[Federal Register Volume 71, Number 206 (Wednesday, October 25, 2006)]
[Proposed Rules]
[Pages 62506-62523]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 06-8835]



[[Page 62505]]

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Part II





Department of the Treasury





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Alcohol and Tobacco Tax and Trade Bureau



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27 CFR Parts 40, 41, 44, and 45



Tax Classification of Cigars and Cigarettes (2006R-276P); Proposed Rule



Total Reducing Sugars Analytical Method; Notice

  Federal Register / Vol. 71, No. 206 / Wednesday, October 25, 2006 / 
Proposed Rules  

[[Page 62506]]


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DEPARTMENT OF THE TREASURY

Alcohol and Tobacco Tax and Trade Bureau

27 CFR Parts 40, 41, 44, and 45

[Notice No. 65]
RIN 1513-AB34


Tax Classification of Cigars and Cigarettes (2006R-276P)

AGENCY: Alcohol and Tobacco Tax and Trade Bureau, Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Department of the Treasury and the Alcohol and Tobacco Tax 
and Trade Bureau are proposing changes to the regulations that govern 
the classification and labeling of cigars and cigarettes for Federal 
excise tax purposes under the Internal Revenue Code of 1986. The 
proposed regulatory changes contained in this document address concerns 
that TTB has regarding the adequacy of the current regulatory standards 
for distinguishing between cigars and cigarettes. The document also 
summarizes and responds to three petitions received by TTB requesting 
rulemaking action regarding the classification of cigars and 
cigarettes, with particular reference to the distinction between little 
cigars and cigarettes. The proposals contained in this document clarify 
the application of existing statutory definitions and update and codify 
administrative policy in order to provide clearer and more objective 
product classification criteria. These clarifications are intended to 
reduce possible revenue losses through the misclassification of 
cigarettes as little cigars. In addition, these clarifications should 
facilitate the determination of payments under the Master Settlement 
Agreement.

DATES: We must receive your written comments on or before December 26, 
2006.

ADDRESSES: You may send comments to any of the following addresses:
     Director, Regulations and Rulings Division, Alcohol and 
Tobacco Tax and Trade Bureau, (Attn: Notice No. 65), P.O. Box 14412, 
Washington, DC 20044-4412.
     202-927-8525 (facsimile).
     [email protected] (e-mail).
     http://www.ttb.gov/tobacco/tobacco_rulemaking.shtml (An 
online comment form is posted with this notice on our Web site).
     http://www.regulations.gov (Federal e-rulemaking portal; 
follow instructions for submitting comments).
    You may view copies of this notice, the related rulemaking 
petitions, and any comments we receive on this proposed rule by 
appointment at the TTB Information Resource Center, 1310 G Street, NW., 
Washington, DC 20220. To make an appointment, call 202-927-2400. You 
may also access copies of this notice and any comments we receive on 
this proposal online at http://www.ttb.gov/tobacco/tobacco_rulemaking.shtml.

FOR FURTHER INFORMATION CONTACT: Linda Wade Chapman, Regulations and 
Rulings Division, Alcohol and Tobacco Tax and Trade Bureau, 1310 G 
Street, NW., Suite 200-E, Washington, DC 20220; telephone 202-927-8210; 
or e-mail [email protected].

SUPPLEMENTARY INFORMATION:

Background

Statutory Provisions

    Chapter 52 of the Internal Revenue Code of 1986 (IRC) sets forth 
the Federal excise tax and related provisions that apply to tobacco 
products manufactured in, or imported into, the United States. Section 
5702(c) of the IRC (26 U.S.C. 5702(c)) defines the term ``tobacco 
products'' as ``cigars, cigarettes, smokeless tobacco, pipe tobacco, 
and roll-your-own tobacco.'' In addition, sections 5702(a) and (b) of 
the IRC define the terms ``cigar'' and ``cigarette'' as set forth 
below:

    Sec. 5702. Definitions.
    When used in this chapter--
    (a) Cigar.
    ``Cigar'' means any roll of tobacco wrapped in leaf tobacco or 
in any substance containing tobacco (other than any roll of tobacco 
which is a cigarette within the meaning of subsection (b)(2)).
    (b) Cigarette.
    ``Cigarette'' means--
    (1) any roll of tobacco wrapped in paper or in any substance not 
containing tobacco, and
    (2) any roll of tobacco wrapped in any substance containing 
tobacco which, because of its appearance, the type of tobacco used 
in the filler, or its packaging and labeling, is likely to be 
offered to, or purchased by, consumers as a cigarette described in 
paragraph (1).

    The distinction between cigars and cigarettes is important for 
Federal tax purposes because the rate of tax varies from one product 
class to another. Section 5701 of the IRC (26 U.S.C. 5701) prescribes 
the following rates of tax for cigars and cigarettes:

    Sec. 5701. Rate of tax.
    (a) Cigars.
    On cigars, manufactured in or imported into the United States, 
there shall be imposed the following taxes:
    (1) Small cigars. On cigars, weighing not more than 3 pounds per 
thousand, $1.828 cents per thousand ($1.594 cents per thousand on 
cigars removed during 2000 or 2001);
    (2) Large cigars. On cigars weighing more than 3 pounds per 
thousand, a tax equal to 20.719 percent (18.063 percent on cigars 
removed during 2000 or 2001) of the price for which sold but not 
more than $48.75 per thousand ($42.50 per thousand on cigars removed 
during 2000 or 2001).
    Cigars not exempt from tax under this chapter which are removed 
but not intended for sale shall be taxed at the same rate as similar 
cigars removed for sale.
    (b) Cigarettes.
    On cigarettes, manufactured in or imported into the United 
States, there shall be imposed the following taxes:
    (1) Small cigarettes. On cigarettes, weighing not more than 3 
pounds per thousand, $19.50 per thousand ($17 per thousand on 
cigarettes removed during 2000 or 2001).
    (2) Large cigarettes. On cigarettes, weighing more than 3 pounds 
per thousand, $40.95 per thousand ($35.70 per thousand on cigarettes 
removed during 2000 or 2001); except that, if more than 61/2 inches 
in length, they shall be taxable at the rate prescribed for 
cigarettes weighing not more than 3 pounds per thousand, counting 
each 23/4 inches, or fraction thereof, of the length of each as one 
cigarette.

    Section 7805 of the IRC (26 U.S.C. 7805) gives the Secretary of the 
Treasury the general authority to issue regulations to carry out the 
provisions of the IRC. In addition, section 5722 of the IRC (26 U.S.C. 
5722) gives the Secretary authority to require from manufacturers or 
importers of tobacco products reports containing such information, in 
such form and at such times, as the Secretary may prescribe by 
regulations. Finally, section 5723(a) of the IRC (26 U.S.C. 5723(a)) 
gives the Secretary authority to prescribe regulatory standards for the 
packaging of tobacco products. Further, section 5723(b) of the IRC 
gives the Secretary the authority to prescribe regulations requiring 
marks, labels, and notices on every package of tobacco products.

Regulatory Provisions

    Regulations implementing the tobacco product provisions of Chapter 
52 of the IRC are contained in 27 CFR parts 40 (manufacture of tobacco 
products and cigarette papers and tubes), 41 (importation of tobacco 
products and cigarette papers and tubes), 44 (exportation of tobacco 
products and cigarette papers and tubes, without payment of tax, or 
with drawback of tax), and 45 (removal of tobacco products and 
cigarette papers and tubes, without payment of tax, for use of the 
United States). These regulations are administered by the Alcohol and 
Tobacco Tax and Trade Bureau (TTB).

[[Page 62507]]

    Sections 40.11, 41.11, 44.11, and 45.11 of the TTB regulations (27 
CFR 40.11, 41.11, 44.11, and 45.11) include definitions of cigars and 
cigarettes that follow the statutory definitions without further 
elaboration. The tax rates imposed on cigars under the IRC are 
reflected in Sec. Sec.  40.21 and 41.31 of the TTB regulations (27 CFR 
40.21 and 41.31) and the IRC tax rates imposed on cigarettes are 
reflected in Sec. Sec.  40.23 and 41.32 of the TTB regulations (27 CFR 
40.23 and 41.32).
    The TTB regulations that set forth notice requirements for packages 
of cigars are found at 27 CFR 40.214, 41.73, 44.186, 44.253, and 45.44. 
These regulations provide that before removal subject to tax 
(Sec. Sec.  40.214 and 41.73) or before removal from a factory (Sec.  
44.186) or before withdrawal from a customs warehouse (Sec.  44.253) or 
before removal (Sec.  45.44), every package of cigars must have 
adequately imprinted on it, or on a label securely affixed to it, the 
designation ``cigars'', the quantity of cigars contained in the 
package, and for small cigars, the classification of the product for 
tax purposes (that is, either ``small'' or ``little''). The TTB 
regulations that set forth cigarette notice requirements are found at 
27 CFR 40.215, 41.74, and 45.45. These regulations provide that before 
removal subject to tax (Sec. Sec.  40.215 and 41.74) or before removal 
(Sec.  45.45), every package of cigarettes must have adequately 
imprinted on it, or on a label securely affixed to it, the designation 
``cigarettes,'' the quantity of cigarettes in the package, and the 
classification for tax purposes (that is, for small cigarettes, either 
``small'' or ``Class A'', and for large cigarettes, either ``large'' or 
``Class B'').

Current Standards and Methods Used To Differentiate Between Little 
Cigars and Cigarettes for Excise Tax Purposes

    In connection with the administration of Chapter 52 of the IRC, 
TTB's predecessor agency, the Bureau of Alcohol, Tobacco and Firearms 
(ATF), published ATF Ruling 73-22 and Procedures 73-5 and 76-2 to 
provide the tobacco industry and the public at large with the Agency's 
official interpretation and guidance with regard to the classification 
of cigars and cigarettes for excise tax purposes. A ruling published by 
ATF or TTB represents an Agency interpretation of applicable statutes 
or regulations or other statement of Agency policy. A published 
procedure provides technical guidance on how to fulfill a regulatory 
requirement, for example by providing detailed analytical criteria that 
the Agency uses to assess compliance with the regulation in question. 
The ruling and two procedures in question, and TTB's adherence to them, 
are discussed below.
ATF Ruling 73-22
    ATF Ruling 73-22 was published in 1973 to update the criteria for 
determining whether a tobacco product wrapped in a ``substance 
containing tobacco'' is a cigar or cigarette for tax purposes. This 
ruling restated the basic provisions of, and superseded, Revenue Ruling 
69-198, C.B. 1969, pg. 1,359 (Internal Revenue). Specifically, Ruling 
73-22 amplified the three fundamental factors that govern the 
classification of little cigars: the wrapper, the filler, and the 
product packaging and labeling.
    With regard to the wrapper material used to manufacture cigars, 
Ruling 73-22 states the following:

    The legislative history concerning Public Law 89-44 indicates 
the terms ``substance containing tobacco'' as used in 26 U.S.C. 5702 
and ``reconstituted tobacco'' were used synonymously. In the trade 
and in general terminology, ``reconstituted tobacco'' is ground or 
pulverized tobacco mixed with various adhesive agents and/or 
cellulose fibers derived from tobacco or other sources and formed 
into sheets.
    For a wrapper material to be considered a ``substitute [sic] 
containing tobacco'' as used in 26 U.S.C. 5702(a), the finished 
wrapper must (1) be approximately two-thirds or more tobacco which 
did not in the reconstitution process lose its tobacco character 
(e.g., taste, aroma, identifiable chemical components), and (2) be 
of a color consistent with that of the natural leaf tobaccos 
traditionally used as a wrapper for American cigars.

    Ruling 73-22 states that a combination of other factors must be 
considered in determining whether a product wrapped in a ``substance 
containing tobacco'' is a cigar or a cigarette. With regard to the 
filler tobacco, the ruling goes on to state:

    For a product to be a cigar the filler must be substantially of 
tobaccos unlike those in ordinary cigarettes and must not have any 
added flavorings which would cause the tobaccos to have the taste or 
aroma generally attributed to cigarettes. The inclusion of flue-
cured or aromatic (Oriental) tobaccos--which traditionally have been 
the primary constituents of cigarette filler--can contribute 
significantly to making a product cigarette-like, and if the product 
also is of the typical cigarette size and shape, has a typical 
cigarette-type filter, and is in a cigarette-type package, the 
inclusion of these tobaccos could cause the product to be classified 
as a cigarette rather than a cigar. Conversely, if a product is made 
predominantly of cigar-type tobaccos with distinctive cigar taste 
and aroma, if it does not resemble a cigarette (such as most large 
cigars do not), and if it is not to be marketed in a cigarette-type 
package, it would probably be classified as a cigar.

    Ruling 73-22 states the following with reference to the issue of 
whether the product is likely to be offered to, or purchased by, 
consumers as a cigarette:

    Two other factors which are relevant under the Code in 
determining the tax category of a product are whether the product is 
likely to be offered to, or purchased by, consumers as a cigarette. 
It is, therefore, important that the package for a product to be 
offered as a cigar conspicuously declare it to be a cigar and that 
all marketing materials and advertising clearly present the product 
to the consumer as a cigar and not as a cigarette. There must be no 
representations or implications on the package or in other 
merchandising or advertising materials which tend to negate the tax 
declaration that the product is a cigar. If the package for a cigar 
product is comparable to the traditional 20-cigarette soft (cup) 
pack or the similar hard pack, the declaration ``cigars'', ``small 
cigars'', or ``little cigars'' must appear in direct conjunction 
with, parallel to, and in substantially the same conspicuousness of 
type and background as the brand name each time the brand name 
appears. A conspicuous ``cigar'' declaration must appear on the 
front, back, and bottom panels of such a typical cigarette-type 
package even if the brand name does not appear on any of these 
panels. Cartons must similarly declare the product to be a cigar in 
conjunction with the brand name and a conspicuous cigar declaration 
must appear on each panel of the carton which is likely to be 
visible in a retail sale display.

    TTB continues to apply the principles reflected in Ruling 73-22 in 
preparing responses to requests from manufacturers, importers and other 
parties for advance rulings or other advice on the tax classification 
of cigars and cigarettes.
    Ruling 73-22 is available on the TTB Web site at http://www.ttb.gov.
ATF Procedure 73-5
    In 1973, ATF published Procedure 73-5, the purpose of which was to 
set forth some basic analytical methods for use by ATF in determining 
if specific reconstituted tobacco material is acceptable as a cigar 
wrapper, and to determine if a product wrapped in such material is a 
cigar or cigarette for tax purposes. Specifically, Procedure 73-5 
established analytical examinations and tests to provide objective 
information for use with other relevant factors in: (1) Distinguishing 
between those materials that contained sufficient tobacco to be 
classified as reconstituted tobacco and those that did not, (2) 
differentiating between the filler tobaccos typically used in cigars 
and those generally used in cigarettes, and (3) determining if a 
smoking product wrapped in reconstituted tobacco is taxable as a cigar 
or as a cigarette under the IRC.
    The examinations and tests provided in Procedure 73-5 are as 
follows:

[[Page 62508]]



                     Wrapper Examinations and Tests
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Color................................  Visual examination with general
                                        description and statement as to
                                        whether it is in the range of
                                        natural leaf tobaccos
                                        traditionally used as a wrapper
                                        for American cigars.
Composition..........................  Microscopic examination for
                                        tobacco particles, vegetable
                                        fibers, mineral particles,
                                        adhesives, other substances.
Cellulose Fibers.....................  Microscopic examination may be
                                        reported as none, few, numerous;
                                        or chemical tests may be used.
Texture..............................  Microscopic examination described
                                        as rough, smooth, etc.
Tensile Strength.....................  Instrumentation can be used, but
                                        usually only a physical
                                        manipulation of stretching,
                                        tearing, etc. Generally reported
                                        as degree of dry and wet tensile
                                        strength.
Paper-like Qualities.................  Subjective evaluation based on
                                        appearance, tensile strength,
                                        number of fibers, general visual
                                        character, and evaluation of
                                        chemical composition as shown
                                        later.
Taste................................  Degree of tobacco-like character.
Burning..............................  Described as more characteristic
                                        of tobacco or of paper.
Fragments of Tobacco.................  Microscopic examination,
                                        described as large, small,
                                        pulverized, none, etc.
------------------------------------------------------------------------
Percent moisture.
Percent total ash.
Percent acid insoluble ash.
Percent sodium.
Percent potassium.
Percent calcium.
Other elements may be determined.
pH of water extract.
Percent nicotine.
Sequential Differential Solvent Extractions as described in Section
 7.08.
------------------------------------------------------------------------


                      Filler Examinations and Tests
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Composition..........................  Microscopically observed
                                        character of filler, expressed
                                        as relative proportions of basic
                                        tobacco types.
Taste................................  Tobacco character, described as
                                        heavily fermented type, fire-
                                        cured type, etc., and other
                                        descriptives such as added
                                        menthol, etc.
Odor before smoking..................  Expressed as to kind of tobacco
                                        product character, such as mild
                                        cigar-like, etc.
Odor when smoking....................  Expressed as to kind of tobacco
                                        product character such as
                                        mentholated cigarette-like, etc.
------------------------------------------------------------------------
Percent moisture.
Percent total ash.
Percent acid insoluble ash.
Percent sodium.
Percent potassium.
Percent calcium.
Other elements may be determined.
pH of water extract.
Percent nicotine.
Sequential Differential Solvent Extractions as described in Section
 7.08.
------------------------------------------------------------------------


                     Product Examinations and Tests
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Diameter.............................  In millimeters to the nearest
                                        tenth.
Length (Including filter)............  In millimeters to the nearest
                                        tenth.
Weight of 1,000 (Including filters)..  In pounds to nearest hundredth.
------------------------------------------------------------------------
Added distinctive flavorings not otherwise reported, such as any
 included in the filter.
pH of smoke.
Opinions of cigarette smokers.
------------------------------------------------------------------------

    Procedure 73-5 is available in its entirety on the TTB Web site at 
http://www.ttb.gov.
ATF Procedure 76-2
    ATF Procedure 76-2 was published in 1976 to supersede, in part, ATF 
Procedure 73-5.
    Specifically, this procedure sets forth an updated sequential 
solvent extraction method to replace the one contained in Procedure 73-
5. The updated method was essentially the same as the method it 
replaced except that the instructions were amplified and the standards 
were redetermined on a residue-free solvent basis. The decision to 
update the method was based in part on information received from some 
industry members to the effect that the method contained in Procedure 
73-5 was not sufficiently specific for it to be effectively employed in 
their laboratories. In addition, it was noted that the extractive 
procedure used in the method did not account for the possibility of 
varying residues from the solvents themselves, thus leading to 
erroneous test results. The solvents used in the sequential solvent 
extraction method under Procedure 76-2 are as follows:
     Petroleum Ether;
     Tetrahydrofuran;
     Acetonitrile;
     95% Ethanol; and
     Dioxane--20% Water.
    Procedure 76-2 is available in its entirety on the TTB Web site at 
http://www.ttb.gov.

[[Page 62509]]

Current Analytical Procedures

    TTB has in recent years supplemented most of the methodologies 
contained in ATF Procedures 73-5 and 76-2 with other more efficient 
methodologies. In particular, TTB no longer uses the sequential solvent 
extraction method to test tobacco products. With regard to analyzing 
the filler tobaccos used in cigars and cigarettes, TTB has adopted a 
less labor intensive analytical method that does not require use of the 
toxic solvents used in the sequential solvent extraction method. 
Although this method, titled ``Characterization of Tobacco Products by 
High-Performance Anion Exchange Chromatography-Pulsed Amperometric 
Detection,'' was published in the Journal of Agricultural and Food 
Chemistry in 1996, it has not been published as an Agency procedure. 
The published abstract for this method is as follows:

    A simple and reproducible method has been developed for the 
classification of cigarette versus cigar tobacco. Although the 
tobacco used for both cigars and cigarettes may be of the same 
natural origin, tobacco types and processing parameters alter the 
relative amounts of natural constituents (e.g., carbohydrates). In 
this method, carbohydrates are obtained by water extraction. The 
extracts are then analyzed using high-performance anion exchange 
chromatography followed by pulsed amperometric detection. The 
relative amounts of glucose, fructose, and sucrose between cigarette 
and cigar tobaccos are used for their characterization. Complete 
analysis of a tobacco product is achieved in less than 60 min.\1\
---------------------------------------------------------------------------

    \1\ Zook, C., Patel, P., LaCourse, W., & Ralapati, S., J. Agric. 
Food Chem., Vol. 44, No. 7, 1996, Characterization of Tobacco 
Products by High-Performance Anion Exchange Chromatography-Pulsed 
Amperometric Detection.

    In addition to the method mentioned above, ATF developed a method 
to determine the quantity of nicotine in tobacco products, specifically 
in cigar and cigarette wrapper materials. This method was not published 
as an Agency procedure, but was published in the Journal of AOAC 
International under the title ``Quantitation of Nicotine in Tobacco 
Products by Capillary Electrophoresis,'' in 2002. The published 
---------------------------------------------------------------------------
abstract for this method is as follows:

    A simple and rapid capillary electrophoresis (CE) method was 
developed for the quantitation of nicotine in commercial tobacco 
products. The method involves a 6 min run at 30 kV, using a 50mM 
phosphate buffer (pH 2.5), paraquat as internal standard, and UV 
detection at 260 nm. Nicotine was extracted from tobacco products in 
<15 min. Recoveries from spiked extracts were >95%, and the 
extraction efficiencies of water, 1M HCl, 1M acetic acid, 5mM 
phosphate buffer (pH 2.5), and 1% triethanol amine were similar. 
Nicotine concentrations in 67 samples of cigarettes, cigars, and 
bidis varied between 0.37 and 2.96% (w/w). An established gas 
chromatography/mass spectrometry method using toluene extraction 
consistently yielded lower nicotine values than the CE method. 
Experimental evidence suggests that this is due to insufficient 
extraction of nicotine by toluene.\2\
---------------------------------------------------------------------------

    \2\ Clarke, M., J.AOAC International, Vol. 85, No. 1, 2002, 
Quantitation of Nicotine in Tobacco Products by Capillary 
Electrophoresis.

Total Reducing Sugars Study
    Over the last several years, TTB has seen an increase in the number 
of tobacco products labeled ``Little Cigars'' submitted to the Agency 
by members of the U.S. tobacco industry, importers, and other Federal 
agencies requesting letter rulings or other advice regarding the proper 
classification of the products under the IRC. In light of this 
increased interest in the tax classification of little cigars, and 
because of a desire to improve the efficacy of the analytical standards 
discussed above, TTB decided to explore other analytical avenues that 
might provide a more reliable standard for distinguishing between 
cigars and cigarettes.
    We found that U.S. manufacturers conduct analyses of their tobacco 
products with a flow analyzer, which has been specifically designed, 
developed, and validated for analysis of target tobacco components, 
including total reducing sugars and nicotine (``total reducing sugars'' 
encompasses all monosaccharides and disaccharides). Since this 
instrument has become a widely used and accepted analytical tool within 
the tobacco industry, we concluded that it would be appropriate for our 
inquiry.
    Accordingly, in 2005, TTB obtained an Astoria 2 + 2 Flow Analyzer 
from Astoria-Pacific International in order to conduct a study of cigar 
and cigarette samples obtained for testing. Our study was grounded on 
the fact that cigars and cigarettes contain different blends of 
tobacco'cigarettes are made primarily from flue-cured or light air-
cured (burley) and oriental (Turkish) tobaccos, whereas cigars are 
usually made from air-cured and fermented tobaccos. Many of the 
significant chemical differences between cigar and cigarette tobaccos 
are related to the curing and/or fermentation processes used to 
manufacture them.
    One of the most significant chemical differences between cigars and 
cigarettes is the level of total reducing sugars, which varies 
significantly depending on the processing of the filler material. Flue-
cured tobaccos, which are high in reducing sugars, are predominant in 
cigarettes sold in the U.S. market.\3\ Furthermore, sugar is often 
added directly to cigarette filler tobaccos to ``balance'' smoke 
flavor.\4\ In contrast, cigars are manufactured from processed tobaccos 
that contain relatively low levels of sugars. Therefore, TTB surmised 
that comparing the sugar content in the filler tobacco used in cigars 
to the sugar content in the filler tobacco used in cigarettes might 
yield a clear and objective line of distinction between these two 
classes of tobacco products.
---------------------------------------------------------------------------

    \3\ Abdallah, F. ``Blending Concepts. ABC Blend Development and 
Maintenance'', Tobacco Reporter, April 2003, pp. 72-78.
    \4\ Leffingwell, J. ``Chemical Constituents of Tobacco Leaf and 
Differences among Tobacco Types'', February 2001.
---------------------------------------------------------------------------

    In the study, TTB analyzed 93 products labeled either as ``cigars'' 
(large cigars and little or small cigars) or as ``cigarettes.'' The 
products were analyzed to determine the quantity of total reducing 
sugars in each product using an Astoria 2 + 2 Flow Analyzer. In the 
study, sucrose was converted to a monosaccharide in order to result in 
a total reducing sugars value for each product.
    Products were chosen for the study based largely on recent sales 
history in the domestic market. For cigarettes, products were obtained 
of the five largest manufacturers whose combined market share totals 
approximately 90 percent of the domestic market. Approximately 140 
cigarette products were collected for analysis, and to date, 47 have 
been analyzed for total reducing sugars. For cigars, products were also 
obtained of the manufacturers with the most significant domestic 
presence. In all, 190 cigars and little cigar products were obtained, 
of which 46, to date, have been analyzed for total reducing sugars.
    The 93 analyzed samples were selected to provide a robust 
representative sample of the domestic marketplace for both cigars and 
cigarettes. Specifically, samples of ``cigarettes'' were chosen to 
ensure that the most common brand descriptors were represented (full 
flavor, mild, light, ultra light, menthol) as well as some of the less 
common descriptors, such as natural cigarettes. The tested ``cigars'' 
were chosen to reflect the diversity of the product lines (flavored, 
machine rolled, premiums, and little cigars). In addition, the little 
cigars used in the study were those that closely resembled cigarettes 
in length, diameter, and uniformity of the cylinder and in having a 
filter. While it is anticipated

[[Page 62510]]

that future additions to the data set will provide greater insight into 
the chemical differences among these products, it is not expected that 
more data will significantly alter the overall results of the study.
    Each tobacco product was prepared for analysis by separating the 
wrapper material from the filler and drying the filler at 90[deg] C for 
one hour in a convection oven. The filler was then ground into a coarse 
powder using a Wiley Mill equipped with a 20 mesh screen and 
transferred to airtight containers. Approximately 100 mg of the ground 
fill material was accurately weighed into a flask and mixed with 100 
milliliters of a 1% acetic acid solution. Extraction of sugars from the 
ground fill material was facilitated by agitation using a wrist action 
shaker for \1/2\ hour. The mixture was then filtered (to remove the 
remaining solid material) using Whatman 114V pleated filter paper and 
poured into sample vials. Three sample vials were prepared for each 
tobacco sample.
    The total reducing sugars results obtained for each tobacco sample 
were the average of nine injections into the flow analyzer (three 
injections for each of the three sample vials prepared for each tobacco 
sample). The results obtained by using this method were reported as 
percent by weight. Further, the method accurately reports the 
percentage weight of reducing sugars in each sample at levels from 2% 
to 40% by weight. As expected, the cigar samples showed levels below 
2%. Because the values for reducing sugars found in cigars are below 
2%, the TTB laboratory could not report those values with the 
exactitude reportable for values within the 2% to 40% range. 
Consequently, any value below 2% for total reducing sugars will be 
reported as ``<2%.'' However, even though 2% is the smallest percentage 
of total reducing sugars that can be quantitatively determined with 
suitable precision and accuracy using this method, the values obtained 
for cigars are still valid for the purpose of distinguishing cigars 
from cigarettes using total reducing sugars. Statistical analyses of 
the results of the study are summarized in the table below.

----------------------------------------------------------------------------------------------------------------
                                                                                                    Interval  @
                 Sample                      Range (% by weight)          Mean (% by weight)            99%
----------------------------------------------------------------------------------------------------------------
Cigars.................................  Below 2....................  Below 2...................            *n/a
Little cigars..........................  Below 2....................  Below 2...................            *n/a
Cigarettes.............................  7.47 to 17.94..............  11.85.....................          0.85
----------------------------------------------------------------------------------------------------------------
*n/a = not applicable.

    The results obtained for total reducing sugars for the cigars 
tested differed greatly from the results obtained for cigarettes 
tested. The data obtained from the study is listed in the chart below 
according to tax class and sample number.

                Total Reducing Sugars (TRS) Study Results
------------------------------------------------------------------------
                                                                 TRS
                       Sample number                         (percent by
                                                               weight)
------------------------------------------------------------------------
                              Large Cigars
------------------------------------------------------------------------
1..........................................................          0.4
2..........................................................          0.5
3..........................................................          0.6
4..........................................................          0.8
5..........................................................          0.8
6..........................................................          0.6
7..........................................................          0.7
8..........................................................          0.6
9..........................................................          0.6
10.........................................................          0.3
11.........................................................          0.5
12.........................................................          0.7
13.........................................................          0.9
14.........................................................          0.7
15.........................................................          0.5
16.........................................................          0.7
17.........................................................          0.6
18.........................................................          0.5
19.........................................................          0.6
20.........................................................          0.5
21.........................................................          0.4
22.........................................................          0.4
23.........................................................          0.8
24.........................................................          0.7
25.........................................................          0.6
26.........................................................          0.3
27.........................................................          0.3
28.........................................................          0.5
29.........................................................          0.5
------------------------------------------------------------------------
                              Little Cigars
------------------------------------------------------------------------
31.........................................................          1.2
32.........................................................          1.3
33.........................................................          1.1
34.........................................................          0.8
35.........................................................          1.0
36.........................................................          1.0
37.........................................................          1.2
38.........................................................          0.5
39.........................................................          0.7
40.........................................................          1.4
41.........................................................          0.6
42.........................................................          0.8
43.........................................................          0.8
44.........................................................          1.5
45.........................................................          0.5
46.........................................................          1.6
47.........................................................          1.0


------------------------------------------------------------------------
                                                    TRS
                 Sample number                  (percent by  Uncertainty
                                                  weight)       (+/-)
------------------------------------------------------------------------
                               Cigarettes
------------------------------------------------------------------------
51............................................         7.47         0.12
52............................................         8.38         0.41
53............................................         7.61         0.15
54............................................         7.71         0.14
55............................................         9.19         0.15
56............................................         9.82         0.09
57............................................         9.80         0.15
58............................................        10.06         0.09
59............................................        11.09         0.08
60............................................        11.31         0.41
61............................................        10.42         0.16
62............................................        10.64         0.23
63............................................        10.89         0.45
64............................................        10.90         0.15
65............................................        10.31         0.16
66............................................         9.43         0.14
67............................................        11.38         0.12
68............................................        11.93         0.18
69............................................        11.28         0.18
70............................................        11.14         0.17
71............................................        13.51         0.26
72............................................        13.75         0.16
73............................................        12.63         0.22
74............................................        13.74         0.19
75............................................        13.41         0.21
76............................................        12.43         0.17
77............................................        12.06         0.09
78............................................        11.49         0.21
79............................................        11.28         0.07
80............................................        11.57         0.16
81............................................        11.50         0.16
82............................................        11.40         0.22
83............................................        13.52         0.12
84............................................        11.21         0.28
85............................................        12.73         0.10
86............................................        11.86         0.21
87............................................        13.57         0.15
88............................................        12.27         0.22
89............................................        13.74         0.25
90............................................        13.76         0.10
91............................................        12.61         0.23
92............................................        16.44         0.24
93............................................        11.74         0.30
94............................................        14.46         0.73
95............................................        14.44         0.32
96............................................        17.21         0.26
97............................................        17.94         0.36
------------------------------------------------------------------------

    The following is a graphical representation of the study results 
listed above.
BILLING CODE 4810-31-P

[[Page 62511]]

[GRAPHIC] [TIFF OMITTED] TP25OC06.000

BILLING CODE 4810-31-C

[[Page 62512]]

Petitions for Rulemaking

    After TTB began developing a plan to clarify and amplify its 
regulations pertaining to the classification of cigars and cigarettes, 
the Agency received three petitions for rulemaking concerning this 
issue. One petition, including a later follow-up to that petition, was 
submitted by the Cigar Association of America, Inc. (CAA). Another 
petition came from the Lorillard Tobacco Company (Lorillard) and the 
R.J. Reynolds Tobacco Company (RJR). The third petition, which included 
a later amendment to that petition, was submitted by 39 States and one 
U.S. territory.

CAA Petition

    On December 19, 2005, the CAA submitted a petition to TTB 
specifically requesting rulemaking on little cigars in order to 
``maintain the integrity of the little cigar class.'' In this petition, 
the CAA urged TTB to expedite its proposed rule to distinguish between 
cigars and cigarettes due to what the CAA believes is widespread 
confusion within the tobacco industry concerning how to classify little 
cigars and cigarettes for Federal regulatory and tax purposes.
    In their petition, the CAA stated that since the signing of the 
Master Settlement Agreement (MSA) by the several States and the 
cigarette companies in 1998, it has witnessed a proliferation of new 
brands of domestic and imported little cigars entering the U.S. market. 
Further, the CAA stated that there is confusion in many of the States, 
whose attorneys general believe that little cigars are cigarettes in 
disguise, specifically designed to circumvent the provisions of the 
MSA. Hence, the CAA stated that the distinction between little cigars 
and cigarettes is an issue requiring Federal action and that TTB should 
assume the leadership role in this area.

Lorillard-RJR Petition

    The Lorillard-RJR petition, dated January 9, 2006, requested that 
TTB amend its regulations regarding the classification of little 
(small) cigars. The petitioners stated that they propose these changes 
because current regulatory and interpretive ruling standards ``do not 
adequately focus the resources of TTB on the many new products that 
have entered the marketplace.'' The petitioners went on to state:

    Lorillard and R.J. Reynolds believe that changes in the 
regulations governing little cigars are necessitated by the 
increased differential between tobacco product categories with 
respect to taxes, fees and assessments paid. The relative burden 
faced by cigarettes has increased by a far greater amount than 
cigars in recent years, creating an economic advantage for the 
little cigar classification. In addition, companies participating in 
the ``Master Settlement Agreement'' (``MSA'') must make payments to 
the States based on sales of cigarettes, not cigars. As a result of 
these and other factors, since the signing of the MSA a number of 
tobacco products have been introduced into the domestic market and 
are being improperly packaged, labeled, and classified as little 
cigars in order to bypass federal and state tax burdens, reporting 
requirements, and MSA payments.
    In a few short years, the tobacco market has changed 
substantially. A large number of products have been introduced and 
marketed as ``little cigars,'' yet they are packaged like 
cigarettes, and in many cases have the look, taste, flavorings, and 
characteristics of cigarettes. Yet they are much less expensive, 
avoiding the taxes and MSA burdens imposed upon cigarettes.

    The petitioners highlighted several reasons why they believe that 
it is important for TTB to update its regulations governing the 
classification of little cigars and cigarettes. They noted the 
following regarding the changes in domestic invoice volume for little 
cigars and cigarettes:

    In 1998, the domestic invoice volume for little cigars was 
1,638,000,000 units. By 2004, this volume had risen to 2,702,000,000 
units, an increase of 64.96%. By contrast, domestic cigarette volume 
was 22,755,000,000 packs in 1998. By 2004, domestic volume had 
fallen to 18,922,000,000 packs, a decrease of 16.84%.

    The petitioners further stated:

    In recent years, lines have been blurred in the marketing of 
cigarettes and little cigars. For example, little cigars are 
increasingly sold in packs of 20, much like cigarettes, with packs 
that are similar in size to a pack of cigarettes.

    In addition to the decrease in domestic sales of cigarettes, the 
petitioners stated that the monetary obligations provided in the MSA 
have increased the financial burden on cigarette makers whereas little 
cigar makers are unaffected since cigars, little and large, are not 
covered under the MSA. The petitioners noted in this regard that the 
financial impact of compliance with the MSA has been estimated to be 50 
cents per pack.
    Further, the petitioners state that State excise taxes on 
cigarettes have increased significantly over the last several years. 
These tax increases, when combined with MSA payments, have driven up 
the cost of cigarettes, thus further widening the cost differential 
between little cigars and cigarettes. To rectify the problems 
identified in the petition and highlighted above, the petitioners 
request that TTB initiate a number of specific actions.
    The first action requested is that TTB publish a notice of proposed 
rulemaking to update the existing regulations that pertain to the 
classification of little cigars and cigarettes. The petitioners request 
several specific regulatory changes described in more detail below.
    The petitioners urged TTB to take steps beyond ATF Ruling 73-22 to 
strengthen the reporting requirements placed on manufacturers and 
importers of little cigars. The petitioners stated:

    ATF Ruling 73-22 specifically allows the TTB to ``reappraise and 
update the criteria'' for defining cigars or cigarettes due to 
``[c]hanging technology and merchandising methods.'' Therefore, the 
ruling provides the TTB with the explicit authority to amend the 
regulations governing cigars in light of changes in the marketplace. 
While we believe that the factors in ATF Ruling 73-22 continue to 
provide a logical basis for the classification of little cigars and 
cigarettes, we also believe that the non-binding and voluntary 
nature of the reporting requirements under this Ruling are no longer 
effective in the current marketplace.
    We think a more targeted approach by TTB will better serve to 
promote effective enforcement and reduce current market confusion of 
little cigars. This approach, outlined below, should include an 
additional disclosure requirement for new brands that may be 
contributing to potential consumer confusion.

    In addition, the petitioners requested that TTB distinguish between 
little cigar brands marketed prior to the signing of the MSA and those 
that appeared on the market only after the MSA, by creating a 
presumption ``in favor of those little cigar brands marketed prior to 
the existence of the financial disincentives created by the MSA.'' 
While those brands would still be subject to monitoring and challenge 
as under existing regulations, there would be a rebuttable presumption 
that such brands continue to comply with all TTB requirements, and are 
likely to be offered to, and purchased by, consumers as little cigars.
    Further, the petitioners urged TTB to establish a certification 
procedure for post-MSA little cigar brands. The petitioners proposed 
the following in this regard:

    For those little cigar brands initially marketed after the 
signing of the MSA (November 23, 1998), a certification requirement 
should be created. Such certification would require each 
manufacturer (under 27 CFR Part 40) or importer (under 27 CFR Part 
41) to certify to the TTB that each of the factors set forth in ATF 
Ruling 73-22 have been satisfied with respect to such brand. For 
enforcement purposes, each of the seven conditions currently 
required for an advanced ruling

[[Page 62513]]

should be included in the certification submission to TTB.
    We recommend that this certification be made a one time 
requirement for post-MSA brands. In addition, any material change in 
the appearance, type of tobacco used in the filler, and packaging 
and labeling of the product would trigger a recertification process. 
New brands marketed after the completion of the rulemaking would 
also be required to comply with the certification process.
    However, we do not recommend that the certification process 
include any affirmative action by the TTB in order for the brand to 
be eligible for entering into commerce. In other words, there would 
not be a pre-approval process prior to the marketing of a post-MSA 
brand. Rather, the certification submissions would form the basis 
for an initial level of TTB analysis and review, focusing on those 
products in the marketplace where the most significant 
classification issues are likely to exist.
    The petitioners also requested that TTB amend the regulations to 
provide for a third party challenge procedure. This procedure would be 
open to any party to demonstrate that tobacco products introduced into 
commerce as ``small'' or ``little'' cigars do not meet the regulatory 
criteria established by TTB.
    Finally, the petitioners requested that any efforts to modernize 
the TTB regulations be done in conjunction with the U.S. Customs and 
Border Protection as they relate to tobacco product imports. In 
addition, the petitioners recommended the inclusion of post-MSA 
presumption and certification requirements in 27 CFR part 41.

CAA Petition Follow-Up

    On February 21, 2006, the CAA submitted a letter with reference to 
its December 19, 2005, petition. This letter is directed to certain 
issues raised in the Lorillard-RJR petition.
    The CAA states in this letter that the Lorillard-RJR proposal does 
not offer much in the way of establishing standards for distinguishing 
between little cigars and cigarettes, but instead focuses on compliance 
and enforcement issues pertaining to these two products. The CAA 
further states that the Lorillard-RJR proposal would impose regulatory 
requirements on one small segment of the tobacco industry that would 
exceed those imposed on the rest of the industry. The CAA notes in this 
regard that the domestic sales volume figures for little cigars and 
cigarettes provided in the Lorillard-RJR petition are misleading 
because the petition uses ``units,'' or individual sticks, for little 
cigars and ``packs'' for cigarettes, which suggests that the cigarette 
industry is ten times the size of the little cigar industry when, in 
fact, it is over 200 times the size.
    The CAA goes on to state:

    The cigarette company proposal also fundamentally 
mischaracterizes the little cigar industry by suggesting incorrectly 
that little cigars are a recent phenomenon. Little cigars have been 
on the market for almost 40 years and, because they were first made 
on old cigarette machines, have always had a superficial resemblance 
to cigarettes. Little cigars, however, have always differed from 
cigarettes, in both composition and marketing. They are made of 
cigar--not cigarette--tobacco, they are wrapped in leaf tobacco or 
in reconstituted tobacco (the material approved by BATF/TTB for use 
on cigar making equipment), and they are clearly labeled and 
promoted as little cigars. While it is true that there are new 
entrants in the little cigar market since the finalization of the 
MSA, it is unreasonable to suggest that all little cigars, or even 
all those introduced since 1998, are suspect.

    For two reasons, the CAA opposes the Lorillard-RJR proposal for a 
compliance and enforcement approach. First, the proposal does not 
provide any new guidance on how to distinguish between little cigars 
and cigarettes but rather suggests that the factors in ATF Ruling 73-22 
continue to provide a logical basis for the classification of these 
products. The CAA argues that Ruling 73-22 needs to be supplemented and 
that, until this is done, it is premature to consider compliance and 
enforcement procedures.
    The CAA then states:

    Second, even with new guidance in place, the cigarette company 
proposal for compliance and enforcement is unacceptable. It would 
create a ``presumption'' in favor of little cigars marketed prior to 
the Master Settlement Agreement of November 23, 1998. This 
``presumption,'' however, is meaningless, since pre-MSA brands would 
``still be subject to monitoring and challenge as under existing 
regulations.'' More importantly, the unstated corollary to the 
favorable presumption for pre-MSA little cigars is that there will 
be a presumption against little cigars first marketed after the MSA. 
The implication is that any such product will be presumed to be a 
cigarette unless the manufacturer can demonstrate otherwise. The 
tax, customs, MSA and other implications of this presumption are 
unstated but the results would certainly include chaos and 
confusion, as products move between categories. This negative 
presumption would apparently apply to pre-MSA brands as to which 
there is any material change in appearance, type of tobacco used in 
the filler, or packaging and labeling of the product. A change in 
any one of these characteristics would reverse the favorable 
presumption, temporarily re-classifying a little cigar as a 
cigarette.

    The CAA also opposes the Lorillard-RJR proposal that TTB create a 
certification procedure for post-MSA little cigar brands, arguing that 
it is premature to discuss ``certification'' of a product as a little 
cigar without knowing what test is to be used. Under the Lorillard-RJR 
proposal, all of the seven conditions specified in ATF Ruling 73-22 for 
an advance ruling would have to be included in the certification, which 
would also apply to pre-MSA brands if there is any material change in 
the product or packaging. The CAA asserts that such an approach is 
tantamount to a pre-approval scheme, as it would result in immediate 
review and inspection of a product coming to market, without any basis 
for such action.
    Finally, the CAA takes issue with the Lorillard-RJR proposal for a 
``third party challenge procedure,'' arguing that such a procedure 
would be an invitation to those with a variety of interests to force 
little cigar manufacturers to continually defend their products from 
unwarranted and unjustified attack. In addition, the CAA noted that 
because under Federal statute the tax status of any particular product 
must be held in confidence by TTB, Federal legislation would be 
required for TTB to create and implement such a third party challenge 
procedure.

The 23 States Joint Petition and Amendment

    On April 24, 2006, the States of Montana, Wisconsin, Oklahoma, 
Utah, Oregon, South Dakota, Vermont, California, Louisiana, Delaware, 
New York, Arizona, Arkansas, Nebraska, West Virginia, New Mexico, Rhode 
Island, Wyoming, Nevada, Kentucky, Idaho, Hawaii, and Pennsylvania (the 
petitioner States) submitted a petition to TTB requesting the repeal of 
the definitions of ``cigar'' and ``cigarette'' as provided in 27 CFR 
40.11, 41.11, 44.11, and 45.11. The petitioner States also propose new 
rules defining ``cigar'' and ``cigarette'' as used in 26 U.S.C. 5702 
and new procedural rules for cigar and cigarette rulings. The 
petitioner States say that they take an active role in protecting the 
health and safety of their citizens. They also state that they find 
that the tax classification of cigars and cigarettes allows products 
that are actually cigarettes to be taxed and sold as cigars. Further, 
the petitioner States maintain that this is a growing trend and that it 
endangers the integrity of the Federal and State tax systems in 
addition to the MSA. They also state that the trend places the health 
and safety of U.S. citizens, especially youths, at risk. Specifically, 
the petitioner States address the following topics in their petition:
     Public Health;

[[Page 62514]]

     Federal Definition of Cigar and Cigarette;
     Lost Tax Revenues;
     Evasion of MSA Payments;
     Evasion of State Escrow and Cigarette Directory Laws;
     Health Warnings and Ingredient Reporting;
     Confusion in the Marketplace; and
     Proposed New Rules.
Public Health
    The petitioner States address several concerns regarding the effect 
that little cigars have on public health. They state that young people 
are beginning to smoke little cigars at a higher rate than they smoke 
cigarettes. Thus, the petitioner States are afraid that this increase 
will reverse the gains they have made in lowering the rate of cigarette 
smoking in this segment of the population. They also allege that young 
people have greater access to little cigars than cigarettes, because in 
many states cigarettes are required to be sold in packages of 20 sticks 
or more, whereas there is no such requirement for little cigars. The 
petitioner States assert that little cigars that are sold in packages 
of less than 20 sticks, such as packages of eight sticks, five sticks, 
or one stick, would be less expensive and thus more accessible for 
younger buyers than a package of 20 sticks. They also note that the 
flavors such as strawberry, cherry, and vanilla used in some little 
cigars make these products attractive to the young.
    The petitioner States also address the general health effects of 
cigars. Specifically, they state that ``[C]igar smokers face a risk of 
death from laryngeal, oral or esophageal cancer that is 4 to 10 times 
greater than the risk faced by nonsmokers.''
    The petitioner States argue that sales of little cigars are on the 
increase and that in some instances the marketing of these products can 
be misleading. Specifically, they state that ``[L]ittle Cigar makers 
have encouraged smokers to identify Little Cigars as cigarettes through 
their marketing practices.''
Federal Definition of Cigar and Cigarette
    The petitioner States included the following points concerning the 
evolution of the Federal definitions of cigar and cigarette:

    Traditionally cigars have been wrapped in a leaf of tobacco. 
Cigars are made of air-cured tobacco that is aged and subjected to a 
multi-step fermentation process that reduces sugar content. 
Traditionally, cigars are also unflavored. Cigar smoke is not 
intended to be inhaled, so traditionally cigars do not have 
integrated filters. Sometimes, however, cigars have a mouthpiece 
made of plastic or wood that is intended to keep stray pieces of 
tobacco out of the mouth. In the United States, cigars come in many 
styles and sizes. Small cigars generally have straight bodies and 
weigh between 1.3 and 2.5 grams each. Large cigars vary greatly in 
size and shape. They can contain from 5 to 17 grams of tobacco.
    Traditionally cigarettes have been wrapped in paper. Cigarettes 
are made of flue-cured tobaccos, not fermented tobaccos. Cigarette 
smoke is intended to be inhaled into the lungs, consequently some 
cigarettes have cellulose acetate filters or other integrated 
filters that are intended to filter some of the tar out of the 
smoke. Cigarette manufacturers often add sugar to enhance the flavor 
of the cigarette smoke. They generally range from 68-121 mm. in 
length and are generally of less than 28 ring gauge.
    Prior to 1965, ``Cigar'' as used in 26 U.S.C. 5702 was defined 
as ``any roll of tobacco wrapped in tobacco'' and ``Cigarette'' was 
defined as ``any roll of tobacco, wrapped in paper or any substance 
other than tobacco.'' 26 U.S.C.S. 5702.
    With the advent of reconstituted tobacco, it became possible to 
machine wrap cigars in a mixture of paper and tobacco. Reconstituted 
tobacco is ground tobacco mixed with various adhesives and cellulose 
fibers. This blurred the line between a cigar and a cigarette. In 
1965, Congress enacted Public Law 89-44 which amended the 
definitions of cigar and cigarette to those we have today. The 
legislative history of Public Law 89-44 describes how technology 
created the problem of distinguishing between cigars and cigarettes.

    The petitioner States also included the following statement from 
the legislative history of Public Law 89-44 to describe the nature of 
the problem of distinguishing between cigars and cigarettes that led to 
the legislation:

    The introduction of reconstituted (homogenized) tobacco for use 
as a wrapper for rolls of tobacco had created problems regarding the 
existing distinction between a cigar and a cigarette. Reconstituted 
tobacco can be used to wrap rolls of tobacco that closely resemble 
cigarettes. Moreover, it possesses many of the properties of paper, 
including suitability for use in high-speed cigarette manufacturing 
machinery.

    The petitioner States further argued as follows based on the 
legislative history and the wording of the amended definitions: 
``Clearly Congress intended that ``cigarette'' would include a product 
wrapped in something that contains tobacco if it was likely to be sold 
as or purchased as a cigarette.''
    The petition noted the issuance of Revenue Ruling 69-198, which was 
subsequently superseded by ATF Ruling 73-22. The petition then stated 
the following regarding the difficulties with Ruling 73-22:

    There are several difficulties with Rev. Rul. 73-22. The Ruling 
assumes that products that are likely to be sold as or purchased as 
cigarettes will not be if they are labeled as cigars. This has led 
to rolls of tobacco that are filtered, appear to be cigarettes in 
brown wrapper and packaged in a traditional cigarette pack, are 
being taxed and sold to consumers as cigars because they are labeled 
as little cigars. But recent surveys on youth use of little cigars 
and the manufacturers' own statements show that ``Little Cigars'' 
are being purchased in lieu of cigarettes. ``Little Cigars'' are 
advertised to consumers as cigarette alternatives and consumers are 
self-identifying ``Little Cigars'' as cigarettes. Consumers 
recognize that a product that looks like a cigarette, is filtered to 
be inhaled like a cigarette, and is packaged like a cigarette is, in 
fact, a cigarette. Unscrupulous manufacturers have exploited the 
loopholes in Ruling 73-22 by self-classifying cigarettes as cigars. 
This intentional, unscrupulous misclassification of cigarettes as 
cigars has resulted not only in damage to the public health but also 
in significant lost revenues and confusion in the marketplace.
Lost Tax Revenues
    The petitioner States allege in their petition that the Federal 
government and the States are losing significant tax revenues because 
cigarettes are improperly taxed as cigars. On the Federal front, with 
the excise tax rate for small cigars at 4 cents per pack or 40 cents 
per carton and that the rate for cigarettes at 39 cents per pack or $ 
3.90 per carton, there is tax difference of $3.50 per carton. Further, 
the petitioner States suggest the following with regard to lost Federal 
tax revenue:

    From 1999 to 2005, the total little cigars sales (domestic, PR & 
imported) increased by over 1.7 billion sticks, or 79%. During this 
same time period cigarette sales decreased by over 20%. The States 
believe that consumers are buying the cigarettes that are 
intentionally misclassified as much cheaper ``Little Cigars'' in 
order to avoid the high cigarette prices. If we assume that this 
increase is all due to the improperly labeled products, the federal 
excise taxes lost total $34 million, based upon the applicable tax 
rate of $3.90 per carton.
    Almost as much federal excise taxes are lost even if the shorter 
time period, from 2002 to 2005, is selected. From 2002 to 2005, 
``Little Cigar'' sales increased over 1.6 billion sticks, or 69%. 
The federal excise taxes lost on this increase, at $3.90 per carton, 
total $32 million.
Evasion of MSA Payments
    The petitioner States point out that the MSA payments to the States 
are based on the sales of cigarettes and not cigars. Further, they 
state that because MSA payments are calculated based on the Federal 
excise taxes paid for cigarettes, little cigars are not included in the 
calculation of MSA payments. The petitioner States argue that this 
creates a financial incentive to shift a product classification from a 
cigarette to a cigar to avoid making MSA payments.

[[Page 62515]]

They note that the MSA payment for 2005 was $4.25 per carton.
Evasion of State Escrow and Cigarette Directory Laws
    The petitioner States point out that the tobacco product 
manufacturers that did not join the MSA (referred to as non-
participating manufacturers) still must make annual payments into 
escrow accounts held by the MSA signatory States; in 2005 the escrow 
amount per carton was $4.16. The payments are based on the 
manufacturer's sales of products stamped as cigarettes in each State, 
and the State Directory laws list the names of the manufacturers who 
make escrow payments and thus are allowed to sell their products in the 
State. However, cigars are not subject to the escrow requirements. 
Therefore, the petitioner States allege that when a cigarette 
manufacturer is sanctioned for failing to make escrow payments, the 
manufacturer simply repackages its cigarettes as ``Little Cigars'' and 
continues to sell them in the State.
Health Warnings and Ingredient Reporting
    The petitioner States state that the Federal Cigarette Labeling and 
Advertising Act (FCLAA) administered by the Federal Trade Commission 
(FTC) requires health warning labels and ingredient reporting for 
cigarettes but that no such requirement exists for cigars. The 
petitioner States further note that in 2000 the FTC and the seven 
largest cigar manufacturers entered into an agreement to place warning 
labels on their cigars. They argue that one of the warning labels 
included in the 2000 settlement, ``Cigar smoking can cause cancers of 
the mouth and throat, even if you do not inhale'', would be highly 
misleading if the product in question were actually a cigarette and not 
a cigar because the warning in question assumes that the consumer will 
not inhale when smoking the product.
Confusion in the Marketplace
    The petitioner States point out that several States have looked at 
``Little Cigars'' and have determined that they are cigarettes as 
defined by the State for state tax purposes. The petitioner States 
further contend that ``[i]f the States change their tax definitions 
without a corresponding change in the TTB regulations, the 
inconsistencies between the two definitions cause tremendous confusion 
in the marketplace.'' To clear up this confusion, the petitioner States 
propose that TTB revise its definitions of cigar and cigarette so that 
the products can be treated consistently under both State law and 
Federal law. Further, they suggest that TTB ``take the lead to 
establish clear, objective, non-lab dependent standards that create a 
clear federal regulatory framework into which the states may integrate 
their laws.''
The States' Proposed New Rules
    The petitioner States included three proposed new rules designed 
to: (1) Preserve the integrity of the cigar classification, (2) fairly 
define cigarettes based upon their design characteristics, and (3) set 
forth a procedure for determining if a product is a cigar or a 
cigarette under Federal law. The States' proposed new rules were 
outlined in the petition as follows:

    Proposed New Rule I--Cigar.
    A cigar is a roll of tobacco that:
    1. Is wrapped in 100% natural leaf tobacco; or
    2. (a) Is wrapped in any substance that contains 75 percent or 
more tobacco which did not in the reconstitution process lose its 
tobacco character (taste, aroma, identifiable chemical components) 
and is of a color consistent with that of the natural leaf tobaccos 
traditionally used as a wrapper for American cigars; and
    (b) Is not a cigarette within the meaning of [New Rule II].
    Proposed New Rule II--Cigarette.
    A cigarette is a roll of tobacco that:
    1. Is wrapped in paper or any substance not containing tobacco; 
or
    2. Is wrapped in a substance containing tobacco, and is likely 
to be offered to, or purchased by, consumers as a cigarette. A roll 
of tobacco wrapped in a substance containing tobacco (other than 100 
percent natural tobacco leaf) shall be considered to be likely to be 
offered to, or purchased by, consumers as a cigarette if any of the 
following are true:
    a. It has a cellulose acetate or other integrated filter;
    b. The tobacco used in the filler contains flue-cured or 
unfermented tobaccos or has flavor additives;
    c. The tobacco in the filler, binder, or wrapper contains any 
sucrose;
    d. The packaging does not clearly and conspicuously declare that 
the product is a cigar;
    e. The appearance, packaging and/or labeling of the product 
meets three or more of the following criteria:
    i. The product is sold in packs containing twenty or twenty-five 
sticks;
    ii. The product is available for sale in cartons of 10 packs;
    iii. The product is sold in soft packs, hard packs, flip-top 
boxes, clam shells, or other cigarette-type boxes;
    iv. The product weighs less than three pounds per thousand 
sticks; or
    v. The product is the diameter and length of a commercially-
manufactured cigarette;
    f. The product is marketed or advertised to consumers as a 
cigarette or cigarette substitute; or
    g. It contains any other indicia that the product fits within 
the definition of cigarette in 26 U.S.C. 5702(b).
    Proposed New Rule III--Procedure.
    1. A manufacturer shall request an advance ruling from the 
bureau as to any product a manufacturer or importer wishes to market 
as a cigar.
    2. The bureau shall make an advance ruling as to whether a 
product is a cigar within the meaning of 26 U.S.C. 5702(a), using 
the criteria above and the characteristics of the tobacco product, 
its packaging and labeling, and the totality of the circumstances.
    3. Along with a request for determination, the manufacturer 
shall submit the following:
    a. The package and any larger consumer container such as the 
carton, or the detailed graphics for these if they have not been 
printed;
    b. A statement of the merchandising theme and copies of all 
advertising that mentions or depicts the product and point of sale 
merchandising material for the product;
    c. A statement under penalty of perjury that the merchandising 
and advertising materials submitted are of the exact, actual 
advertising that will be used in the United States;
    d. A statement under penalty of perjury that the manufacturer 
will obtain a new ruling from the Bureau if any material 
modifications are made to the marketing or advertising of the 
product prior to any change in the existing marketing or 
advertising;
    e. A statement of composition of the wrapper including the type, 
geographic origin, treatment, age, and percentage of each tobacco 
used;
    f. 2,500 square inches (17 square feet) of the wrapper material;
    g. A statement of all the materials, chemicals, and additives 
and proportion of each used in the binder, and the production 
process;
    h. 400 sticks of the finished product (if weighing not more than 
10 pounds a thousand), or 200 sticks of the finished product (if 
weighing more than 10 pounds a thousand);
    i. A statement under penalty of perjury of all the materials, 
chemicals, and additives and proportion of each used in the filler 
and the production process, including, but not limited to, the 
proportion of fermented air-cured tobacco, flue-cured tobacco and 
unfermented tobacco;
    j. A statement under penalty of perjury that the samples 
submitted are of the exact, actual product that will be sold in the 
United States; and
    k. A statement under penalty of perjury that the manufacturer 
will obtain a new ruling from the Bureau if any modifications are 
made to the composition or ingredients of the product prior to sales 
of any modified product.
    4. If the manufacturer requests a ruling, the manufacturer shall 
submit all other relevant evidence required to enable the bureau to 
make a ruling. Pending a ruling by the Bureau, the manufacturer may 
only sell its product as a cigarette and comply with all laws 
applicable to cigarettes; such sales may

[[Page 62516]]

occur only after the manufacturer notifies the revenue departments 
of the states where the product will be sold that a ruling by the 
Bureau is still pending.
    5. Not later than January 1, 2007, the Bureau shall develop and 
publish on its Internet Web site a directory listing of all rulings 
by the Bureau regarding the classification of a tobacco product as a 
cigar or as a cigarette, including the name and address of the 
manufacturer requesting the product classification, the product 
brand family and if the trademark for the brand family is not owned 
by the manufacturer, the name and address of the owner of the 
trademark.

    On May 18, 2006, the Assistant Attorney General for the State of 
Montana, Kelly M. O'Sullivan, submitted an amendment to the petition 
submitted by the 23 States on April 24, 2006. The amendment was 
submitted to add an additional 16 States and one territory to the 
original petition, bringing the supporters of this petition to 39 
States and one territory, as follows: Alaska, Arizona, Arkansas, 
California, Connecticut, Delaware, Georgia, Hawaii, Idaho, Illinois, 
Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, 
Michigan, Minnesota, Montana, Nebraska, Nevada, New Mexico, New Jersey, 
New York, North Carolina, Oklahoma, Oregon, Pennsylvania, Rhode Island, 
South Carolina, South Dakota, Tennessee, Utah, Vermont, Washington, 
West Virginia, Wisconsin, Wyoming, and Guam.
    In addition, the petition amendment included more recent 
information pertaining to the consumption of little cigars and 
cigarettes. Specifically, the petition amendment states:

    Since the States filed our petition with the TTB, the following 
official information from the United States government, U.S. 
Department of Agriculture, Tobacco Outlook has come to our 
attention. While cigarette consumption has continued to decline, 
small cigar consumption increased significantly in 2005 over 2004. 
``Consumption of little cigars reached 4,037 million cigars, 
compared with 2,917 million in 2004. Popularity of little cigars 
increased in part due to lower tax rates than cigarettes and because 
Master Settlement Agreement payments are not assessed on small 
cigars as they are with cigarettes.'' [U.S. Dep't of Agriculture, 
Tobacco Outlook. Wash., DC: U.S. Dep't of Agric., Econ. Res. Serv., 
2005, p. 2. The Tobacco Outlook and accompanying tables are 
available at: usda.mannlib.cornell.edu/reports/erssor/specialty/tbs-bb/2006/tbs260.pdf.] Data compiled from reports of the Bureau of 
Alcohol, Tobacco and Firearms, and the Bureau of the Census indicate 
that per capita consumption of small cigars increased from 10.4 
small cigars per person in 2003 to 12.1 small cigars in 2004 and 
17.2 small cigars in 2005, an increase of 65% since 2003 and an 
increase of 42% in the most recent year.
    The petition amendment concludes with the following statement:
    We believe it is obvious that the majority of this astonishing 
growth is due to the fact that cigarettes are being passed off as 
``little cigars'' and that, absent effective action by this agency, 
this dangerous and illegal activity will only intensify * * * The 
States urge the TTB to act now to adopt new rules and regulations 
that clearly classify as a cigarette through specific, objective 
criteria, products that are properly a cigarette--namely ``any roll 
of tobacco wrapped in any substance containing tobacco which, 
because of its appearance, the type of tobacco used in the filler, 
or its packaging and labeling, is likely to be offered to, or 
purchased by, consumers as a cigarette.'' The States also request 
that TTB adopt policies and procedures for classification which 
prevent manufacturers from self-classifying their cigarettes as 
cigars in order to avoid the attendant federal and state 
regulations, laws, taxes and payments.

The Need for Regulatory Changes

    Based on the considerations that led to the total reducing sugars 
study discussed above, and in light of the uncertainties and other 
problems outlined in the three petitions summarized above, TTB believes 
that a pressing need for regulatory improvements exists. TTB notes in 
this regard that the only extant regulatory standard for distinguishing 
between cigars and cigarettes consists of the definitions of these 
terms, which merely repeat the statutory definitions. The only other 
published source for guidance in this area is ATF Ruling 73-22, which 
does not have the same force and effect as a regulation.
    We also must emphasize that tax administration under the IRC is the 
only appropriate basis for the regulatory changes proposed in this 
document. Although the CAA, Lorillard-RJR, and the petitioner States 
petitions stress the significance of the signing of the Master 
Settlement Agreement (MSA), in particular regarding the alleged effect 
of the MSA on the marketing of little cigars, we note that TTB has no 
jurisdiction to act under the MSA. Similarly, although the petitioner 
States cited a number of public health issues in their petition, such 
issues are clearly outside the scope of Chapter 52 of the IRC. 
Accordingly, the proposed regulatory amendments contained in the 
document are directed only to enforcing the provisions of Chapter 52 of 
the IRC.

Basic Interpretative Principles

    TTB recognizes that the statutory definitions of ``cigar'' and 
``cigarette'' are controlling and are not susceptible to modification 
by regulation. Accordingly, we must operate within those definitions in 
amending the regulations to clarify the distinction between cigars and 
cigarettes for tax purposes. This being said, TTB has authority to 
interpret those definitions and determine how they are applied to 
specific products. Several basic interpretations of those definitions 
underlie the regulatory changes proposed in this document.
    One interpretation concerns the effect of the usage of the terms 
``leaf tobacco'' and ``substance containing tobacco'' in these 
definitions. It is the position of TTB that a ``roll of tobacco'' that 
is wrapped in ``leaf tobacco'' must be classified as a cigar and never 
as a cigarette. This position is based on the fact that whereas both 
definitions include a reference to a ``substance containing tobacco'' 
when referring to the wrapper material, the term ``leaf tobacco'' 
appears as a wrapper reference only in the ``cigar'' definition. The 
terms ``leaf tobacco'' and ``substance containing tobacco'' were 
introduced when the definitions were amended in 1965 (prior to that 
amendment, the cigar definition referred to a roll of tobacco wrapped 
in ``tobacco'' and the cigarette definition referred to a roll of 
tobacco wrapped in ``paper or any substance other than tobacco''). The 
fact that Congress chose not to use the new wrapper term ``leaf 
tobacco'' in the cigarette definition is evidence of an intent to 
restrict it to a cigar wrapper context.
    As a corollary to the rule stated above, a distinction must be made 
between ``leaf tobacco'' and a ``substance containing tobacco.'' This 
is necessary both because the statutory definition of ``cigar'' uses 
both terms in the disjunctive (thus making an implicit distinction 
between them) and because including leaf tobacco within the meaning of 
``substance containing tobacco'' would allow a ``cigarette'' to have a 
wrapper consisting of leaf tobacco, contrary to the rule stated above.
    Similarly, it is the position of TTB that a ``roll of tobacco'' 
that is wrapped in a ``substance not containing tobacco'' must be 
classified as a cigarette and never as a cigar. This position is based 
on two factors: (1) The presence of tobacco in the wrapper (either as 
``leaf tobacco'' or in a ``substance containing tobacco'') is a 
prerequisite to classification as a cigar under the cigar definition; 
and (2) only the first of the two cigarette definitions refers to a 
``substance not containing tobacco.''
    Finally, and most important, it is the position of TTB that, in the 
case of a ``roll of tobacco'' that is wrapped in a ``substance 
containing tobacco,'' the statutory definition of ``cigar'' requires a

[[Page 62517]]

threshold determination of whether the product in question is a 
cigarette; if it is, it must be treated as a cigarette for tax 
purposes. We note in this regard that a ``roll of tobacco'' wrapped in 
a ``substance containing tobacco'' is potentially classifiable either 
as a cigar or as a cigarette, because those words are used both in the 
``cigar'' definition and in the second ``cigarette'' definition. 
However, the words ``other than any roll of tobacco which is a 
cigarette within the meaning of subsection (b)(2)'' in the statutory 
definition of ``cigar'' require the reader first to determine whether 
it is described by the second definition of ``cigarette.'' If it is so 
described, it must be classified as a cigarette notwithstanding the 
fact that it also meets the description of a ``roll of tobacco * * * 
wrapped in any substance containing tobacco'' contained in the 
definition of ``cigar.''

Issues Raised in the Petitions

    TTB has carefully reviewed the comments and recommendations made in 
the three submitted petitions. In addition to our general agreement 
with all of the petitioners regarding the need for regulatory action to 
clarify the distinction between cigars and cigarettes, we note the 
following with regard to the tax-related points made in the petitions.
Creation of an MSA-Based Presumption
    TTB does not concur with the Lorillard-RJR petition suggestion to 
create a (rebuttable) presumption in favor of those little cigar brands 
marketed prior to the MSA, for two reasons. First, the adoption of such 
a presumption would give the MSA an inappropriate role in tax 
classification. As indicated above, TTB's regulatory authority proceeds 
from the IRC, not the MSA. TTB also agrees with the observation made by 
the CAA in its response to the Lorillard-RJR petition that such a 
presumption could lead to confusion, particularly as products move from 
one category to another or are subjected to a material change in 
composition or presentation.
Certification for Post-MSA Brands
    TTB does not agree with the Lorillard-RJR suggestion to require a 
one-time certification for post-MSA brands, for the same reason that an 
MSA-based presumption would not be appropriate. However, TTB does not 
agree with the CAA assertion that it would be premature to consider the 
certification concept because it is not known what ``test'' is to be 
used. For reasons set forth in more detail below, we believe that, with 
the adoption of improved, objective regulatory standards for 
distinguishing between cigars and cigarettes, a properly designed 
certification procedure could provide a workable solution for 
manufacturers, importers, and TTB.
Third Party Challenge Procedure
    TTB agrees with the CAA that the third party product classification 
challenge procedure suggested in the Lorillard-RJR petition would be 
unworkable. Such a challenge procedure would put TTB in the position of 
having to mediate a dispute involving private parties, a position that 
TTB should not occupy. Moreover, any role that TTB might perform in 
such a dispute would inevitably involve the issue of disclosure of tax 
return information, which in most cases is prohibited under 26 U.S.C. 
6103. We should point out, however, that any person, including a 
competitor, may refer information to us about a manufacturer's or 
importer's improperly classified tobacco product.
Coordination With Customs and Border Protection
    TTB agrees with the suggestion in the Lorillard-RJR petition 
regarding coordination with Customs and Border Protection (CBP) on 
regulatory changes as they affect imported products. We consulted with 
CBP in connection with the drafting of this document, and we will 
continue to closely coordinate with CBP on our regulatory and related 
actions as they relate to import transactions falling under the 
jurisdiction of CBP.
Proposed New Rules To Define Cigars and Cigarettes
    While TTB agrees with the suggestion of the petitioner States that 
specific new rules are necessary to clarify the distinction between 
cigars and cigarettes, we do not agree with their proposed new 
definitions approach, because, as noted above, the IRC definitions 
control and cannot be changed by regulatory action. Rather, we believe 
that the proper approach is to set forth specific rules that interpret 
and apply the IRC definitions for tax classification purposes. The 
acceptability of the specific rules suggested by the petitioner States 
is addressed below in the discussion of the proposed regulatory texts 
set forth in this document.
Proposed Advance Ruling Procedure
    TTB is opposed to the new advance ruling procedure proposed by the 
petitioner States, because this would improperly shift the burden of 
tax compliance from the taxpayer to the Government. We believe that the 
following statement from ATF Ruling 73-22 continues to reflect the 
proper agency position on this issue:

    Manufacturers and importers have the initial responsibility for 
(1) determining whether material intended for use as a wrapper for 
rolls of tobacco is a ``substance containing tobacco,'' (2) 
determining whether a roll of tobacco wrapped in such material has 
the characteristics of a cigar or a cigarette, (3) knowing whether 
the product is likely to be offered to or purchased by consumers as 
a cigar or a cigarette, and (4) paying the tax at the proper rate.

However, we no longer believe that the advance ruling procedure 
referred to in ATF Ruling 73-22 is the best way to ensure compliance. 
Rather, we believe that a procedure involving the advance submission of 
a written tax classification certification to TTB is the best approach 
because it places the initial responsibility where it lies under the 
IRC, that is, with the manufacturer or importer. The certification 
procedure that TTB proposes is discussed in more detail later in this 
document.

Status of ATF Ruling 73-22 and ATF Procedures 73-5 and 76-2

    With the exception of the reference to the advance ruling 
procedure, TTB is in substantial agreement with the standards and 
statements contained in ATF Ruling 73-22. However, as noted above, it 
is preferable to have tax classification standards reflected in the 
text of a regulation rather than in a guidance document that was not 
the subject of public notice and comment procedures. Accordingly, we 
propose to incorporate the substance of ATF Ruling 73-22 in the 
regulations, with the result that ATF Ruling 73-22 will be superseded 
in its entirety upon adoption of the proposed regulatory changes as a 
final rule.
    With regard to ATF Procedures 73-5 and 76-2, TTB notes that the 
tobacco industries in the United States and abroad have changed the way 
they manufacture and market their products, and this may be especially 
true for little cigars. As a result of these changes and in view of the 
technological advances made with regard to the analytical 
instrumentation used to examine tobacco products, TTB believes it will 
be necessary to update the analytical standards it uses to evaluate 
these products. Moreover, the new standards proposed in this document 
rely in part on the results of the total reducing sugars study 
discussed above, which requires an analytical approach not covered by 
the existing Procedures. We are publishing elsewhere in this issue of

[[Page 62518]]

the Federal Register a notice describing the analytical methodology 
that TTB uses to determine the total reducing sugar content of tobacco 
products.

Discussion of the Proposed Amendments

    We are proposing to amend parts 40, 41, 44, and 45 to clarify the 
tax classification of cigars and cigarettes, with particular emphasis 
on the adoption of standards in the regulations to distinguish between 
these two classes of products. The proposed amendments, which are 
essentially the same for each part, involve:
    (1) The addition of two new definitions in Sec. Sec.  40.11, 41.11, 
44.11, and 45.11 and, in each current definition of ``cigar'' and 
``cigarette,'' the inclusion of a cross-reference to the new clarifying 
classification provisions.
    (2) The addition of two new sections in each part (Sec. Sec.  40.12 
and 40.13, 41.12 and 41.13, 44.12 and 44.13, and 45.12 and 45.13), the 
first one of which in each part sets forth the clarifying 
classification rules and the second of which requires a cigar 
manufacturer or importer to submit a classification certification to 
TTB; and
    (3) The addition of a new paragraph (b) setting forth additional 
notice requirements for cigars in Sec. Sec.  40.214, 41.73, 44.186, 
44.253, and 45.44.
    The following specific points are noted regarding the proposed 
regulatory amendments.

New Definitions

    The two new definitions cover two terms, ``substance containing 
tobacco'' and ``substance not containing tobacco,'' the first of which 
appears in the existing statutory and regulatory definitions of 
``cigar'' and ``cigarette'' and the second of which is only in the 
``cigarette'' definition. We included both because including only one 
of them would not in all cases clarify the meaning (scope) of the other 
defined term. The ``substance containing tobacco'' definition refers 
specifically (but not exclusively) to ``reconstituted tobacco'' based 
on the significance of this material in this context, as discussed 
earlier in this document.
    The two definitions incorporate the two-thirds rule, rather than 
the 75 percent standard proposed by the petitioner States (see the 
description of the two-thirds rule in the discussion of ATF Ruling 73-
22 earlier in this preamble). We note in this regard that the two-
thirds rule is familiar to the trade and has been the standard since 
ATF Ruling 73-22 was issued, and our experience since 1973 does not 
support any change in this standard.
    The proposed definitions do not include the additional two criteria 
in ATF Ruling 73-22 requiring that the reconstituted tobacco not lose 
its tobacco character (e.g. taste, aroma, identifiable chemical 
components) and be of a color consistent with that of the natural 
tobacco leaf tobaccos traditionally used as a wrapper for American 
cigars. This criterion was also reflected in the superseded Revenue 
Ruling 69-198 that was issued after the 1965 statutory amendments to 
the definitions of cigars and cigarettes in order to help implement 
those changes to the law. TTB believes that these standards are too 
subjective and should not be included in the proposed definitions, 
which aim to establish an objective standard.
    Finally, the two definitions refer to ``leaf or other fibrous 
material from the plant Nicotiana tabacum or the plant Nicotiana 
rustica'' because the former is the plant most commonly associated with 
``tobacco'' (see, for example, Webster's Third New International 
Dictionary of the English Language, unabridged, 1993, Merriam Webster, 
Inc. Springfield, MA) and because we understand that the latter is also 
used in tobacco products on a more limited scale.

Classification of Cigars and Cigarettes

    The ``classification of cigars and cigarettes'' section added to 
each part reflects the classification principles that we outlined 
earlier in this document. In addition, it incorporates a ``3.0 percent 
by weight of total reducing sugars'' standard as a dividing line 
between the two classes of products, with cigars at or below that level 
and cigarettes above it. This reflects the results of our total 
reducing sugar study, which yielded a clear, objective criterion to 
distinguish between these products that we believe is more complete 
than the ``contains any sucrose'' standard for a cigarette suggested by 
the petitioner States because, as explained earlier, sucrose is 
captured in the total reducing sugar values disclosed in the study. The 
proposed standards for classification as a cigarette also incorporate 
some specific criteria from both the petitioner States petition and ATF 
Ruling 73-22.
    The ``cigar certification'' section added to each part requires a 
manufacturer or importer of cigars to have filed with TTB's National 
Revenue Center a certification that the product in question meets the 
rules for classification as a cigar prior to removal of the product. 
This certification reflects the principle stated in ATF Ruling 73-22, 
and reaffirmed in this document, that it is the legal obligation of the 
taxpayer to initially determine the tax status of a tobacco product. 
TTB believes that, with the adoption of the classification standards 
proposed in this document, manufacturers will be in a much better 
position to do that. Manufacturers will also be able to assess more 
readily whether a change in the formulation or manufacturing process 
for their products results in a change in their tax classification. The 
new section in each case also requires the submission of a new 
certification if there is a change to a previously certified product.

Notice Requirements for Cigars

    Finally, the new paragraph (b) added to the cigar notice 
requirements in the four parts reflects primarily the terms of ATF 
Ruling 73-22. These additional notice requirements are intended to 
ensure that a cigar is fully and clearly marked as such, so that it 
would not be ``likely to be offered to, or purchased by, consumers as a 
cigarette'' within the meaning of the second cigarette definition.

Effective Date Considerations

    In addition to soliciting comments on the proposed regulatory text 
amendments set forth below and on the position of TTB on the issues 
discussed in the preamble of this document, we invite comments on 
whether, and if so for what period, a delayed effective date should 
apply to any final rule action on this matter. Noting in particular the 
proposed new pre-removal cigar certification procedure, we are 
interested in knowing whether a delayed effective date would be needed 
to afford manufacturers and importers sufficient time to obtain all of 
the facts necessary to execute and file a proper certification.

Public Participation

Comments Sought

    TTB requests comments on the proposed amendments to our regulations 
discussed in this notice from anyone interested. Please submit your 
comments by the closing date shown above in this notice. Your comments 
must include this notice number (Notice No. 65) and your name and 
mailing address. Your comments must be legible and written in language 
acceptable for public disclosure. We do not acknowledge receipt of 
comments, and we consider all comments as originals.

Submitting Comments

    You may submit comments in one of five ways:

[[Page 62519]]

     Mail: You may send written comments to TTB at the address 
listed in the ADDRESSES section.
     Facsimile: You may submit comments by facsimile 
transmission to 202-927-8525. Faxed comments must--
    (1) Be on 8.5- by 11-inch paper;
    (2) Contain a legible, written signature; and
    (3) Be no more than five pages long. This limitation assures 
electronic access to our equipment. We will not accept faxed comments 
that exceed five pages.
     E-mail: You may e-mail comments to [email protected]. Comments 
transmitted by electronic mail must--
    (1) Contain your e-mail address;
    (2) Reference this notice number on the subject line; and
    (3) Be legible when printed on 8.5- by 11-inch paper.
     Online form: We provide a comment form with the online 
copy of this notice on our Web site at http://www.ttb.gov/tobacco/tobacco_rulemaking.shtml. Select the ``Send comments via e-mail'' link 
under this notice number.
     Federal e-rulemaking portal: To submit comments to us via 
the Federal e-rulemaking portal, visit http://www.regulations.gov and 
follow the instructions for submitting comments.
    You may also write to the Administrator before the comment closing 
date to ask for a public hearing. The Administrator reserves the right 
to determine whether to hold a public hearing.

Confidentiality

    All submitted material is part of the public record and subject to 
disclosure. Do not enclose any material in your comments that you 
consider confidential or inappropriate for public disclosure.

Public Disclosure

    You may view copies of this notice, the related rulemaking 
petitions, and any comments we receive on this proposal by appointment 
at the TTB Information Resource Center at 1310 G Street, NW., 
Washington, DC 20220. You may also obtain copies at 20 cents per 8.5- 
by 11-inch page. Contact the TTB information specialist at the above 
address or by telephone at 202-927-2400 to schedule an appointment or 
to request copies of comments.
    We will post this notice and any comments we receive on this 
proposal on the TTB Web site. All name and address information 
submitted with comments, including e-mail addresses, will be posted. We 
may omit voluminous attachments or material that we consider unsuitable 
for posting. In all cases, the full comment will be available in the 
TTB Information Resource Center. To access the online copy of this 
notice and the submitted comments, visit http://www.ttb.gov/tobacco/tobacco_rulemaking.shtml. Select the ``View Comments'' link under this 
notice number to view the posted comments.

Paperwork Reduction Act

    The collection of information contained in this notice of proposed 
rulemaking has been submitted to the Office of Management and Budget 
(OMB) for review in accordance with the Paperwork Reduction Act of 1995 
(44 U.S.C. 3507). An agency may not conduct or sponsor, and a person is 
not required to respond to, a collection of information unless the 
collection of information displays a valid control number.
    The current information collections are in Sec. Sec.  40.214, 
44.186, 44.253, and 45.44, which was approved under OMB control number 
1513-0101 and included notice requirements for all cigars. The 
estimated average burden for the current information collections is one 
hour. The new information collection requirements are in new Sec. Sec.  
40.214(b), 41.73, 44.186(b), 44.253(b), and 45.44(b) and involves 
notice requirements for all exported cigars and additional notice 
requirements for all small cigars. This information is required to 
ensure proper excise payment of taxes on tobacco products. The likely 
respondents are businesses or other for-profit institutions, including 
partnerships, associations, and corporations.
    The notice information currently required to be displayed on cigar 
labels is minimal. It is information that is maintained by 
manufacturers as part of cost and quality control measures. Cigar 
manufacturers and importers do not expend significant time or expense 
collecting or providing the notice information. Accordingly, the new 
collection of information will not result in an increased burden on 
respondents.
    Comments on the collection of information may be sent by e-mail to 
OMB at [email protected], or by paper mail to Office of 
Management and Budget, Attention: Desk Officer for the Department of 
the Treasury, Office of Information and Regulatory Affairs, Washington, 
DC 20503. A copy should also be sent to TTB by any of the methods 
previously described.
    Comments should be submitted within the time frame that comments 
are due regarding the substance of the regulation.
    Comments are invited on: (a) Whether the collections of information 
are necessary for the proper performance of the functions of the 
agency, including whether the information shall have practical utility; 
(b) the accuracy of the agency's estimate of the information collection 
burden; (c) ways to enhance the quality, utility, and clarity of the 
information to be collected; (d) ways to minimize the information 
collection burden on respondents, including through the use of 
automated collection techniques or other forms of information 
technology; and (e) estimate of capital or start up costs and costs of 
operations, maintenance, and purchase of services to provide 
information.

Regulatory Flexibility Act

    Pursuant to the requirements of the Regulatory Flexibility Act (5 
U.S.C. chapter 6), we certify that this notice of proposed rulemaking 
will not have a significant economic impact on a substantial number of 
small entities. The proposed regulations primarily codify and clarify 
existing administrative tax classification principles and practices. 
Accordingly, a regulatory flexibility analysis is not required. 
Pursuant to section 7805(f) of the Internal Revenue Code of 1986, we 
will submit this notice of proposed rulemaking to the Chief Counsel for 
Advocacy of the Small Business Administration for comment on its impact 
on small businesses.

Executive Order 12866

    This proposed rule is not a significant regulatory action as 
defined by Executive Order 12866. Therefore, it requires no regulatory 
analysis.

Drafting Information

    The principle author of this document is Linda Wade Chapman, 
Regulations and Rulings Division, Alcohol and Tobacco Tax and Trade 
Bureau.

List of Subjects

27 CFR Part 40

    Cigars and cigarettes, Claims, Electronic funds transfers, Excise 
taxes, Imports, Labeling, Packaging and containers, Reporting and 
recordkeeping requirements, Surety bonds, Tobacco.

27 CFR Part 41

    Cigars and cigarettes, Claims, Customs duties and inspection, 
Electronic funds transfers, Excise taxes, Imports, Labeling, Packaging 
and containers, Puerto Rico, Reporting and recordkeeping requirements, 
Surety bonds, Tobacco, Virgin Islands, Warehouses.

[[Page 62520]]

27 CFR Part 44

    Aircraft, Armed forces, Cigars and cigarettes, Claims, Customs 
duties and inspection, Excise taxes, Exports, Foreign trade zones, 
Labeling, Packaging and containers, Reporting and recordkeeping 
requirements, Surety bonds, Tobacco, Vessels, Warehouses.

27 CFR Part 45

    Administrative practice and procedure, Authority delegations 
(Government agencies), Cigars and cigarettes, Excise taxes, Labeling, 
Packaging and containers, Reporting and recordkeeping requirements, 
Tobacco.

Proposed Amendments to the Regulations

    For the reasons discussed in the preamble, we propose to amend 27 
CFR parts 40, 41, 44, and 45 as set forth below.

PART 40--MANUFACTURE OF TOBACCO PRODUCTS AND CIGARETTE PAPERS AND 
TUBES

    1. The authority citation for part 40 continues to read as follows:

    Authority: 26 U.S.C. 5142, 5143, 5146, 5701, 5703-5705, 5711-
5713, 5721-5723, 5731, 5741, 5751, 5753, 5761-5763, 6061, 6065, 
6109, 6151, 6301, 6302, 6311, 6313, 6402, 6404, 6423, 6676, 6806, 
7011, 7212, 7325, 7342, 7502, 7503, 7606, 7805; 31 U.S.C. 9301, 
9303, 9304, 9306.

    2. In Sec.  40.11, a new sentence is added at the end of the 
definition of ``Cigar,'' a new sentence is added at the end of 
paragraph (2) in the definition of ``Cigarette,'' and new definitions 
of ``Substance containing tobacco'' and ``Substance not containing 
tobacco'' are added in alphabetical order, to read as follows:


Sec.  40.11  Meaning of terms.

* * * * *
    Cigar. * * * For classification rules applicable to cigars, see 
Sec.  40.12.
    Cigarette. * * *
    (2) * * * For classification rules applicable to cigarettes, see 
Sec.  40.12.
* * * * *
    Substance containing tobacco. Reconstituted tobacco sheet or any 
other material, other than leaf tobacco, at least two-thirds by weight 
of which consists of tobacco leaf or other fibrous material from the 
plant Nicotiana tabacum or the plant Nicotiana rustica.
    Substance not containing tobacco. Paper or any other material of 
which less than two-thirds by weight consists of tobacco leaf or other 
fibrous material from the plant Nicotiana tabacum or the plant 
Nicotiana rustica.
* * * * *
    3. New Sec. Sec.  40.12 and 40.13 are added to read as follows:


Sec.  40.12  Classification of cigars and cigarettes.

    The rules set forth in this section control in determining whether 
a tobacco product is classified as a cigar or as a cigarette for 
purposes of this part.
    (a) Classification of cigars. (1) General. A tobacco product is 
classified as a cigar if:
    (i) It consists of a roll of tobacco wrapped in leaf tobacco; or
    (ii) It consists of a roll of tobacco that contains no more than 
3.0 percent by weight of total reducing sugars and that is wrapped in a 
substance containing tobacco, and it is not classifiable as a cigarette 
under paragraph (a)(2) of this section.
    (2) Cigarette classification precedence. A tobacco product 
consisting of a roll of tobacco wrapped in a substance containing 
tobacco is classified as a cigarette rather than as a cigar if it is 
described in paragraph (b)(2) or (b)(3) of this section.
    (b) Classification of cigarettes. A tobacco product is classified 
as a cigarette if:
    (1) It consists of a roll of tobacco wrapped in paper or in any 
substance not containing tobacco;
    (2) It consists of a roll of tobacco that contains more than 3.0 
percent by weight of total reducing sugars and that is wrapped in a 
substance containing tobacco; or
    (3) It consists of a roll of tobacco wrapped in a substance 
containing tobacco; and--
    (i) It is put up in a package that bears a product designation or 
tax classification specified in Sec.  40.215;
    (ii) It has a typical cigarette size and shape, has a cellulose 
acetate or other cigarette-type integrated filter, or is put up in a 
traditional cigarette-type package that does not bear all of the notice 
requirements for cigars specified in Sec.  40.214; or
    (iii) It has a filler primarily consisting of flue-cured, burley, 
oriental, or unfermented tobaccos or has a filler material yielding the 
smoking characteristics of any of those tobaccos.


Sec.  40.13  Cigar certification.

    (a) Submission. In the case of a tobacco product classified as a 
cigar under Sec.  40.12(a)(1)(ii), the manufacturer must have filed a 
tax classification certification with TTB before removal of the product 
subject to tax. The manufacturer must sign, date, and file the 
certification with the National Revenue Center, Alcohol and Tobacco Tax 
and Trade Bureau, 550 Main Street, Cincinnati, Ohio 45202. The 
certification must be in the following form:


I, ------ ------ ---- (name of person executing certification) of ----
---------------- (name and address of manufacturer) hereby certify 
under penalty of perjury that the product designated ------------------
-- (brand and style of product) ---- complies with ---- does not comply 
with (check one) the rules for classification as a cigar set forth in 
27 CFR 40.12. -------------------- (Signature and Date).

    (b) Change in product. If, after the filing of a certification for 
a product under paragraph (a) of this section, there is any change in 
the composition or presentation of that product, the manufacturer must 
file a new certification that:
    (1) The product complies with the rules for classification as a 
cigar; or
    (2) The product does not comply with the rules for classification 
as a cigar.
    4. Section 40.214 is revised to read as follows:


Sec.  40.214  Notice for cigars.

    (a) General. Before removal subject to tax, every package of cigars 
shall have adequately imprinted on it, or on a label securely affixed 
to it:
    (1) The designation ``cigars'';
    (2) The quantity of cigars contained in the package; and
    (3) For small cigars, the classification of the product for tax 
purposes (i.e., either ``small'' or ``little'').
    (b) Additional notice for small cigars. In addition to the notice 
required under paragraph (a) of this section, the following notice 
requirements apply to small cigars put up in a package that is 
comparable to a traditional cigarette-type package:
    (1) The declaration ``cigars'', ``small cigars'', or ``little 
cigars'' must appear in direct conjunction with, parallel to, and in 
substantially the same conspicuousness of type and background as the 
brand name each time the brand name appears;
    (2) A conspicuous ``cigars'', ``small cigars'', or ``little 
cigars'' declaration must appear on the front, back, and bottom panels 
of the package even if the brand name does not appear on one or more of 
these panels; and
    (3) A carton containing multiple packages must bear the declaration 
``cigars'', ``small cigars'', or ``little cigars'' in conjunction with 
the brand

[[Page 62521]]

name and on each panel of the carton that is likely to be visible in a 
retail sale display.

PART 41--IMPORTATION OF TOBACCO PRODUCTS AND CIGARETTE PAPERS AND 
TUBES

    5. The authority citation for part 41 continues to read as follows:

    Authority: 18 U.S.C. 2342; 26 U.S.C. 5701, 5703, 5704, 5705, 
5708, 5712, 5713, 5721-5723, 5741, 5754, 5761-5763, 6301, 6302, 
6313, 6404, 7101, 7212, 7342, 7606, 7651, 7652, 7805; 31 U.S.C. 
9301, 9303, 9304, 9306.

    6. In Sec.  41.11, a new sentence is added at the end of the 
definition of ``Cigar,'' a new sentence is added at the end of 
paragraph (2) in the definition of ``Cigarette,'' and new definitions 
of ``Substance containing tobacco'' and ``Substance not containing 
tobacco'' are added in alphabetical order, to read as follows:


Sec.  41.11  Meaning of terms.

* * * * *
    Cigar. * * * For classification rules applicable to cigars, see 
Sec.  41.12.
    Cigarette. * * *
    (2) * * * For classification rules applicable to cigarettes, see 
Sec.  41.12.
* * * * *
    Substance containing tobacco. Reconstituted tobacco sheet or any 
other material, other than leaf tobacco, at least two-thirds by weight 
of which consists of tobacco leaf or other fibrous material from the 
plant Nicotiana tabacum or the plant Nicotiana rustica.
    Substance not containing tobacco. Paper or any other material of 
which less than two-thirds by weight consists of tobacco leaf or other 
fibrous material from the plant Nicotiana tabacum or the plant 
Nicotiana rustica.
* * * * *
    7. New Sec. Sec.  41.12 and 41.13 are added to read as follows:


Sec.  41.12  Classification of cigars and cigarettes.

    The rules set forth in this section control in determining whether 
a tobacco product is classified as a cigar or as a cigarette for 
purposes of this part.
    (a) Classification of cigars. (1) General. A tobacco product is 
classified as a cigar if:
    (i) It consists of a roll of tobacco wrapped in leaf tobacco; or
    (ii) It consists of a roll of tobacco that contains no more than 
3.0 percent by weight of total reducing sugars and that is wrapped in a 
substance containing tobacco, and it is not classifiable as a cigarette 
under paragraph (a)(2) of this section.
    (2) Cigarette classification precedence. A tobacco product 
consisting of a roll of tobacco wrapped in a substance containing 
tobacco is classified as a cigarette rather than as a cigar if it is 
described in paragraph (b)(2) or (b)(3) of this section.
    (b) Classification of cigarettes. A tobacco product is classified 
as a cigarette if:
    (1) It consists of a roll of tobacco wrapped in paper or in a 
substance not containing tobacco;
    (2) It consists of a roll of tobacco that contains more than 3.0 
percent by weight of total reducing sugars and that is wrapped in a 
substance containing tobacco; or
    (3) It consists of a roll of tobacco wrapped in a substance 
containing tobacco, and--
    (i) It is put up in a package that bears a product designation or 
tax classification specified in Sec.  41.74;
    (ii) It has a typical cigarette size and shape, has a cellulose 
acetate or other cigarette-type integrated filter, or is put up in a 
traditional cigarette-type package that does not bear all of the notice 
requirements for cigars specified in Sec.  41.73; or
    (iii) It has a filler primarily consisting of flue-cured, burley, 
oriental, or unfermented tobaccos or has a filler material yielding the 
smoking characteristics of any of those tobaccos.


Sec.  41.13  Cigar certification.

    (a) Submission. In the case of a tobacco product classified as a 
cigar under Sec.  41.12(a)(1)(ii), the importer must have filed a tax 
classification certification with TTB before removal of the product 
subject to internal revenue tax. The importer must sign, date, and file 
the certification with the National Revenue Center, Alcohol and Tobacco 
Tax and Trade Bureau, 550 Main Street, Cincinnati, Ohio 45202. The 
certification must be in the following form:


I, ---------------- (name of person executing certification) of ------
-------------- (name and address of importer) hereby certify under 
penalty of perjury that the product designated ---------------------- 
(brand and style of product) ---- complies with ---- does not comply 
with (check one) the rules for classification as a cigar set forth in 
27 CFR 41.12. -------------------- (Signature and Date).

    (b) Change in product. If, after the filing of a certification for 
a product under paragraph (a) of this section, there is any change in 
the composition or presentation of that product, the importer must file 
a new certification that:
    (1) The product complies with the rules for classification as a 
cigar; or
    (2) The product does not comply with the rules for classification 
as a cigar.
    8. Section 41.73 is revised to read as follows:


Sec.  41.73  Notice for cigars.

    (a) General. Before removal subject to internal revenue tax, every 
package of cigars, except as provided in Sec.  41.75, shall have 
adequately imprinted on it, or on a label securely affixed to it:
    (1) The designation ``cigars'';
    (2) The quantity of cigars contained in the package; and
    (3) For small cigars, the classification of the product for tax 
purposes (i.e., either ``small'' or ``little'').
    (b) Additional notice for small cigars. In addition to the notice 
required under paragraph (a) of this section, the following notice 
requirements apply to small cigars put up in a package that is 
comparable to a traditional cigarette-type package:
    (1) The declaration ``cigars'' , ``small cigars'', or ``little 
cigars'' must appear in direct conjunction with, parallel to, and in 
substantially the same conspicuousness of type and background as the 
brand name each time the brand name appears;
    (2) A conspicuous ``cigars'', ``small cigars'', or ``little 
cigars'' declaration must appear on the front, back, and bottom panels 
of the package even if the brand name does not appear on one or more of 
these panels; and
    (3) A carton containing multiple packages must bear the declaration 
``cigars'', ``small cigars'', or ``little cigars'' in conjunction with 
the brand name and on each panel of the carton that is likely to be 
visible in a retail sale display.

PART 44--EXPORTATION OF TOBACCO PRODUCTS AND CIGARETTE PAPERS AND 
TUBES, WITHOUT PAYMENT OF TAX, OR WITH DRAWBACK OF TAX

    9. The authority citation for part 44 is revised to read as 
follows:

    Authority: 26 U.S.C. 5142, 5143, 5146, 5701, 5703-5706, 5711-
5713, 5721-5723, 5731, 5741, 5751, 5754, 6061, 6065, 6151, 6402, 
6404, 6806, 7011, 7212, 7342, 7606, 7805; 31 U.S.C. 9301, 9303, 
9304, 9306.

    10. In Sec.  44.11, a new sentence is added at the end of the 
definition of ``Cigar,'' a new sentence is added at the end of 
paragraph (b) in the definition of ``Cigarette,'' and new definitions 
of ``Substance containing tobacco'' and ``Substance not containing 
tobacco'' are added in alphabetical order, to read as follows:


Sec.  44.11  Meaning of terms.

* * * * *

[[Page 62522]]

    Cigar. * * * For classification rules applicable to cigars, see 
Sec.  44.12.
    Cigarette. * * *
    (b) * * * For classification rules applicable to cigarettes, see 
Sec.  44.12.
* * * * *
    Substance containing tobacco. Reconstituted tobacco sheet or any 
other material, other than leaf tobacco, at least two-thirds by weight 
of which consists of tobacco leaf or other fibrous material from the 
plant Nicotiana tabacum or the plant Nicotiana rustica.
    Substance not containing tobacco. Paper or any other material of 
which less than two-thirds by weight consists of tobacco leaf or other 
fibrous material from the plant Nicotiana tabacum or the plant 
Nicotiana rustica.
* * * * *
    11. New Sec. Sec.  44.12 and 44.13 are added to read as follows:


Sec.  44.12  Classification of cigars and cigarettes.

    The rules set forth in this section control in determining whether 
a tobacco product is classified as a cigar or as a cigarette for 
purposes of this part.
    (a) Classification of cigars. (1) General. A tobacco product is 
classified as a cigar if:
    (i) It consists of a roll of tobacco wrapped in leaf tobacco; or
    (ii) It consists of a roll of tobacco that contains no more than 
3.0 percent by weight of total reducing sugars and that is wrapped in a 
substance containing tobacco, and it is not classifiable as a cigarette 
under paragraph (a)(2) of this section.
    (2) Cigarette classification precedence. A tobacco product 
consisting of a roll of tobacco wrapped in a substance containing 
tobacco is classified as a cigarette rather than as a cigar if it is 
described in paragraph (b)(2) or (b)(3) of this section.
    (b) Classification of cigarettes. A tobacco product is classified 
as a cigarette if:
    (1) It consists of a roll of tobacco wrapped in paper or in any 
substance not containing tobacco;
    (2) It consists of a roll of tobacco that contains more than 3.0 
percent by weight of total reducing sugars and that is wrapped in a 
substance containing tobacco; or
    (3) It consists of a roll of tobacco wrapped in a substance 
containing tobacco, and--
    (i) It has a typical cigarette size and shape, has a cellulose 
acetate or other cigarette-type integrated filter, or is put up in a 
traditional cigarette-type package that does not bear all of the notice 
requirements for cigars specified in Sec.  44.186 or Sec.  44.253; or
    (ii) It has a filler primarily consisting of flue-cured, burley, 
oriental, or unfermented tobaccos or has a filler material yielding the 
smoking characteristics of any of those tobaccos.


Sec.  44.13  Cigar certification.

    (a) Submission. In the case of a tobacco product classified as a 
cigar under Sec.  44.12(a)(1)(ii), the manufacturer must have filed a 
tax classification certification with TTB before removal. The 
manufacturer must sign, date, and file the certification with the 
National Revenue Center, Alcohol and Tobacco Tax and Trade Bureau, 550 
Main Street, Cincinnati, Ohio 45202. The certification must be in the 
following form:

    I, ---------------- (name of person executing certification) of --
------------------ (name and address of manufacturer) hereby certify 
under penalty of perjury that the product designated ------------------
--(brand and style of product) ----complies with---- does not comply 
with (check one) the rules for classification as a cigar set forth in 
27 CFR 44.12. --------------------(Signature and Date).

    (b) Change in product. If, after the filing of a certification for 
a product under paragraph (a) of this section, there is any change in 
the composition or presentation of that product, the manufacturer must 
file a new certification that:
    (1) The product complies with the rules for classification as a 
cigar; or
    (2) The product does not comply with the rules for classification 
as a cigar.
    12. Section 44.186 is revised to read as follows:


Sec.  44.186  Tax classification for cigars.

    (a) General. Before removal from a factory under this subpart, 
every package of cigars shall have adequately imprinted on it, or on a 
label securely affixed to it:
    (1) The designation ``cigars'';
    (2) The quantity of cigars contained in the package; and
    (3) For small cigars, the classification of the product for tax 
purposes; (i.e., either ``small'' or ``little'').
    (b) Additional notice for small cigars. In addition to the notice 
required under paragraph (a) of this section, the following notice 
requirements apply to small cigars put up in a package that is 
comparable to a traditional cigarette-type package:
    (1) The declaration ``cigars'', ``small cigars'', or ``little 
cigars'' must appear in direct conjunction with, parallel to, and in 
substantially the same conspicuousness of type and background as the 
brand name each time the brand name appears;
    (2) A conspicuous ``cigars'', ``small cigars'', or ``little 
cigars'' declaration must appear on the front, back, and bottom panels 
of the package even if the brand name does not appear on one or more of 
these panels; and
    (3) A carton containing multiple packages must bear the declaration 
``cigars'', ``small cigars'', or ``little cigars'' in conjunction with 
the brand name and on each panel of the carton that is likely to be 
visible in a retail sale display.
    13. Section 44.253 is revised to read as follows:


Sec.  44.253  Tax classification for cigars.

    (a) General. Before withdrawal of cigars from a customs warehouse 
under this subpart, every package of cigars shall have adequately 
imprinted on it, or on a label securely affixed to it:
    (1) The designation ``cigars'';
    (2) The quantity of cigars contained in the package; and
    (3) For small cigars, the classification of the product for tax 
purposes (i.e., either ``small'' or ``little'').
    (b) Additional notice for small cigars. In addition to the notice 
required under paragraph (a) of this section, the following notice 
requirements apply to small cigars put up in a package that is 
comparable to a traditional cigarette-type package:
    (1) The declaration ``cigars'', ``small cigars'', or ``little 
cigars'' must appear in direct conjunction with, parallel to, and in 
substantially the same conspicuousness of type and background as the 
brand name each time the brand name appears;
    (2) A conspicuous ``cigars'', ``small cigars'', or ``little 
cigars'' declaration must appear on the front, back, and bottom panels 
of the package even if the brand name does not appear on one or more of 
these panels; and
    (3) A carton containing multiple packages must bear the declaration 
``cigars'', ``small cigars'', or ``little cigars'' in conjunction with 
the brand name and on each panel of the carton that is likely to be 
visible in a retail sale display.

PART 45--REMOVAL OF TOBACCO PRODUCTS AND CIGARETTE PAPERS AND 
TUBES, WITHOUT PAYMENT OF TAX, FOR USE OF THE UNITED STATES

    14. The authority citation for part 45 continues to read as 
follows:

    Authority: 26 U.S.C. 5703, 5704, 5705, 5723, 5741, 5751, 5762, 
5763, 6313, 7212, 7342, 7606, 7805, 44 U.S.C. 3504(h).

    15. In Sec.  45.11, a new sentence is added at the end of the 
definition of

[[Page 62523]]

``Cigar,'' a new sentence is added at the end of paragraph (2) in the 
definition of ``Cigarette,'' and new definitions of ``Substance 
containing tobacco'' and ``Substance not containing tobacco'' are added 
in alphabetical order, to read as follows:


Sec.  45.11  Meaning of terms.

* * * * *
    Cigar. * * * For classification rules applicable to cigars, see 
Sec.  45.12.
    Cigarette. * * *
    (2) * * * For classification rules applicable to cigarettes, see 
Sec.  45.12.
* * * * *
    Substance containing tobacco. Reconstituted tobacco sheet or any 
other material, other than leaf tobacco, at least two-thirds by weight 
of which consists of tobacco leaf or other fibrous material from the 
plant Nicotiana tabacum or the plant Nicotiana rustica.
    Substance not containing tobacco. Paper or any other material of 
which less than two-thirds by weight consists of tobacco leaf or other 
fibrous material from the plant Nicotiana tabacum or the plant 
Nicotiana rustica.
* * * * *
    16. New Sec. Sec.  45.12 and 45.13 are added to read as follows:


Sec.  45.12  Classification of cigars and cigarettes.

    The rules set forth in this section control in determining whether 
a tobacco product is classified as a cigar or as a cigarette for 
purposes of this part.
    (a) Classification of cigars. (1) General. A tobacco product is 
classified as a cigar if:
    (i) It consists of a roll of tobacco wrapped in leaf tobacco; or
    (ii) It consists of a roll of tobacco that contains no more than 
3.0 percent by weight of total reducing sugars and that is wrapped in a 
substance containing tobacco, and it is not classifiable as a cigarette 
under paragraph (a)(2) of this section.
    (2) Cigarette classification precedence. A tobacco product 
consisting of a roll of tobacco wrapped in a substance containing 
tobacco is classified as a cigarette rather than as a cigar if it is 
described in paragraph (b)(2) or (b)(3) of this section.
    (b) Classification of cigarettes. A tobacco product is classified 
as a cigarette if:
    (1) It consists of a roll of tobacco wrapped in paper or in any 
substance not containing tobacco;
    (2) It consists of a roll of tobacco that contains more than 3.0 
percent by weight of total reducing sugars and that is wrapped in a 
substance containing tobacco; or
    (3) It consists of a roll of tobacco wrapped in a substance 
containing tobacco, and--
    (i) It is put up in a package that bears a product designation or 
tax classification specified in Sec.  45.45;
    (ii) It has a typical cigarette size and shape, has a cellulose 
acetate or other cigarette-type integrated filter, or is put up in a 
traditional cigarette-type package that does not bear all of the notice 
requirements for cigars specified in Sec.  45.44; or
    (iii) It has a filler primarily consisting of flue-cured, burley, 
oriental or unfermented tobaccos or has a filler material yielding the 
smoking characteristics of any of those tobaccos.


Sec.  45.13  Cigar certification.

    (a) Submission. In the case of a tobacco product classified as a 
cigar under Sec.  45.12(a)(1)(ii), the manufacturer must have filed a 
tax classification certification with TTB before removal of the 
product. The manufacturer must sign, date, and file the certification 
with the National Revenue Center, Alcohol and Tobacco Tax and Trade 
Bureau, 550 Main Street, Cincinnati, Ohio 45202. The certification must 
be in the following form:


I, ---------------- (name of person executing certification) of ------
-------------- (name and address of manufacturer) hereby certify under 
penalty of perjury that the product designated ---------------- (brand 
and style of product) ---- complies with ---- does not comply with 
(check one) the rules for classification as a cigar set forth in 27 CFR 
45.12. -------------------- (Signature and Date).

    (b) Change in product. If, after the filing of a certification for 
a product under paragraph (a) of this section, there is any change in 
the composition or presentation of that product, the manufacturer must 
file a new certification that:
    (1) The product complies with the rules for classification as a 
cigar; or
    (2) The product does not comply with the rules for classification 
as a cigar.
    17. Section 45.44 is revised to read as follows:


Sec.  45.44  Notice for cigars.

    (a) General. Before removal under this part, every package of 
cigars shall have adequately imprinted on it, or on a label securely 
affixed to it:
    (1) The designation ``cigars'';
    (2) The quantity of cigars contained in the package; and
    (3) For small cigars, the classification of the product for tax 
purposes (i.e., either ``small'' or ``little'').
    (b) Additional notice for small cigars. In addition to the notice 
required under paragraph (a) of this section, the following notice 
requirements apply to small cigars put up in a package that is 
comparable to a traditional cigarette-type package:
    (1) The declaration ``cigars'', ``small cigars'', or ``little 
cigars'' must appear in direct conjunction with, parallel to, and in 
substantially the same conspicuousness of type and background as the 
brand name each time the brand name appears;
    (2) A conspicuous ``cigars'', ``small cigars'', or ``little 
cigars'' declaration must appear on the front, back, and bottom panels 
of the package even if the brand name does not appear on one or more of 
these panels; and
    (3) A carton containing multiple packages must bear the declaration 
``cigars'', ``small cigars'', or ``little cigars'' in conjunction with 
the brand name.

    Signed: August 3, 2006.
John J. Manfreda,
Administrator.

    Approved: September 28, 2006.
Timothy E. Skud,
Deputy Assistant Secretary (Tax, Trade, and Tariff Policy).
[FR Doc. 06-8835 Filed 10-24-06; 8:45 am]
BILLING CODE 4810-31-P