the tolerances provided in Sec.  7.71, or to the type size 
requirements in Sec.  7.28.
    With regard to the actual statement of alcohol content, Sec.  
7.71(a)(3) requires labeling with the percentage of alcohol by volume, 
which may be expressed in one of several ways: (1) ``Alcohol X percent 
by volume;'' (2) ``alcohol by volume X percent;'' (3) `` X percent 
alcohol by volume;'' or (4) `` X percent alcohol/volume.'' You may use 
the abbreviations ``alc'' and ``vol'' and the symbol ``%'' in lieu of 
``percent.''
    Tolerances are prescribed at Sec.  7.71(c). This section allows 
alcohol content of a malt beverage to vary by plus or minus 0.3% from 
the stated label alcohol content.
    Type size requirements for statement of alcohol content appear in 
Sec.  7.28(b)(3). For containers of \1/2\ pint or less, the minimum 
type size is 1 mm. For containers larger than \1/2\ pint, the minimum 
size is 2 mm. Type size may not exceed 3 mm for containers of 40 fl. 
oz. or smaller, or exceed 4 mm for containers larger than 40 fl. oz.

D. Effect of State Law

    In the case of all malt beverages, the penultimate clause of the 
FAA Act makes Federal labeling regulations applicable only to the 
extent that State law imposes similar requirements on malt beverages 
sold within the State. Specifically, the proposed regulations apply to 
malt beverage labeling and advertising in interstate commerce only to 
the extent that State law imposes similar requirements on malt 
beverages that are exclusively intrastate. You must comply with these 
regulations to the extent that the State imposes similar requirements 
on malt beverages that are to be consumed or sold within that State. 
For example, if a State law requires that the alcohol content statement 
appear in a form different than provided by Federal regulations, then 
State law will govern the labeling of malt beverages sold or introduced 
into commerce in that State.

E. Discussion of Alcohol Content Labeling for All Malt Beverages

    In Rubin v. Coors Brewing Co., 514 U.S. 476 (1995), the U.S. 
Supreme Court upheld a lower court ruling in favor of Coors Brewing 
Co., which had challenged the provisions of the FAA Act and 27 CFR part 
7 regulations prohibiting statements of alcohol content on malt 
beverage labels. The Court found that brewers have a right to inform 
consumers of their products' alcohol content. Since this 1995 Supreme 
Court ruling, we added Sec.  7.71 to the part 7 malt beverage labeling 
and advertising regulations to permit the optional listing of alcohol 
content on malt beverage labels. (See T.D. ATF-339, 58 FR 21228.)
    We believe that there are good reasons to require labels of all 
malt beverages to bear an alcohol content statement; however, we are 
not proposing to do so in this notice. To the maximum extent possible, 
we wish to restrict this notice of proposed rulemaking to proposals 
concerning flavored malt beverages and not further complicate this 
notice with proposals that relate to all malt beverages. Thus, we 
propose to require mandatory alcohol content labeling only for malt 
beverages that contain alcohol from added flavors or other material 
containing alcohol. We may examine the question of mandatory alcohol 
content labeling for all malt beverages in a future notice of proposed 
rulemaking.

VIII. Use of Distilled Spirits Terms in Malt Beverage Labeling and 
Advertising

A. Background

    Some newer flavored malt beverages use the names of well-known 
brands of distilled spirits as part of their own brand names. The 
labels of these flavored malt beverage brands are also often designed 
to resemble the labels of the distilled spirits brand used in their 
name. In addition, when first introduced, some of these flavored malt 
beverages bore label statements referring to the class and type of 
distilled spirits used in producing the nonbeverage flavoring 
component.
    For these reasons, many State regulatory and taxing authorities 
questioned the classification of flavored malt beverages and requested 
that we take action to clarify their status as either malt beverages or 
distilled spirits.

B. ATF Ruling 2002-2

    In response to these concerns, ATF issued Ruling 2002-2 on April 8, 
2002. Please note that while the former ATF issued this ruling, it 
remains in effect and any references to ATF in the ruling should be 
considered references to TTB. This ruling may be accessed on the TTB 
Web site at: http://www.ttb.gov/alcohol/info/revrule/revrulex.htm.
    ATF issued this ruling to clarify permissible labeling and 
advertising practices for flavored malt beverages, and to give brewers 
and importers labeling guidelines that would serve to prohibit the 
misleading impression that flavored malt beverages are distilled

[[Page 14298]]

spirits or contain distilled spirits. ATF also restated the holdings 
made in Ruling 96-1 concerning the use of alcohol flavorings in 
producing flavored malt beverages and concerning the requirements for 
filing statements of process for malt beverages. With respect to 
labeling and advertising of malt beverages, Ruling 2002-2 held:
    [sbull] Held, for brand names.

--The use of a brand name of a distilled spirits product as the brand 
name of a malt beverage is not in itself misleading.
--The use of a distilled spirits term found in the standards of 
identity in 27 CFR part 5 such as whisky, rum, vodka, brandy, gin, and 
so forth, as the brand name for a malt beverage is misleading. ATF will 
not approve labels where a distilled spirits term is used as the brand 
name for a malt beverage.
--The use of a coined term that is similar to or resembles a class and 
type of distilled spirits as part of the brand name for a malt beverage 
will be examined on a case-by-case basis to determine if it is 
misleading as to the identity of the product.

    [sbull] Held, for class and type statements including statements of 
composition and fanciful names.

--The use of a distilled spirits terms found in the standards of 
identity in 27 CFR part 5, or the use of a distilled spirits brand 
name, in the statement of composition or in the fanciful name for a 
flavored malt beverage is misleading as to the identity of the product. 
ATF will no longer approve labels where distilled spirits terms or 
brand names appear in the fanciful name or the statement of composition 
for a malt beverage.
--Use of a cocktail term as the fanciful name of a malt beverage is not 
misleading if there is no misleading impression about the identity of 
the product, based on the overall labeling and advertising of the 
product.

    [sbull] Held, for all other labeling and advertising statements.

--The use of any distilled spirits terms found in the standards of 
identity in 27 CFR part 5, or of distilled spirits brand names, 
appearing in any other place on a malt beverage label or in an 
advertisement for a malt beverage will be presumed to be misleading. 
Examples of statements that will be presumed to be misleading include:

+ ``Tastes like rum.''
+ ``The flavor of brandy.''
+ ``Serve like a liqueur.''
+ ``Made by Old Sourmash Whisky Company, City, State.''

--Use of cocktail terms on a label or advertisement for a malt beverage 
is not in itself misleading if there is no misleading impression about 
the identity of the product, based on the overall labeling or 
advertising of the product.

C. Proposal for Labeling and Advertising

    We propose to amend Sec. Sec.  7.29 and 7.54 to incorporate the 
provisions of Ruling 2002-2. Although brewers and importers have 
revised their labels and advertising to comply with the ruling, we wish 
to place these provisions in our part 7 regulations. By doing so, you 
may more easily refer to, and comply with, these labeling and 
advertising provisions. Moreover, by proposing these requirements, the 
public, the alcohol beverage industry, and State regulatory agencies 
will have the opportunity to comment and provide input on these 
regulations.
    In 1968, ATF added provisions to the regulations in Part 4, 
Labeling and Advertising of Wine, to prohibit labeling and advertising 
statements that imply that wine products are similar to distilled 
spirits, or imply that wine is made with or contains distilled spirits. 
(See Sec. Sec.  4.39 and 4.64.) We propose to add similar language to 
the malt beverage regulations at Sec. Sec.  7.29 and 7.54. These 
proposed part 7 regulatory provisions would prohibit a labeling or 
advertising statement or representation which tends to create the 
impression that a malt beverage:
    [sbull] Contains distilled spirits (other than from ``nonbeverage'' 
flavors containing alcohol),
    [sbull] Is similar to a distilled spirit, or
    [sbull] Has intoxicating qualities.
    A statement of alcohol content on a malt beverage label is 
permitted under this proposal. In accord with Ruling 2002-2, the use of 
a brand name of a distilled spirits product as the brand name of a malt 
beverage is permitted. However, the use of a distilled spirits brand 
name in any other malt beverage labeling or advertising contexts would 
be prohibited under this proposal. The use of a cocktail name would not 
be considered a reference to distilled spirits if the overall 
formulation, label, or advertisement does not present a misleading 
impression about the identity of the product.
    We welcome comments on this proposal.

IX. Filing Formulas for Fermented Beverages

A. Current Statement of Process Requirement

    Existing regulations at 27 CFR 25.67 require you to file a 
statement of process with TTB's National Revenue Center in Cincinnati, 
Ohio as part of your Brewer's Notice for any fermented beverage that 
you intend to market under a name other than ``beer,'' ``lager,'' 
``ale,'' ``porter,'' ``stout,'' or ``malt liquor.'' Under Sec.  25.76, 
you must file an amended Brewer's Notice if you make changes to an 
approved statement of process.
    When you file a statement of process with the National Revenue 
Center, a specialist at TTB's Advertising, Labeling and Formulation 
Division in Washington, DC examines the proposed statement of process 
in order to ensure that authorized materials will be used, to determine 
the correct class and type, and to ensure that the fermented product 
may be made at a brewery.

B. Regulatory Proposal for Filing a Formula

    We wish to describe more clearly the fermented products for which 
you must file a formula. Additionally, we believe that all brewers 
should be able to file their statements of process or formulas directly 
with our Advertising, Labeling and Formulation Division in Washington, 
DC. For these reasons, we propose to replace the statement of process 
requirement found at Sec. Sec.  25.62 and 25.67 with a formula 
requirement.
1. Requirements for Filing Formulas
    We believe current Sec. Sec.  25.62 and 25.67, which require you to 
file a statement of process for any product not marketed as a ``beer,'' 
``ale,'' and so forth, are vague and lead to questions as to when a 
formula is required. For example, if you intend to produce a flavored 
beer, you have been required to file a formula although this 
requirement is not clear in the current regulation. Similarly, if you 
add coloring or flavoring material to a product that you intend to 
market as a beer, it is unclear if you are required to file a statement 
of process when, in fact, you are required to file one because of the 
use of these added materials.
    Proposed Sec.  25.55 requires you to file a formula with TTB for 
certain fermented products that you intend to make at your brewery. For 
the purposes of tax classification and label evaluation, products for 
which you must file a formula include: sake, flavored sake, and 
sparkling sake, products to which you add any material containing 
alcohol such as nonbeverage flavors, products to which you add coloring 
or natural or artificial flavors, or any product to which you add 
fruits, herbs, spices, or honey.
    Under this proposed rule, you must also file a formula for any 
fermented

[[Page 14299]]

product that will undergo special processing or filtration, or undergo 
any other process not used in traditional brewing. The use of reverse 
osmosis, ion exchange treatments, filtration that changes the character 
of beer or removes material from beer, concentration or reconstitution 
of beer, and freezing or superchilling of beer, are examples of 
processes for which you must file a formula with TTB. You are not 
required to file a formula for traditional brewing processes such as 
pasteurization, filtration prior to bottling, filtration in lieu of 
pasteurization, centrifuging (for clarification), lagering, 
carbonation, and the like.
    You must currently file your formula prior to producing the 
fermented product at your brewery. Proposed Sec.  25.55(c) permits you 
to produce certain fermented beverages for research and product 
development purposes without receiving formula approval. Under proposed 
Sec.  25.55(c), you could not sell or market these products until 
receiving formula approval.
2. Filing Formulas
    Under the proposed rule, you must file your formula in duplicate 
directly with TTB's Advertising, Labeling and Formulation Division in 
Washington, DC. After approval, we will return one copy to you. You may 
make copies of this approved formula for use at any of your breweries 
where the formula is valid. A copy of this formula will become part of 
the required records kept at any individual brewery where you make 
products using the formula. These proposed regulations do not require a 
Government form for your formula, although we are considering use of a 
form like ATF Form 5120.29, Formula and Process for Wine, or requiring 
both beer and wine formulas to be filed on this form.
    Under the proposed rule, you may file one formula to cover 
production of a fermented product made at any brewery that you own or 
operate. You may not use your approved formula to cover production of a 
fermented product at a brewery that you do not operate, such as when 
you have beer produced for you under contract by another brewer. Also, 
when you file a formula to cover production of a fermented product at 
more than one of your breweries, you must identify each brewery where 
the formula is valid by including each brewery's name, address, and 
brewery registry number on the formula.
3. Information Required in Formulas
    Proposed Sec.  25.57 lists the information that you must include in 
a formula. This section spells out this information in more detail than 
does existing Sec. Sec.  25.62 and 25.67 relating to statements of 
process. Proposed Sec.  25.57 also requires you to provide information 
required in your statements of process by Rulings 94-3, 96-1, and 2002-
2.
    Under the proposed rule, your formula must list each ingredient 
used in the production of a fermented product and the quantity of that 
ingredient or a range of the quantity. If you indicate use of a range 
of an ingredient, the range may not be so wide as to render the formula 
meaningless. For example, a formula that indicates use of ingredients 
as ``water 0-100 gallons, flavors 0-10 gallons, beer base 0-500 
gallons,'' has limited value in determining what kind of product will 
be made. Therefore any range of ingredients indicated in a formula must 
be ``reasonable.'' We seek comment on means to quantify in the 
regulations what a ``reasonable'' range of ingredients should be.
    If flavors are present in your fermented product, you must include: 
(1) The name of the flavor; (2) the product number, if any; (3) the 
name and location of the flavor manufacturer; (4) the TTB or ATF 
formula number and approval date, if any, of the flavor; (5) and the 
alcohol content of the flavor.
    If you use flavors containing alcohol, or other ingredients 
containing alcohol, proposed Sec.  25.57 imposes additional 
requirements. You must indicate in your formula: (1) The volume and 
alcohol content of the beer base; (2) the maximum volumes of flavors or 
other ingredients containing alcohol; (3) the alcohol strength of 
flavors or other materials containing alcohol; (4) the alcohol 
contribution to the finished product made by flavors and ingredients 
containing alcohol; and (5) the final volume and alcohol strength of 
the finished product. We will use this information to determine the 
amount of alcohol in a fermented product that is not derived from 
fermentation at the brewery and whether the proposed product meets the 
proposed definition of beer in this notice.
    Under the proposed rule, you must also describe in detail any 
special process that you use in producing your fermented product. This 
information will help us to determine whether a particular process may 
be distillation and thus not eligible to be conducted on brewery 
premises. It will also help us determine the product classification of 
a proposed brewery product.
4. Superseding Formulas
    Under proposed Sec.  25.58, you must file a formula superseding an 
existing formula if you change a product's ingredients or production 
process. In this case, ``change'' means to add a new ingredient or 
process, to eliminate an ingredient or process, or to change the 
quantity of an ingredient outside of an approved range. When you file a 
superseding formula you may give it the same serial number as the 
superseded formula, but you must indicate that it is a superseding 
formula, such as ``Formula No. 2, Superseding, 3-04-2003.'' We will 
cancel a formula that you supersede.
5. Previously Approved Statements of Process
    Your previously approved statements of process (SOP) will remain 
valid after the adoption of these regulations provided the finished 
product under the SOP is in compliance with the new requirements 
relating to the definition of beer in proposed Sec.  25.15. You will 
not need to notify us or take any other action regarding these 
documents. After these regulations become effective, you must comply 
with the formula requirements or supercede statements of process for 
any new formulas that you intend to use.

C. Comments Sought on Formula Proposal

    We welcome comments on the proposed regulations for the preparation 
and filing of formulas. We are especially interested to know if the 
proposed system will be easier and less confusing than the present 
statement of process requirement.

X. Samples

    We propose to add a new section, Sec.  25.53, regarding the 
submission of samples. This section recognizes our authority to require 
a brewer to submit a sample of a beer or an ingredient used for 
producing beer. We occasionally examine samples of beer or ingredients 
in conjunction with our review of statements of process or formulas and 
in order to determine the proper tax classification of fermented 
products. This proposal merely incorporates this existing statutory 
authority in our part 25 regulations.

XI. Formulas and Samples for Imported Malt Beverages

    We propose amending Sec.  7.31 by placing in the part 7 regulations 
our statutory authority to require an importer to submit a formula to 
us in conjunction with the filing of a certificate of label approval, 
ATF Form 5100.31. Similarly, we propose to place in the part 7 
regulations our authority to require importers to submit samples of a 
malt beverage or samples of

[[Page 14300]]

ingredients used in producing a malt beverage. Occasionally, we must 
examine a statement of process or analyze samples of a malt beverage in 
order to determine the proper classification of a product, whether a 
particular product is a malt beverage, or whether a product is 
correctly labeled under part 7 regulations. We welcome comments on this 
proposal.

XII. Public Participation

A. Comments Requested

    The Department of the Treasury and TTB request comments from all 
interested parties on the proposals contained in this notice.
    We specifically request comments on other standards or approaches 
that would be appropriate as an alternative or addition to any final 
rule, including one that would limit the presence of alcohol derived 
from added flavors or other materials to not more than 49% of the 
alcohol volume of the finished product. In developing the final rule, 
Treasury and TTB will carefully re-evaluate the proposed standard in 
light of all comments and suggested alternative standards and 
approaches and will adopt the most appropriate standard or approach.
    We also specifically request comments on:
    [sbull] The proposed amendments to our regulations relating to the 
production, labeling, and composition of products marketed as flavored 
malt beverages;
    [sbull] The proposed definitions for beer and malt beverages 
requiring these products to be composed primarily of alcohol from 
fermentation and that limit the contribution of alcohol from added 
flavors or other ingredients containing alcohol to less than 0.5% 
alcohol by volume;
    [sbull] The proposed requirement that malt beverages containing 
alcohol derived from added flavors or other ingredients containing 
alcohol bear a mandatory alcohol content statement on their brand 
labels;
    [sbull] Whether products currently on the market could be made 
under our proposed standard or under an alternative standard;
    [sbull] The amount of time required to comply with any new 
restrictions on adding alcohol to beer and malt beverages;
    [sbull] The new formula filing requirements for brewers and 
importers who wish to produce or import beer or malt beverages 
containing added flavors, added colors, or which undergo processing not 
customary in the production of traditional beers; and
    [sbull] While we believe that our proposal is consistent with the 
definitions in the Internal Revenue Code and the FAA Act, flavored malt 
beverages that contain a significant amount of added alcohol may not 
have been contemplated by Congress at the time of the statutes' 
enactment. Therefore, we also seek comments on whether Treasury and TTB 
should seek legislation that would specifically address the treatment 
of such products, and whether such legislation is necessary to avoid 
unintended economic consequences of the application of the statute 
under this rule.
    We also specifically request comments on the clarity of the 
proposed regulations and how they may be made easier to understand.

B. What Is a Comment?

    In order for a submission to be considered a ``comment,'' it must 
clearly indicate a position for or against the proposed rule or some 
part of it, or must express neutrality about the proposed rule. 
Comments that use reasoning, logic, and, if applicable, good science to 
explain the respondent's position are most persuasive in the formation 
of a final rule.
    To be eligible for consideration, comments must:
    [sbull] Contain your name and mailing address;
    [sbull] Reference this notice number;
    [sbull] Be legible and written in language generally acceptable for 
public disclosure;
    [sbull] Contain a legible, written signature if submitted by mail 
or fax; and
    [sbull] Contain your e-mail address if submitted by e-mail.
    To ensure that the public is able to access our office equipment, 
comments submitted by fax must be no more than five pages in length 
when printed on 8\1/2\ by 11 inch paper. Comments submitted by mail or 
e-mail may be of any length.

C. How May I Submit Comments?

    By mail: You may send written comments by mail to the address shown 
in the ADDRESSES section of this notice.
    By fax: You may submit comments by facsimile transmission to 716-
434-8041. We will treat faxed transmissions as originals.
    By e-mail: You may submit comments by e-mail by sending the 
comments to [email protected]. We will treat e-mailed transmissions as 
originals.
    By online form: You may also submit comments using the comment form 
provided with the online copy of this proposed rule on the TTB Web site 
at http://www.ttb.gov/alcohol/rules/index.htm. We will treat comments 
submitted via the Web site as originals.
    Public Hearing: Any person who desires an opportunity to comment 
orally at a public hearing on the proposed regulation should submit his 
or her request in writing to the Administrator within the 90-day 
comment period. The Administrator, however, reserves the right to 
determine, in light of all circumstances, whether a public hearing will 
be held.

D. How Does TTB Use the Comments?

    We will carefully consider all comments that we receive on or 
before the closing date. We will not acknowledge receipt of comments or 
reply to individual comments. We will summarize and discuss pertinent 
comments in the preamble of any subsequent notices or the final rule 
published on this subject.

E. May I Review Comments Received?

    You may view copies of the comments received in response to this 
notice of proposed rulemaking by appointment at the ATF Reference 
Library, Room 6480, 650 Massachusetts Avenue, NW., Washington, DC 
20226, telephone 202-927-7890. You may request copies of the comments 
at 20 cents per page by writing to the ATF Reference Librarian at the 
above address.
    For the convenience of the public, we will also post comments 
received in response to this notice on the TTB Web site. All comments 
posted on our Web site will show the name of the commenter, but will 
not show street addresses, telephone numbers, or e-mail addresses. We 
may also omit voluminous attachments or material that we do not 
consider suitable for posting. In all cases, the full comment will be 
available in the ATF Reference Library. To access online copies of the 
comments on this rulemaking, visit http://www.ttb.gov/alcohol/rules/index.htm, and click on the ``View Comments'' button under this notice 
number.

F. Will TTB Keep My Comments Confidential?

    We cannot recognize any material in comments as confidential. All 
comments and materials may be disclosed to the public in the ATF 
Reference Library. We may also post the comment on our Web site. (See 
``May I Review Comments Received?'') Finally, we may disclose the name 
of any person who submits a comment and quote from the comment in the 
preamble to a final rule on this subject. If you consider your material 
to be confidential or inappropriate for disclosure to the

[[Page 14301]]

public, you should not include it in the comments.

XIII. Regulatory Analyses and Notices

A. Does the Paperwork Reduction Act Apply to This Proposed Rule?

    The provisions of the Paperwork Reduction Act of 1995, Public Law 
104-13, 44 U.S.C. chapter 35, and its implementing regulations, 5 CFR 
part 1320, do not apply to this notice of proposed rulemaking because 
we are not proposing any new or revised recordkeeping requirements. We 
are only proposing to clarify when a formula must be filed with TTB 
and, for the purpose of efficiency, we propose to change the place 
where within TTB these formulas are filed. In the future, we may 
develop a specific form for this information collection.
    The Office of Management and Budget has previously approved the 
information collection and recordkeeping provisions contained in 
proposed Sec. Sec.  25.55 through 25.58 under OMB control number 1512-
0045, in accordance with the requirements of the Paperwork Reduction 
Act. This information collection and the related recordkeeping 
requirements are currently contained in Sec. Sec.  25.62 and 25.67.

B. Does the Regulatory Flexibility Act Apply to This Proposed Rule?

    We certify under the provisions of the Regulatory Flexibility Act 
(5 U.S.C. 601 et seq.) that this notice will not have a significant 
impact on a substantial number of entities. We believe that 10 or fewer 
qualified small breweries actually manufacture flavored malt beverages 
subject to this rule. We specifically solicit comments on the number of 
small breweries that may be affected by this rule and on the impact of 
this rule on those breweries. We ask that any small brewery that 
believes that it would be significantly affected by this rule to let us 
know and tell us how it would affect you.
    Pursuant to Sec.  7805(f) of the Internal Revenue Code of 1986, we 
have submitted this regulation to the Chief Counsel for Advocacy of the 
Small Business Administration for comment on its impact on small 
business.

C. Is This a Significant Regulatory Action as Defined by Executive 
Order 12866?

    This is not a significant regulatory action as defined by Executive 
Order 12866. Therefore, the order does not require a regulatory 
assessment because no effect of $100 million or more flows from this 
rule and because any effect flows directly from the underlying 
statutes.

XIV. Drafting Information

    Various personnel of the Alcohol and Tobacco Tax and Trade Bureau 
and the Department of the Treasury drafted this document.

List of Subjects

27 CFR Part 7

    Advertising, Authority delegations, Beer, Consumer protection, 
Customs duties and inspection, Imports, Labeling, Packaging and 
containers, Reporting and recordkeeping requirements.

27 CFR Part 25

    Beer, Claims, Electronic fund transfers, Excise taxes, Exports, 
Labeling, Liquors, Packaging and containers, Reporting and 
recordkeeping requirements, Research, Surety bonds.

The Proposed Rule

    For the reasons set forth in the preamble, the Department of the 
Treasury and the Alcohol and Tobacco Tax and Trade Bureau propose to 
amend the regulations in title 27, Code of Federal Regulations, as 
follows:

PART 7--LABELING AND ADVERTISING OF MALT BEVERAGES

    1. The authority citation for 27 CFR part 7 continues to read as 
follows:

    Authority: 27 U.S.C. 205.

    2. We amend Sec.  7.10 by revising the definition of ``malt 
beverage'' to read as follows:


Sec.  7.10  Meaning of terms.

* * * * *
    Malt beverage. A beverage made by the alcoholic fermentation of an 
infusion or decoction, or combination of both, in potable brewing 
water, of malted barley with hops, or their parts, or their products, 
and with or without other malted cereals, and with or without the 
addition of unmalted or prepared cereals, other carbohydrates or 
products prepared therefrom, and with or without the addition of carbon 
dioxide, and with or without other wholesome products suitable for 
human food consumption. Standards applying to malt beverages appear in 
Sec.  7.11.
* * * * *
    3. We amend Subpart B by adding a new Sec.  7.11 to read as 
follows:


Sec.  7.11  Standards for malt beverages.

    The following standards apply to a fermented product that is 
considered a malt beverage under this part.
    (a) Alcohol flavoring materials and other ingredients containing 
alcohol may be used in producing a malt beverage provided these alcohol 
ingredients constitute less than 0.5 percent alcohol by volume (0.5% 
alc/vol) of the finished malt beverage. For example, a finished malt 
beverage of 5.0% alc/vol must derive more than 4.5% alc/vol from the 
fermentation of barley malt and other materials, and must derive less 
than 0.5% alc/vol from the addition of alcohol flavors or other 
ingredients containing alcohol.
    (b) A malt beverage may be filtered or processed in order to remove 
color, taste, aroma, bitterness, or other characteristics derived from 
fermentation.
    4. We amend Sec.  7.22 by adding a new paragraph (a)(5) to read as 
follows:


Sec.  7.22  Mandatory label information.

    There shall be stated:
    (a) On the brand label:
* * * * *
    (5) Alcohol content in accordance with Sec.  7.71, for malt 
beverages that contain any alcohol derived from added flavors or other 
ingredients containing alcohol.
* * * * *
    5. We amend Sec.  7.29 by revising paragraph (a) and by adding a 
new paragraph (a)(7) to read as follows:


Sec.  7.29  Prohibited practices.

    (a) Statements on labels. Containers of malt beverages, or any 
labels on such containers, or any carton, case, or individual covering 
of such containers, used for sale at retail, or any written, printed, 
graphic, or other material accompanying such containers to the consumer 
must not contain:
* * * * *
    (7)(i) Any statement, design, device, or representation which tends 
to create the impression that a malt beverage:
    (A) Contains distilled spirits; or
    (B) Is similar to a distilled spirit; or
    (C) Has intoxicating qualities.
    (ii) A label statement of alcohol content in conformity with Sec.  
7.71 is not considered a prohibited practice in violation of this 
section. Use of a brand name of a distilled spirits product as a malt 
beverage brand name is permitted. Use of a cocktail name as a brand 
name or fanciful name is permitted if the overall malt beverage 
formulation and label do not present a misleading impression about the 
identity of the product.
* * * * *
    6. We amend Sec.  7.31 by adding paragraph (e) to read as follows:

[[Page 14302]]

Sec.  7.31  Label approval and release.

* * * * *
    (e) Formula and samples. The Administrator may require you to 
submit a formula for a malt beverage, and a sample of any malt beverage 
or ingredients used in producing a malt beverage in conjunction with 
the filing of a certificate of label approval on ATF Form 5100.31.
    7. We amend Sec.  7.54 by revising paragraph (a) and by adding a 
new paragraph (a)(8), to read as follows:


Sec.  7.54  Prohibited statements.

    (a) General prohibition. An advertisement of malt beverages must 
not contain:
* * * * *
    (8)(i) Any statement, design, device, or representation which 
relates to alcohol content or which tends to create the impression that 
a malt beverage:
    (A) Contains distilled spirits; or
    (B) Is similar to a distilled spirit; or
    (C) Has intoxicating qualities.
    (ii) A label statement of alcohol content in conformity with Sec.  
7.71 is not considered a prohibited practice in violation of this 
section. Use of a brand name of a distilled spirits product as a malt 
beverage brand name is permitted. Use of a cocktail name as a brand 
name or as a fanciful name is permitted if the overall malt beverage 
advertisement does not present a misleading impression about the 
identity of the product.
* * * * *

PART 25--BEER

    8. The authority citation for part 25 continues to read as follows:

    Authority: 19 U.S.C. 81c; 26 U.S.C. 5002, 5051-5054, 5056, 5061, 
5091, 5111, 5113, 5142, 5143, 5146, 5222, 5401-5403, 5411-5417, 
5551, 5552, 5555, 5556, 5671, 5673, 5684, 6011, 6061, 6065, 6091, 
6109, 6151, 6301, 6302, 6311, 6313, 6402, 6651, 6656, 6676, 6806, 
7011, 7342, 7606, 7805; 31 U.S.C. 9301, 9303-9308.

    9. We amend Sec.  25.11 by revising the definition of ``beer'' to 
read as follows:


Sec.  25.11  Meaning of terms.

* * * * *
    Beer. Beer, ale, porter, stout, and other similar fermented 
beverages (including sak[eacute] and similar products) of any name or 
description containing one-half of one percent or more alcohol by 
volume, brewed or produced from malt, wholly or in part, or from any 
substitute for malt. Standards for the beer tax rate appear in Sec.  
25.15.
* * * * *
    10. We amend subpart B by adding an undesignated center heading and 
a new section, Sec.  25.15, to read as follows:

Standards for Beer Tax Rate


Sec.  25.15  What standards must be met to qualify as a fermented 
product to be taxed at the beer rate?

    (a) You may use barley malt, malted grains other than barley, 
unmalted grains, sugars, syrups, molasses, honey, fruit, fruit juice, 
fruit concentrate, herbs, spices, and other food materials for 
fermenting beer.
    (b) You may use alcohol flavoring materials, taxpaid wine, and 
other ingredients containing alcohol in producing beer, provided these 
alcohol ingredients contribute less than 0.5 percent alcohol by volume 
of the finished beer. For example, a finished beer of 5.0% alc/vol must 
derive more than 4.5% alc/vol from the fermentation of ingredients at 
the brewery. Added flavors or other ingredients containing alcohol may 
constitute less than 0.5% alc/vol of the finished beer.
    11. We amend Subpart F by adding two undesignated center headings, 
and by adding new Sec. Sec.  25.53, and 25.55 through 25.58, to read as 
follows:

Subpart F--Miscellaneous Provisions

* * * * *

Samples


Sec.  25.53  Am I required to furnish samples of my fermented products 
or ingredients?

    The appropriate TTB officer may, at any time, require you to submit 
samples of:
    (a) Cereal beverage, sake, or any fermented product produced at the 
brewery.
    (b) Materials used in the production of cereal beverage, sake, or 
any fermented product.
    (c) Cereal beverage, sake, or any fermented product, in conjunction 
with the filing of a formula. (26 U.S.C. 5415, 5555, 7805(a))

Formulas


Sec.  25.55  Are formulas required for my fermented products?

    (a) For what fermented products must a formula be filed? You must 
file a formula with TTB if you intend to produce:
    (1) Any fermented product that will be treated by any special 
processing, filtration, or other methods of manufacture that change the 
character of beer or remove material from beer. The removal of any 
volume of water from beer, filtration of beer to remove color, flavor, 
or character, the separation of a beer into different components, 
reverse osmosis, concentration of beer, and ion exchange treatments are 
examples of processes that require you to file a formula under this 
section.
    (2) Any fermented product to which taxpaid wine or any flavor or 
other ingredient containing alcohol will be added.
    (3) Any fermented product to which coloring or natural or 
artificial flavors will be added.
    (4) Any fermented product to which fruits, herbs, spices, or honey 
will be added.
    (5) Sake, flavored sake, or sparkling sake.
    (b) Are separate formulas required for different products? You must 
file a separate formula for each fermented product for which a formula 
is required.
    (c) When must I file a formula? (1) Except as provided in paragraph 
(2), you may not produce a fermented product for which a formula is 
required until you have filed and received approval of a formula for 
that product.
    (2) You may, for research and product development purposes, produce 
a fermented product without an approved formula, but you may not sell 
or market this product until you receive approval of a formula.
    (d) How long is my formula approval valid? Your formula approved 
under this section remains in effect until you supersede it with a new 
formula, until you voluntarily surrender it to TTB, or until TTB 
cancels or revokes it.
    (e) Are my previously approved statements of process valid? Your 
statements of process approved before [EFFECTIVE DATE OF FINAL RULE] 
are considered approved formulas under this section, provided the 
finished product under the statement of process is in compliance with 
Sec.  25.15. You do not need to resubmit any approved statements of 
process. (26 U.S.C. 5415, 5555, 7805(a))


Sec.  25.56  How do I file a formula?

    (a) What are the general requirements for filing a formula?
    (1) You must identify each brewery where the formula is valid by 
including each brewery name, address, and the brewery registry number 
for each brewery for which the formula applies.
    (2) You must serially number each formula, commencing with ``1'' 
and continuing in numerical sequence.
    (3) You must date and sign each formula.
    (4) You must submit two copies of each formula to TTB.
    (b) Where do I file a formula? File your formulas with the Chief, 
Advertising, Labeling and Formulation Division, Alcohol and Tobacco Tax 
and Trade Bureau, 650 Massachusetts Avenue, NW., Washington, DC 20226. 
(26 U.S.C. 5401, 7805)

[[Page 14303]]

Sec.  25.57  What ingredient and process information must I include on 
a formula?

    (a) For each formula you must list--
    (1) Each separate ingredient and the specific quantity used, or a 
reasonable range of quantities used.
    (2) For fermented products containing flavorings, you must include: 
The name of the flavor; the product number, if any; the name and 
location (city, State and TTB company code) of the flavor manufacturer; 
the TTB or ATF formula number and approval date, and the alcohol 
content of the flavor.
    (3) For formulas that include the use of taxpaid wine or other 
ingredients containing alcohol, you must explicitly indicate:
    (i) The volume and alcoholic content of the beer base;
    (ii) The maximum volumes of the flavoring materials or other 
ingredients to be used;
    (iii) The alcoholic strength of the flavoring materials or other 
ingredients;
    (iv) The overall alcohol contribution to the finished product 
provided by the addition of flavoring materials or other ingredients 
containing alcohol; and
    (v) The final volume and alcoholic content of the finished product.
    (b) You must describe in detail each process used to produce a 
fermented beverage.
    (c) You must state the alcohol content of the fermented product at 
each step in production after fermentation, and the alcohol content of 
the finished product.
    (d) At any time, an appropriate TTB officer may require you to file 
additional information concerning a fermented product, ingredients, or 
processes, in order to determine whether a formula should be approved, 
disapproved, or if the approval of a formula should be continued. (26 
U.S.C. 5415, 5555, 7805(a))


Sec.  25.58  When must I file a new or superseding formula?

    (a) You must file a new or superseding formula if you--
    (1) Create an entirely new fermented product that requires a 
formula;
    (2) Add new ingredients to an existing formulation;
    (3) Delete ingredients from an existing formulation;
    (4) Change the quantity of an ingredient used from the quantity or 
range of usage in an approved formula;
    (5) Change an approved processing, filtration, or other special 
method of manufacture that requires the filing of a formula; or
    (6) Change the contribution of alcohol from flavor or ingredients 
that contain alcohol.
    (b) When you file a new or superseding formula with TTB, follow the 
procedures described above in Sec. Sec.  25.56 through 25.57.
    (c) When you file a new formula, you must give it a new formula 
number.
    (d) A superseding formula is one that replaces an existing formula. 
You must inform TTB when you file a superseding formula. When TTB 
approves a superseding formula, we will cancel your previous formula. 
You may use the same formula number for a superseding formula as the 
formula it replaces, but you must annotate the formula number to 
indicate it is a superseding formula (For example, Formula 2, 
superseding). (26. U.S.C. 5401)


Sec.  25.62  [Amended]

    12. We amend Sec.  25.62 by removing and reserving paragraph 
(a)(7).


Sec. Sec.  25.67 and 25.76  [Removed]

    13. We amend Subpart G by removing and reserving Sec. Sec.  25.67 
and 25.76.

    Signed: March 4, 2003.
John J. Manfreda,
Acting Administrator.
    Approved: March 17, 2003.
Timothy E. Skud,
Deputy Assistant Secretary, (Regulatory, Tariff, and Trade 
Enforcement).
[FR Doc. 03-6855 Filed 3-21-03; 8:45 am]
BILLING CODE 4810-31-P