[Federal Register Volume 71, Number 147 (Tuesday, August 1, 2006)]
[Proposed Rules]
[Pages 43371-43385]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 06-6596]


 ========================================================================
 Proposed Rules
                                                 Federal Register
 ________________________________________________________________________
 
 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
 
 ========================================================================
 

  Federal Register / Vol. 71, No. 147 / Tuesday, August 1, 2006 / 
Proposed Rules  

[[Page 43371]]



DEPARTMENT OF AGRICULTURE

Food and Nutrition Service

7 CFR Part 246

RIN 0584-AD47


Special Supplemental Nutrition Program for Women, Infants and 
Children (WIC): Discretionary WIC Vendor Provisions in the Child 
Nutrition and WIC Reauthorization Act of 2004, Public Law 108-265

AGENCY: Food and Nutrition Service, USDA.

ACTION: Proposed rule.

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

SUMMARY: This rule proposes to amend regulations for the Special 
Supplemental Nutrition Program for Women, Infants and Children (WIC) by 
adding three requirements mandated by the Child Nutrition and WIC 
Reauthorization Act of 2004 concerning retail vendors authorized by WIC 
State agencies to provide supplemental food to WIC participants in 
exchange for WIC food instruments. This rulemaking would require WIC 
State agencies to notify WIC-authorized retail vendors of an initial 
violation in writing, for violations requiring a pattern of occurrences 
in order to impose a sanction, before documenting a subsequent 
violation, unless notification would compromise an investigation. In 
addition, State agencies would be required to maintain a list of State-
licensed wholesalers, distributors, and retailers, and infant formula 
manufacturers registered with the Food and Drug Administration, and 
would require WIC-authorized retail vendors to purchase infant formula 
only from sources on the list. Further, State agencies would be 
required to prohibit the authorization of or payments to WIC-authorized 
vendors that derive more than 50 percent of their annual food sales 
revenue from WIC food instruments (``above-50-percent vendors'') and 
which provide incentive items or other free merchandise, except food or 
merchandise of nominal value, to program participants or customers 
unless the vendor provides the State agency with proof that the vendor 
obtained the incentive items or merchandise at no cost. The intent of 
these provisions is to, respectively, enhance due process for vendors; 
prevent defective infant formula from being consumed by infant WIC 
participants; and ensure that the WIC Program does not pay the cost of 
incentive items provided by above-50-percent vendors in the form of 
high food prices.
    Finally, this rule also proposes to adjust the vendor civil money 
penalty (CMP) levels to reflect inflation.

DATES: To be assured of consideration, comments on this proposed rule 
must be received by the Food and Nutrition Service on or before October 
2, 2006.

ADDRESSES: The Food and Nutrition Service invites interested persons to 
submit comments on this proposed rule. Comments may be submitted by any 
of the following methods:
     Mail: Send comments to Patricia N. Daniels, Director, 
Supplemental Food Programs Division, Food and Nutrition Service, USDA, 
3101 Park Center Drive, Room 528, Alexandria, Virginia, 22302, (703) 
305-2746.
     Web Site: Go to http://www.fns.usda.gov/wic. Follow the 
online instructions for submitting comments through the link at the 
Supplemental Food Programs Division Web site.
     E-Mail: Send comments to [email protected]. Include 
Docket ID Number 0584-AD47, Discretionary WIC Vendor Provisions 
Proposed Rule in the subject line of the message.
     Federal eRulemaking Portal: Go to http://www.regulations.gov. Follow the online instructions for submitting 
comments.
    All comments submitted in response to this proposed rule will be 
included in the record and will be made available to the public. Please 
be advised that the substance of the comments and the identities of the 
individuals or entities submitting the comments will be subject to 
public disclosure. All written submissions will be available for public 
inspection at the address above during regular business hours (8:30 
a.m. to 5 p.m.) Monday through Friday.

FOR FURTHER INFORMATION CONTACT: Debra Whitford, Chief, Policy and 
Program Development Branch, Supplemental Food Programs Division, Food 
and Nutrition Service, USDA, 3101 Park Center Drive, Room 528, 
Alexandria, Virginia, 22302, (703) 305-2746, OR 
[email protected].

SUPPLEMENTARY INFORMATION:

I. Procedural Matters

Executive Order 12866

    This proposed rule has been determined to be significant and was 
reviewed by the Office of Management and Budget (OMB) in conformance 
with Executive Order 12866.

Regulatory Impact Analysis

    The following summarizes the conclusions of the regulatory impact 
analysis.
Need for Action
    This rule proposes to amend the Federal WIC Regulations by adding 
three requirements mandated by the Child Nutrition and WIC 
Reauthorization Act of 2004 concerning WIC-authorized retail vendors. 
This rulemaking would require WIC State agencies to notify WIC-
authorized retail vendors of an initial violation in writing, for 
violations requiring a pattern of occurrences in order to impose a 
sanction, before documenting a subsequent violation, unless 
notification would compromise an investigation. In addition, State 
agencies would be required to maintain a list of State-licensed 
wholesalers, distributors, and retailers, and infant formula 
manufacturers registered with the FDA, and would require WIC-authorized 
retail vendors to purchase infant formula only from sources on the 
list. Further, State agencies would be required to prohibit the 
authorization of or payments to above-50-percent vendors which provide 
incentive items or other free merchandise, except food or merchandise 
of nominal value, to program participants or customers unless the 
vendor provides the State agency with proof that the vendor obtained 
the incentive items or merchandise at no cost. Finally, this rule also 
proposes a process for the periodic adjustment (at least once every 
four years) of all vendor civil money penalty (CMP) levels to reflect 
inflation; under the current regulations, the CMP levels for some but 
not all vendor

[[Page 43372]]

violations have been previously adjusted for inflation. Initially, this 
would have the effect of raising the maximum CMP level from $10,000 to 
$11,000 per violation, and raising the CMP level from $40,000 to 
$44,000 as the maximum amount for all violations occurring during a 
single investigation, for those WIC CMP levels which have not 
previously been adjusted for inflation.
Benefits
    The notification of vendors of an initial incidence of a violation 
provides the vendor with an opportunity to correct a violation. Thus, 
State agencies may spend less time and resources on sanction cases and 
ultimately program operations would be improved and program costs would 
decrease.
    Requiring vendors to obtain infant formula only from suppliers 
registered with FDA or licensed under State law will help to prevent 
the sale of adulterated stolen infant formula for use by infant WIC 
participants, thus safeguarding their health.
    Requiring above-50-percent vendors to restrict the costs of their 
participant incentive items to nominal value would protect the WIC 
program from paying excess money for WIC foods.
    Making the inflation adjustment consistent for all CMP levels would 
benefit WIC Program administration by making all CMP calculations 
uniform.
Costs
    Although this proposed rule has been designated as significant, the 
costs associated with implementing the proposed changes are not 
expected to significantly add to current program costs.
    Little time will be needed to issue a notice of violations to a 
vendor, which presumably will entail a standardized format with space 
for the vendor's name and address and for listing the violations. 
Likewise, little time will be needed to document in the vendor file the 
reason(s) such notice would compromise an investigation and thus would 
not be sent.
    The State agency is required to provide the list of registered or 
licensed infant formula suppliers to vendors on an annual basis, which 
a State agency could satisfy by linking its Web site to the list of 
licensed suppliers on the Web site of the State's licensing agency.
    FNS currently estimates that only about 2,000 of the approximately 
50,000 authorized vendors will be subject to incentive items 
restrictions. Little time will be needed by the State agency to 
approve/disapprove incentive items, since this process only involves 
comparison of the vendor's price documentation with the less-than-$2 
nominal value limit. Indeed, the State agency may provide above-50-
percent vendors with a list of allowable incentive items, and the 
vendor would indicate on the list which of these incentive items it 
wishes to use and return the list to the State agency.
    The proposed process for the periodic adjustment of WIC vendor CMP 
amounts to reflect inflation would not increase administrative costs 
because the CMP calculation process would be the same for all vendor 
violations. Under the current regulations, the CMP levels for some but 
not all vendor violations have previously been adjusted for inflation. 
Under the proposed process, all vendor CMP levels would be periodically 
adjusted for inflation. Initially, this would have the effect of 
raising the maximum CMP level from $10,000 to $11,000 per violation, 
and raising the CMP level from $40,000 to $44,000 as the maximum amount 
for all violations occurring during a single investigation, for those 
WIC CMP levels which have not previously been adjusted for inflation.

Regulatory Flexibility Act

    This rule has been reviewed with regard to the requirements of the 
Regulatory Flexibility Act (RFA) of 1980, (5 U.S.C. 601-612). Pursuant 
to that review, Eric M. Bost, Under Secretary, Food, Nutrition, and 
Consumer Services, has certified that this rule would not have a 
significant impact on a substantial number of small entities. However, 
in fulfilling the intent of the Child Nutrition and WIC Reauthorization 
Act of 2004, the rule may have a significant economic impact on the 
small number of above-50-percent vendors that have been authorized to 
participate in the WIC Program. These vendors tend to be smaller 
grocery stores that serve WIC participants exclusively or 
predominantly, have a large volume of WIC transactions, and may not be 
subject to the retail market forces that keep food prices at 
competitive levels. In accordance with the law, the proposed rule would 
require that State agencies implement restrictions on the incentive 
items provided to program participants by above-50-percent vendors in 
order to prevent the cost of the incentive items from increasing the 
food prices charged to the WIC Program by these vendors. Currently FNS 
estimates that about 2,000 of the approximately 50,000 authorized 
vendors will be subject to incentive items restrictions. FNS does not 
expect that the rule will result in an overall reduction in the number 
of authorized vendors, but rather in lower food prices charged to the 
WIC Program by above-50-percent vendors.
    FNS also does not expect the other three provisions of the proposed 
rule to have a significant economic impact on small entities. One of 
these provisions requires State agencies to provide WIC retail vendors 
with a list of State-licensed infant formula wholesalers, distributors, 
retailers, and FDA-registered manufacturers; vendors may obtain infant 
formula for sale to WIC participants only from the entities on the 
list. FNS believes that a large majority of WIC vendors currently 
obtain infant formula from legitimate sources which will appear on the 
lists provided by the State agencies. Thus the requirement for the list 
will impact a very small minority of WIC vendors.
    One of the other provisions requires the State agency to notify a 
vendor of a violation in writing before documenting a subsequent 
violation which could result in sanctions based on a pattern of 
violations, unless such notification would compromise an investigation. 
This provision will help vendors to comply with their responsibilities 
and thus prevent sanctions. FNS estimates that only 5 percent of WIC-
authorized vendors would be impacted by this provision. Moreover, this 
impact would be economically beneficial for these vendors since such 
notification would help them to prevent the loss of business resulting 
from disqualification, or CMP payments imposed in lieu of 
disqualification, and related legal costs.
    The remaining provision would periodically increase the CMP amounts 
to reflect inflation for those CMP's which had not previously been 
adjusted for inflation. Under the current regulations, the CMP levels 
for some but not all vendor violations have previously been adjusted 
for inflation. Initially, the proposed process would have the effect of 
raising the maximum CMP level from $10,000 to $11,000 per violation, 
and raising the CMP level from $40,000 to $44,000 as the maximum amount 
for all violations occurring during a single investigation, for those 
WIC CMP levels which have not previously been adjusted for inflation. 
FNS estimates that only 3 percent of WIC-authorized vendors would be 
impacted by this provision. Moreover, this provision would only 
increase maximum CMP amounts on a periodic basis to reflect inflation; 
the underlying formula for calculating CMP amounts, based on a 
percentage of a vendor's average redemptions and the number of 
violations as set forth in

[[Page 43373]]

Sec.  246.12(l)(1)(x), would not be altered by this provision.

Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995 (UMRA), Public 
Law 104-4, establishes requirements for Federal agencies to assess the 
effects of their regulatory actions on State, local and tribal 
governments and the private sector. Under section 202 of the UMRA, the 
Department generally must prepare a written statement, including a cost 
benefit analysis, for proposed and final rules with ``Federal 
mandates'' that may result in expenditures by State, local or tribal 
governments, in the aggregate, or the private sector, of $100 million 
or more in any one year. When such a statement is needed for a rule, 
Section 205 of the UMRA generally requires the Department to identify 
and consider a reasonable number of regulatory alternatives and adopt 
the most cost effective or least burdensome alternative that achieves 
the objectives of the rule.
    This proposed rule contains no Federal mandates (under the 
regulatory provisions of Title II of the UMRA) for State, local and 
tribal governments or the private sector of $100 million or more in any 
one year. Thus, the rule is not subject to the requirements of sections 
202 and 205 of the UMRA.

Executive Order 12372

    The WIC Program is listed in the Catalog of Federal Domestic 
Assistance Programs under 10.557. For the reasons set forth in the 
final rule in 7 CFR part 3015, subpart V, and related Notice (48 FR 
29115, June 24, 1983), this program is included in the scope of 
Executive Order 12372 which requires intergovernmental consultation 
with State and local officials.

Federalism Summary Impact Statement

    Executive Order 13132 requires Federal agencies to consider the 
impact of their regulatory actions on State and local governments. 
Where such actions have federalism implications, agencies are directed 
to provide a statement for inclusion in the preamble to the regulations 
describing the agency's considerations in terms of the three categories 
called for under Section (6)(b)(2)(B) of Executive Order 13121.
Prior Consultation With State Officials
    Prior to drafting this proposed rule, we received input from State 
agencies regarding issues and concerns with implementation of the three 
legislative provisions contained in this rulemaking. FNS regional 
offices have formal and informal discussions with WIC State agency 
officials on an ongoing basis regarding program and policy issues. In 
December and April 2005, FNS issued policy guidance to WIC State 
agencies on the implementation of the legislative requirements 
addressed in this proposed rule. In response, FNS received a number of 
questions which resulted in informal discussions with State agency 
officials and other stakeholders on program implementation. Much of the 
discussion in the preamble of this rule reflects the substance of those 
consultations.
Nature of Concerns and the Need To Issue This Rule
    State agencies are primarily concerned with the potential 
administrative burdens involved with implementing the new legislative 
requirements in this proposed rule. However, as previously noted, this 
proposed rule is based mainly on three new requirements mandated by the 
Child Nutrition and WIC Reauthorization Act of 2004, Public Law 108-
265. First, the statute requires State agencies to notify WIC-
authorized retail vendors in writing of an initial violation, for 
violations requiring a pattern of occurrences in order to impose a 
sanction, before documenting a subsequent violation unless notification 
would compromise an investigation; this requirement was intended to 
enhance the due process afforded to vendors facing disqualification or 
civil money penalties. Second, the statute requires State agencies to 
maintain a list of State-licensed wholesalers, distributors, and 
retailers, and infant formula manufacturers registered with the Food 
and Drug Administration, and requires that WIC-authorized retail 
vendors purchase infant formula only from sources on the list; this 
requirement was intended to prevent defective infant formula from being 
consumed by infant WIC participants. Third, the statute requires State 
agencies to prohibit the authorization of or payments to above-50-
percent vendors which provide incentive items or other free 
merchandise, except food or merchandise of nominal value, to program 
participants or customers unless the vendor provides the State agency 
with proof that the vendor obtained the incentive items or merchandise 
at no cost; this requirement was intended to ensure that the WIC 
Program does not pay the cost of incentive items provided by above-50-
percent vendors in the form of high food prices.
    The proposed rule would also provide a process for periodically 
adjusting WIC vendor CMP levels for inflation in a manner consistent 
with the process for adjusting other WIC CMP levels for inflation set 
forth in the final rule ``Department of Agriculture Civil Monetary 
Penalties Adjustment,'' 70 FR 29573, May 24, 2005. Under that final 
rule, the CMP levels for some but not all vendor violations have 
previously been adjusted for inflation. Initially, the proposed process 
would have the effect of raising the maximum CMP level from $10,000 to 
$11,000 per violation, and raising the CMP level from $40,000 to 
$44,000 as the maximum amount for all violations occurring during a 
single investigation, for those WIC CMP levels which have not 
previously been adjusted for inflation.
Extent to Which We Meet Those Concerns
    FNS has considered the impact of this proposed rule on WIC State 
and local agencies. Through the rule-making process, FNS has attempted 
to balance the need for State agencies to meet the new requirements 
against the administrative challenges that State agencies are likely to 
encounter in meeting them. These challenges include the commitment of 
adequate resources to compile the list of acceptable entities from 
which infant formula must be purchased; determine when notification of 
violations would compromise an investigation; and, develop and enforce 
the incentive items provisions.
    The proposed rule would allow State agencies discretion to 
determine if providing notification of violations to vendors before 
documenting additional violations would compromise the investigation.
    In addition, under the proposed rule, State agencies could use 
their Web sites as the primary means for providing their vendors with 
lists of infant formula manufacturers registered with the FDA and 
infant formula wholesalers, distributors, and retailers licensed under 
State law. FNS will also provide the State agencies with the FDA list 
of manufacturers, and State licensing and tax authorities could provide 
the WIC State agencies with lists or Web site links on the other 
entities. Also, State legislation or rulemaking could be used to limit 
the kind of entities to be included on the lists provided to the 
vendors.
    Further, State agencies would not be required to permit above-50-
percent vendors to provide incentive items. If a State agency decides 
not to permit such promotions at all, then there would be no 
administrative burden to the State agency to approve such items to 
ensure compliance with the statutory requirement.

[[Page 43374]]

    Finally, State agencies would need to amend their schedules of 
sanctions to reflect the inflation adjustments for CMP levels in the 
proposed rule and to notify their vendors of this change. FNS does not 
expect this to involve a significant expenditure of resources.

Executive Order 12988

    This proposed rule has been reviewed under Executive Order 12988, 
Civil Justice Reform. This proposed rule is intended to have preemptive 
effect with respect to any State or local laws, regulations or policies 
which conflict with its provisions or which would otherwise impede its 
full and timely implementation. This rule is not intended to have 
retroactive effect unless so specified in the Effective Dates section 
of the final rule. Prior to any judicial challenge to the provisions of 
the final rule, all applicable administrative procedures must be 
exhausted. This rule concerns WIC vendors. In the WIC Program, the 
administrative procedures which must be exhausted by WIC vendors are as 
follows. First, State agency hearing procedures pursuant to Sec.  
246.18(a)(1) must be exhausted for vendors concerning denial of 
authorization, termination of agreement, disqualification, civil money 
penalty or fine. Second, the State agency process for providing the 
vendor an opportunity to justify or correct the food instrument 
pursuant to Sec.  246.12(k)(3) must be exhausted for vendors concerning 
delaying payment for a food instrument or a claim. Third, 
administrative appeal to the extent required by Sec.  3016.36 must be 
exhausted for vendors concerning procurement decisions of State 
agencies.

Civil Rights Impact Analysis

    FNS has reviewed this proposed rule in accordance with the 
Department Regulation 4300-4, ``Civil Rights Impact Analysis,'' to 
identify and address any major civil rights impacts the rule might have 
on minorities, women, and persons with disabilities. After a careful 
review of the rule's intent and provisions, FNS has determined that 
there is no way to soften the effect on any of the protected classes 
regarding those provisions of the rule concerning notice of violations 
and restrictions on incentive items. However, the rule explicitly 
forbids discrimination against a protected class recognized by the WIC 
Program (race, color, national origin, age, sex, or disability) 
regarding the inclusion of businesses on the list which State agencies 
must provide to vendors of infant formula manufacturers registered with 
the FDA, and State-licensed infant formula wholesalers, distributors, 
or retailers. All data available to FNS indicate that protected classes 
have the same opportunity to participate in the WIC Program as non-
protected classes. FNS specifically prohibits the State and local 
government agencies that administer the WIC Program from engaging in 
actions that discriminate based on race, color, national origin, age, 
sex, or disability in accordance with Sec.  246.8 of the WIC 
Regulations. Where State agencies have options and they choose to 
implement a certain provision, they must implement it in such a way 
that it complies with the regulations at Sec.  246.8.

Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (44 U.S.C. Chapter 35; see 5 
CFR part 1320) requires that OMB approve all collections of information 
by a Federal agency from the public before they can be implemented. 
Respondents are not required to respond to any collection of 
information unless it displays a current valid OMB control number. This 
proposed rule contains information collections that are subject to 
review and approval by OMB; therefore, FNS has submitted an information 
collection under OMB0584-0043, which contains the changes in 
burden from adoption of the proposals in the rule, for OMB's review and 
approval.
    Comments on the information collection in this proposed rule must 
be received by October 2, 2006.
    Send comments to the Office of Information and Regulatory Affairs, 
OMB, Attention: Desk Officer for FNS, Washington, DC 20503. Please also 
send a copy of your comments to Patricia N. Daniels, Director, 
Supplemental Food Programs Division, Food and Nutrition Service, U.S. 
Department of Agriculture, 3101 Park Center Drive, Room 528, 
Alexandria, Virginia 22302. For further information, or for copies of 
the information collection requirements, please contact Debra Whitford 
at the address indicated above. Comments are invited on: (1) Whether 
the proposed collection of information is necessary for the proper 
performance of the Agency's functions, including whether the 
information will have practical utility; (2) the accuracy of the 
Agency's estimate of the proposed information collection burden, 
including the validity of the methodology and assumptions used; (3) 
ways to enhance the quality, utility and clarity of the information to 
be collected; and (4) ways to minimize the burden of the collection of 
information on those who are to respond, including use of appropriate 
automated, electronic, mechanical, or other technological collection 
techniques or other forms of information technology.
    All responses to this request for comments will be summarized and 
included in the request for OMB approval. All comments will also become 
a matter of public record.
    Title: Special Supplemental Nutrition Program for Women, Infants 
and Children (WIC): Discretionary WIC Vendor Provisions in the Child 
Nutrition and WIC Reauthorization Act of 2004, Public Law 108-265.
    OMB Number: 0584-0043.
    Expiration Date: March 31, 2007.
    Type of Request: Revision of a currently approved collection.
    Abstract: Pursuant to the Child Nutrition and WIC Reauthorization 
Act of 2004, Public Law 108-265, this rule proposes three new 
requirements and one administrative change for WIC State agencies 
regarding vendors authorized to provide supplemental food to WIC 
participants in exchange for WIC food instruments. First, State 
agencies would be required to notify a vendor of an initial violation 
in writing for violations requiring a pattern of occurrences in order 
to impose a sanction before documenting a subsequent violation, unless 
such notification would compromise an investigation. Second, State 
agencies would be required to provide the vendors with a list of State-
licensed infant formula wholesalers, distributors, and retailers, and 
FDA-registered infant formula manufacturers, and would require the 
vendors to purchase infant formula only from the sources on the list. 
Third, State agencies would be required to implement restrictions on 
incentive items provided to WIC participants by above-50-percent 
vendors, with limited exceptions subject to State agency discretion.
    The administrative change concerns Sec.  246.12(l)(1)(x)(C) and 
(l)(2)(i), which this rule proposes to amend by adding a process for 
periodically adjusting the WIC vendor CMP levels for inflation in a 
manner consistent with the process for adjusting other WIC CMP levels 
for inflation set forth in the final rule ``Department of Agriculture 
Civil Monetary Penalties Adjustment,'' 70 FR 29573, May 24, 2005. Under 
that final rule, the CMP levels for some but not all vendor violations 
have previously been adjusted for inflation. Initially, this would have 
the effect of raising the maximum CMP level from $10,000 to $11,000 per 
violation, and raising the CMP level from $40,000 to $44,000 as the 
maximum amount for all violations occurring during a single 
investigation, for those WIC CMP levels which have not previously been 
adjusted for inflation. This would only require WIC

[[Page 43375]]

State agencies to change the maximum CMP amount per violation and the 
maximum CMP amount per total investigation in the CMP calculation 
process set forth in each State agency's schedule of sanctions, which 
is part of the vendor agreement. The CMP calculation process may be set 
forth only once in the sanctions schedule since the same CMP 
calculation process may be applied to all violations and 
investigations. Thus no measurable reporting or recordkeeping burden 
would result.
    The respondents are the 89 WIC State agencies which administer the 
WIC Program under Federal-State agreements executed annually with FNS. 
The average burden per response and the annual burden hours are 
explained below and summarized in the chart which follows.
    Respondents for this Proposed Rule: State agencies.
    Estimated Number of Respondents for this Proposed Rule: 405.
    Estimated Number of Responses per Respondent for this Proposed 
Rule: 3,303.
    Estimated Total Annual Burden on Respondents for this Proposed 
Rule: 1,095 Hours.

                               Estimated Annual Reporting and Recordkeeping Burden
----------------------------------------------------------------------------------------------------------------
                                                   Annual number      Annual      Average burden   Annual burden
             Section of regulations               of respondents     frequency     per response        hours
----------------------------------------------------------------------------------------------------------------
Reporting Burden:
    Sec.   246.4(a)(14)(iii)....................              90               1            1.0               90
    Sec.   246.4(a)(14)(xvii)...................              90               1            1.0               90
ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½
        Total Reporting Burden in the Proposed               180               2  ..............             180
         Rule...................................
Recordkeeping Burden:
    Sec.   246.12(g)(10)........................              90               1            1.0               90
    Sec.   246.12(h)(8).........................              45           1,000            0.25             250
    Sec.   246.12 (l)(3)........................              90           2,300            0.25             575
ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½
        Total Recordkeeping Burden in the                    225           3,301  ..............             915
         Proposed Rule..........................
ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½
        Total Reporting and Recordkeeping Burden             405           3,303  ..............           1,095
         in the Proposed Rule...................
ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½
        Total Current WIC Reporting and               16,325,125      28,280,366  ..............       3,051,075
         Recordkeeping Burden Hours Approved by
         OMB for Information Collection 0584-0043............................
ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½
        Grand Total Proposed WIC Reporting and        16,325,530      28,283,669  ..............       3,052,170
         Recordkeeping Burden Hours Resulting
         from the Proposed Rule.................
----------------------------------------------------------------------------------------------------------------

1. Reporting
Section 246.4(a)(14)(iii)
    Section 246.4(a)(14)(iii), as amended by this proposed rule, would 
require WIC State agencies to set forth policies and procedures in 
their WIC State Plans for notifying a retail vendor in writing when an 
investigation reveals an initial violation for which a pattern of 
violations must be imposed in order to impose a sanction, unless the 
State agency determines that the notice would compromise an 
investigation. FNS estimates that this would require one burden hour 
per State agency per year.
Section 246.4(a)(14)(xvii)
    Section 246.4(a)(14)(xvii), as proposed to be added by this rule, 
would require WIC State agencies to set forth policies and procedures 
in their WIC State Plans for annually compiling and distributing to 
authorized WIC retail vendors a list of infant formula wholesalers, 
distributors, and retailers licensed under State law, and infant 
formula manufacturers registered with the Food and Drug Administration 
(FDA). FNS estimates that this would require one burden hour per State 
agency per year.
2. Recordkeeping
Section 246.12(g)(10)
    Section 246.12(g)(10) would require WIC State agencies to provide 
to authorized WIC retail vendors a list, on an annual basis, of infant 
formula wholesalers, distributors, and retailers licensed in the State 
in accordance with State law (including regulations), and infant 
formula manufacturers registered with FDA that provide infant formula. 
FNS has provided the State agencies with the list of the infant formula 
manufacturers registered with FDA. A State agency would contact the 
licensing agency in its State to obtain a list of the other suppliers. 
A State agency could satisfy this requirement by linking its Web site 
to the list of licensed suppliers on the Web site of the State's 
licensing agency. FNS estimates that this would require one burden hour 
per State agency per year.
Section 246.12(h)(8)
    Section 246.12(h)(8) would require WIC State agencies to establish 
a process for approval or disapproval of requests from above-50-percent 
vendors for permission to provide incentive items to WIC participants 
or other customers. As previously mentioned, FNS currently estimates 
that about 2,000 of the approximately 50,000 authorized vendors will be 
subject to incentive items restrictions. A State agency could decide 
not to allow any incentive items at all, in which case an approval 
process would not be necessary. FNS has received inquiries from several 
WIC State agencies indicating an interest in not allowing such 
incentive items at all.
    Accordingly, we assume that half of the WIC State agencies will not 
allow any incentive items at all, and that half of the approximate 
2,000 above-50-percent vendors nationwide reside in those States. We 
also assume that little time will be needed to approve/disapprove a 
request and record it, since this process only involves comparison of 
the vendor's price documentation with the less-than-$2 limit 
established for such items in the rule. Indeed, the State agency may 
provide above-50-percent vendors with a list of allowable incentive 
items, valued above the less-than-$2 nominal value limit per item; the 
vendor would indicate on the list which of these incentive items it 
wishes to use and return the list to the State agency. Thus FNS 
estimates that State

[[Page 43376]]

agencies will approve/disapprove incentive items for 1,000 above-50-
percent vendors, and that each approval/disapproval will require 15 
minutes, resulting in 250 total annual burden hours.
Section 246.12(l)(3)
    Section 246.12(l)(3) would require the State agency to notify a 
vendor in writing when an investigation reveals an initial violation 
for which a pattern of violations must be established in order to 
impose a sanction before another such violation is documented, unless 
the State agency determines, in its discretion on a case-by-case basis, 
that notifying the vendor would compromise an investigation. Prior to 
imposing a sanction for a pattern of violations, the State agency would 
either provide such notice to the vendor, or document in the vendor 
file the reason(s) for determining that such notice would compromise an 
investigation. Approximately 2,300 vendors investigated annually commit 
violations involving a pattern. We assume that little time will be 
needed to issue the notice, which presumably will entail a standardized 
format with space for the vendor's name and address and for listing the 
violations. We also assume that little time will be needed to document 
in the vendor file the reason(s) such notice would compromise an 
investigation and thus would not be sent. Thus FNS estimates that State 
agencies will either issue such notices or make such entries in vendor 
files 2,300 times, and that issuing each notice or making such entries 
will require 15 minutes, resulting in 575 total annual burden hours.

E-Government Act Compliance

    The Food and Nutrition Service is committed to complying with the 
E-Government Act, to promote the use of the Internet and other 
information technologies to provide increased opportunities for citizen 
access to Government information and services, and for other purposes.

II. Background

    As previously noted, this proposed rule would amend the WIC Program 
regulations by adding three requirements mandated by the Child 
Nutrition and WIC Reauthorization Act of 2004, Public Law 108-265, 
concerning retail vendors authorized by WIC State agencies to provide 
supplemental food to WIC participants in exchange for WIC food 
instruments. This rulemaking would reflect the statutory requirement 
that WIC State agencies notify WIC-authorized vendors of an initial 
violation in writing for violations requiring a pattern of occurrences 
in order to impose a sanction before documenting a subsequent 
violation, unless notification would compromise an investigation. In 
addition, the State agency would be required to maintain a list of 
State-licensed wholesalers, distributors, and retailers, and FDA-
registered manufacturers, and WIC-authorized vendors would be required 
to purchase infant formula only from sources on the list. Further, 
State agencies would be required to prohibit the authorization of or 
payments to WIC-authorized vendors that derive more than 50 percent of 
their annual food sales revenue from WIC food instruments (``above-50-
percent vendors'') and which provide incentive items or other free 
merchandise, except food or merchandise of nominal value, to program 
participants or other customers unless the vendor provides the State 
agency with proof that the vendor obtained the incentive items or 
merchandise at no cost.
    October 1, 2004 was the effective date of Public Law 108-265 for 
all of these requirements. In December 2004 and April 2005, FNS issued 
policy and guidance to WIC State agencies on implementation of these 
requirements. This proposed rule reflects the policy and guidance 
provided to State agencies.
    Additionally, this proposed rule would add a process for 
periodically adjusting the WIC vendor CMP levels for inflation in a 
manner consistent with the process for adjusting other CMP levels for 
inflation set forth in the final rule ``Department of Agriculture Civil 
Monetary Penalties Adjustment,'' 70 FR 29573, May 24, 2005. Under that 
final rule, the CMP levels for some but not all vendor violations have 
previously been adjusted for inflation. Initially, this proposed 
provision would have the effect of raising the maximum CMP level from 
$10,000 to $11,000 per violation, and raising the CMP level from 
$40,000 to $44,000 as the maximum amount for all violations occurring 
during a single investigation.

1. Notice of Violation

a. Introduction
    Section 203(c)(5) of Public Law 108-265 amended section 17(f) of 
the Child Nutrition Act of 1966, 42 U.S.C. 1786 (CNA), by adding a new 
paragraph (26) to require the State agency to notify the vendor in 
writing of the initial violation, for violations requiring a pattern of 
occurrences in order to impose a sanction, prior to documenting another 
violation, unless the State agency determines that notifying the vendor 
would compromise an investigation.
    This requirement was effective for violations committed under 
investigations beginning on or after October 1, 2004, superseding Sec.  
246.12(l)(3) of the current WIC regulations, which provides that the 
State agency is not required to warn a vendor that violations had been 
detected before imposing a sanction. (All references to regulatory 
sections in this preamble are to Title 7 of the CFR unless otherwise 
indicated.) In December 2004, State agencies were advised that their 
vendor agreements and sanction schedules must be reviewed and amended 
as appropriate to reflect this new requirement.
b. Provisions in the Proposed Rule (Sec. Sec.  246.4(a)(14)(iii), 
246.12(h)(3)(xviii), 246.12(l)(3))
    The proposed revision of Sec.  246.12(l)(3) would require the State 
agency, prior to imposing a sanction for a pattern of violations, to 
either notify the vendor in writing of the initial violation, or 
document in the vendor file the reason(s) for determining that such 
notification would compromise an investigation.
    Also, as proposed in Sec.  246.12(l)(3)(ii), the State agency may 
use the same method of notification which the State agency uses to 
provide a vendor with adequate advance notice of the time and place of 
an administrative review per Sec.  246.18(b)(3) of the WIC regulations. 
We recommend that State agencies use a method of notification which 
provides evidence of delivery of the notification. Finally, as proposed 
in Sec.  246.12(l)(3)(iii), the State agency may conduct another 
compliance buy visit after the notification of violation is received by 
the vendor, or presumed to be received by the vendor consistent with 
the State agency's procedures for providing such notification. During a 
compliance buy visit, an investigative agent of the State or local 
agency transacts WIC food instruments with a vendor while posing as a 
participant.
    Further, the proposed amendment of Sec.  246.12(h)(3)(xviii) would 
remove the reference to the current requirement that the State agency 
does not have to provide a vendor with a prior warning about 
violations, and would add the notification requirement as set forth in 
Public Law 108-265.
    Section 246.4(a)(14)(iii) currently provides that the State Plan 
must include a copy of the vendor agreement, including a copy of the 
sanction schedule, which may be incorporated as an attachment, or, if 
the sanction schedule is in the State agency's

[[Page 43377]]

regulations, through citation to those regulations. This proposed rule 
amends Sec.  246.4(a)(14)(iii) by including the notice of violations 
process so that, like the schedule of sanctions, the notice of 
violations process may be incorporated as an attachment or, if it is in 
the State agency's regulations, through citation to those regulations.
c. Types of Violations Subject to the Notification Requirement
    The State agency must notify a vendor in writing when an 
investigation reveals an initial violation for which a pattern of 
violations must be established in order to impose a sanction, before 
another such violation is documented, unless the State agency 
determines that notifying the vendor would compromise an investigation. 
This includes violations for a pattern of overcharging; receiving, 
transacting and/or redeeming food instruments outside of authorized 
channels, including the use of an unauthorized vendor and/or an 
unauthorized person; charging for supplemental food not received by the 
participant; providing credit or non-food items, other than alcohol, 
alcoholic beverages, tobacco products, cash, firearms, ammunition, 
explosives, or controlled substances as defined in 21 U.S.C. 802, in 
exchange for food instruments; or providing unauthorized food items in 
exchange for food instruments, including charging for supplemental 
foods provided in excess of those listed on the food instrument. This 
notice requirement also applies to any violations for which a pattern 
of violations must be established in order to impose a State agency 
vendor sanction in accordance with Sec.  246.12(l)(2) of the WIC 
regulations.
    Notification is not required for violations involving a vendor's 
redemptions exceeding its inventories, since there are no initial 
violations in such instances; such violations are determined during one 
audit of inventory, not separate compliance buy visits. Additionally, 
such notification is not required for WIC vendor disqualifications or 
civil money penalties based on Food Stamp Program sanctions. Neither is 
notification required for violations that only require one incidence 
before a sanction is imposed.
d. Impact of the Notice Requirement on Documenting a Pattern of 
Violations
    Several State agencies have requested clarification as to whether a 
State agency may sanction a vendor based on violations detected in the 
initial compliance buy visit if those violations fulfill the State 
agency's pattern requirement, even though a notice of violations has 
not been provided to the vendor. We have also been asked several 
related questions.
    For investigations beginning on or after October 1, 2004, a pattern 
may not be established based solely on violations occurring during one 
compliance buy visit, even if violations on several food instruments 
occur during that one compliance buy visit. This is true regardless of 
whether the State agency determines that notifying the vendor would 
compromise the investigation. For example, if a State agency requires 
three violations as the pattern for overcharging, and the vendor 
initially commits this violation by overcharging on three food 
instruments during one compliance buy visit, the State agency may not 
sanction the vendor without two additional overcharging violations 
detected during one or more subsequent compliance buy visits. The 
intent of the notification provision is that a vendor be notified in 
writing that a violation had occurred prior to documenting another 
violation, unless such notification would compromise an investigation. 
As such, to allow a pattern to be identified during one compliance buy 
visit would be contrary to the intent of the law. Instead, the State 
agency must treat all of the violations of one type occurring during 
the first compliance buy visit as one occurrence in the pattern 
determination.
    Also, if multiple violations occur during a compliance buy visit, 
the State agency must cite in the notification all of the types of 
violations which require a pattern of violative incidences in order to 
impose a sanction (with the exception of redemptions exceeding 
inventory, as previously discussed). For example, if a vendor transacts 
food instruments for unauthorized food items and also overcharges 
during the same compliance visit, then the vendor has committed two 
separate types of violations; both types must be cited in a 
notification of violation, unless such notification would compromise an 
investigation on either type of violation.
    Likewise, if a vendor commits one type of violation in one 
compliance buy visit, followed by a notification, and then commits 
another type of violation in a subsequent compliance visit, then 
another notification must be provided to the vendor concerning this 
second type of violation. Further, we also encourage State agencies to 
attach a copy of the sanctions schedule to any notification of 
violations, to provide greater assurance that a vendor is on notice of 
all sanctionable violations prior to a subsequent compliance buy visit.
e. Determination of Whether the Notice Would Compromise an 
Investigation
    As noted above, the State agency is not required to notify the 
vendor after the initial violation if the State agency determines that 
such notice would compromise an investigation. The notice could 
compromise an investigation if the investigation is covert, such as a 
compliance buy investigation, which involves an investigative agent 
posing as a WIC participant and transacting WIC food instruments. In 
such circumstances, the notice would reveal the existence of an 
investigation which had been previously unknown to the vendor.
    The notice could also compromise covert investigations of the 
vendor being conducted by the Food Stamp Program, the USDA Office of 
Inspector General, the State Police, or other authorities, as well as 
the WIC investigation being conducted by the State agency; the term 
``investigation'' does not exclusively refer to WIC investigations. 
Ideally, these other authorities should coordinate with the WIC State 
agency to prevent several investigations of the same vendor from being 
conducted at the same time. However, sometimes the WIC State agency may 
not learn about the existence of another investigation until after the 
WIC investigation has already begun.
    A State agency may determine that any notification based on a 
different violation occurring during a subsequent compliance buy visit 
would compromise the investigation, even though the State agency had 
not determined that the notification following the previous compliance 
buy visit would compromise the investigation. The State agency may 
choose not to notify the vendor regarding a different violation 
identified in a subsequent compliance buy visit.
    The statute provides the State agency with the discretion to 
determine whether notifying the vendor will compromise an investigation 
and to use its judgment to determine whether a notice should be sent to 
the vendor. Such determinations must be made on a case-by-case basis. 
In making this determination, there are a number of factors which the 
State agency may wish to review--for example, the severity of the 
initial violation, the compliance history of the vendor, or whether the 
vendor has been determined to be high risk consistent with Sec.  
246.12(j)(3) of the WIC regulations. The State agency has the 
discretion to determine which factors to consider and how much weight 
should be assigned to each factor. If the State agency decides not to

[[Page 43378]]

send the notice, the basis for this decision must be documented in the 
vendor file since the matter may be raised on appeal of any adverse 
actions taken as a result of the investigative activity.

2. List of Infant Formula Manufacturers, Wholesalers, Distributors, and 
Retailers

a. Introduction (Sec.  246.12(g)(10))
    Section 203(e)(8) of the Public Law 108-265 amends section 
17(h)(8)(A) of the CNA by requiring that each State agency maintain a 
list of infant formula wholesalers, distributors, and retailers 
licensed in the State in accordance with State law (including 
regulations), and infant formula manufacturers registered with FDA that 
provide infant formula. This statute requires authorized vendors to 
only purchase infant formula from sources on the above-described list. 
In December 2004, State agencies were notified of the requirement and 
when to amend their State Plans, vendor agreements, vendor manuals, and 
vendor training plans and materials as appropriate to reflect this new 
requirement.
    This provision is intended to prevent stolen infant formula from 
being purchased with WIC food instruments. Such formula may constitute 
a health hazard for a variety of reasons, including direct tampering 
with formula before it is sold to unsuspecting retailers, falsification 
of labeling to change expiration dates, counterfeiting, or improper 
storage.
    This proposed rule would add a new Sec.  246.12(g)(10) which 
requires the State agency to provide the above-noted list of infant 
formula sources to the vendors on at least an annual basis, and to 
provide that the list must include the addresses as well as the names 
of the businesses; this is intended to make it easier for vendors to 
locate a nearby business and also to avoid inadvertently contacting an 
unlicensed business with a similar name.
    The proposed Sec.  246.12(g)(10)(i) would require a State agency to 
notify vendors that they must purchase infant formula only from the 
sources set forth on the State agency's list, although the State agency 
may, at its option, permit vendors to obtain infant formula from 
sources on another State agency's list.
    The proposed Sec.  246.12(g)(10)(i) also clarifies that the infant 
formula list requirement would only pertain to ``infant formula,'' 
contract and non-contract brand, as defined in Sec.  246.2, and infant 
formula covered by a waiver granted under Sec.  246.16a(e), but not to 
``exempt infant formula'' or ``WIC-eligible medical foods'' as defined 
in Sec.  246.2. These terms are used in the same manner in the CNA and 
Public Law 108-265.
b. State Licenses for Wholesalers, Distributors, and Retailers (Sec.  
246.12(g)(10)(ii) and (g)(10)(iii))
    The proposed Sec.  246.12(g)(10) would require the State agency to 
compile its list in accordance with its State licensing laws and 
regulations. As previously noted, Public Law 108-265 requires State 
agencies to maintain a list of infant formula wholesalers, 
distributors, and retailers licensed in the State in accordance with 
State law (including regulations), and infant formula manufacturers 
registered with FDA that provide infant formula. Congress recognized 
that licensing requirements and types may vary significantly among 
States, noting, for example, that some States may have health licensing 
requirements while other States have business licensing requirements. 
(House Committee on Education and the Workforce, Report No. 108-445, 3/
23/04, p. 58) Consistent with this recognition, the statute does not 
require that the license must specifically cover infant formula; many 
States/Indian Tribal Organizations (ITOs) may not have such licensing.
    For example, a State agency has asked whether tax registration 
would be considered a State/ITO ``license'' within the meaning of the 
statutory provision. If a State/ITO has no other kind of health or 
business licensing, then tax registration or some other form of 
official State recognition of a business would suffice.
    Moreover, the statute does not require that a State agency use all 
of the licenses which might apply to one of the State-licensed 
categories (wholesaler, distributor, retailer). For example, a State 
might have health licensing and business licensing for retailers. Thus, 
the proposed Sec.  246.12(g)(10)(ii) would permit a State agency to 
choose which license to use for compiling the list; the State agency 
would not be required to use both kinds of licenses.
    Further, the statute does not address the question as to whether a 
State agency could restrict the sources of infant formula available to 
authorized vendors. Absent guidance in statute, this proposed rule has 
been drafted to permit a State agency to exclude an entity from the 
list only for two specific reasons. First, the proposed Sec.  
246.12(g)(10)(iii)(A) would permit the State agency to exclude a State-
licensed entity when specifically required by State law or regulations; 
State agencies would need to consult with their legal counsel to 
determine the correct process for implementing any restrictions on its 
list of infant formula sources. Second, the proposed Sec.  
246.12(g)(10)(iii)(B) would permit a State agency to exclude an entity 
from the list if the entity does not sell infant formula.
    Also, the statute did not provide a basis for a licensed entity to 
exclude itself from the list. Accordingly, there is no basis in the 
proposed rule for a wholesaler, distributor, or retailer to exclude 
itself from the list, except as permitted by State law or regulations.
    The State agency must be mindful of its responsibility to abide by 
all applicable Civil Rights laws and regulations. The State agency may 
not exclude any business from the list in a discriminatory manner 
against any protected class, or in a manner which would have a 
disparate impact on a protected class. Likewise, State agencies are 
encouraged to consider the impact on small businesses of their 
decisions on how to construct their lists.
c. Methods for Providing the List to Vendors (Sec.  246.12(g)(10))
    Under this proposed provision, the State agency may provide a hard 
copy list to each vendor. However, the list may also be provided by 
``other effective means.'' This refers to such means as providing 
vendors with a telephone number or e-mail address to inquire about the 
license status of a source. Alternatively, the list could be made 
available to the general public on-line, including an on-line list 
maintained by a State licensing agency. Such on-line lists may provide 
a search function for the license status of a business, instead of an 
actual list; this is acceptable. These are only examples; other methods 
may also be acceptable, depending on whether these other methods are 
effective.
    Of course, some vendors may not have access to the Internet and 
will need a hard copy provided by the State agency, or some other means 
to determine if a business is licensed, such as contacting the State 
agency by telephone, in writing, or by electronic facsimile 
transmission.
d. Selection Criterion (Sec.  246.12(g)(3)(i), 246.4(a)(14)(xvii))
    The proposed rule would require the State agency to adopt a new 
vendor selection criterion requiring vendors to obtain infant formula 
from the listed sources as a condition of authorization. The current 
Sec.  246.12(g)(3)(i) requires minimum variety and quantity of 
supplemental foods as a vendor selection criterion. This proposed rule 
would add a sentence to this existing selection criterion which would 
make

[[Page 43379]]

infant formula from a supplier on the State agency's list part of the 
requirement for a minimum variety and quantity of supplemental foods. 
This proposed rule would add Sec.  246.4(a)(14)(xvii) to require that 
the State agency describe its policies and procedures in the State Plan 
regarding compiling and distributing the infant formula list, and 
requiring vendors to purchase infant formula only from that list. Also, 
State agencies have the discretion under Sec.  246.12(l)(2) to 
establish sanctions for vendors obtaining infant formula from 
unlicensed sources.
    For the selection criterion to be effective, as well as any 
sanctions which a State agency may choose to establish, vendors must be 
required to maintain invoices or receipts showing the source of their 
infant formula purchases to enable the State agency to monitor vendor 
compliance. State agencies currently have the authority to require 
vendors to maintain such documentation under Sec.  246.12(h)(3)(xv). 
State agencies should ensure that their vendor agreements require 
maintenance of this documentation by the vendors.
e. Training (Sec.  246.12(i)(2))
    Section 246.12(i)(2) of the current WIC regulations, would be 
revised by the proposed rule to ensure that vendors are aware of their 
responsibilities regarding use of the list of infant formula sources 
provided to them by State agencies. Section 246.12(i)(2) of the current 
WIC regulations sets forth the content of the training which State 
agencies are required to provide to their vendors. This proposed rule 
would revise Sec.  246.12(i)(2) to add the State agency infant formula 
list requirement to the subjects which State agencies must include in 
their training for vendors.

3. Incentive Items

a. Introduction (Sec.  246.12(g)(3)(iv))
    Section 203(e)(13) of Public Law 108-265 amends section 17(h)(14) 
of the CNA by prohibiting a State agency from authorizing or making 
payments to above-50-percent vendors which provide incentive items or 
other free merchandise to program participants, with only two 
exceptions. One exception includes food or merchandise of nominal value 
as determined by the Secretary; USDA advised the State agencies in 
December 2004 that the nominal value is less than $2. The other 
exception includes incentive items or other merchandise for which the 
vendor provides proof to the State agency showing that the vendor had 
obtained the incentive items or other merchandise at no cost. Above-50-
percent vendors are for-profit vendors that derive more than 50 percent 
of their annual food revenue from the transaction of WIC food 
instruments or for-profit vendor applicants expected to derive more 
than 50 percent of annual food revenue from the transaction of WIC food 
instruments. The above-50-percent vendor category includes vendors 
which have often been referred to as ``WIC-only stores.'' In December 
2004, State agencies were advised to amend their vendor selection 
criteria and sanction schedules to reflect this new requirement.
    Data indicate that WIC food expenditures increasingly include 
payments to WIC-only stores whose prices are not governed by the market 
forces that affect most retail grocers. As a result, the prices charged 
by these vendors tend to be higher than the prices charged by other 
WIC-authorized retail vendors. WIC-only stores have provided a wide 
array of incentive items to WIC participants--including diapers, 
strollers, bicycles, small kitchen appliances, other household 
products, food, sales or ``specials,'' services such as transportation, 
and cash incentives to WIC shoppers for bringing new customers to these 
stores. Because WIC-only vendors serve WIC shoppers exclusively or 
primarily, this provision is intended to ensure that the WIC Program 
does not pay the cost of incentive items in the form of high food 
prices.
    Under Sec.  246.12(h)(3)(ii) of the current Federal WIC 
Regulations, a WIC food instrument may only be used to purchase the 
supplemental foods listed on that food instrument, and directly adding 
the cost of an incentive item to a WIC food instrument is a vendor 
violation subject to sanctions under Sec.  246.12(l)(1)(iii)(F). 
However, these regulatory provisions do not address the increased 
prices charged by above-50-percent vendors for WIC supplemental foods 
to reflect the costs of the incentive items.
    As discussed more fully below, the proposed rule would add a new 
vendor selection criterion to the WIC regulations which would make 
compliance with the State agency's incentive items policies a condition 
of vendor authorization for above-50-percent vendors. This proposed 
provision, Sec.  246.12(g)(3)(iv), also describes allowable and 
prohibited incentive items. Further, the proposed regulations include a 
requirement for a mandatory sanction for incentive items violations 
committed by above-50-percent vendors. The proposed regulations also 
require training for vendors on the policies and procedures concerning 
incentive items. Finally, this rule proposes to require the State 
agency to include in its vendor agreement with the above-50-percent 
vendor, or in another document provided to the above-50-percent vendor 
and cross-referenced in the vendor agreement, the policies and 
procedures regarding the provision of incentive items to customers.
    Also, Sec.  246.12(h)(3)(iii) of the current WIC regulations 
requires the vendor to provide program participants the same courtesies 
offered to other customers. Thus, an above-50-percent vendor must not 
treat non-WIC customers more favorably than WIC customers regarding 
incentive items. In addition, such vendors would not have a reliable 
means to distinguish between WIC customers and non-WIC customers when a 
WIC food instrument is not transacted. Consequently, the only way to 
ensure that WIC participants are not provided with incentive items 
which exceed nominal value would be to apply the same restrictions on 
incentive items provided to all customers.
b. Allowable and Prohibited Incentive Items (Sec.  246.12(g)(3)(iv))
i. Allowable Incentive Items
    Although Public Law 108-265 prohibits the authorization of above-
50-percent vendors that provide most incentive items, it does not 
require State agencies to permit the use of any incentive items. State 
agencies currently have broad discretion to establish vendor selection 
criteria that meet their needs for effective program administration. 
Moreover, since State agencies have authority to exclude all above-50-
percent vendors, they may establish more restrictive limits on 
incentive items for such vendors as a condition of authorization. Thus 
allowable incentive items could be disallowed by a State agency under 
the proposed rule.
    As proposed by this rule, the first allowable incentive item would 
include food or merchandise obtained at no cost to the above-50-percent 
vendor, and provided to customers without charge or sold to customers 
at or above cost, subject to documentation. As proposed by this rule, 
the second allowable incentive item would include food or merchandise 
of nominal value; that is, having a per item cost of less than $2, 
including food or merchandise of nominal value involved with a raffle 
or similar promotion.
    As proposed by this rule, the third allowable incentive item would 
include

[[Page 43380]]

food sales and ``specials'' if there is no cost or only a nominal cost 
to the above-50-percent vendor (less than $2) regarding the food items 
involved and they do not result in a charge to a WIC food instrument 
for foods in excess of the foods listed on the food instrument. Sales 
and specials include reduced prices for a period of time; buy one, get 
one free; buy one, get one at a reduced price; free amounts added to an 
item by a manufacturer; manufacturer coupons; and, store loyalty 
shopping cards.
    As an example of no cost or nominal cost to the above-50-percent 
vendor, regarding buy one, get one free, the free food item would be 
acceptable if it had been obtained by the vendor at no cost or for less 
than $2, or if the vendor would be compensated for the second item, 
e.g., upon presentation of a manufacturer's coupon to the manufacturer. 
However, if the vendor had purchased the food item for $2 or more, then 
the free item would not be acceptable.
    Regarding buy one, get one at a reduced price promotions, the 
reduced price may not be charged to the WIC food instrument if the 
second product is not covered by the food instrument; the WIC customer 
must pay this amount with his/her own money. Otherwise, this incentive 
item would be purchased with Federal funds, which is prohibited by 
statute. Also, use of the food instrument to purchase a second product 
not covered by the food instrument would constitute a violation of 
Sec.  246.12(l)(1)(iv) of the WIC regulations, which mandates a one-
year disqualification of the vendor for providing foods in excess of 
those listed on the food instrument.
    As proposed by this rule, the fourth allowable incentive item would 
include for-profit services which would not otherwise be prohibited, 
and which the participant would purchase at a fair market value. As 
discussed below, services which constitute a conflict of interest or 
the appearance of such conflict, such as assistance with applying for 
benefits, would be prohibited. However, other services, such as 
transportation, would be allowable if the participant purchases such 
services at a fair market value for comparable services.
    As previously noted, the only exceptions to the statute's 
prohibition on incentive items of above-50-percent vendors are food or 
merchandise of nominal value and incentive items or other merchandise 
which the above-50-percent vendor had obtained at no cost. This implies 
that all services are prohibited since services are not food or 
merchandise. However, the legislative history of the statute does not 
indicate an intention to prohibit for-profit business enterprises or 
minimal customary courtesies of the retail food trade.
    For example, as proposed by this rule, an above-50-percent vendor 
would be allowed to provide customers with transportation by automobile 
if the fare charged to customers for this service would be equal to the 
taxi cab fare for the same distance. The fare charged by the above-50-
percent vendor could be based on a bus or van fare for the same 
distance if the above-50-percent vendor provides participants with 
transportation by bus or van, and the comparable bus or van fare is not 
publicly subsidized. The transportation fare charged by the above-50-
percent vendor could not be based on a fare which is subsidized with 
tax funds, as often occurs with bus fares, since such fares do not 
compensate for all of the related costs and provide all of the profit. 
A service not otherwise prohibited would be allowable if it is provided 
only for profit. This would ensure that none of the costs of the 
transportation would be reflected in the prices charged for WIC 
supplemental food.
    The legislative history of the statute also does not indicate an 
intention to prohibit the minimal customary courtesies of the retail 
food trade, such as helping the customer to obtain an item from a shelf 
or from behind the counter, bagging purchased items for the customer, 
and assisting the customer with loading the purchased items into his/
her automobile. Such services are an integral part of customer service 
in a retail food store. As proposed by this rule, the fifth allowable 
incentive item includes the minimal customary courtesies of the retail 
food trade.
ii. Prohibited Incentive Items
    First, as proposed by this rule, services which would constitute a 
conflict of interest, or which would have the appearance of such 
conflict, would be prohibited. For example, assistance with applying 
for WIC benefits would be prohibited because the above-50-percent 
vendor would benefit financially if the applicant is certified.
    Second, as previously discussed, the State agency would have the 
discretion to prohibit incentive items which this rule proposes to 
allow.
    Third, lottery and raffle tickets provided to WIC shoppers at no 
charge or below face value would be prohibited incentive items. The 
perceived value of a lottery or raffle ticket is far greater than its 
face value, since the perceived value is based on potential winnings. 
The legislative history of Public Law 108-265 supports the prohibition 
of lottery tickets as incentives, 150 Cong. Rec. S7244-01., June 23, 
2004.
    Fourth, cash gifts in any amount for any reason would be prohibited 
incentive items. Cash is neither food nor merchandise, and thus would 
not fall under the exceptions.
    Fifth, anything made available in a public area as a complimentary 
gift which a customer may consume or take without charge would be a 
prohibited incentive item. This applies to give-away food, soft drinks, 
or other items which are placed on a counter top, shelf, or display 
rack, for customers to take as they please. As a result, there is no 
control on the amount of such items which a customer may take. Thus 
there is no assurance that a customer would be limited to less than $2 
worth of such items.
    Sixth, an allowable incentive item of nominal value would be a 
prohibited incentive item if it is provided more than once per customer 
per shopping visit, regardless of the number of participants, the 
amount of food, or the number of food instruments involved. Without 
this restriction, the less-than-$2 limit would be undermined. However, 
this restriction does not apply if the less-than-$2 limit would not be 
exceeded. For example, the less-than-$2 limit would not be exceeded if 
the incentive items had been obtained by the vendor at no cost. 
Likewise, the less than $2 limit would also not be exceeded for an 
incentive item with a nominal value of less than $2, which, if 
multiplied, would not exceed the less-than-$2 limit; for example, the 
vendor would be allowed to provide two incentive items during one 
shopping visit if the per item cost of the incentive item was 99 cents.
    Seventh, food or merchandise of greater than nominal value would be 
a prohibited incentive item, as required by the statute. As previously 
noted, the statute provided USDA with the authority to determine the 
nominal value amount, which USDA has advised State agencies to be less 
than $2.
    Eighth, food or merchandise provided to customers for more than 
$1.99 that is below cost would be prohibited incentive items, since the 
$1.99 nominal value requirement would otherwise be circumvented, and 
services provided for a fee of less than fair market value would be 
prohibited incentive items, to ensure that the costs of the 
transportation would not be reflected in the prices charged for WIC 
supplemental food, as intended by the statute.

[[Page 43381]]

    Ninth, any kind of incentive item which incurs a liability for the 
WIC Program would be prohibited. For example, if an accident occurs 
when an above-50-percent vendor provides transportation services to 
customers, resulting in personal injury or property damage, the WIC 
Program would not be liable for such personal injury or property 
damage.
    Tenth, any kind of incentive item would be prohibited if it 
violates any Federal, State, or local law or regulations. For example, 
this prohibition would be intended to prevent an above-50-percent 
vendor from providing transportation services without the permits 
required by State and local laws for such services.
    We are specifically soliciting comments on whether there are 
circumstances in which a legitimately market-competitive above-50-
percent vendor could be disadvantaged by the prohibition on providing 
incentives to non-WIC customers.
c. The Authorization Process (Sec.  246.12(g)(3)(iv))
    As previously noted, Public Law 108-265 prohibits a State agency 
from authorizing or making payments to an above-50-percent vendor which 
provides prohibited incentive items to customers. As discussed below, 
the vendor agreement would set forth the restrictions on incentive 
items; the vendor's signature on the agreement would signify the 
intention to comply with the restrictions. However, other evidence of 
intent might be revealed at the on-site preauthorization visit, such as 
advertising prohibited incentive items. Accordingly, the proposed Sec.  
246.12(g)(3)(iv) prohibits the authorization of an above-50-percent 
vendor which engages in such practices or otherwise indicates an 
intention to provide prohibited incentive items to customers.
d. Sanctions (Sec.  246.12(l)(iii)(G)) and Training (Sec.  
246.12(i)(2))
    A mandatory sanction would be appropriate if an authorized vendor 
has engaged in a pattern of incentive items violations. As previously 
indicated, this kind of violation reduces the funds available to 
provide benefits to needy women, infants and children at nutritional 
risk. Accordingly, Sec.  246.12(l)(1)(iv)(B) of this proposed rule 
would provide a one-year disqualification for a pattern of such 
violations. This sanction must be included in the State agency's 
schedule of sanctions. To ensure that the above-50-percent vendors are 
aware of their responsibilities regarding incentive items, this issue 
has been added to Sec.  246.12(i)(2) in this proposed rule, which lists 
the subjects which State agencies must include in their training for 
vendors.
e. Vendor Agreement Provisions on Incentive Items (Sec.  246.12(h)(8))
    Sections 246.4(a)(14)(iii) and 246.12(h)(8) of the proposed rule 
would require the State agency in its vendor agreement or another 
document provided to the vendor and cross-referenced in the vendor 
agreement for above-50-percent vendors to set forth which incentive 
items are allowable, if any, and the process for obtaining approval 
before the vendor provides incentive items to customers.
    Further, if any incentive items are permitted, the State agency 
would have to approve all incentive items which above-50-percent 
vendors intend to provide to customers. Therefore, such vendors would 
have to submit to State agencies a list of incentive items, the cost of 
each item, and documentation, such as an invoice or similar document, 
indicating the cost of each incentive item. The documentation for each 
item would have to show that it had been obtained for either less than 
the $2 nominal value limit or that it had been obtained at no cost.
    The WIC State agency may need to contact the source stated on the 
invoice or similar document to verify the information. The invoices 
must be closely examined to ensure that the sources of the incentive 
items are not buying services or other arrangements designed to 
circumvent the law. For example, the vendor provides $30 to a buying 
service, which purchases a stroller for $30 and then provides it to the 
vendor at no cost; the vendor then provides it to the customer at no 
cost. The State agency must ensure that the vendor does not provide 
this stroller to a customer for less than $30. Otherwise, this kind of 
arrangement would circumvent the prohibition on using Federal funds to 
provide incentive items above nominal value to WIC shoppers.
    Under this proposed rule, the State agency would be required to 
notify the vendor in writing of the approval or disapproval of the 
incentive item; this notification may be electronic, such as electronic 
mail or facsimile. This approval process may be structured in a number 
of different ways. The list and its supporting documentation may be 
submitted when the vendor signs the vendor agreement, either for an 
initial or subsequent authorization, and returns it to the State agency 
for approval and cosigning by the State agency. The State agency may 
include a list of allowable incentive items as part of the vendor 
agreement format; the vendor would indicate on the list which of these 
incentive items it wishes to use. Of course, the State agency may only 
include food or merchandise on the list, and must ensure that these 
items are not valued above the less-than-$2 nominal value limit per 
item.
    Alternatively, instead of including the incentive items approval 
process within the authorization process, the State agency may permit 
the vendor to request approval for use of an incentive item at any time 
during the period of the agreement, or only at specified times during 
the period of the agreement.
f. Incentive Item Restrictions for Non-Above-50-Percent Vendors
    The statute only addresses incentive items provided by above-50-
percent vendors. Thus, restrictions on incentive items for vendors 
other than above-50-percent vendors must be established in accordance 
with State/ITO law and/or regulations. State agencies should consult 
with their legal counsel to determine the correct process for 
implementing any restrictions on incentive items for vendors other than 
above-50-percent vendors in accordance with State/ITO law and/or 
regulations.

4. Administrative Review (Sec.  246.18(a)(1)(iii)(D) Through 
(a)(1)(iii)(F))

    This proposed rule would add three new exclusions under which a 
currently authorized vendor would not be entitled to pursue an 
administrative review of the State agency's WIC policies through the 
WIC administrative review process. First, a current vendor could not 
obtain an administrative review of the State agency's determination to 
include or exclude an infant formula manufacturer, wholesaler, 
distributor, or retailer from the list which the State agency must 
provide to vendors. Second, an above-50-percent vendor could not obtain 
administrative review of the State agency's determination to deny that 
above-50-percent vendor's request for approval of an allowable 
incentive item. Third, the State agency's determination whether to 
notify a vendor in writing when an investigation reveals an initial 
violation for which a pattern of violations must be established in 
order to impose a sanction is not subject to administrative review.
a. State Agency's Exclusion or Inclusion From the Infant Formula 
Supplier List Not Subject to Administrative Review (Sec.  
246.18(a)(1)(iii)(D))
    The State agency's determination to include or exclude an infant 
formula supplier from the list provided to

[[Page 43382]]

vendors is a responsibility of the State agency set forth in the CNA. 
Section 246.4(a)(14)(xvii) of this proposed rule would require State 
agencies to describe this determination process in its WIC State Plan. 
Thus, concerns about this determination process would be properly 
raised during the public comment phase of State Plan development. 
Moreover, a vendor would retain the right to seek review of a denial of 
authorization, termination of the vendor agreement, or imposition of a 
sanction based on the vendor's alleged non-compliance with the infant 
formula supplier list policies and procedures.
    Further, the exclusion from an administrative review for a State 
agency's determination to include or exclude an infant formula 
manufacturer, wholesaler, distributor, or retailer from the infant 
formula list only applies to WIC-authorized retail vendors. This 
exclusion would not deny any party aggrieved by such decisions, such as 
a retailer excluded from the list, from using the legal process 
administratively or in the courts to pursue an action based on laws or 
regulations concerning Civil Rights, small business, or other legal 
rights.
b. The Validity or Appropriateness of the State Agency's Prohibition of 
Incentive Items and the State Agency's Denial of an Above-50-Percent 
Vendor's Request To Provide an Incentive Item to Customers Not Subject 
to Administrative Review (Sec.  246.18(a)(1)(iii)(E))
    The Department's view is that State agencies must have the 
authority to safeguard WIC food funds. WIC is not an entitlement 
program. Rather, WIC's funding is discretionary, meaning it is provided 
as a set amount of funding and can serve only as many customers as this 
funding allows. As previously noted, the higher prices charged to the 
WIC Program by above-50-percent vendors reflect the cost of the 
incentive items which above-50-percent vendors provide to customers. 
Thus, it is necessary to restrict such incentive items in order to 
safeguard WIC food funds.
    Consistent with this authority, as previously discussed in section 
3.b. of this preamble, this proposed rule would provide State agencies 
with the discretion to prohibit all incentive items.
     Administrative review of the State agency's decision to prohibit a 
particular kind of incentive item or to deny an above-50-percent 
vendor's request to provide an incentive item to customers would be 
inconsistent with this discretion of the State agency. However, a 
vendor would retain the right to seek review of a denial of 
authorization, termination of the vendor agreement, or imposition of a 
sanction based on a vendor's alleged non-compliance with restrictions 
on incentive items.
c. State Agency's Determination To Notify a Vendor of Violations Not 
Subject to Administrative Review (Sec.  246.18(a)(1)(iii)(F))
    The statute provides the State agency with the discretion to 
determine whether to notify a vendor in writing after a violation has 
occurred, based on whether it would compromise an investigation. If the 
State agency determines that the notification would compromise an 
investigation, the State agency is not required to provide the 
notification to the vendor. Thus, administrative review of the absence 
of such notification would be inconsistent with the discretion provided 
to the State agency by the statute. Section 246.12(l)(3) of this 
proposed rule would require the State agency to determine whether 
notification would compromise an investigation on a case-by-case basis 
and to document this determination in the vendor file whenever 
notification is not provided.

5. Adjusting Vendor Civil Money Penalty (CMP) Levels for Inflation

    The Federal Civil Penalties Inflation Adjustment Act of 1990 
(FCPIAA), Public Law 101-410, 28 U.S.C 2461, requires periodic 
adjustment (at least once every four years) of civil money penalty 
(CMP) levels to reflect inflation. The only WIC vendor-related CMPs 
established in the CNA pertain to convictions in court for trafficking 
and illegal sales.
    Each Federal Executive agency is responsible for adjusting all CMPs 
within the agency's jurisdiction. Accordingly, the Department published 
a final rule to implement inflation adjustments for CMPs of all USDA 
agencies, ``Department of Agriculture Civil Monetary Penalties 
Adjustment,'' 70 FR 29573, May 24, 2005, which amended the regulations 
of individual programs, including WIC (7 CFR part 246), as well as the 
Departmental regulations on CMPs (Adjusted Civil Money Penalties, 7 CFR 
3.91).
    Prior to the Department's rule, for all of the mandatory and State 
agency sanctions, WIC regulations provided that a CMP or fine may not 
exceed $10,000 per violation or $40,000 for all of the violations 
investigated as part of a single investigation. The Department's final 
rule amended Sec.  246.12(l)(1)(x)(C) of the WIC regulations by adding 
citations to Sec.  3.91(b)(3)(v) and (b)(3)(vi) which provide the 
amount of the CMP adjusted for inflation for only those vendor 
sanctions set forth in the CNA. This had the effect of raising the 
maximum CMP level from $10,000 to $11,000 per violation for convictions 
for trafficking and illegal sales, and raising the CMP level from 
$40,000 to $44,000 as the maximum amount for such violations occurring 
during a single investigation.
    As a result, all of the other vendor-related CMPs established in 
the WIC regulations have not been adjusted for inflation and remain 
unchanged. This includes CMPs for vendor violations resulting in 
mandatory sanctions that are handled administratively by the State 
agency instead of through the courts, and CMPs for State agency 
sanctions.
    The Department believes that the amount of all CMPs should be 
uniform for all vendor violations. Accordingly, we are proposing to 
amend Sec.  246.12(l)(1)(x)(C) and (l)(2)(i), to change the amount of 
the CMPs for the remaining WIC vendor violations to be consistent with 
the CMP levels set forth in the Department's rule at Sec.  
3.91(b)(3)(v).

List of Subjects in 7 CFR Part 246

    Food assistance programs, Food donations, Grant programs--Social 
programs, Indians, Infants and children, Maternal and child health, 
Nutrition education, Public assistance programs, WIC, Women.

    For the reasons set forth in the preamble, 7 CFR part 246 is 
proposed to be amended as follows:

PART 246--SPECIAL SUPPLEMENTAL NUTRITION PROGRAM FOR WOMEN, INFANTS 
AND CHILDREN

    1. The authority citation for part 246 continues to read as 
follows:

    Authority: 42 U.S.C. 1786.
    2. In Sec.  246.4, revise the first sentence of paragraph 
(a)(14)(iii) and add a new paragraph (a)(14)(xvii) to read as follows:


Sec.  246.4  State plan.

    (a) * * *
    (14) * * *
    (iii) * * * A sample vendor agreement, including the sanction 
schedule, the process for notification of violations in accordance with 
Sec.  246.12(l)(3), and the State agency's policies and procedures on 
incentive items in accordance with Sec.  246.12(g)(3)(iv), which may be 
incorporated as attachments or, if the sanction schedule, the process 
for

[[Page 43383]]

notification of violations, or policies on incentive items are in the 
State agency's regulations, through citations to the regulations. * * *
* * * * *
    (xvii) List of infant formula wholesalers, distributors, and 
retailers. The policies and procedures for compiling and distributing 
to authorized WIC retail vendors, on an annual or more frequent basis, 
as required by Sec.  246.12(g)(10), a list of infant formula 
wholesalers, distributors, and retailers licensed in the State in 
accordance with State law (including regulations), and infant formula 
manufacturers registered with the Food and Drug Administration (FDA) 
that provide infant formula. The vendor may provide only the authorized 
infant formula which the vendor has obtained from a source included on 
the list described in Sec.  246.12(g)(10) to participants in exchange 
for food instruments specifying infant formula.
* * * * *
    3. In Sec.  246.12:
    a. Amend paragraph (g)(3)(i) by adding a sentence at the end of the 
paragraph;
    b. Add new paragraphs (g)(3)(iv) and (g)(10);
    c. Revise paragraph (h)(3)(ii);
    d. Revise the third sentence of paragraph (h)(3)(xviii);
    e. Add new paragraph (h)(8);
    f. Revise paragraphs (i)(2) and (l)(1)(iv);
    g. Amend the third sentence of paragraph (l)(1)(x)(C) by removing 
the words ``$10,000, except for those violations listed in paragraph 
(l)(1)(i) of this section, where the civil money penalty must be the 
maximum amount per violation specified in Sec.  3.91(b)(3)(v) of this 
title for trafficking violations, or Sec.  3.91(b)(3)(vi) of this title 
for selling firearms, ammunition, explosives, or controlled substances 
in exchange for food instruments.'' and adding in their place the words 
``a maximum amount specified in Sec. 3.91(b)(3)(v) of this title for 
each violation.'';
    h. Amend the fifth sentence of paragraph (l)(1)(x)(C) by removing 
the words ``$40,000, except for those violations listed in paragraph 
(l)(1)(i) of this section, where the total amount of civil money 
penalties may not exceed the maximum amount for violations occurring 
during a single investigation specified in Sec.  3.91(b)(3)(v) of this 
title for trafficking violations, or Sec.  3.91(b)(3)(vi) of this title 
for selling firearms, ammunition, explosives, or controlled substances 
in exchange for food instruments.'' and adding in their place the words 
``an amount specified in Sec.  3.91(b)(3)(v) of this title as the 
maximum penalty for violations occurring during a single 
investigation.'';
    i. Amend paragraph (l)(2)(i) by removing the words ``$10,000 for 
each violation.'' in the fourth sentence, and adding in their place the 
words ``a maximum amount specified in Sec. 3.91(b)(3)(v) of this title 
for each violation.'', and by removing the word ``$40,000.'' in the 
fifth sentence, and adding in its place the words ``an amount specified 
in Sec. 3.91(b)(3)(v) of this title as the maximum penalty for 
violations occurring during a single investigation.''; and
    j. Revise paragraph (l)(3).
    The revisions and additions read as follows:


Sec.  246.12  Food delivery systems.

* * * * *
    (g) * * *
    (3) * * *
    (i) * * * The State agency may not authorize a vendor applicant 
unless it determines that the vendor applicant obtains infant formula 
only from sources included on the State agency's list described in 
Sec.  246.12(g)(10).
* * * * *
    (iv) Provision of incentive items. The State agency may not 
authorize or continue the authorization of an above-50-percent vendor, 
or make payments to an above-50-percent vendor, which provides or 
indicates an intention to provide prohibited incentive items to 
customers. Evidence of such intent includes, but is not necessarily 
limited to, advertising the availability of prohibited incentive items.
    (A) The State agency may approve the following incentive items to 
be provided by above-50-percent vendors to customers:
    (1) Food or merchandise obtained at no cost to the vendor, subject 
to documentation;
    (2) Food or merchandise of nominal value, i.e., having a per item 
cost of less than $2, subject to documentation;
    (3) Food sales and specials which involve no cost or less than $2 
in cost to the vendor for the food items involved, subject to 
documentation, and do not result in a charge to a WIC food instrument 
for foods in excess of the foods listed on the food instrument;
    (4) For-profit services which are not otherwise prohibited and are 
purchased by participants at a fair market value based on comparable 
for-profit services; and
    (5) Minimal customary courtesies of the retail food trade, such as 
helping the customer to obtain an item from a shelf or from behind a 
counter, bagging food for the customer, and assisting the customer with 
loading the food into a vehicle.
    (B) The following incentive items are prohibited for above-50-
percent vendors to provide to customers:
    (1) Services which result in a conflict of interest or the 
appearance of such conflict for the above-50-percent vendor, such as 
assistance with applying for WIC benefits;
    (2) Incentive items allowed under paragraph (g)(3)(iv)(A) of this 
section, at the discretion of the State agency;
    (3) Lottery tickets provided to customers at no charge or below 
face value;
    (4) Cash gifts in any amount for any reason;
    (5) Anything made available in a public area as a complimentary 
gift which may be consumed or taken without charge;
    (6) An allowable incentive item provided more than once per 
customer per shopping visit, regardless of the number of customers or 
food instruments involved, unless the incentive items had been obtained 
by the vendor at no cost or the total value of multiple incentive items 
provided during one shopping visit would not exceed the less-than-$2 
nominal value limit;
    (7) Food, merchandise or services of greater than nominal value 
provided to the customer;
    (8) Food, merchandise sold to customers below cost, or services 
purchased by customers below fair market value;
    (9) Any kind of incentive item which incurs a liability for the WIC 
Program; and
    (10) Any kind of incentive item which violates any Federal, State, 
or local law or regulations.
* * * * *
    (10) List of infant formula wholesalers, distributors, and 
retailers licensed under State law or regulations, and infant formula 
manufacturers registered with the Food and Drug Administration (FDA). 
The State agency must provide a list in writing or by other effective 
means to all authorized WIC retail vendors of the names and addresses 
of infant formula wholesalers, distributors, and retailers licensed in 
the State in accordance with State law (including regulations), and 
infant formula manufacturers registered with the Food and Drug 
Administration (FDA) that provide infant formula, on at least an annual 
basis.
    (i) Notification to vendors. The State agency is required to notify 
vendors that they must purchase infant formula only

[[Page 43384]]

from a source included on the State agency's list, or from a source on 
another State agency's list if the vendor's State agency permits this, 
and must only provide such infant formula to participants in exchange 
for food instruments specifying infant formula. For the purposes of 
paragraph (g)(10) of this section, ``infant formula'' means infant 
formula as defined in Sec.  246.2, contract brand and non-contract 
brand infant formula as defined in Sec.  246.2, and infant formula 
covered by a waiver granted under Sec.  246.16a(e).
    (ii) Type of license. If more than one type of license applies, the 
State agency may choose which one to use.
    (iii) Exclusions from list. The State agency may not exclude a 
State-licensed entity from the list except when:
    (A) Specifically required or authorized by State law or 
regulations; or
    (B) The entity does not carry infant formula.
    (h) * * *
    (3) * * *
    (ii) No substitutions, cash, credit, refunds, or exchanges. The 
vendor may provide only the authorized supplemental foods listed on the 
food instrument.
    (A) The vendor may not provide unauthorized food items, nonfood 
items, cash, or credit (including rain checks) in exchange for food 
instruments. The vendor may not provide refunds or permit exchanges for 
authorized supplemental foods obtained with food instruments, except 
for exchanges of an identical authorized supplemental food item when 
the original authorized supplemental food item is defective, spoiled, 
or has exceeded its ``sell by,'' ``best if used by,'' or other date 
limiting the sale or use of the food item. An identical authorized 
supplemental food item means the exact brand and size as the original 
authorized supplemental food item obtained and returned by the 
customer.
    (B) The vendor may provide only the authorized infant formula which 
the vendor has obtained from sources included on the list described in 
Sec.  246.10(g)(10) to participants in exchange for food instruments 
specifying infant formula.
* * * * *
    (xviii) * * * The State agency must notify a vendor in writing when 
an investigation reveals an initial incidence of a violation for which 
a pattern of incidences must be established in order to impose a 
sanction, before another such incidence is documented, unless the State 
agency determines, in its discretion, on a case-by-case basis, that 
notifying the vendor would compromise an investigation.
* * * * *
    (8) Allowable and prohibited incentive items for above-50-percent 
vendors. The vendor agreement for an above-50-percent vendor, or 
another document provided to the vendor and cross-referenced in the 
agreement, must include the State agency's policies and procedures for 
allowing and prohibiting incentive items to be provided by an above-50-
percent vendor to customers, consistent with paragraph (g)(3)(iv) of 
this section.
    (i) The State agency must provide written approval or disapproval 
(including by electronic means such as electronic mail or facsimile) of 
requests from above-50-percent vendors for permission to provide 
allowable incentive items to customers;
    (ii) The State agency must maintain documentation for the approval 
process, including invoices or similar documents showing that the cost 
of each item is either less than the $2 nominal value limit, or 
obtained at no cost; and
    (iii) The State agency must define unallowed incentive items.
    (i) * * *
    (2) Content. The annual training must include instruction on the 
purpose of the Program, the supplemental foods authorized by the State 
agency, the minimum varieties and quantities of authorized supplemental 
foods that must be stocked by vendors, the requirement that vendors 
obtain infant formula only from sources included on a list provided by 
the State agency, the procedures for transacting and redeeming food 
instruments, the vendor sanction system, the vendor complaint process, 
the claims procedures, the State agency's policies and procedures 
regarding the use of incentive items, and any changes to program 
requirements since the last training.
* * * * *
    (l) * * *
    (1) * * *
    (iv) One-year disqualification. The State agency must disqualify a 
vendor for one year for:
    (A) A pattern of providing unauthorized food items in exchange for 
food instruments, including charging for supplemental foods provided in 
excess of those listed on the food instrument; or
    (B) A pattern of an above-50-percent vendor providing prohibited 
incentive items to customers as set forth in paragraph (g)(3)(iv) of 
this section, in accordance with the State agency's policies and 
procedures required by paragraph (h)(8) of this section.
* * * * *
    (3) Notification of violations. The State agency must notify a 
vendor in writing when an investigation reveals an initial incidence of 
a violation for which a pattern of incidences must be established in 
order to impose a sanction, before another such incidence is 
documented, unless the State agency determines, in its discretion, on a 
case-by-case basis, that notifying the vendor would compromise an 
investigation. This notification requirement applies to the violations 
set forth in paragraphs (l)(1)(iii)(C) through (l)(1)(iii)(F), 
(l)(1)(iv), and (l)(2)(i) of this section.
    (i) Prior to imposing a sanction for a pattern of incidences of a 
violation, the State agency must either provide such notice to the 
vendor, or document in the vendor file the reason(s) for determining 
that such notice would compromise an investigation.
    (ii) The State agency may use the same method of notification which 
the State agency uses to provide a vendor with adequate advance notice 
of the time and place of an administrative review in accordance with 
Sec.  246.18(b)(3).
    (iii) The State agency may conduct another compliance buy visit 
after the notice of violation is received by the vendor, or presumed to 
be received by the vendor consistent with the State agency's procedures 
for providing such notice.
    (iv) All of the incidences of a violation occurring during the 
first compliance buy visit must constitute only one incidence of that 
violation for the purpose of establishing a pattern of incidences.
* * * * *
    4. In Sec.  246.18, redesignate (a)(1)(iii)(D) through 
(a)(1)(iii)(H) as paragraphs (a)(1)(iii)(G) through (a)(1)(iii)(K) and 
add new paragraphs (a)(1)(iii)(D), (a)(1)(iii)(E), and (a)(1)(iii)(F), 
to read as follows:


Sec.  246.18  Administrative review of State agency actions.

    (a) * * *
    (1) * * *
    (iii) * * *
    (D) The State agency's determination to include or exclude an 
infant formula manufacturer, wholesaler, distributor, or retailer from 
the list required pursuant to Sec.  246.10(g)(10);
    (E) The validity or appropriateness of the State agency's 
prohibition of incentive items and the State agency's denial of an 
above-50-percent vendor's request to provide an incentive item to 
customers pursuant to Sec.  246.12(h)(8);
    (F) The State agency's determination whether to notify a vendor in 
writing when an investigation reveals an initial

[[Page 43385]]

violation for which a pattern of violations must be established in 
order to impose a sanction, pursuant to Sec.  246.12(l)(3);
* * * * *

    Dated: July 18, 2006.
Eric M. Bost,
Under Secretary, Food, Nutrition, and Consumer Services.
[FR Doc. 06-6596 Filed 7-31-06; 8:45 am]
BILLING CODE 3410-30-P