[Federal Register Volume 74, Number 3 (Tuesday, January 6, 2009)]
[Rules and Regulations]
[Pages 544-572]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-31063]



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Part III





Department of Agriculture





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Food and Nutrition Service



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7 CFR Part 246



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

  Federal Register / Vol. 74, No. 3 / Tuesday, January 6, 2009 / Rules 
and Regulations  

[[Page 544]]


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DEPARTMENT OF AGRICULTURE

Food and Nutrition Service

7 CFR Part 246

[FNS-2006-0035]
RIN 0584-AD47


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

AGENCY: Food and Nutrition Service, USDA.

ACTION: Final rule.

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SUMMARY: This final rule amends regulations for the Special 
Supplemental Nutrition Program for Women, Infants and Children (WIC) by 
adding three requirements mandated by the Child Nutrition and WIC 
Reauthorization Act of 2004 in amendments to the Child Nutrition Act of 
1966 (CNA) concerning retail vendors authorized by WIC State agencies 
to provide supplemental food to WIC participants in exchange for WIC 
food instruments. The intent of these provisions is to enhance due 
process for vendors; prevent defective infant formula from being 
consumed by infant WIC participants; and ensure that the WIC Program 
does not pay the cost of incentive items provided by above-50-percent 
vendors in the form of high food prices. Finally, this rule also 
adjusts the vendor civil money penalty (CMP) levels to reflect 
inflation.

DATES: This rule is effective March 9, 2009.

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

SUPPLEMENTARY INFORMATION:

I. Procedural Matters

Executive Order 12866

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

Regulatory Impact Analysis Summary

    The following summarizes the conclusions of the regulatory impact 
analysis. A complete copy of the Impact Analysis appears in the 
appendix to this rule.

Need for Action

    This rule amends the WIC regulations by adding three requirements 
mandated by the CNA concerning WIC-authorized retail vendors, as 
discussed below. This rule also establishes a process for the periodic 
adjustment (at least once every four years) of all vendor civil money 
penalty (CMP) levels to reflect inflation; under the current 
regulations, the CMP levels for some but not all vendor violations have 
been previously adjusted for inflation. Initially, this would have the 
effect of raising the maximum CMP level from $10,000 to $11,000 per 
violation, and raising the CMP level from $40,000 to $44,000 as the 
maximum amount for all violations occurring during a single 
investigation, for those WIC CMP levels which have not previously been 
adjusted for inflation.

Benefits

    The notification of vendors of an initial incidence of a violation, 
one of the new requirements based on the 2004 reauthorization 
legislation, provides the vendor with an opportunity to correct a 
violation. Thus, State agencies may spend less time and resources on 
sanction cases and ultimately program operations would be improved and 
program costs would decrease. Requiring vendors to obtain infant 
formula only from suppliers registered with FDA or licensed under State 
law, another requirement based on the 2004 reauthorization legislation, 
will help to prevent the sale of adulterated stolen infant formula for 
use by infant WIC participants, thus safeguarding their health.
    Requiring above-50-percent vendors to restrict the costs of their 
participant incentive items to nominal value, the last of the 
requirements based on the 2004 reauthorization legislation, would 
protect the WIC Program from paying excess money for WIC foods. Making 
the inflation adjustment consistent for all CMP levels would benefit 
WIC Program administration by making the CMP maximum amounts uniform 
for all violations.

Costs

    Although this final rule has been designated as significant, the 
costs associated with implementing the changes are not expected to 
significantly add to current program costs.
    Little time will be needed to issue a notice of violation to a 
vendor, which presumably will entail a standardized format with space 
for the vendor's name and address and for listing the violation. 
Likewise, little time will be needed to document in the vendor file the 
reason(s) such notice would compromise an investigation and thus would 
not be sent.
    The State agency is required to provide the list of registered or 
licensed infant formula suppliers to vendors on an annual basis, which 
a State agency could satisfy by linking its Web site to the list of 
licensed suppliers on the Web site of the State's licensing agency, or 
by providing vendors with a telephone number or e-mail address to 
inquire about the license status of a supplier.
    Based on Fiscal Year 2006 data, FNS currently estimates that only 
about 1,700 of the approximately 47,000 authorized retail vendors would 
potentially be subject to incentive items restrictions. Little time 
will be needed by the State agency to approve/disapprove incentive 
items, since this process only involves comparison of the vendor's 
price documentation with the less-than-$2 nominal value limit. Indeed, 
the State agency may provide above-50-percent vendors with a list of 
allowable incentive items, and the vendor would indicate on the list 
which of these incentive items it wishes to use and return the list to 
the State agency.
    The final rule's process for the periodic adjustment of WIC vendor 
CMP amounts to reflect inflation would not increase administrative 
costs because the CMP calculation process would be the same for all 
vendor violations. Under the current regulations, the CMP levels for 
some but not all vendor violations have previously been adjusted for 
inflation. Under the final rule's process, all vendor CMP levels would 
be periodically adjusted for inflation. Initially, this would have the 
effect of raising the maximum CMP level from $10,000 to $11,000 per 
violation, and raising the CMP level from $40,000 to $44,000 as the 
maximum amount for all violations occurring during a single 
investigation, for those WIC CMP levels which have not previously been 
adjusted for inflation.

Regulatory Flexibility Act

    This rule has been reviewed with regard to the requirements of the 
Regulatory Flexibility Act (RFA) of 1980, (5 U.S.C. 601-612). Pursuant 
to that review, Nancy Montanez Johner, Under Secretary, Food, 
Nutrition, and Consumer Services, has certified that this rule would 
not have a significant impact on a substantial number of small 
entities. Although not required by the RFA, FNS has prepared this 
Regulatory Flexibility Analysis describing the impact of the rule on 
small entities and State agencies.

[[Page 545]]

    In accordance with the CNA, as amended, the final rule would 
require that State agencies implement restrictions on the incentive 
items provided at no cost to program participants by above-50-percent 
vendors in order to prevent the cost of the incentive items from 
increasing the food prices charged to the WIC Program by these vendors. 
The final rule permits certain kinds of incentive items which cost the 
vendor less than $2, pursuant to USDA's authority in the CNA to 
establish a nominal monetary amount which would be acceptable for 
incentive items. FNS estimates that about 1,700 of the approximately 
47,000 authorized vendors are above-50-percent vendors, including 1,066 
which serve WIC participants exclusively, and an additional 634 which 
derive more revenue from WIC sales than from non-WIC sales but also 
have a substantial non-WIC customer base.
    The annual receipts of 25 percent of all WIC-authorized vendors 
(11,600) surpass the maximum level of annual receipts used by the Small 
Business Administration (SBA) to define a ``small business concern'' in 
13 CFR 121.201 ($25 million for grocery stores and $6.5 million for 
pharmacies), including 69 of the above-50-percent vendors. Also, the 
634 above-50-percent vendors with a substantial non-WIC customer base 
have not been known to use the sort of incentive items which are 
prohibited by this rule. Thus the rule's incentive item restrictions 
mainly impact 997 of the 35,400 vendors which are small businesses 
according to SBA's regulations, 2.8 percent of the total (1,700 above-
50-percent vendors-69 large business = 1,631; 1,631-634 above-50-
percent vendors with a substantial non-WIC customer base = 997).
    It is unlikely that the incentive item restrictions of this final 
rule will have a significant impact on these 997 vendors which 
exclusively serve WIC participants. In 2005, the Food and Nutrition 
Service (FNS) published a regulation aimed at controlling the costs of 
higher-priced vendors (see, WIC Vendor Cost Containment Interim Rule, 
70 FR 71708, November 29, 2005). The Vendor Cost Containment regulation 
requires that the average WIC redemptions per food instrument type for 
above-50-percent vendors (which includes those vendors that exclusively 
serve WIC participants) not exceed the regular vendor average WIC 
redemptions per food instrument type in each State. The requirements of 
the Vendor Cost Containment regulation have made it increasingly 
difficult to incorporate the cost of incentive items into the cost of 
supplemental foods. Thus, it is likely that the number of vendors 
providing incentive items has decreased significantly since the 
effective date of the Vendor Cost Containment regulation.
    The Department considered nominal amounts slightly higher than $2. 
However, to avoid the possibility of the value of incentive items being 
incorporated into the costs of supplemental foods, the Department chose 
the $2 limit instead of higher amounts in order to preserve WIC funds 
for service to participants.
    FNS also does not expect the other three provisions of the final 
rule to have a significant economic impact on small entities. One of 
these provisions requires State agencies to provide WIC retail vendors 
with a list of State-licensed infant formula wholesalers, distributors, 
retailers, and FDA-registered manufacturers; vendors may obtain infant 
formula for sale to WIC participants only from the suppliers on the 
list. These authorized sources of infant formula include thousands of 
wholesalers, distributors, and retailers nationwide, as well as six 
manufacturers. Thus it is exceedingly doubtful that this requirement 
will harm or inconvenience any vendors.
    Also, State agencies are not included under the definition of 
``small governmental jurisdictions'' in section 601(5) of the RFA, 
which only includes local governmental organizations. Thus the impacts 
of regulations on WIC State agencies, including the requirement for 
this list of infant formula sources, are not subject to RFA 
requirements. Even so, this final rule is sensitive to the 
administrative burden of State agencies, permitting State agencies to 
provide their lists of infant formula sources to vendors on web sites, 
to obtain the lists from other State agencies, and to limit the kinds 
of sources which will be included so that the lists would not be too 
large.
    One of the other provisions requires the State agency to notify a 
vendor of a violation in writing before documenting a subsequent 
violation which could result in sanctions based on a pattern of 
violations, unless such notification would compromise an investigation. 
This provision will help vendors to comply with their responsibilities 
and thus prevent sanctions. FNS estimates that only 5 percent of WIC-
authorized vendors would be impacted by this provision. Moreover, this 
impact would be economically beneficial for these vendors since such 
notification would help them to prevent the loss of business resulting 
from disqualification, or CMP payments imposed in lieu of 
disqualification, and related legal costs.
    The remaining provision would periodically increase the CMP amounts 
to reflect inflation for those CMPs which had not previously been 
adjusted for inflation. FNS estimates that only 3 percent of WIC-
authorized vendors would be impacted by this provision. Moreover, this 
provision would only increase maximum CMP amounts on a periodic basis 
to reflect inflation; the underlying formula for calculating CMP 
amounts, based on a percentage of a vendor's average redemptions and 
the number of violations as set forth in Sec.  246.12(l)(1)(x), would 
not be altered by this provision.

Unfunded Mandates Reform Act

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

Executive Order 12372

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

Federalism Summary Impact Statement

    Executive Order 13132 requires Federal agencies to consider the 
impact

[[Page 546]]

of their regulatory actions on State and local governments. Where such 
actions have federalism implications, agencies are directed to provide 
a statement for inclusion in the preamble to the regulations describing 
the agency's considerations in terms of the three categories called for 
under section (6)(b)(2)(B) of Executive Order 13121.

Prior Consultation With State Officials

    Prior to drafting this final rule, FNS received input from State 
agencies regarding issues and concerns with implementation of the three 
legislative provisions contained in this rulemaking. FNS regional 
offices have formal and informal discussions with WIC State agency 
officials on an ongoing basis regarding program and policy issues. In 
December 2004 and April 2005, FNS issued policy guidance to WIC State 
agencies on the implementation of the legislative requirements 
addressed in this final rule. In response, FNS received a number of 
questions which resulted in informal discussions with State agency 
officials and other stakeholders on program implementation. Much of the 
discussion in the preamble of this rule reflects the substance of those 
consultations.

Nature of Concerns and the Need To Issue This Rule

    State agencies are primarily concerned with the potential 
administrative burdens involved with implementing the new legislative 
requirements in this final rule.

Extent to Which Those Concerns Have Been Met

    FNS has considered the impact of this final rule on WIC State and 
local agencies. Through the rulemaking process, FNS has attempted to 
balance the need for State agencies to meet the new requirements 
against the administrative challenges that State agencies are likely to 
encounter in meeting them. These challenges include the commitment of 
adequate resources to compile the list of acceptable entities from 
which infant formula must be purchased; determine when notification of 
violations would compromise an investigation; and, develop and enforce 
the incentive items provisions.
    The final rule allows State agencies discretion to determine if 
providing notification of violations to vendors before documenting 
additional violations would compromise the investigation.
    In addition, under the final rule, State agencies could use their 
Web sites as the primary means for providing their vendors with lists 
of infant formula manufacturers registered with the FDA and infant 
formula wholesalers, distributors, and retailers licensed under State 
law. Indeed, under the term ``other effective means,'' the final rule 
permits State agencies to provide vendors with a telephone number or e-
mail address to inquire about the license status of a supplier, instead 
of providing vendors with a list. FNS will also provide the State 
agencies with the FDA list of manufacturers, and State licensing and 
tax authorities could provide the WIC State agencies with lists or Web 
site links on the other suppliers. Further, State legislation or 
rulemaking could be used to limit the kind of suppliers to be included 
on the lists provided to the vendors.
    The final rule allows State agencies the discretion to determine 
what, if any, incentive items may be provided by above-50-percent 
vendors to participants. If a State agency decides not to permit such 
promotions at all, then there would be no administrative burden to the 
State agency to approve such items to ensure compliance with the 
statutory requirement.
    Finally, State agencies would need to amend their schedules of 
sanctions to reflect the inflation adjustments for CMP levels in this 
final rule and to notify their vendors of this change. FNS does not 
expect this to involve a significant expenditure of resources.

Executive Order 12988

    This final rule has been reviewed under Executive Order 12988, 
Civil Justice Reform. This final rule is intended to have preemptive 
effect with respect to any State or local laws, regulations or policies 
which conflict with its provisions or which would otherwise impede its 
full and timely implementation. This rule is not intended to have 
retroactive effect unless so specified in the DATES section of this 
rule. Prior to any judicial challenge to the provisions of the final 
rule, all applicable administrative procedures must be exhausted. This 
rule concerns WIC vendors. In the WIC Program, the administrative 
procedures which must be exhausted by WIC vendors are as follows. 
First, State agency hearing procedures pursuant to Sec.  246.18(a)(1) 
must be exhausted for vendors concerning denial of authorization, 
termination of agreement, disqualification, civil money penalty or 
fine, or the State agency's determination of peer group or above-50-
percent status. Second, the State agency process for providing the 
vendor an opportunity to justify or correct the food instrument 
pursuant to Sec.  246.12(k)(3) must be exhausted for vendors concerning 
delaying payment for a food instrument or a claim. Third, 
administrative appeal to the extent required by Sec.  3016.36 must be 
exhausted for vendors concerning procurement decisions of State 
agencies.

Civil Rights Impact Analysis

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

Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (44 U.S.C. Chap. 35; see 5 CFR 
part 1320) requires that OMB approve all collections of information by 
a Federal agency from the public before they can be implemented. 
Respondents are not required to respond to any collection of 
information unless it displays a current valid OMB control number. This 
final rule contains information collections that are subject to review 
and approval by OMB; therefore, FNS has submitted an information 
collection under OMB0584-0043 to OMB. This information 
collection contains changes in the burden based on comments on the 
proposed rule Discretionary WIC Vendor Provisions in the Child 
Nutrition and WIC Reauthorization Act of 2004, Public Law 108-265, 71 
FR 43371, August 1, 2006 (proposed rule),

[[Page 547]]

and information not available when the proposed rule was published.
    As previously noted, October 1, 2004 was the effective date of 
Public Law 108-265. Thus in December 2004 and April 2005, FNS issued 
policy and guidance to WIC State agencies on implementation of its 
three requirements noted above. As a result, the comments on the 
information collection burden reflect actual experience. The following 
discussion describes the information collection burden of the proposed 
rule and responds to the comments received on the information 
collection burden:

1. Reporting

Section 246.4(a)(14)(iii)
    Section 246.4(a)(14)(iii), as proposed, would require WIC State 
agencies to set forth policies and procedures in their WIC State Plans 
for notifying a retail vendor in writing when an investigation reveals 
an initial violation for which a pattern of violations must be imposed 
in order to impose a sanction, unless the State agency determines that 
the notice would compromise an investigation. Section 
246.4(a)(14)(iii), as proposed, would also require WIC State agencies 
to set forth policies and procedures in their WIC State Plans for the 
approval of incentive items which above-50-percent vendors may provide 
to participants. FNS estimated that Sec.  246.4(a)(14)(iii) would 
require one burden hour per State agency per year, resulting in 90 
total annual burden hours. There were no comments on the information 
collection burden of this provision. Accordingly, 90 total annual 
burden hours is adopted for this provision.
Section 246.4(a)(14)(xvii)
    Section 246.4(a)(14)(xvii), as proposed, would require WIC State 
agencies to set forth policies and procedures in their WIC State Plans 
for annually compiling and distributing to authorized WIC retail 
vendors a list of infant formula wholesalers, distributors, and 
retailers licensed under State law, and infant formula manufacturers 
registered with the Food and Drug Administration (FDA). FNS estimated 
that this would require one burden hour per State agency per year, 
resulting in 90 total annual burden hours. There were no comments on 
the information collection burden of this provision. Accordingly, 90 
total annual burden hours is adopted for this provision.
Section 246.12(h)(8)
    Section 246.12(h)(8), as proposed, would require WIC State agencies 
to establish a process for approval or disapproval of requests from 
above-50-percent vendors for permission to provide incentive items to 
WIC participants or other customers. The proposed rule did not include 
any burden hours for vendors for this provision. However, given the 
analysis of the recordkeeping information burden for State agencies 
regarding this provision, a reporting information burden for vendors 
also needs to be recognized. Both are discussed below regarding Sec.  
246.12(h)(8).

2. Recordkeeping

Section 246.12(g)(11)
    Section 246.12(g)(10) of the proposed rule (which is designated as 
Sec.  246.12(g)(11) in this final rule due to publication of an 
intervening rule) would require WIC State agencies to provide to 
authorized WIC retail vendors a list, on an annual basis, of infant 
formula wholesalers, distributors, and retailers licensed in the State 
in accordance with State law (including regulations), and infant 
formula manufacturers registered with FDA that provide infant formula. 
FNS has provided the State agencies with the list of the infant formula 
manufacturers registered with FDA. A State agency would contact the 
licensing agency in its State to obtain a list of the other suppliers. 
A State agency could satisfy this requirement by linking its Web site 
to the list of licensed suppliers on the web site of the State's 
licensing agency. FNS estimated that this would require one burden hour 
per State agency per year, resulting in 90 total annual burden hours.
    Two WIC State agencies commented on the information collection 
burden concerning this requirement. One State agency commenter 
estimated that 500 hours would be required annually to maintain the 
list. Another State agency commenter estimated that 120 hours had been 
required for initial compilation and ongoing maintenance of the list. 
The experiences and views of these two State agencies may not be 
representative of the other State agencies. However, to ensure that the 
estimate provided to OMB for this final rule takes into account the 
varied experiences of all State agencies, the estimated burden hours 
per response for the list requirement has been increased from 1 hour to 
50 hours for State agencies. Accordingly, the total annual burden hours 
for the list requirement has been increased from 90 to 4,500 (90 State 
agencies x 50 burden hours = 4,500 total annual burden hours).
    FNS did not estimate any burden hours for vendors regarding this 
requirement. However, one commenter stated that this requirement would 
impose an undue burden on vendors because most vendors deal with dozens 
if not hundreds of suppliers of products within their stores, including 
numerous jobbers, sub-jobbers, and other sales persons; it would be 
impossible, this commenter stated, for the vendor to verify the 
validity of each source of every purchase or to contact the State 
agency to ascertain the status of the supplier.
    The commenter's concerns are unjustified. The source which must be 
identified is only the source from whom the vendor purchased the infant 
formula, not the manufacturer or supplier from whom the vendor's source 
purchased the infant formula. Also, the infant formula list requirement 
only pertains to ``infant formula'' as defined in the WIC regulations, 
which does not include ``exempt infant formula'' (formulas requiring a 
medical prescription), ``WIC-eligible medical foods,'' or any other 
kind of food.
    Further, as recognized by Sec.  246.12(h)(3)(xv), vendors are 
already required to maintain inventory records used for Federal tax 
reporting purposes, which would include invoices for infant formula, 
and to make such records available to the State agency upon request. 
Thus the infant formula list requirement does not impose any new 
reporting or recordkeeping burden on vendors. Moreover, attaching a 
copy of an invoice to a vendor application form, or providing a copy to 
the State agency at some other time, would involve a negligible amount 
of time.
Section 246.12(h)(8)
    Section 246.12(h)(8), as proposed, would require WIC State agencies 
to establish a process for approval or disapproval of requests from 
above-50-percent vendors for permission to provide incentive items to 
WIC participants or other customers. As previously mentioned, FNS 
currently estimates that about 1,700 of the approximately 47,000 
authorized vendors would potentially be subject to incentive items 
restrictions. However, when the proposed rule was issued, FNS estimated 
that about 2,000 of approximately 50,000 authorized vendors would be 
subject to incentive items restrictions. A State agency could decide 
not to allow any incentive items at all, in which case an approval 
process would not be necessary. FNS had received inquiries from several 
WIC State agencies indicating an interest in not allowing such 
incentive items at all.

[[Page 548]]

    As a result, the estimate set forth in the preamble of the proposed 
rule assumed that half of the WIC State agencies would not allow any 
incentive items at all, and that half of the approximately 2,000 above-
50-percent vendors nationwide reside in those States. The estimate also 
assumed that little time would be needed to approve/disapprove a 
request and record it, since this process only involves comparison of 
the vendor's price documentation with the less-than-$2 limit 
established for such items in the rule. Indeed, the State agency could 
have provided above-50-percent vendors with a list of allowable 
incentive items, valued below the less-than-$2 nominal value limit per 
item; the vendor would indicate on the list which of these incentive 
items it wishes to use and return the list to the State agency. Thus 
FNS estimated that State agencies would approve/disapprove incentive 
items for 1,000 above-50-percent vendors, and that each approval/
disapproval would require 0.25 burden hours, resulting in 250 total 
annual burden hours.
    One commenter addressed the burden of the incentive items 
restrictions. This commenter stated that the incentive items 
restrictions were burdensome, requiring complex internal policies and 
regulations, and resulting in additional monitoring and enforcement, as 
well as more training for vendors. The commenter did not address the 
number of burden hours.
    Another commenter stated that it would be burdensome for State 
agencies to maintain invoices or similar documentation of the vendor's 
approved incentive items, showing that the cost of each item is either 
less than the $2 nominal value limit or obtained at no cost, as would 
be required by Sec.  246.12(h)(8)(ii). As indicated in the proposed 
rule at 71 FR 43381, this documentation could include a list of items 
and the related invoices, submitted by the vendor to the State agency 
for approval, or this documentation could include a list of pre-
approved items submitted by the State agency to the vendor for the 
vendor to return to the State agency indicating which of the pre-
approved incentive items have been chosen by the vendor; this latter 
approach is acceptable as intended by the regulatory language that 
refers to ``similar documents.'' Thus, the State agency is required to 
maintain copies of invoices only if the State agency permits vendors to 
request approval for incentive items not included on a list of 
acceptable incentive items provided by the State agency.
    The Department does not view the pre-approved list as involving an 
appreciable information collection burden. If the pre-approved list is 
returned by the vendor at the same time the vendor returns the signed 
vendor agreement during the authorization process, the proposed 
requirement of Sec.  246.12(h)(8)(ii) amounts to little more than 
maintaining the copy of the vendor agreement signed by the vendor, 
which the State agency is already required to do. However, some State 
agencies may not use this approach, preferring instead that vendors 
request approval for incentive items outside of the vendor agreement 
process.
    This commenter also did not state the number of burden hours needed 
to comply with this requirement. However, to ensure that the estimate 
provided to OMB for this final rule takes into account the concerns of 
these two commenters, the estimated burden hours per response for Sec.  
246.12(h)(8) has been increased from 0.25 hours to 1 hour per response 
for State agencies which require approval for incentive items outside 
of the vendor agreement process.
    As pointed out in the section of this preamble concerning the RFA, 
it is likely that the number of vendors providing incentive items has 
decreased significantly since the effective date of the Vendor Cost 
Containment regulation. It is also likely that a significant portion of 
the above-50-percent vendors reside in States where either incentive 
items are not allowed, or, if incentive items are allowed, the 
agreement process is used. Based on data not available when the 
proposed rule was published, FNS now knows that 32 State agencies 
authorized above-50-percent vendors during Fiscal Year 2006. Thus FNS 
estimates that half of the approximately 1,700 above-50-percent vendors 
(850) would have an appreciable reporting information collection burden 
due to the restrictions on incentive items. Accordingly, the estimate 
has been revised to 850 total annual burden hours for the incentive 
items restrictions in this final rule (850 above-50-percent vendors / 
16 State agencies = 53.125 above-50-percent vendors per State agency; 
16 x 53.125 x 1 hour per response = 850 total annual burden hours).
Section 246.12(l)(3)
    Section 246.12(l)(3) of the proposed rule would require the State 
agency to notify a vendor in writing when an investigation reveals an 
initial violation for which a pattern of violations must be established 
in order to impose a sanction before another such violation is 
documented, unless the State agency determines, in its discretion on a 
case-by-case basis, that notifying the vendor would compromise an 
investigation. Prior to imposing a sanction for a pattern of 
violations, the State agency would either provide such notice to the 
vendor, or document in the vendor file the reason(s) for determining 
that such notice would compromise an investigation. Approximately 2,300 
vendors investigated annually commit violations involving a pattern.
    For the proposed rule, FNS assumed that little time would be needed 
to issue the notice, which presumably would entail a standardized 
format with space for the vendor's name and address and for listing the 
violations. FNS also assumed that little time would be needed to 
document in the vendor file the reason(s) such notice would compromise 
an investigation and thus would not be sent. Thus FNS estimated that 
State agencies would either issue such notices or make such entries in 
vendor files 2,300 times, and that issuing each notice or making such 
entries would require 15 minutes each, resulting in 575 total annual 
burden hours (2,300 / 90 = 25.55; 25.55 x 90 x 0.25 = 575).
    There were three comments on the information collection burden of 
this provision. Two of these comments stated that the provision was 
inconsistent with the goal of paperwork reduction, but did not take 
issue with the number of burden hours estimated in the preamble of the 
proposed rule. The other commenter, a State agency, stated that it had 
used approximately 9,180 hours reviewing additional compliance buys and 
generating notice letters as a result of the notice requirement.
    As previously noted, approximately 2,300 vendors investigated 
annually by all WIC State agencies are found to be committing types of 
violations subject to sanctions only if the investigation shows that a 
pattern of such violations had occurred. Thus, applying the commenter's 
estimate of 9,180 hours for one State agency to the 2,300 vendors for 
all State agencies, 4 hours would be required to either issue the 
notification of violation to the vendor or note in the vendor's file 
the reason(s) for not issuing the notification. Since a single State 
agency conducts far fewer than 2,300 such investigations annually, the 
number of hours needed for a single State agency to issue the 
notification or document the reason(s) for not doing so would be 
significantly greater than 4 hours based on the commenter's estimate of 
9,180 hours.

[[Page 549]]

    However, the commenter's estimate indicates that the estimated 
burden hours in the preamble of the proposed rule may have been too 
low. Accordingly, the information collection burden submitted to OMB 
for this activity has been increased from 0.25 hours per response to 1 
hour per response, for an annual total for all 90 State agencies of 
2,350 burden hours (2,300 / 90 = 25.55; 25.55 x 90 x 1 burden hour = 
2,300 burden hours).
Adjustments Unrelated to the Final Rule
    Adjustments have been made to the existing burden hours for the 
entire OMB 0584-0043 information collection burden to reflect 
the adding of a new respondent category for applicants for program 
benefits, and for vendors concerning collections which existed prior to 
the final rule. For applicants for program benefits, 292,983 burden 
hours have been added, to take into account the information provided by 
these applicants during the certification process.
    For vendors, 23,500 burden hours have been added to take into 
account the information provided by vendors during the vendor 
application and agreement processes. Further, there are now 47,000 
vendors, an increase over the previous 45,000 recognized in the 
approved information burden, which impacts the burden hour calculations 
for the application and agreement processes as well as the collection 
of vendor shelf prices and food sales data. However, the number of 
vendors actually required to provide food sales data annually has been 
reduced from the previous number of 45,000 to 5,640 because FNS 
matching of WIC vendor redemptions with redemptions for the same 
vendors in the Supplemental Nutrition Assistance Program (SNAP), 
formerly known as the Food Stamp Program, has made it unnecessary to 
collect shelf price data from 88 percent of the vendors (12 percent of 
47,000 vendors is 5,640).
    Also, numerous categories of State agency information burdens were 
previously based on 89 State agencies. Since the previous approval of 
the OMB 0584-0043 collection burden, an additional State 
agency has been added, so that now there are a total of 90 State 
agencies. All of the aforementioned adjustments together account for 
391,981 hours.
    The following chart shows the estimated annual information burden 
for the final rule. Five of the six burden categories noted in the 
chart pertain to State agencies; the one which pertains to vendors is 
so noted. Decimals are not included in the figures.

                      Estimated Annual Information Collection Burden OMB 0584-0043
----------------------------------------------------------------------------------------------------------------
                                                                                          Average       Annual
          Section of regulations            Annual number of respondents     Annual    burden hours     burden
                                                                           frequency   per response     hours
----------------------------------------------------------------------------------------------------------------
Reporting Burden
Sec.   246.4(a)(14)(iii)..................  90..........................            1           1.0           90
Sec.   246.4(a)(14)(xvii).................  90..........................            1           1.0           90
Sec.   246.12(h)(8)vendors................  850.........................            1           1.0          850
                                           ---------------------------------------------------------------------
    Total Reporting Burden in the Final     180.........................            2  ............        1,030
     Rule.
Recordkeeping Burden
Sec.   246.12(g)(11)......................  90..........................            1          50          4,500
Sec.   246.12(h)(8).......................  16..........................           53           1.0          850
Sec.   246.12(l)(3).......................  90..........................           26           1.0        2,300
                                           ---------------------------------------------------------------------
    Total Recordkeeping Burden in the       196.........................           80  ............        7,650
     Final Rule.
                                           ---------------------------------------------------------------------
    Total Reporting and Recordkeeping       376.........................           82  ............        8,680
     Burden in the Final Rule.
                                           ---------------------------------------------------------------------
    Total Program Changes Burden Hours for  ............................  ...........  ............        8,680
     the Final Rule.
                                           ---------------------------------------------------------------------
    Total Adjustments Burden Hours          ............................  ...........  ............      391,981
     (including other sections of the
     regulations).
                                           ---------------------------------------------------------------------
    Total Program Changes and Adjustments   ............................  ...........  ............      400,661
     Burden Hours.
Total Current WIC Reporting and             15,595,000 (over-count).....  ...........  ............    3,050,545
 Recordkeeping Burden Approved by OMB for
 Information Collection 0584-0043.
Grand Total WIC Reporting and               1,990,457 (as adjusted).....  ...........  ............    3,451,206
 Recordkeeping Burden.
----------------------------------------------------------------------------------------------------------------

E-Government Act Compliance

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

II. Background

    The proposed rule entitled Discretionary WIC Vendor Provisions in 
the Child Nutrition and WIC Reauthorization Act of 2004, Public Law 
108-265, was published on August 1, 2006, at 71 FR 43371 (proposed 
rule). FNS received 17 letters or electronic mail messages commenting 
on the proposed rule, including 10 from WIC State agencies; 2 from WIC-
authorized vendors; 2 from vendor advocacy organizations; 1 from a WIC 
local agency association; 1 from a social service advocacy 
organization; and 1 from a company which provides consulting services 
to government agencies.

[[Page 550]]

    As previously noted, this final rule amends the WIC Program 
regulations by adding three requirements mandated by the amended CNA 
concerning retail vendors authorized by WIC State agencies to provide 
supplemental food to WIC participants in exchange for WIC food 
instruments. This rulemaking reflects the statutory requirement that 
WIC State agencies notify WIC-authorized vendors of an initial 
violation in writing for violations requiring a pattern of violative 
incidences in order to impose a sanction before documenting a 
subsequent violation, unless notification would compromise an 
investigation. In addition, the State agency is required to maintain a 
list of State-licensed wholesalers, distributors, and retailers, and 
FDA-registered manufacturers, and WIC-authorized vendors are required 
to purchase infant formula only from sources on the list. Further, 
State agencies are prohibited from authorizing or making payments to 
WIC-authorized vendors that derive more than 50 percent of their annual 
food sales revenue from WIC food instruments (``above-50-percent 
vendors'') and which provide incentive items or other free merchandise, 
except food or merchandise of nominal value, to program participants or 
other customers unless the vendor provides the State agency with proof 
that the vendor obtained the incentive items or merchandise at no cost.
    October 1, 2004 was the effective date of Public Law 108-265 for 
all of these requirements. In December 2004 and April 2005, FNS issued 
policy and guidance to WIC State agencies on implementation of these 
requirements. This final rule reflects the policy and guidance provided 
to State agencies.
    Additionally, this final rule adds a process for periodically 
adjusting the WIC vendor CMP levels for inflation in a manner that is 
consistent for all WIC violations.
    The Department's responses to the comments are set forth below, 
except for the comments on the administrative burden of the proposed 
provisions. The Department's response to the comments on the 
administrative burden of the proposed rule are set forth above in the 
sections of this preamble entitled ``Federalism Summary Impact 
Statement'' and ``Paperwork Reduction Act.''

1. Notice of Violation (Sec. Sec.  246.4(a)(14)(iii), 
246.12(h)(3)(xviii), 246.12(l)(3), and 246.18(a)(1)(iii)(F))

    Section 203(c)(5) of Public Law 108-265 amended Section 17(f) of 
the CNA by adding a new paragraph (26) to require the State agency to 
notify the vendor in writing of the initial violation, for violations 
requiring a pattern of occurrences in order to impose a sanction, prior 
to documenting another violation, unless the State agency determines 
that notifying the vendor would compromise an investigation.
    This requirement was effective for violations committed under 
investigations beginning on or after October 1, 2004, even though the 
current Sec.  246.12(l)(3) provides that the State agency is not 
required to warn a vendor that violations had been detected before 
imposing a sanction. In December 2004, State agencies were advised that 
their vendor agreements and sanction schedules must be reviewed and 
amended as appropriate to reflect this new requirement.
    Nine comments addressed the notification provisions of the proposed 
rule. One commenter stated unconditional support for the notification 
provisions. Five commenters stated conditional support for the proposed 
provision. Three commenters stated their opposition to the proposed 
provision.
The Extent of the State Agency's Discretion (Sec.  246.12(l)(3))
    One commenter objected to the provision for State agency discretion 
in the determination on whether to provide notification in Sec.  
246.12(l)(3) of the proposed rule. The commenter also objected to the 
statement at 71 FR 43377 of the proposed rule that a State agency could 
decide not to use notification on the basis of the severity of the 
initial violation, the compliance history of the vendor, and whether 
the vendor has been determined to be high risk. The commenter viewed 
these examples as well beyond the scope of the statute.
    According to the commenter, the State agency must provide the 
notification unless there is a substantial basis to believe that fraud 
is occurring and such fraud is actively under investigation. Further, 
this commenter stated that the State agency must determine that the 
notice would compromise an investigation, not ``may'' or ``might'' do 
so, in order to decide that notification should not be provided. The 
commenter also stated that the State agency should be required to make 
an affirmative determination that notification would compromise an 
ongoing investigation and document the results of the determination 
before conducting a subsequent inspection. However, another commenter 
stated that the State agency should be permitted to determine that the 
notice ``could,'' ``probably,'' or would ``likely'' compromise an 
investigation, not ``would'' compromise an investigation, which is 
definite and difficult to know. Another commenter stated that, in most 
instances, vendors are unaware of violations because it is not possible 
to monitor all of the WIC food instruments accepted by store staff, 
although notification would not be appropriate when the State agency 
has sound reason to believe that the vendor owner or manager is 
involved in fraud against WIC.
    The Department continues to believe, as stated at 71 FR 43377 of 
the proposed rule, that the statute provides the State agency with the 
discretion to determine whether notifying the vendor will compromise an 
investigation and to use its judgment to determine whether a notice 
should be sent to the vendor. Accordingly, the provision for State 
agency discretion in Sec.  246.12(l)(3) of the proposed rule remains in 
the final rule. Also, the Department disagrees with the commenter's 
objections to the examples of factors cited at 71 FR 43377 which the 
State agency has the discretion to consider in making its 
determination.
    One of the commenters also interpreted a statement at 71 FR 43377 
of the proposed rule to mean that a State agency could decide not to 
provide the notification on the basis that an investigation is covert. 
The commenter stated that this would be contrary to the intention of 
the legislative provision since the need for notification pertained 
only to covert investigations; this provision would be rendered 
meaningless if a State agency could decide not to provide notification 
on the basis that an investigation is covert. The commenter also 
pointed out that this would be inconsistent with the provision in the 
proposed rule which would require a case-by-case determination by the 
State agency on whether to provide notification to the vendor. The 
Department agrees with the commenter. The statement in the preamble of 
the proposed rule was only intended to point out that the notification 
requirement pertains only to covert investigations since notification 
would reveal the existence of an investigation which had been 
previously unknown to the vendor. Thus Sec.  246.12(l)(3) of the final 
rule, unchanged from the proposed rule, does not permit the State 
agency to exclude an investigation from the notification requirement on 
the sole basis that the investigation is covert.
    This commenter further stated that the preamble of the proposed 
rule at 71 FR 43377 should not have stated that a State agency could 
decide not to provide notification on the basis that an

[[Page 551]]

investigation was being conducted on the same vendor by another agency, 
since the coincidental investigation by another agency does not 
necessarily have any bearing on the status of the vendor's compliance 
with WIC Program requirements. The Department does not agree with this 
comment. The statutory provision states that the State agency shall 
notify the vendor unless the State agency determines that notifying the 
vendor would compromise an investigation, not its investigation. Thus 
an investigation being conducted by another agency, such as FNS or the 
USDA Office of Inspector General, is relevant to the State agency's 
determination on whether to provide notification. Accordingly, 
unchanged from the proposed rule, Sec.  246.12(l)(3) of the final rule 
refers to an investigation, not its investigation.
    This commenter also requested clarification regarding a statement 
at 71 FR 43377 that notification would not be needed after a violation 
occurred in a compliance buy visit subsequent to a notification based 
on a different type of violation which had occurred during a previous 
visit. The commenter believes that this may mean that the State agency 
may consider the risk of compromising investigations with notification 
to increase if a violation is observed in subsequent visits.
    Such subsequent violations would need to be violations of a 
different type than the previous violation because a second or 
subsequent notification is not required for a violation of the same 
type for which notification has already been provided. Also, the fact 
that notification was provided regarding a previous violation does not 
mean that the State agency must provide notification for all subsequent 
violations of different types. Thus Sec.  246.12(l)(3) of the final 
rule, unchanged from the proposed rule, allows the State agency to 
determine that notification concerning subsequent violations would 
compromise an investigation even though this determination was not made 
regarding the previous violation, due to facts or circumstances not 
known or not considered at the time of the previous violation.
    Two commenters stated that State agencies should not be required to 
determine whether to provide notification on a case-by-case basis, as 
would be required by Sec.  246.12(l)(3) of the proposed rule, but 
instead should be permitted to make categorical determinations based on 
the nature and seriousness of the violations. These commenters stated 
that serious violations such as overcharging are not inadvertent and 
thus should be subject to categorical exclusions from the notice 
requirement as determined by the State agency. One of these commenters 
also pointed out that the proposed rule categorically excludes 
violations based on WIC redemptions exceeding inventory and violations 
resulting in sanctions based on single violations such as trafficking, 
implying that other categories could also be excluded.
    The Department does not agree. Serious violations may be 
fraudulent, but sometimes are not; overcharging cannot be categorically 
assumed to be fraudulent. Sometimes, overcharging might be inadvertent. 
Thus one compliance buy showing overcharging could not, by that fact 
alone, be sufficient for determining that notification would compromise 
an investigation. However, the severity of that violative incidence 
might be sufficient, if, for example, the overcharge was considerably 
higher than the monetary threshold established by the State agency as 
the basis for establishing that overcharging had occurred. The proposed 
rule would have excluded violations established by a single incidence 
because the statutory provision requires notification following the 
initial incidence of a violation which is established by a pattern of 
violative incidences; trafficking (Sec.  246.12(l)(1)(ii)(A)), illegal 
sales (Sec.  246.12(l)(1)(ii)(B)), and exchange of alcohol or tobacco 
for food instruments (Sec.  246.12(l)(1)(iii)(A)) are violations 
established by one violative incidence. Also, the proposed rule would 
have excluded violations based on WIC redemptions exceeding inventory 
(Sec.  246.12(l)(1)(iii)(B)) since this violation is detected in a 
single inventory audit instead of a pattern of violative incidences, so 
that there is no initial incidence. Accordingly, Sec.  246.12(l)(3) of 
this final rule requires the State agency to determine whether to 
provide notification of violations to vendors on a case-by-case basis, 
as in the proposed rule.
    Finally, one commenter stated that the notification requirement 
would allow a dishonest vendor to commit a violation without 
consequence and continue to do so for an extended period. The 
Department does not agree. A State agency may initiate a claim pursuant 
to Sec.  246.12(k) regarding the food instruments containing the 
violative incidences even though the number of violative incidences 
(i.e., the pattern) needed to impose a sanction has not been 
established. Moreover, claims may be initiated before or after the 
investigation is completed; Sec.  246.12(k)(4) states that the State 
agency must deny payment or initiate claims collection action within 90 
days of either the date of detection of the vendor violation or the 
completion of the review or investigation giving rise to the claim, 
whichever is later.
Compliance Investigation Consisting of One Violative Incidence (Sec.  
246.12(l)(2)(i) and (l)(3)(v))
    One commenter stated that the vendor would be defenseless if the 
State agency defines one compliance buy as an investigation, since the 
vendor owner or manager would only learn about an employee's error when 
the State agency imposes a sanction on the vendor; the rule should 
require that, upon the initial discovery of any violation, the vendor 
must be notified, and this initial discovery must not constitute an 
investigation.
    One violative incidence would constitute a complete investigation 
under the current regulations for only the most serious types of vendor 
violations subject to mandatory sanctions. As set forth in Sec.  
246.12(l)(1)(ii) and (l)(1)(iii), one violative incidence of 
trafficking (buying or selling WIC food instruments for cash) or 
illegal sales (selling firearms, ammunition, explosives, or controlled 
substances in exchange for WIC food instruments) must result in a six-
year disqualification, and one violative incidence of the sale of 
alcoholic beverages or tobacco products in exchange for WIC food 
instruments must result in a three-year disqualification.
    A pattern of violative incidences must be established in order to 
impose any of the other mandatory vendor sanctions. This pertains to 
four violations subject to mandatory three-year disqualifications, 
including overcharging; receiving, transacting, or redeeming food 
instruments outside of authorized channels; charging for supplemental 
food not received by the participant; and providing credit or non-food 
items (other than alcoholic beverages, tobacco products, cash, 
firearms, ammunition, explosives, or controlled substances) in exchange 
for WIC food instruments. A pattern of violative incidences must also 
be established in order to impose a mandatory one-year disqualification 
based on providing unauthorized food items, including for supplemental 
foods provided in excess of those listed on the food instrument.
    By contrast, the current Sec.  246.12(l)(2)(i) does not require 
that a pattern of violative incidences must be established in order for 
a State agency to impose sanctions based on violations which are not 
subject to mandatory

[[Page 552]]

sanctions, referred to as ``State agency vendor sanctions.'' The State 
agency has the discretion to define such violations and the resulting 
sanctions, including the number of violative incidents required. 
However, the resulting disqualifications may not exceed one year 
because the violations addressed by State agency vendor sanctions are 
less serious than those addressed by mandatory sanctions.
    Thus a State agency vendor sanction may be based on only one 
instance of a violation even though the more serious mandatory 
sanctions require a pattern of violative incidences; only the most 
serious mandatory sanctions are imposed based on one violative 
incidence.
    As such, the proposed notification requirement would not apply to 
mandatory or State agency vendor sanctions based on one incidence of a 
violation; for those sanctions, one compliance buy would constitute a 
complete investigation. As a result, a vendor may receive notification 
and an opportunity to correct more serious violations that require a 
pattern of violative incidences, but no such opportunity for less 
serious violations subject to State agency vendor sanctions.
    We believe that this result is inconsistent. Thus the Department 
has concluded that the State agency discretion under the current 
regulations to require only one violative incidence in order to impose 
State agency vendor sanctions is incompatible with the new notification 
requirement.
    Accordingly, Sec.  246.12(l)(2)(i) is revised in this final rule to 
state that a State agency vendor sanction must be based on a pattern of 
violative incidences. Also, the final rule includes a conforming change 
by adding Sec.  246.12(l)(3)(v) to state that a single violative 
incidence visit may only be used to establish a violation for 
trafficking, illegal sales, and exchange of alcohol or tobacco for WIC 
food instruments.
Administrative Review (Sec.  246.18(a)(1)(iii)(F))
    One commenter stated that the State agency's determination against 
providing notification should be subject to administrative review so 
that the vendor could present evidence illustrating that a State 
agency's determination to withhold notification was based on factors 
that a reasonable person could not believe justified the withholding of 
notification. Another commenter stated that the State agency's 
determination should be subject to review because the circumstances 
under which a State agency may avail itself of an exception to the 
notification requirement are narrowly drawn by the statute.
    The Department does not agree. As stated at 71 FR 43382 of the 
proposed rule, administrative review of the absence of such 
notification would be inconsistent with the discretion provided to the 
State agency by the statute. Further, the information used by the State 
agency to make its determination may not be appropriate for public 
disclosure, such as the high-risk determination process, knowledge of 
an investigation conducted by another agency, and evidence obtained 
from a confidential source. Accordingly, Sec.  246.18(a)(1)(iii)(F) of 
the proposed rule remains unchanged in the final rule.

2. List of Infant Formula Manufacturers, Wholesalers, Distributors, and 
Retailers (Sec. Sec.  246.4(a)(14)(xvii), 246.12(g)(3)(i), 
246.12(g)(11), 246.12(h)(3)(ii), 246.12(i)(2), and 
246.18(a)(1)(iii)(D))

    Section 203(e)(8) of Public Law 108-265 amends Section 17(h)(8)(A) 
of the CNA by requiring that each State agency maintain a list of 
infant formula wholesalers, distributors, and retailers licensed in the 
State in accordance with State law (including regulations), and infant 
formula manufacturers registered with FDA that provide infant formula. 
This statute requires authorized vendors to only purchase infant 
formula from sources on the above-described list. In December 2004, 
State agencies were notified of the requirement and when to amend their 
State Plans, vendor agreements, vendor manuals, and vendor training 
plans and materials as appropriate to reflect this new requirement.
    This provision is intended to prevent stolen infant formula from 
being purchased with WIC food instruments. Such formula may constitute 
a health hazard for a variety of reasons, including direct tampering 
with formula before it is sold to unsuspecting retailers, falsification 
of labeling to change expiration dates, counterfeiting, or improper 
storage.
    The Department proposed to add a new Sec.  246.12(g)(10) which 
would require the State agency to provide the above-noted list of 
infant formula sources to the vendors on at least an annual basis, and 
that list must include the addresses as well as the names of the 
businesses; this is intended to make it easier for vendors to locate a 
nearby business and also to avoid inadvertently contacting an 
unlicensed business with a similar name. In addition, in Sec.  
246.12(g)(10)(i), the Department proposed to require a State agency to 
notify vendors that they must purchase infant formula only from the 
sources set forth on the State agency's list, although the State agency 
may, at its option, permit vendors to obtain infant formula from 
sources on another State agency's list. (Section 246.12(g)(10) of the 
proposed rule has become Sec.  246.12(g)(11) in the final rule.) 
Further, Sec. Sec.  246.4(a)(14)(xvii) and 246.12(g)(3)(i) proposed to 
require the State agency to adopt a new vendor selection criterion 
requiring vendors to obtain infant formula from the listed sources as a 
condition of authorization.
    Eleven comments addressed these provisions; two supported the 
provisions unconditionally, one supported the provisions conditionally, 
with comments, and eight opposed the provisions.
    Several comments questioned the effectiveness of the legislative 
provision and recommended that this provision be amended. One commenter 
stated that the proposed rule will not consistently prevent vendors 
from obtaining formula from unlisted suppliers and thus will not 
prevent stolen or defective formula from reaching WIC participants. 
Another commenter stated that the purchase of infant formula for sale 
by retailers is not sufficiently regulated by most States to keep 
adulterated stolen infant formula off of the shelves of retail stores 
because State or local business or health licensing in most States does 
not involve the oversight needed to ensure that retail stores only 
obtain infant formula from legitimate sources. This commenter 
recommended that the legislative provision be amended to prohibit 
vendors from obtaining infant formula from retailers, or give the State 
agency the discretion to exclude retailers. As an alternative to the 
list requirement, two commenters recommended that State agencies be 
required to routinely verify that their vendors have purchased infant 
formula from legitimate sources, such as at authorization or during 
routine monitoring visits. One commenter stated that the burden should 
be on the vendor to show that it obtains infant formula from an 
acceptable source.
    These comments recommend revision of the legislative provision and 
are thus beyond the scope of this rulemaking. However, regarding State 
discretion on the exclusion of retailers, Sec.  246.12(g)(10)(iii)(A) 
of the proposed rule would permit the exclusion of a State-licensed 
entity when specifically required by State law or regulations. State 
agencies would need to consult with their legal counsel to determine 
the correct process for implementing any restrictions on its list of 
infant formula

[[Page 553]]

sources. Section 246.12(g)(10)(iii)(A) of the proposed rule remains 
unchanged in content, and now appears at Sec.  246.12(g)(11)(iii)(A) of 
the final rule. Also, in Sec.  246.12(g)(10), the Department proposed 
to permit the State agency to provide the list to vendors in a hard 
copy format or by other effective means, e.g., providing vendors with a 
telephone number, e-mail address, or Web site to inquire about the 
license status of a source. Under the proposed rule, a method of 
communicating this information to vendors would be acceptable if it is 
effective. For example, some vendors may not have access to the 
Internet and will need a hard copy provided by the State agency, or 
some other means to determine if a business is licensed. Section 
246.12(g)(10)(iii)(A) of the proposed rule remains unchanged in 
content, and now appears at Sec.  246.12(g)(11)(iii)(A) of the final 
rule.
    Two commenters stated that an annual list would not account for the 
licensing of entities following issuance of the list. If a vendor wants 
to obtain infant formula from an entity which is not listed, the vendor 
can contact the State agency for the most up-to-date information. The 
Department recommends that State agencies seek input from their vendors 
on the best method for obtaining the most up-to-date information. A 
vendor advisory council would be an excellent forum for this 
discussion. Section 246.12(g)(10) of the proposed rule remains 
unchanged in content, and now appears at Sec.  246.12(g)(11) of the 
final rule.
    Two comments stated that the list requirement will make it 
difficult for vendors to obtain infant formula from entities located 
out-of-state. One of the commenters stated that a standard method for 
reporting data elements is needed because otherwise a State agency will 
find it difficult to determine if an out-of-state entity is on another 
State agency's list, and this commenter also inquired as to whether 
each State agency would need to obtain the lists of other State 
agencies. Section 246.12(g)(3)(i) of the proposed rule would provide 
State agencies with the discretion to permit its vendors to obtain 
infant formula from out-of-state entities on the lists of other State 
agencies. Section 246.12(g)(3)(i) of the proposed rule remains 
unchanged in the final rule. Thus a vendor desiring to obtain infant 
formula from an out-of-State supplier needs to contact its State agency 
for further instructions on whether this is permitted, and, if so, the 
procedure for doing so.
    One commenter requested guidance regarding the State agency's 
responsibilities for ensuring that vendors are only obtaining infant 
formula from the licensed suppliers on the list, such as collecting 
supplier data from the vendors. Section 246.12(g)(3)(i) of the proposed 
rule would not have permitted the State agency to authorize a vendor 
applicant unless it determines that the vendor applicant obtains infant 
formula only from entities included on the State agency's list 
described in Sec.  246.12(g)(10). As pointed out in the proposed rule 
at 71 FR 43379, vendors would be required to maintain invoices or 
receipts showing the source of their infant formula purchases to enable 
the State agency to monitor vendor compliance. State agencies currently 
have the authority to require vendors to maintain such documentation 
under Sec.  246.12(h)(3)(xv).
    Further, State agencies also currently have the authority under 
Sec.  246.12(g)(3) to reassess any authorized vendor at any time during 
the vendor's agreement period using the vendor selection criteria in 
effect at the time of the reassessment and must terminate the 
agreements with those vendors that fail to meet them. Finally, State 
agencies currently have the discretion under Sec.  246.12(l)(2) to 
establish sanctions for vendors which have obtained infant formula from 
unlicensed entities. The State agency may use routine monitoring visits 
pursuant to Sec.  246.12(j)(2) to review infant formula invoices or 
other similar documentation for the purpose of determining whether the 
vendor has continued to obtain infant formula from a licensed entity.
    Finally, one commenter stated that Sec.  246.12(h)(3)(ii)(A) in the 
proposed rule should use the term ``participant'' instead of 
``customer.'' The Department agrees. Accordingly, ``participant'' is 
substituted for ``customer'' in the last sentence of Sec.  
246.12(h)(3)(ii)(A) in the final rule.

3. Incentive Items (Sec. Sec.  246.12(g)(3)(iv), 246.12(h)(8), 
246.12(i)(2), 246.12(l)(1)(iv)(B), and 246.18(a)(1)(iii)(E))

    Section 203(e)(13) of Public Law 108-265 amends section 17(h)(14) 
of the CNA by prohibiting a State agency from authorizing or making 
payments to above-50-percent vendors which provide incentive items or 
other free merchandise to program participants, with only two 
exceptions. One exception includes food or merchandise of nominal value 
as determined by the Secretary; USDA advised State agencies in December 
2004 that the nominal value is less than $2. The other exception 
includes incentive items or other merchandise for which the vendor 
provides proof to the State agency showing that the vendor had obtained 
the incentive items or other merchandise at no cost. Above-50-percent 
vendors are for-profit vendors that derive more than 50 percent of 
their annual food revenue from the transaction of WIC food instruments 
or for-profit vendor applicants expected to derive more than 50 percent 
of annual food revenue from the transaction of WIC food instruments. 
The above-50-percent vendor category includes vendors which have often 
been referred to as ``WIC-only stores.'' In December 2004, State 
agencies were advised to amend their vendor selection criteria and 
sanction schedules to reflect this new requirement.
    The Department proposed to add a new vendor selection criterion to 
the WIC regulations which would make compliance with the State agency's 
incentive items policies a condition of vendor authorization for above-
50-percent vendors. This proposed provision, Sec.  246.12(g)(3)(iv), 
also described allowable and prohibited incentive items. Further, the 
Department proposed to include a requirement for a mandatory sanction 
for incentive items violations committed by above-50-percent vendors. 
The proposed rule would also require training for vendors on the 
policies and procedures concerning incentive items. Finally, the rule 
proposed to require the State agency to include in its vendor agreement 
with the above-50-percent vendor, or in another document provided to 
the above-50-percent vendor and cross-referenced in the vendor 
agreement, the policies and procedures regarding the provision of 
incentive items to customers.
    Seven comments were submitted on the incentive items provisions of 
the proposed rule. Two of these comments supported the incentive items 
provisions unconditionally; three supported the provisions 
conditionally, requesting revisions; and, two comments opposed the 
provisions.
Services
    Under the proposed rule, services which constitute a conflict of 
interest, or which have the appearance of such conflict, would be a 
prohibited incentive item. For example, assistance with applying for 
WIC benefits would be prohibited because the above-50-percent vendor 
would benefit financially if the applicant is certified. For-profit 
services for which the participant pays a fair market value, and which 
do not present a conflict of interest, would be allowable.
    One commenter stated that for-profit services should not be 
permitted as an

[[Page 554]]

incentive item, as would have been allowed by Sec.  
246.12(g)(3)(iv)(A)(4) of the proposed rule. This commenter stated that 
it would require extensive research by the State agency to determine 
the fair market value of a service; the State agency's determination 
would be open to interpretation; and, resources would be needed to 
monitor vendor compliance. The commenter stated that such other 
services are really other business enterprises, so that WIC 
requirements for such activity would infringe on property rights. In 
addition, the commenter stated that this provision implies that 
transportation service could be an acceptable incentive item, but which 
should be prohibited for the aforementioned reasons. Similarly, another 
commenter stated that Sec.  246.12(g)(3)(iv)(B)(7) of the proposed rule 
should not have proposed to prohibit services of greater than nominal 
value if they are minimal customary courtesies of the retail food 
trade, are not for-profit, and do not involve an actual or apparent 
conflict of interest. One other commenter stated that State agencies 
should not be able to prohibit the minimal customary courtesies of the 
retail food trade or for-profit services offered at fair market value, 
as would have been permitted by Sec.  246.12(g)(3)(iv)(B)(2) of the 
proposed rule. Section 246.12(g)(3)(iv)(A)(5) of the proposed rule 
described such courtesies as helping a customer to find an item, 
bagging food, and assisting with loading food into the customer's 
vehicle, but these are only examples; other legitimate minimal 
customary courtesies may exist.
    The legislative provision was intended to restrict the use of WIC 
funds by above-50-percent vendors to provide incentive items. (See 
House Committee on Education and the Workforce, Report No. 108-445, 
March 23, 2004, page 59, and Senate Committee on Agriculture, 
Nutrition, and Forestry, Report No. 108-279, June 7, 2004, page 58.) 
The legislative provision was not intended to infringe on the property 
rights of vendors to engage in legitimate for-profit business 
enterprises except to the extent that WIC funds are involved. Thus 
above-50-percent vendors must be permitted to engage in for-profit 
business enterprises that offer goods and services at a fair market 
value to WIC participants, since such goods and services would not be 
subsidized with WIC funds. Accordingly, the subject of for-profit 
business enterprises is addressed in Sec.  246.12(g)(3)(iv)(C) of the 
final rule instead of Sec.  246.12(g)(3)(iv). Section 
246.12(g)(3)(iv)(C) states that for-profit business enterprises that 
offer goods or services at a fair market value to WIC participants are 
not incentive items subject to approval or prohibition, except that 
such goods or services must not constitute a conflict of interest or 
result in a liability for the WIC Program. Goods or services of a for-
profit enterprise would include any kind of business enterprise, 
service or otherwise; for example, both the sale of diapers as well as 
a diaper service would be excluded from the restrictions on incentive 
items.
    The State agency will need to determine whether a business 
enterprise offers its goods or services at a fair market value based on 
comparable for-profit businesses. However, Sec.  246.12(h)(3)(xv) 
already provides the State agency with the authority to specify the 
records which must be maintained by the vendor and provided to the 
State agency upon request. Thus the State agency may require the vendor 
to show that the prices charged by its business enterprise are 
comparable to the prices charged by comparable for-profit business 
enterprises. Also, the State agency may require that the vendor provide 
more information.
    The Department continues to believe that State agencies should have 
the discretion to permit or prohibit above-50-percent vendors from 
providing participants with the minimal customary courtesies of the 
retail food trade, as reflected in Sec.  246.12(g)(3)(iv)(A) of the 
final rule.
    Finally, the comment on Sec.  246.12(g)(3)(iv)(B)(7) of the 
proposed rule was correct to point out that the legislative provision 
does not refer to services as an exception to the prohibition on 
incentive items; the only exceptions specified in the legislative 
provision are food or merchandise of nominal value. However, the 
commenter agreed with the proposed rule's exception for the minimal 
customary courtesies of the retail food trade even though the 
legislative provision does not specify an exception for such services. 
The Department concludes that, given the intent of the incentive items 
restrictions in the legislation, services should be treated the same as 
food or merchandise. As noted above, the point of these restrictions is 
to restrict the use of WIC funds by above-50-percent vendors to provide 
incentive items. Services also cost money, which, in the case of above-
50-percent vendors, would be provided by WIC transactions. Thus 
incentive items in the form of services should be restricted to the 
same extent as incentive items in the form of food or merchandise. 
Accordingly, the term ``services'' has been added to Sec.  
246.12(g)(3)(iv)(A)(1) and (g)(3)(iv)(A)(2) of the final rule for the 
purpose of treating services in the same manner as food or merchandise.
Impact on Market-Competitive Above-50-Percent Vendors
    In the proposed rule, the Department specifically solicited 
comments on whether there are circumstances in which a legitimately 
market-competitive above-50-percent vendor could be disadvantaged by 
the prohibition on providing incentives to non-WIC customers. Two 
commenters stated that the incentive items restrictions of the proposed 
rule would penalize non-WIC-only above-50-percent vendors, because 
these vendors are competing for the same customers with other non-WIC-
only vendors which are not restricted in their use of incentive items. 
However, the legislative provision does not distinguish between WIC-
only vendors and other above-50-percent vendors; the legislative 
provision treats all above-50-percent vendors the same. As previously 
noted, revision of legislative provisions is beyond the scope of this 
rule-making.
Miscellaneous Comments
    One commenter stated that Sec.  246.12(g)(3)(iv)(B)(2) of the 
proposed rule could be interpreted as ``all or nothing,'' instead of 
proposing to provide the State agency with the authority to allow some 
but not all kinds of allowable incentive items. The commenter 
recommended that this provision refer to any allowable incentive item, 
not all incentive items as a whole. The Department agrees. Accordingly, 
this provision has been deleted and replaced with language in Sec.  
246.12(g)(3)(iv)(A) of the final rule which clarifies that a State 
agency may approve any of the incentive items listed in paragraph 
(g)(3)(iv)(A) at its discretion.
    One commenter stated that Sec.  246.12(h)(8)(ii) of the proposed 
rule should have proposed that the vendor, not the State agency, be 
required to maintain the copies of the vendor invoices showing that 
each incentive item had been obtained at less than the $2 nominal value 
limit or at no cost. This commenter states that the nominal value limit 
should be enforced by State agency review or audit. For example, if a 
vendor is discovered to be providing incentive items to participants 
during a compliance buy investigation, the State agency could request 
copies of the invoices from the vendor. However, the statutory 
provision at 42 U.S.C. 1786(h)(14) requires that State agencies not 
authorize an above-50-percent vendor providing incentive items above

[[Page 555]]

the nominal value limit. Consistent with this statutory provision, the 
proposed Sec.  246.12(g)(3)(iv) would prohibit the authorization of 
above-50-percent vendors who provide prohibited incentive items. As 
previously noted, the State agency may provide the above-50-percent 
vendor with a list of pre-approved incentive items at authorization, in 
which case the State agency does not need to obtain vendor invoices. 
Otherwise, the need for such documentation arises initially at 
authorization. Accordingly, the proposed Sec.  246.12(h)(8)(ii) has 
been revised in the final rule to state that the State agency must 
maintain this documentation unless the State agency provides the vendor 
with a list of pre-approved incentive items at authorization.
    One commenter also requested clarification on whether advertising 
constitutes an actual or apparent conflict of interest by creating the 
impression that the WIC Program is the source of the advertisement, 
such as an advertisement providing a 1-888 telephone number for 
contacting the vendor about eligibility for a ``federal nutrition 
assistance program that helps pregnant women.'' Advertising is not 
subject to this final rulemaking because it was not addressed in the 
proposed rule. However, Sec.  246.12(g)(3)(iv) of this final rule 
prohibits the authorization of an above-50-percent vendor which 
indicates an intention to provide prohibited incentive items to 
customers, and refers to advertising as evidence of such intent. 
Further, Sec.  246.12(g)(3)(iv)(B)(1) of this final rule prohibits 
above-50-percent vendors from providing services which constitute 
conflicts of interest or appear to do so, such as assistance with 
applying for WIC benefits.

4. Adjusting Vendor Civil Money Penalty (CMP) Levels for Inflation 
(Sec.  246.12(l)(1)(x)(C) and (l)(2)(i))

    The Federal Civil Penalties Inflation Adjustment Act of 1990 
(FCPIAA), Public Law 101-410, 28 U.S.C 2461, requires adjustment of 
civil money penalty (CMP) levels to reflect inflation at least once 
every four years. This only applies to CMPs set forth in statutes. The 
only WIC vendor-related CMPs established in the CNA pertain to 
convictions in court for trafficking and illegal sales (Sec.  
246.12(l)(1)(i)). Thus the Department's final rule implementing FCPIAA, 
``Department of Agriculture Civil Monetary Penalties Adjustment,'' 70 
FR 29573, May 24, 2005, only affected the WIC CMPs based on convictions 
in court for trafficking and illegal sales. As a result, the WIC CMP 
levels for all other vendor violations were not adjusted for inflation. 
This includes all CMPs for vendor violations that are addressed 
administratively by the State agency instead of through the courts. The 
Department believes that the amount of all CMPs should be uniform for 
all vendor violations. Accordingly, the proposed rule included 
provisions which would change the amount of the CMPs for the remaining 
WIC vendor violations to be consistent with the CMP levels based on 
convictions.
    Four comments were submitted concerning these provisions. Three 
comments supported these provisions unconditionally. One comment 
supported the provisions conditionally. This commenter stated that any 
adjustment to CMP levels should be prospective, not retroactive, so 
that the inflation adjustment should commence with the effective date 
of the final rule as opposed to an immediate increase in the amount of 
those penalties. The Department agrees. The new CMP levels take effect 
on the effective date of the final rule, which, as noted above under 
DATES, is 60 days following the publication of the final rule in the 
Federal Register. The new CMP levels may not be implemented prior to 
that time.

List of Subjects in 7 CFR Part 246

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

0
For the reasons set forth in the preamble, 7 CFR part 246 is amended as 
follows:

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

0
1. The authority citation for part 246 continues to read as follows:

    Authority: 42 U.S.C. 1786.


0
2. In Sec.  246.4, revise the first sentence of paragraph (a)(14)(iii) 
and add a new paragraph (a)(14)(xvii) to read as follows:


Sec.  246.4  State plan.

    (a) * * *
    (14) * * *
    (iii) A sample vendor and farmer, if applicable, agreement. The 
sample vendor agreement must include the sanction schedule, the process 
for notification of violations in accordance with Sec.  246.12(l)(3), 
and the State agency's policies and procedures on incentive items in 
accordance with Sec.  246.12(g)(3)(iv), which may be incorporated as 
attachments or, if the sanction schedule, the process for notification 
of violations, or policies on incentive items are in the State agency's 
regulations, through citations to the regulations. * * *
* * * * *
    (xvii) List of infant formula wholesalers, distributors, and 
retailers. The policies and procedures for compiling and distributing 
to authorized WIC retail vendors, on an annual or more frequent basis, 
as required by Sec.  246.12(g)(11), a list of infant formula 
wholesalers, distributors, and retailers licensed in the State in 
accordance with State law (including regulations), and infant formula 
manufacturers registered with the Food and Drug Administration (FDA) 
that provide infant formula. The vendor may provide only the authorized 
infant formula which the vendor has obtained from a source included on 
the list described in Sec.  246.12(g)(11) to participants in exchange 
for food instruments specifying infant formula.
* * * * *

0
3. In Sec.  246.12:
0
a. Amend paragraph (g)(3)(i) by adding a sentence at the end of the 
paragraph.
0
b. Add new paragraphs (g)(3)(iv) and (g)(11).
0
c. Revise paragraph (h)(3)(ii).
0
d. Revise the third sentence of paragraph (h)(3)(xviii).
0
e. Add new paragraph (h)(8).
0
f. Revise paragraphs (i)(2) and (l)(1)(iv).
0
g. Amend the second sentence of paragraph (l)(1)(x)(C) by removing the 
word ``$10,000'' and adding in its place the words ``the maximum amount 
specified in Sec.  3.91(b)(3)(v) of this title'';
0
h. Amend the third sentence of paragraph (l)(1)(x)(C) by removing the 
words ``$10,000, except for those violations listed in paragraph 
(l)(1)(i) of this section, where the civil money penalty shall be the 
maximum amount per violation specified in Sec.  3.91(b)(3)(v) of this 
title for trafficking violations, or Sec.  3.91(b)(3)(vi) of this title 
for selling firearms, ammunition, explosives, or controlled substances 
in exchange for food instruments.'' and adding in their place the words 
``the maximum amount specified in Sec.  3.91(b)(3)(v) of this title for 
each violation.'';
0
i. Amend the fifth sentence of paragraph (l)(1)(x)(C) by removing the 
words ``$40,000, except for those violations listed in paragraph 
(l)(1)(i) of this section, where the total amount of civil money 
penalties may not exceed the maximum amount for violations

[[Page 556]]

occurring during a single investigation specified in Sec.  
3.91(b)(3)(v) of this title for trafficking violations, or Sec.  
3.91(b)(3)(vi) of this title for selling firearms, ammunition, 
explosives, or controlled substances in exchange for food 
instruments.'' and adding in their place the words ``the amount 
specified in Sec.  3.91(b)(3)(v) of this title as the maximum penalty 
for violations occurring during a single investigation.'';
0
j. Amend paragraph (l)(2)(i) by removing the words ``$10,000 for each 
violation.'' in the fourth sentence, and adding in their place the 
words ``a maximum amount specified in Sec.  3.91(b)(3)(v) of this title 
for each violation.'', by removing the word ``$40,000.'' in the fifth 
sentence, and adding in its place the words ``an amount specified in 
Sec.  3.91(b)(3)(v) of this title as the maximum penalty for violations 
occurring during a single investigation.'';
0
k. Further amend paragraph (l)(2)(i) by adding a sentence at the end of 
the paragraph; and
0
l. Revise paragraph (l)(3).
    The revisions and additions read as follows:


Sec.  246.12  Food delivery systems.

* * * * *
    (g) * * *
    (3) * * *
    (i) * * * The State agency may not authorize a vendor applicant 
unless it determines that the vendor applicant obtains infant formula 
only from sources included on the State agency's list described in 
paragraph (g)(11) of this section.
* * * * *
    (iv) Provision of incentive items. The State agency may not 
authorize or continue the authorization of an above-50-percent vendor, 
or make payments to an above-50-percent vendor, which provides or 
indicates an intention to provide prohibited incentive items to 
customers. Evidence of such intent includes, but is not necessarily 
limited to, advertising the availability of prohibited incentive items.
    (A) The State agency may approve any of the following incentive 
items to be provided by above-50-percent vendors to customers, at the 
discretion of the State agency:
    (1) Food, merchandise, or services obtained at no cost to the 
vendor, subject to documentation;
    (2) Food, merchandise, or services of nominal value, i.e., having a 
per item cost of less than $2, subject to documentation;
    (3) Food sales and specials which involve no cost or less than $2 
in cost to the vendor for the food items involved, subject to 
documentation, and do not result in a charge to a WIC food instrument 
for foods in excess of the foods listed on the food instrument;
    (4) Minimal customary courtesies of the retail food trade, such as 
helping the customer to obtain an item from a shelf or from behind a 
counter, bagging food for the customer, and assisting the customer with 
loading the food into a vehicle.
    (B) The following incentive items are prohibited for above-50-
percent vendors to provide to customers:
    (1) Services which result in a conflict of interest or the 
appearance of such conflict for the above-50-percent vendor, such as 
assistance with applying for WIC benefits;
    (2) Lottery tickets provided to customers at no charge or below 
face value;
    (3) Cash gifts in any amount for any reason;
    (4) Anything made available in a public area as a complimentary 
gift which may be consumed or taken without charge;
    (5) An allowable incentive item provided more than once per 
customer per shopping visit, regardless of the number of customers or 
food instruments involved, unless the incentive items had been obtained 
by the vendor at no cost or the total value of multiple incentive items 
provided during one shopping visit would not exceed the less-than-$2 
nominal value limit;
    (6) Food, merchandise or services of greater than nominal value 
provided to the customer;
    (7) Food, merchandise sold to customers below cost, or services 
purchased by customers below fair market value;
    (8) Any kind of incentive item which incurs a liability for the WIC 
Program;
    (9) Any kind of incentive item which violates any Federal, State, 
or local law or regulations.
    (C) For-profit goods or services offered by the above-50-percent 
vendor to WIC participants at a fair market value based on comparable 
for-profit goods or services of other businesses are not incentive 
items subject to approval or prohibition, except that such goods or 
services must not constitute a conflict of interest or result in a 
liability for the WIC Program.
* * * * *
    (11) List of infant formula wholesalers, distributors, and 
retailers licensed under State law or regulations, and infant formula 
manufacturers registered with the Food and Drug Administration (FDA). 
The State agency must provide a list in writing or by other effective 
means to all authorized WIC retail vendors of the names and addresses 
of infant formula wholesalers, distributors, and retailers licensed in 
the State in accordance with State law (including regulations), and 
infant formula manufacturers registered with the Food and Drug 
Administration (FDA) that provide infant formula, on at least an annual 
basis.
    (i) Notification to vendors. The State agency is required to notify 
vendors that they must purchase infant formula only from a source 
included on the State agency's list, or from a source on another State 
agency's list if the vendor's State agency permits this, and must only 
provide such infant formula to participants in exchange for food 
instruments specifying infant formula. For the purposes of paragraph 
(g)(11) of this section, ``infant formula'' means Infant formula, 
Contract brand infant formula and Non-contract brand infant formula as 
defined in Sec.  246.2, and infant formula covered by a waiver granted 
under Sec.  246.16a(e).
    (ii) Type of license. If more than one type of license applies, the 
State agency may choose which one to use.
    (iii) Exclusions from list. The State agency may not exclude a 
State-licensed entity from the list except when:
    (A) Specifically required or authorized by State law or 
regulations; or
    (B) The entity does not carry infant formula.
    (h) * * *
    (3) * * *
    (ii) No substitutions, cash, credit, refunds, or exchanges. The 
vendor may provide only the authorized supplemental foods listed on the 
food instrument and cash-value voucher.
    (A) The vendor may not provide unauthorized food items, nonfood 
items, cash, or credit (including rain checks) in exchange for food 
instruments or cash-value vouchers. The vendor may not provide refunds 
or permit exchanges for authorized supplemental foods obtained with 
food instruments or cash-value vouchers, except for exchanges of an 
identical authorized supplemental food item when the original 
authorized supplemental food item is defective, spoiled, or has 
exceeded its ``sell by,'' ``best if used by,'' or other date limiting 
the sale or use of the food item. An identical authorized supplemental 
food item means the exact brand and size as the original authorized 
supplemental food item obtained and returned by the participant.

[[Page 557]]

    (B) The vendor may provide only the authorized infant formula which 
the vendor has obtained from sources included on the list described in 
paragraph (g)(11) of this section to participants in exchange for food 
instruments specifying infant formula.
* * * * *
    (xviii) * * * The State agency must notify a vendor in writing when 
an investigation reveals an initial incidence of a violation for which 
a pattern of incidences must be established in order to impose a 
sanction, before another such incidence is documented, unless the State 
agency determines, in its discretion, on a case-by-case basis, that 
notifying the vendor would compromise an investigation.
* * * * *
    (8) Allowable and prohibited incentive items for above-50-percent 
vendors. The vendor agreement for an above-50-percent vendor, or 
another document provided to the vendor and cross-referenced in the 
agreement, must include the State agency's policies and procedures for 
allowing and prohibiting incentive items to be provided by an above-50-
percent vendor to customers, consistent with paragraph (g)(3)(iv) of 
this section.
    (i) The State agency must provide written approval or disapproval 
(including by electronic means such as electronic mail or facsimile) of 
requests from above-50-percent vendors for permission to provide 
allowable incentive items to customers;
    (ii) The State agency must maintain documentation for the approval 
process, including invoices or similar documents showing that the cost 
of each item is either less than the $2 nominal value limit, or 
obtained at no cost, unless the State agency provides the vendor with a 
list of pre-approved incentive items at the time of authorization; and
    (iii) The State agency must define prohibited incentive items.
    (i) * * *
    (2) Content. The annual training must include instruction on the 
purpose of the Program, the supplemental foods authorized by the State 
agency, the minimum varieties and quantities of authorized supplemental 
foods that must be stocked by vendors, the requirement that vendors 
obtain infant formula only from sources included on a list provided by 
the State agency, the procedures for transacting and redeeming food 
instruments and cash-value vouchers, the vendor sanction system, the 
vendor complaint process, the claims procedures, the State agency's 
policies and procedures regarding the use of incentive items, and any 
changes to program requirements since the last training.
* * * * *
    (l) * * *
    (1) * * *
    (iv) One-year disqualification. The State agency must disqualify a 
vendor for one year for:
    (A) A pattern of providing unauthorized food items in exchange for 
food instruments or cash-value vouchers, including charging for 
supplemental foods provided in excess of those listed on the food 
instrument; or
    (B) A pattern of an above-50-percent vendor providing prohibited 
incentive items to customers as set forth in paragraph (g)(3)(iv) of 
this section, in accordance with the State agency's policies and 
procedures required by paragraph (h)(8) of this section.
* * * * *
    (2) * * *
    (i) * * * A State agency vendor sanction must be based on a pattern 
of violative incidences.
* * * * *
    (3) Notification of violations. The State agency must notify a 
vendor in writing when an investigation reveals an initial incidence of 
a violation for which a pattern of incidences must be established in 
order to impose a sanction, before another such incidence is 
documented, unless the State agency determines, in its discretion, on a 
case-by-case basis, that notifying the vendor would compromise an 
investigation. This notification requirement applies to the violations 
set forth in paragraphs (l)(1)(iii)(C) through (l)(1)(iii)(F), 
(l)(1)(iv), and (l)(2)(i) of this section.
    (i) Prior to imposing a sanction for a pattern of violative 
incidences, the State agency must either provide such notice to the 
vendor, or document in the vendor file the reason(s) for determining 
that such notice would compromise an investigation.
    (ii) The State agency may use the same method of notification which 
the State agency uses to provide a vendor with adequate advance notice 
of the time and place of an administrative review in accordance with 
Sec.  246.18(b)(3).
    (iii) If notification is provided, the State agency may continue 
its investigation after the notice of violation is received by the 
vendor, or presumed to be received by the vendor, consistent with the 
State agency's procedures for providing such notice.
    (iv) All of the incidences of a violation occurring during the 
first compliance buy visit must constitute only one incidence of that 
violation for the purpose of establishing a pattern of incidences.
    (v) A single violative incidence may only be used to establish the 
violations set forth in paragraphs (l)(1)(ii)(A), (l)(1)(ii)(B), and 
(l)(1)(iii)(A) of this section.
* * * * *

0
4. In Sec.  246.18, redesignate paragraphs (a)(1)(iii)(D) through 
(a)(1)(iii)(H) as paragraphs (a)(1)(iii)(G) through (a)(1)(iii)(K) and 
add new paragraphs (a)(1)(iii)(D), (a)(1)(iii)(E), and (a)(1)(iii)(F), 
to read as follows:


Sec.  246.18  Administrative review of State agency actions.

    (a) * * *
    (1) * * *
    (iii) * * *
    (D) The State agency's determination to include or exclude an 
infant formula manufacturer, wholesaler, distributor, or retailer from 
the list required pursuant to Sec.  246.12(g)(11);
    (E) The validity or appropriateness of the State agency's 
prohibition of incentive items and the State agency's denial of an 
above-50-percent vendor's request to provide an incentive item to 
customers pursuant to Sec.  246.12(h)(8);
    (F) The State agency's determination whether to notify a vendor in 
writing when an investigation reveals an initial violation for which a 
pattern of violations must be established in order to impose a 
sanction, pursuant to Sec.  246.12(l)(3);
* * * * *

    Dated: December 23, 2008.
Nancy Montanez Johner,
Under Secretary, Food, Nutrition, and Consumer Services.

    Note: This Appendix will not appear in the Code of Federal 
Regulations.

    Title: Special Supplemental Nutrition Program for Women, Infants 
and Children (WIC): Discretionary WIC Vendor Provisions in the Child 
Nutrition and WIC Reauthorization Act of 2004, Public Law 108-265.
    Date: December 11, 2008.
    Agency: USDA, Food and Nutrition Service.
    Contact: Ed Harper.
    Phone: (703) 305-2340.
    Fax: (703) 305-2576.
    E-mail: [email protected].
    Action:
    a. Nature: Final Rule.
    b. Need: This rule amends regulations for the Special Supplemental 
Nutrition Program for Women, Infants and Children (WIC) by adding three 
retail vendor provisions mandated by the Child Nutrition and WIC 
Reauthorization Act of 2004. The

[[Page 558]]

amendments are intended to (1) Strengthen the due process accorded to 
vendors found to be in violation of program rules, (2) reduce the risk 
that mislabeled, improperly stored, expired, or stolen infant formula 
is distributed to WIC participants, and (3) ensure that program funds 
are not used to subsidize the distribution of incentive items by 
vendors who derive more than fifty percent of their food sales revenue 
from WIC.
    The rule also restores uniformity to the WIC vendor civil money 
penalty (CMP) system by indexing all maximum CMP amounts for inflation. 
The Federal Civil Penalties Inflation Adjustment Act of 1990 (FCPIAA) 
requires periodic adjustment of CMP levels to reflect inflation. 
However, the Act applies only to CMPs identified by statute. The only 
WIC vendor-related CMPs that are covered by the FCPIAA are those 
imposed following a conviction for trafficking or illegal sales. As a 
result, the CMP caps for those violations are the only WIC vendor 
sanctions subject to an inflation adjustment; the maximum penalties for 
other vendor violations are not. This rule would restore uniformity to 
the WIC CMP system by making an initial upward adjustment to the 
maximum CMP amount for penalties not covered by the FCPIAA, and then 
subjecting all CMP maximums to the same future inflation adjustments.
    c. Affected Parties: The parties affected by this regulation are 
the USDA's Food and Nutrition Service (FNS), State agencies that 
administer the WIC program, retail vendors that are authorized to 
accept WIC food instruments, and infant formula wholesalers, 
distributors, retailers, and manufacturers.

 
 
 
Action.......................................................  .........
Background...................................................  .........
Summary of Key Provisions....................................  .........
Table 1: Regulatory Language and Effects of the Rule.........  .........
Cost/Benefit Assessment of Economic and Other Effects........  .........
Costs........................................................  .........
Table 2: Administrative Cost Summary--Burden Hours...........  .........
Table 3: Cost of Administrative Burden.......................  .........
Benefits.....................................................  .........
1. Incentive items...........................................  .........
2. Vendor notification of initial program violations.........  .........
3. Authorized infant formula suppliers.......................  .........
4. CMP inflation.............................................  .........
Cost Benefit Summary.........................................  .........
Alternatives.................................................  .........
1. State agency discretion in giving notice to vendors of      .........
 initial program violations..................................
2. Requirement that State agencies determine whether to        .........
 withhold or provide notice of initial vendor violations on a
 case by case basis..........................................
 

Background

    This rule amends the regulations of the Special Supplemental 
Nutrition Program for Women, Infants and Children (WIC) by adding three 
vendor-related requirements mandated by the Child Nutrition and WIC 
Reauthorization Act of 2004, Public Law 108-265. The rule also restores 
uniformity to the maximum CMP amounts imposed on vendors for violation 
of program rules. These changes are described in greater detail below.

Vendor Notification

    Penalties for some WIC vendor violations are not imposed until a 
vendor is found to have engaged in a pattern of improper behavior. In 
an effort to discourage repeat violations of the same program rules, 
and to strengthen due process for vendors accused of violations, this 
rule requires WIC State agencies to provide WIC vendors with written 
notice of an initial violation. The rule provides an exception for 
cases where State agencies determine that notification would compromise 
an ongoing investigation.

Authorized Infant Formula Suppliers

    The rule requires State agencies to maintain lists of State-
licensed wholesalers, distributors, and retailers, and infant formula 
manufacturers registered with the Food and Drug Administration. These 
lists must be distributed by the State agencies to their authorized WIC 
vendors, and must be included, directly or by reference, in the State 
agencies' WIC State Plans. In order to prevent defective formula from 
reaching WIC participants, the rule requires WIC vendors to purchase 
infant formula only from sources on those lists.

Incentive Items

    Retailers that serve WIC clients exclusively (``WIC-only'' stores) 
have traditionally offered incentive items or free services to their 
customers. These incentives are one way that WIC-only stores compete 
with other retailers; WIC-only stores do not attract WIC clients based 
on the price of their products. In order to prevent WIC program funds 
from subsidizing these incentives through federal reimbursement of 
inflated store prices, the rule prohibits the use of most incentives by 
WIC-only vendors and by the broader group of retailers that derive more 
than 50 percent of their food sales revenue from WIC food instruments. 
The rule would continue to allow WIC-authorized vendors to offer 
incentives of nominal value, and incentives acquired by vendors at no 
cost.

Civil Money Penalties

    The rule subjects all maximum civil money penalty (CMP) levels to 
periodic inflation adjustments. CMPs are levied against WIC vendors for 
program violations. This provision restores consistency to the penalty 
system. Under current rules, the maximum CMP for most vendor violations 
is fixed; the only CMP maximum amounts that are subject to periodic 
inflation adjustments are those imposed for trafficking and illegal 
sales violations that result in convictions in court.\1\ As a result, 
the maximum CMP varies by type of violation. To correct this, the rule 
makes an immediate adjustment to the maximum penalty amounts that had 
not previously been subject to inflation adjustments. On enactment of 
the rule, the maximum penalty for those violations will be raised to 
$11,000 from $10,000 per incident; the total maximum CMP for all 
violations committed during a single investigation will be raised to 
$44,000 from $40,000. In future years, the maximum penalty

[[Page 559]]

amounts for all violations will be subject to the same inflation 
adjustment.
---------------------------------------------------------------------------

    \1\ These violations are covered by the Federal Civil Penalties 
Inflation Adjustment Act of 1990 (28 U.S.C. 2461).
---------------------------------------------------------------------------

    With the exception of the CMP inflation provision, the changes 
proposed by this rule were mandated by Congress. They were effective 
October 1, 2004. FNS issued policy and guidance to WIC State agencies 
to implement these mandatory provisions in December 2004 and April 
2005. This rule reflects the earlier policy, guidance, and proposed 
rule issued by FNS.

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[[Page 569]]



Cost/Benefit Assessment of Economic and Other Effects

    The provisions of this rule are expected to improve WIC program 
performance and integrity by reducing the incidence of program 
violations by WIC-authorized vendors, minimizing the expenditure of 
program funds on non-program vendor incentive items, and ensuring the 
quality of infant formula distributed to WIC participants. The rule 
also establishes a uniform system of adjusting the maximum WIC CMP 
amounts for inflation.

Costs

    Several provisions of the rule are expected to increase slightly 
the administrative burden faced by State WIC agencies. The total 
expected increase in costs is $0.66 million over five years.
1. Reporting
    State WIC agencies are required to develop a sample vendor 
agreement that details their policies and procedures concerning the 
rule's vendor notification and incentive item provisions. The sample 
vendor agreement must be included (by attachment or citation) in the 
agencies' WIC State Plans. FNS estimates that this provision (Sec.  
246.4(a)(14)(iii)) will increase the administrative burden faced by 
each State agency by one hour per year.
    State agencies must also develop a set of policies and procedures 
for compiling and distributing to WIC vendors a list of State-licensed 
infant formula wholesalers, distributors, and retailers, and FDA-
registered manufacturers. These policies must also be included, 
directly or by citation, in the agencies' State Plans. FNS estimates 
that this provision (Sec.  246.4(a)(14)(xvii)) will also add one hour 
annually to the States' administrative burden.
    The rule requires State agencies to establish a system to review 
requests by above-50-percent vendors who wish to offer incentive items 
to their WIC customers (Sec.  246.12(h)(8)). The cost to vendors of 
submitting requests for approval is a reporting cost. As of early 2008, 
thirty-two State WIC agencies authorized above-50-percent WIC 
vendors.\2\ FNS estimates that roughly half of these States both permit 
their above-50-percent vendors to offer incentive items and require 
them to seek individual State agency approval for each proposed 
incentive. Given that there are 1,700 authorized above-50-percent WIC 
vendors nationwide, this suggests that 850 vendors will submit 
individual incentive items to State agencies for approval. FNS 
estimates that the administrative burden of these requests will average 
one hour per vendor per year.
---------------------------------------------------------------------------

    \2\ FNS program data.
---------------------------------------------------------------------------

2. Recordkeeping
    State WIC agencies must develop, maintain, and distribute to WIC 
vendors a list of State-licensed infant formula wholesalers, 
distributors, and retailers, and FDA-registered manufacturers. FNS 
provides the State agencies with the list of FDA-registered 
manufacturers. State agencies are responsible for compiling their own 
lists of wholesalers, distributors, and retailers licensed in their 
States. State agencies are required to update and distribute these 
lists to their WIC vendors at least annually. FNS estimates that this 
task (Sec.  246.12(g)(11)) will require 50 hours of administrative work 
per State agency per year.
    As noted in the discussion of reporting burdens, the rule requires 
State agencies to develop a set of procedures for approval or 
disapproval of requests by above-50-percent vendors to offer particular 
incentive items to their customers. The rule gives the States some 
flexibility in implementing this provision. State agencies may choose 
to issue written approval or disapproval in response to each vendor 
request to offer a particular incentive. This relatively labor-
intensive option would require that the States maintain documentation 
of each vendor request. The documentation would include invoices or 
receipts that verify the cost to the vendor of the proposed incentive. 
Alternatively, State agencies could develop a pre-approved list of 
acceptable incentive items. Vendors would select vendor items from the 
approved list and submit those selections to the State agency along 
with its signed WIC vendor agreement. That process would relieve the 
State agency from having to respond to individual vendor requests for 
incentive item approval.
    FNS assumes that half of the thirty-two State WIC agencies that 
authorize above-50-percent WIC vendors will spend one hour per year on 
each one of an estimated 850 vendor incentive item requests. This 
suggests an annual recordkeeping burden for this provision (Sec.  
246.12(h)(8)) of roughly 850 hours.\3\
---------------------------------------------------------------------------

    \3\ This estimate assumes that the administrative burden faced 
by State agencies that make use of pre-approved incentive item lists 
is insignificant.
---------------------------------------------------------------------------

    Finally, the rule requires State agencies to notify a vendor in 
writing of an initial program violation, for violations of the type 
that require a second offense before a sanction is imposed, unless 
notification would compromise an ongoing investigation. Approximately 
2,300 of the vendors who are investigated annually commit violations 
that require a pattern before a sanction can be imposed. If each notice 
requirement consumes, on average, one hour to process, then the total 
administrative burden of this provision (Sec.  246.12(l)(3)) is about 
2,300 hours.
    The total administrative cost of this rule, in terms of hours spent 
in compliance, is summarized in Table 2 \4\:
---------------------------------------------------------------------------

    \4\ The ``annual frequency'' figures in table 2 are just the 
estimated number of hours divided by the number of respondents. The 
annual frequencies are shown rounded to the nearest integer.

[[Page 570]]



                                      Table 2--Administrative Cost Summary
                                                 [Burden hours]
----------------------------------------------------------------------------------------------------------------
                                                                                             Average
                                                                       Annual      Annual     burden     Annual
                      Section of Regulations                         number of   frequency  hours per    burden
                                                                    respondents              response    hours
----------------------------------------------------------------------------------------------------------------
New Reporting Burden:
    Sec.   246.4(a)(14)(iii)......................................          90           1          1         90
    Sec.   246.4(a)(14)(xvii).....................................          90           1          1         90
    Sec.   246.12(h)(8) vendors...................................         850           1          1        850
                                                                   ---------------------------------------------
        Total New Reporting Burden in the Final Rule..............  ...........  .........  .........      1,030
New Recordkeeping Burden:
    Sec.   246.12(g)(11)..........................................          90           1         50      4,500
    Sec.   246.12(h)(8)...........................................          16          53          1        850
    Sec.   246.12(1)(3)...........................................          90          26          1      2,300
                                                                   ---------------------------------------------
        Total New Recordkeeping Burden in the Final Rule..........  ...........  .........  .........      7,650
Reporting and Recordkeeping Burden
                                                                   ---------------------------------------------
        Total New Reporting and Recordkeeping Burden in the Final   ...........  .........  .........      8,860
         Rule.....................................................
----------------------------------------------------------------------------------------------------------------

    Table 3 applies an average hourly wage rate to the estimated 
increase in administrative burden hours to estimate the total 
administrative cost of the rule \5\:
---------------------------------------------------------------------------

    \5\ Wages and salaries for state and local government office and 
administrative support occupations, first quarter, FY 2008. Employer 
Costs for Employee Compensation, U.S. Department of Labor, Bureau of 
Labor Statistics. (http://www.bls.gov/data/home.htm)
    The wage rate is inflated by the projected increase in the State 
and Local Expenditure Index. Office of Management and Budget 
projections for the President's FY 2009 Budget.\

                 Table 3--Cost of Administrative Burden
------------------------------------------------------------------------
                                                       Wage   Total cost
                     FY                        Hours   rate   (millions)
------------------------------------------------------------------------
2008........................................   8,680  $16.09     $0.14
2009........................................   8,680   16.69      0.14
2010........................................   8,680   17.30      0.15
2011........................................   8,680   17.94      0.16
2012........................................   8,680   18.61      0.16
                                             ---------------------------
    Total...................................  ......  ......     $0.75
------------------------------------------------------------------------

Benefits

1. Incentive Items
    FNS collects no data on the type or value of incentive items that 
were offered by above-50-percent vendors to their WIC customers prior 
to passage of the 2004 Child Nutrition and WIC Reauthorization Act. Nor 
does FNS know how frequently such incentives were distributed by the 
typical vendor. However, among WIC-only stores (a subset of the broader 
category of above-50-percent vendors), incentive items were routinely 
offered as part of a typical marketing strategy.\6\ In 2004, 
approximately 2.5 percent of WIC vendors were WIC-only. That relatively 
small group, however, accounted for a disproportionate 12 percent of 
2004 WIC redemptions.\7\
---------------------------------------------------------------------------

    \6\ WIC-only vendors do not compete for WIC customers on the 
price of their products. Incentives (including merchandise, food, 
and services) were, and remain, one way that WIC-only stores try to 
differentiate themselves from their competition.
    \7\ Data on the number, location and redemptions of WIC-only 
stores is reported to FNS annually in The Integrity Profile (TIP).
---------------------------------------------------------------------------

    At least some of the incentives offered before the 2004 
Reauthorization Act were worth far more than this rule's $2 nominal 
limit. Senate Report 108-279, which accompanied the 2004 
Reauthorization Act, cites ``appliances, pots and pans, bicycles, food 
items such as tortillas, and cash'' among the incentives offered by 
WIC-only stores.
    Although this information does not permit the development of a 
quality numeric estimate of the total value of incentive items offered 
to WIC customers prior to enactment of the 2004 Reauthorization Act, it 
does suggest that the value could have been substantial.\8\ The 
computation shown below is not intended to estimate the value of this 
rule's incentive item reforms with any precision. Instead, it is 
intended to demonstrate that even with very conservative assumptions, 
the administrative costs of this rule are almost certainly outweighed 
by the program savings of this one reform.
---------------------------------------------------------------------------

    \8\ The rule's restriction on incentive items is intended to 
prevent vendors from covering their costs of acquiring incentives by 
raising the prices that they charge the program for WIC foods. The 
value of the incentives offered by vendors is therefore an indirect 
cost to the WIC program.

[[Page 571]]



 
 
 
850..........................  Assume that 850 above-50-percent vendors
                                currently offer incentive items to their
                                WIC customers.\9\
/ 48,297.....................  Total number of WIC-authorized
                                vendors.\10\
------------------------------
1.8%.........................  Assume that this 1.8% of vendors serve a
                                number of WIC participants exactly
                                proportionate to their share of all WIC
                                authorized vendors.\11\
x 4,577,348..................  Estimated number of households served
                                monthly by WIC, FY 2007 \12\ (Total
                                Participation/1.81).\13\
------------------------------
80,559.......................  Number of incentive item recipients.
x $5.00......................  Assume each WIC household received just
                                one $5 incentive item per year before
                                the 2004 Reauthorization Act.\14\
------------------------------
$402,794.....................  Annual value of incentives that would
                                have been distributed annually in the
                                absence of the 2004 Reauthorization Act.
- $161,117...................  Value of incentives if capped at the $2
                                nominal value of this rule.\15\
------------------------------
$241,676.....................  Estimated Annual Savings from this rule.
 

    Even with assumptions that almost certainly understate the numbers 
at each step in this computation, the annual savings from this 
provision of the rule alone far exceed the estimated annual 
administrative costs developed earlier.\16\
---------------------------------------------------------------------------

    \9\ This is taken from the discussion of costs on p. 5. This 
number is, of course, a very rough estimate of the number of above-
50-percent vendors that offer incentive items today. The number who 
offered incentive items prior to the 2004 Reauthorization was likely 
higher than the number who offer them today.
    \10\ FNS estimate, 2006.
    \11\ The TIP data on WIC participants served by WIC-only vendors 
in 2004 suggests that this assumption understates the dollar 
estimate developed here.
    \12\ Annual WIC program participation, FY 2007. FNS program 
data.
    \13\ National Survey of WIC Participants, 2001. WIC Economic 
Unit Composition by Category, Mean WIC participants in unit = 1.81.
    \14\ The 2004 Senate report suggests that this too is a 
conservative estimate.
    \15\ 104,664 incentive item recipients x $2.00.
    \16\ Another factor that complicates an estimate of the value of 
this provision of the rule, is the effect of the Vendor Cost 
Containment rule. That rule was also mandated by the Child Nutrition 
and WIC Reauthorization Act of 2004. The rule requires State 
agencies to implement a vendor peer group system, competitive price 
criteria, and allowable reimbursement levels with the goal of 
ensuring that the WIC Program pays authorized vendors competitive 
prices for supplemental foods. It specifically requires State 
agencies to ensure that above-50-percent vendors do not charge the 
program more for WIC foods than other authorized vendors do. The 
Vendor Cost Containment rule's competitive price requirements 
indirectly limit the ability of above-50-percent vendors to pass the 
cost of incentive items on to the WIC program. The incremental 
economic benefit of the incentive item provisions of the WIC 
Discretionary Vendor rule is less than what it would have been in 
the absence of the Vendor Cost Containment rule.
---------------------------------------------------------------------------

2. Vendor Notification of Initial Program Violations
    This provision of the rule is designed to encourage WIC-authorized 
vendors to correct behavior after being informed by State agencies of 
an initial program violation. In addition to enhancing the due process 
accorded to WIC vendors, the new rule is expected to increase vendor 
compliance with program rules. Improved compliance with program rules 
may have economic benefits; it also has the potential to improve the 
health outcomes of WIC participants.
    The most serious program violations mandate the imposition of 
sanctions after an initial occurrence.\17\ The rule does not change the 
way that these violations are handled. However, the rule should reduce 
repeat occurrences of vendor violations such as overcharging the 
program, claiming reimbursement for sales not supported by inventory 
records, exchanging WIC food instruments for non-WIC foods or 
merchandise, and transacting food instruments outside of proper 
channels. To the extent that the rule is effective at reducing repeat 
occurrences of overcharging, the program will realize direct dollar 
savings.\18\ Reduction in the repeat occurrence of the other violations 
listed here will enhance program effectiveness. A direct dollar value 
cannot be placed on that benefit. However, if fewer WIC food 
instruments are redeemed for non-WIC foods or merchandise, then the 
ultimate health outcomes of WIC participants may be improved.
---------------------------------------------------------------------------

    \17\ These include trafficking (exchanging WIC food instruments 
for cash), exchange of food instruments for firearms or other 
controlled substances, and exchange of food instruments for alcohol 
or tobacco. See Sec.  246.12(l)(1).
    \18\ FNS has not attempted to measure the effect of the rule's 
vendor notification provision on the value of subsequent vendor 
overcharges. If effective, the rule will reduce the number of vendor 
overcharges following an initial occurrence identified by a State 
WIC agency (through a compliance buy or other means). Under prior 
rules, the State agency was not required to notify the vendor of 
that initial occurrence. However, the imposition of a CMP following 
a second occurrence (after a follow-up compliance buy) would 
presumably have been as effective at ending subsequent vendor 
violations as a written notice following an initial violation. A 
primary benefit of the notification rule, then, is that it should 
free State agency resources to allow compliance buys at more vendors 
in a given amount of time.
---------------------------------------------------------------------------

    Although it is true that this provision of the rule, if effective, 
will reduce the number of CMPs imposed for repeat program violations, 
the consequent reduction in penalty income should not be counted as an 
economic loss to the program. To the extent that CMP income is viewed 
as vendor compensation for program violations, it simply offsets harm 
done to the program and WIC participants. The primary purpose of the 
CMP system, however, is to increase vendor compliance with program 
rules. The reduction in CMP assessments is just another way to measure 
the benefit of increased vendor compliance and improved program 
performance.
3. Authorized Infant Formula Suppliers
    The benefit of this provision cannot be quantified. FNS does not 
believe that stolen, expired, improperly stored, or otherwise defective 
formula reaches WIC participants in significant quantities. 
Nevertheless, the rule establishes a system that further safeguards the 
supply of program formula. The administrative costs of this safeguard, 
as estimated above, are minimal. The benefits, in terms of public 
confidence in the program and a reduction in an already small health 
risk to WIC infants, are believed to outweigh these small 
administrative costs.
4. CMP Inflation
    Civil Money Penalties collected from WIC vendors are recorded in 
WIC accounts as ``program income'' which can be used by the States for 
food or administrative expenses. FNS collects some data on sanctions 
imposed on WIC vendors for program violations. However, the data are 
not detailed or complete enough to estimate the effect of the rule's 
CMP inflation provision on WIC program income. The WIC program's TIP 
(``The Integrity Profile'') system tracks the number, but not the 
value, of sanctions imposed on WIC vendors for ``serious'' program 
violations. Serious violations are those for which sanctions may be 
imposed under WIC regulations. The TIP data do not track less serious 
State agency-established violations.
    The rule's CMP inflation provision does not have any effect on 
sanctions

[[Page 572]]

imposed for WIC food instrument trafficking, or exchange of food 
instruments for firearms, explosives, or other controlled substances. 
Those violations are covered by the FCPIAA, and the maximum penalties 
that may be imposed for those violations are already adjusted for 
inflation.
    Note also that the rule has no effect on sanctions that fall short 
of WIC's $10,000 maximum CMP amount per violation. The rule does not 
change the way that sanctions are computed. CMP amounts imposed in lieu 
of disqualification are still computed as ten percent of the vendor's 
average monthly WIC redemptions multiplied by the number of months that 
the vendor could have been disqualified under program rules for the 
same violation.\19\ The inflation adjustment provision of the rule only 
has effect on penalties, computed under the formula described here, 
that hit the current $10,000 ceiling per violation (or $40,000 ceiling 
per investigation).
---------------------------------------------------------------------------

    \19\ Sec.  246.12(l)(x).
---------------------------------------------------------------------------

    The TIP system reports 956 serious vendor violations (other than 
trafficking or exchange of food instruments for controlled substances) 
for FY 2007.\20\ The States imposed 94 CMPs for those violations. If, 
in the extreme, one assumes that all of these violations were imposed 
at the $10,000 maximum allowed under current rules, then the total 
value of penalties imposed would have been $940,000.\21\ This rule 
would raise the maximum CMP from $10,000 to $11,000, and subject the 
new maximum to future inflation adjustments. Thus, the rule would have 
immediately raised the value of these penalties by $94,000. Future 
inflation adjustments would increase the value of penalties imposed by 
a much smaller amount.
---------------------------------------------------------------------------

    \20\ TIP report, ``Store Tracking and Redemption System--
Sanctions Resulting From Serious Program Violations'', FY 2007 
total, run date May 1, 2008. This is a count of vendor violations 
identified by State WIC agencies. Because some vendors committed 
more than one of these 956 violations, the total number of vendors 
that were found to have committed a violation is less than 956.
    \21\ This assumes that none of the less serious State agency-
established penalties, which are not tracked by TIP, would have been 
imposed at the $10,000 CMP maximum.
---------------------------------------------------------------------------

    The actual effect of the rule on the value of CMPs imposed cannot 
be estimated. The $94,000 figure developed above is probably a very 
high-end estimate of the first year effect of the rule's CMP provision.
    Cost Benefit Summary:
    The costs of the rule, summarized in table 3, are estimated with 
some confidence. Each of the administrative burden estimates contained 
in the proposed rule were subject to public comment. FNS refined 
several of its final administrative burden estimates in response to 
suggestions that the proposed rule's estimates were too low. Even with 
these revisions, the administrative cost of the rule remains very 
small. FNS estimates that the total costs of implementation and ongoing 
administration to State WIC agencies is just $750,000 over five years.
    FNS has not developed a dollar benefit of the rule. Nevertheless, 
FNS is confident that the dollar benefit of the rule exceeds the rule's 
modest costs. A very conservative estimate of the benefit of the rule's 
incentive item provision alone exceeds the estimated cost of the entire 
rule. The vendor notification provision is expected to generate 
additional dollar savings by quickly correcting inadvertent vendor 
mistakes (including mistaken overcharges) once a first incident is 
identified by the States. The notification provision also offers honest 
WIC vendors the opportunity to amend their procedures and avoid costly 
sanctions. The rule also strengthens safeguards designed to prevent the 
distribution of stolen, expired, contaminated, or otherwise defective 
infant formula to WIC participants. The infant formula provisions of 
the rule benefit participants by reducing an already small health risk. 
Finally, the rule's CMP provisions restore uniformity to the maximum 
dollar penalties imposed for serious vendor violations. This will 
simplify program administration and restore fairness to the penalty 
structure.
    Alternatives:
    The basic parameters of the incentive item, vendor notification, 
and infant formula supplier provisions are mandated by statute. 
Significant alternatives to these provisions of the rule could not be 
considered. However, commenters on the proposed rule raised some issues 
that were considered by FNS as alternatives to the final rule. A few of 
the comments that proposed significant alternatives are discussed 
below.
    1. State agency discretion in giving notice to vendors of initial 
program violations.
    FNS received several comments on the proposed rule's provision to 
allow State agencies the discretion to withhold notification of an 
initial vendor violation. Some commenters objected to the rule's 
failure to specify criteria or standards to be followed by State 
agencies in determining whether an initial notification would 
compromise a broader investigation into vendor misconduct. FNS did not 
alter the final rule in response to these commenters' concerns. 
Instead, FNS believes that the provision, as proposed, follows the 
intent of Congress, as expressed by the House Committee on Education 
and the Workforce.\22\ The Committee encouraged the USDA to draft 
regulations and guidance that gives State agencies the discretion to 
withhold notice of initial violations from vendors that would 
compromise a State investigation into suspected vendor fraud.
---------------------------------------------------------------------------

    \22\ Report No. 108-445, March 23, 2004.
---------------------------------------------------------------------------

    For similar reasons, FNS declined to change the proposed rule to 
require administrative review of State agency decisions to withhold 
notification of an initial vendor violation. Administrative review of 
all such State agency decisions would deny the States the discretion 
that Congress intended them to have. As noted above, the standard 
specified by the rule (and recommended by Congress) to justify a State 
decision to withhold notification is simply suspicion of fraud. State 
agency suspicion, even carefully considered suspicion, does not lend 
itself to administrative review.
    2. Requirement that State agencies determine whether to withhold or 
provide notice of initial vendor violations on a case by case basis.
    Some commenters urged FNS to allow States to establish categorical 
rules on vendor notification of initial program violations. The 
commenters suggested that some types of violations are sufficiently 
serious to justify a State rule against initial vendor notification. 
FNS considered this suggestion, but did not change the rule's 
requirement that States consider each violation individually. The 
proposed and final rules both require State agencies to suspect fraud 
before deciding to withhold notification. The purpose of withholding 
notification is to permit further investigation into the nature and 
extent of the fraudulent behavior. The seriousness of a vendor 
violation is not an indication of vendor intent. For that reason, 
States should not be permitted to establish categorical rules on 
notification based on the seriousness of a violation alone. Such rules 
might have the unintended consequence of preventing States from 
immediately notifying vendors who inadvertently commit a serious 
violation. No purpose is served by disallowing immediate notification 
of violations that do not merit further investigation.

[FR Doc. E8-31063 Filed 1-5-09; 8:45 am]
BILLING CODE 3410-30-P