[Federal Register Volume 75, Number 140 (Thursday, July 22, 2010)]
[Proposed Rules]
[Pages 42659-42662]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-17957]


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DEPARTMENT OF THE TREASURY

Alcohol and Tobacco Tax and Trade Bureau

27 CFR Parts 40, 41, 44, 45, and 46

[Docket No. TTB-2010-0004; Notice No. 106]
RIN 1513-AB78


Standards for Pipe Tobacco and Roll-Your-Own Tobacco; Request for 
Public Comment

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

ACTION: Advance notice of proposed rulemaking; solicitation of 
comments.

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SUMMARY: The Alcohol and Tobacco Tax and Trade Bureau requests public 
comments on standards that have been proposed to distinguish between 
pipe tobacco and roll-your-own tobacco for Federal excise tax purposes 
based upon certain physical characteristics of the two products. We 
also request comments on any other physical characteristics that may be 
used for such purposes.

DATES: We must receive written comments on or before September 20, 
2010.

ADDRESSES: You may send comments on this advance notice to one of the 
following addresses:
     http://www.regulations.gov (via the online comment form 
for this advance notice as posted within Docket No. TTB-TTB-2010-0004 
at ``Regulations.gov,'' the Federal e-rulemaking portal);
     Mail: Director, Regulations and Rulings Division, Alcohol 
and Tobacco Tax and Trade Bureau, P.O. Box 14412, Washington, DC 20044-
4412; or
     Hand Delivery/Courier in Lieu of Mail: Alcohol and Tobacco 
Tax and Trade Bureau, 1310 G Street, NW., Suite 200-E, Washington, DC 
20005.
    See the Public Participation section of this advance notice for 
specific instructions and requirements for submitting comments, and for 
information on how to request a public hearing.
    You may view copies of this advance notice, selected supporting 
materials, and any comments we receive about this proposal at http://www.regulations.gov within Docket No. TTB-2010-0004. A direct link to 
this docket is posted on the TTB Web site at http://www.ttb.gov/tobacco/tobacco-rulemaking.shtml under Notice No. 106. You also may 
view copies of this advance notice, any supporting materials, and any 
comments we receive about this proposal by appointment at the TTB 
Information Resource Center, 1310 G Street, NW., Washington, DC 20220. 
Please call 202-453-2270 to make an appointment.

FOR FURTHER INFORMATION CONTACT: Amy R. Greenberg, Regulations and 
Rulings Division, Alcohol and Tobacco Tax and Trade Bureau (202-453-
2099).

SUPPLEMENTARY INFORMATION: 

Background

TTB Authority

    Chapter 52 of the Internal Revenue Code of 1986 (IRC) sets forth 
the Federal excise tax and related provisions that apply to tobacco 
products and processed tobacco manufactured in, or imported into, the 
United States. Section 5702(c) of the IRC (26 U.S.C. 5702(c)) defines 
the term ``tobacco products'' as ``cigars, cigarettes, smokeless 
tobacco, pipe tobacco, and roll-your-own tobacco.'' Each of these terms 
is also separately defined in section 5702.
    Regulations implementing the provisions of chapter 52 of the IRC 
are contained in 27 CFR parts 40 (Manufacture of tobacco products, 
cigarette papers and tubes, and processed tobacco), 41 (Importation of 
tobacco products, cigarette papers and tubes, and processed tobacco), 
44 (Exportation of tobacco products and cigarette papers and tubes, 
without payment of tax, or with drawback of tax), 45 (Removal of 
tobacco products and cigarette papers and tubes, without payment of 
tax, for use of the United States), and 46 (Miscellaneous regulations 
relating to tobacco products and cigarette papers and tubes). These 
regulations are administered by the Alcohol and Tobacco Tax and Trade 
Bureau (TTB).

Children's Health Insurance Program Reauthorization Act of 2009

    On February 4, 2009, the President signed into law the Children's 
Health Insurance Program Reauthorization Act of 2009, Public Law 111-3, 
123 Stat. 8 (``the Act'').

[[Page 42660]]

    Section 701 of the Act amended the IRC to increase the Federal 
excise tax rates on tobacco products and cigarette papers and tubes, 
effective as of April 1, 2009. The tax rates on pipe tobacco and roll-
your-own tobacco, which had both previously been $1.0969 per pound, 
were raised to $2.8311 per pound for pipe tobacco and $24.78 per pound 
for roll-your-own tobacco. See 26 U.S.C. 5701(f) and (g), respectively. 
On March 31, 2009, TTB published in the Federal Register (T.D. TTB-75, 
74 FR 14479) a temporary rule to amend the TTB regulations to reflect 
the section 701 changes. In the same issue of the Federal Register, TTB 
also published a notice of proposed rulemaking (Notice No. 93, 74 FR 
14506) inviting comments on the temporary regulations.
    On June 22, 2009, TTB published a temporary rule in the Federal 
Register (T.D. TTB-78, 74 FR 29401) to implement certain additional 
changes made to the IRC by section 702 of the Act. In the same issue of 
the Federal Register, TTB also published a notice of proposed 
rulemaking (Notice No. 95, 74 FR 29433) inviting comments on the 
temporary regulations.
    In an additional temporary rule, published in the Federal Register 
on September 24, 2009 (T.D. TTB-81, 74 FR 48650), TTB amended certain 
temporary provisions set forth in T.D. TTB-78 by extending the length 
of time packages of roll-your-own tobacco and pipe tobacco that did not 
comply with new regulatory requirements could still be used. This 
temporary rule also was published concurrent with a notice of proposed 
rulemaking in the same issue of the Federal Register (Notice No. 99, 74 
FR 48687) soliciting comments on the revision.

Distinguishing Between Pipe Tobacco and Roll-Your-Own Tobacco in T.D. 
TTB-78

    Temporary rule T.D. TTB-78 included new provisions regarding the 
expansion of the statutory definition of roll-your-own tobacco 
generally to include cigar wrapper and filler, and regarding the 
packaging and labeling of pipe tobacco and roll-your-own tobacco to 
better differentiate, on the basis of the packaging and labeling, 
between these two types of taxable products. In T.D. TTB-78, TTB noted 
that the tax rate increases adopted in section 701 of the Act resulted 
in a significant difference between the rate of tax imposed on roll-
your-own tobacco ($24.78 per pound) and the rate of tax imposed on pipe 
tobacco ($2.8311 per pound). Prior to the amendments made by the Act, 
the two tax rates were the same.
    The Bureau further noted that the existing TTB regulations 
contained no standards to differentiate between roll-your-own tobacco 
and pipe tobacco beyond a repeat of the statutory definitions. In T.D. 
TTB-78, we amended these definitions to incorporate the definitional 
changes contained in the Act. These definitional changes did not 
include any language which provides objective standards to readily 
distinguish between roll-your-own tobacco and pipe tobacco. Section 
5702(o) of the IRC, as amended by the Act, defines the term ``roll-
your-own tobacco'' as ``any tobacco, which, because of its appearance, 
type, packaging, or labeling, is suitable for use and likely to be 
offered to, or purchased by, consumers as tobacco for making cigarettes 
or cigars, or for use as wrappers thereof.'' The term ``pipe tobacco'' 
is defined at 26 U.S.C. 5702(n) as ``any tobacco which, because of its 
appearance, type, packaging, or labeling, is suitable for use and 
likely to be offered to, or purchased by, consumers as tobacco to be 
smoked in a pipe.''
    TTB recognizes that the similarity of roll-your-own tobacco and 
pipe tobacco and the much lower rate on pipe tobacco resulting from the 
tax rate changes made by the Act created an incentive for persons who 
roll their own cigarettes to use pipe tobacco. In T.D. TTB-78, the 
agency noted that there is now a heightened need for more regulatory 
detail to clarify the difference between the two products. Because both 
the definition of roll-your-own tobacco and the definition of pipe 
tobacco require consideration of the packaging and labeling of the 
product in order to determine the appropriate tax classification and 
because additional regulatory standards regarding the packaging and 
labeling were available, TTB amended the regulations to more clearly 
distinguish between the two products on those bases. With regard to the 
products' other defining characteristics, TTB stated that it was 
evaluating analytical methods and other standards that may lead to 
future rulemaking proposals.

Comments Received

    As a result of our rulemaking actions, TTB received six written 
submissions from four industry members and one consumer organization 
suggesting specific standards that could be used to distinguish between 
roll-your-own tobacco and pipe tobacco. According to some of these 
commenters, such standards are urgently needed because, they allege, 
the new packaging and labeling regulations are not sufficient to 
prevent the misrepresentation of roll-your-own tobacco as pipe tobacco.
    A representative for Altadis USA, Inc., a manufacturer and importer 
of pipe tobacco, submitted the most detailed proposal regarding 
physical standards in comments to Notice No. 95, which were repeated in 
a separate letter to TTB's Administrator. Stating that it believes the 
new packaging requirements outlined in Notice No. 95 are only 
marginally helpful in dealing with the ``misclassification problem,'' 
Altadis USA, Inc. proposes that TTB establish standards of physical 
characteristics for pipe tobacco. It asserts that examination of 
physical characteristics is necessary to determine whether the product, 
by virtue of its ``appearance'' and ``type,'' is ``suitable for use'' 
as tobacco to be smoked in a pipe, as described in the statutory 
definition of pipe tobacco at 26 U.S.C. 5702(n), or as tobacco for 
making cigarettes or cigars, as described in the statutory definition 
of roll-your-own tobacco at 26 U.S.C. 5702(o). This commenter therefore 
proposes that processed tobacco in its finished form be classified as 
pipe tobacco only if it meets at least one of the following:
     At least 18% of its weight consists of reducing sugars;
     Moisture content exceeds 22% of its weight;
     Its cut tobacco exceeds \1/8\ inch in width;
     At least 10% of its weight consists of Latakia, Perique, 
or Black Tobacco (USDA Type 37) or a combination thereof; or
     At least 20% of its weight consists of flavoring, casing, 
or other non-tobacco content.
    According to the commenter, any processed tobacco product that does 
not meet any of these criteria cannot be legitimately classified as 
pipe tobacco and must be classified as roll-your-own tobacco.
    TTB notes that this commenter also proposes that TTB take into 
consideration pre-existing or established brands for pipe tobacco and 
roll-your-own tobacco. The commenter states that prior to the 
introduction of the relevant tobacco tax legislation in Congress in 
January 2009, there were no ``crossover brands'', that is, ``brands 
associated with both pipe tobacco and roll-your-own tobacco.'' The 
commenter therefore urged TTB to deem any processed tobacco regularly 
sold under a pre-existing brand name, trade name, or trademark 
predominantly associated with roll-your-own tobacco, prior to January 
1, 2009, as roll-your-own tobacco. Similarly, any processed tobacco 
regularly sold under a pre-

[[Page 42661]]

existing brand name, trade name, or trademark predominantly associated 
with pipe tobacco prior to January 1, 2009, should be deemed pipe 
tobacco.
    A representative of Top Tobacco L.P., a manufacturer of roll-your-
own-tobacco, specifically addresses the above commenter's proposed 
standards for pipe tobacco in a letter to TTB's Administrator. Although 
the company states that it agrees with the general statement of facts 
in the submission, it disagrees with the proposed criterion regarding 
the width of the cut of the tobacco. This commenter states that it does 
not believe that the width factor can be a reliable indicator of 
whether or not a product is intended for consumption as roll-your-own 
tobacco or pipe tobacco because, according to the commenter, tobacco 
cut at \1/8\ of an inch can be rolled into cigarettes and, further, 
consumers can use basic kitchen or hardware appliances to grind wider 
cut tobacco into a size suitable for use as roll-your-own tobacco. The 
commenter goes on to assert that width standards proposed in Germany 
were not successful.
    In response to Notice No. 95, the Pipe Tobacco Council, Inc. (PTC) 
submitted a comment proposing that pipe tobacco products sold as such 
prior to January 1, 2009, be exempt from the proposed labeling and 
packaging regulations. The PTC proposes that manufacturers with such 
products certify that the products were on the market prior to January 
1, 2009, and that TTB create and maintain a database of such 
certifications. Manufacturers wishing to market any products as pipe 
tobacco that would be sold to consumers for the first time on or after 
January 1, 2009, would be required to submit a sample of the finished 
product to TTB along with a ``valid reason why the product should be 
considered pipe tobacco.'' Such reasons could include the product's cut 
size, casing and flavoring rates, tobacco grades used, cut style, and 
moisture. Finally, PTC proposes that any brand name or trademark that 
was ever sold as either a roll-your-own tobacco product or cigarette 
brand produced and sold after January 1, 2009, should not be classified 
as pipe tobacco.
    A representative of the National Tobacco Company LP (NTC), a 
manufacturer of both pipe tobacco and roll-your-own tobacco, in a 
comment to Notice No. 95, states that the constituent tobacco materials 
used in various tobacco products often overlap in terms of their type 
and appearance. Therefore, NTC believes that the type of tobacco and 
the appearance of the tobacco product are not always reliable guides to 
the product's suitable and intended use. Nonetheless, the commenter 
does suggest a number of characteristics that could be used to identify 
pipe tobacco, such as the inclusion of substantial amounts of 
Cavendish, Latakia, or Perique tobacco, the appearance of a broad-leaf 
cut tobacco blend, high moisture content, dense packing, burn 
inhibitors, and block or flake cut. NTC states that the presence of 
menthol flavoring and the use of blending components such as expanded 
stem, expanded leaf tobacco, or reconstituted sheet tobacco could 
indicate that a tobacco product is intended for use as roll-your own 
tobacco.
    In a comment to Notice No. 99 (74 FR 48687), Extension of Package 
Use-Up Rule for Roll-Your-Own Tobacco and Pipe Tobacco, the consumer 
organization Campaign for Tobacco-Free Kids states that the proposed 
packaging regulations do not do enough to prevent the mislabeling of 
roll-your-own tobacco as pipe tobacco. It urges TTB to establish clear 
criteria to distinguish between those types of tobacco that may be 
labeled as pipe tobacco and those that may not. The group suggests that 
one possibility is to require that any loose tobacco consisting 
primarily of flue-cured or burley tobacco be labeled and taxed as roll-
your-own tobacco.

TTB Response

    We are aware that additional regulatory standards to distinguish 
between roll-your-own tobacco and pipe tobacco, based on physical 
characteristics, would be beneficial. It is our primary concern that 
any regulatory distinction drawn between these products be objective 
and enforceable. To that end, TTB continues to conduct research on the 
physical characteristics of the products that may be used to 
effectively distinguish between the two products for tax purposes. We 
also believe that soliciting comments from the public may assist us in 
developing objective, enforceable, and not easily subverted 
distinctions. Accordingly, in this document we are requesting comments 
on the proposals set forth above, and any additional comments, on the 
distinguishing physical characteristics of the two products.

Public Participation

Comments Invited

    We invite comments from interested members of the public on whether 
the physical standards discussed above under the heading ``Comments 
Received'' are appropriate and sufficient for distinguishing between 
pipe tobacco and roll-your-own tobacco. We also request comments on any 
additional physical characteristics that could also be used to 
distinguish between these two tobacco products for tax classification 
purposes. Furthermore, we invite comments on any particular 
combination(s) of physical characteristics which would distinguish 
between pipe tobacco and roll-your-own tobacco. If a commenter can 
identify a specific list of differentiating physical characteristics, 
we invite the commenter to opine on what number of the physical 
characteristics should be present in order for the product to be 
classified as ``pipe tobacco'' (e.g., 2 of 5, 3 of 6). In addition, we 
request comments providing objective methods for analyzing whether or 
not a tobacco product meets the physical characteristics discussed in 
this notice or any additional physical characteristics suggested by the 
commenter. In particular, we invite commenters to provide objective 
methods for determining the percentage of Cavendish, Latakia, Perique, 
or Black Tobacco in a tobacco product, and for determining the 
percentage of casings and flavorings on a tobacco product.

Submitting Comments

    You may submit comments on this advance notice by using one of the 
following three methods:
     Federal e-Rulemaking Portal: You may send comments via the 
online comment form linked to this advance notice in Docket No. TTB-
2010-0004 on ``Regulations.gov,'' the Federal e-rulemaking portal, at 
http://www.regulations.gov. A link to the docket is available under 
Notice No. 106 on the TTB Web site at http://www.ttb.gov/tobacco/tobacco-rulemaking.shtml. Supplemental files may be attached to 
comments submitted via Regulations.gov. For information on how to use 
Regulations.gov, click on the site's Help or FAQ tabs.
     U.S. Mail: You may send comments via postal mail to the 
Director, Regulations and Rulings Division, Alcohol and Tobacco Tax and 
Trade Bureau, P.O. Box 14412, Washington, DC 20044-4412.
     Hand Delivery/Courier: You may hand-carry your comments or 
have them hand-carried to the Alcohol and Tobacco Tax and Trade Bureau, 
1310 G Street, NW., Suite 200-E, Washington, DC 20005.
    Please submit your comments by the closing date shown above in this 
notice. Your comments must reference Notice No. 106 and include your 
name and mailing address. Your comments also must be made in English, 
be legible, and be written in language acceptable for public 
disclosure. We do not

[[Page 42662]]

acknowledge receipt of comments, and we consider all comments as 
originals.
    If you are commenting on behalf of an association, business, or 
other entity, your comment must include the entity's name as well as 
your name and position title. If you comment via Regulations.gov, 
please include the entity's name in the ``Organization'' blank of the 
comment form. If you comment via postal mail, please submit your 
entity's comment on letterhead.
    You may also write to the Administrator before the comment closing 
date to ask for a public hearing. The Administrator reserves the right 
to determine whether to hold a public hearing.

Confidentiality

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

Public Disclosure

    On the Federal e-rulemaking portal, Regulations.gov, we will post, 
and the public may view, copies of this advance notice, selected 
supporting materials, and any electronic or mailed comments we receive 
about this proposal. A direct link to the Regulations.gov docket 
containing this advance notice and the posted comments received on it 
is available on the TTB Web site at  http://www.ttb.gov/tobacco/tobacco-rulemaking.shtml under Notice No. 106. You may also reach the 
docket containing this advance notice and the posted comments received 
on it through the Regulations.gov search page at http://www.regulations.gov.
    All posted comments will display the commenter's name, organization 
(if any), city, and State, and, in the case of mailed comments, all 
address information, including e-mail addresses. We may omit voluminous 
attachments or material that we consider unsuitable for posting.
    You and other members of the public may view copies of this advance 
notice, any related supporting materials, and any electronic or mailed 
comments we receive about this proposal by appointment at the TTB 
Information Resource Center, 1310 G Street, NW., Washington, DC 20220. 
You may also obtain copies at 20 cents per 8.5 x 11 inch page. Contact 
our information specialist at the above address or by telephone at 202-
453-2270 to schedule an appointment or to request copies of comments or 
other materials.

Drafting Information

    Jennifer Berry of the Regulations and Rulings Division drafted this 
advance notice.

    Signed: April 28, 2010.
John J. Manfreda,
Administrator.
    Approved: May 26, 2010.
Timothy E. Skud,
Deputy Assistant Secretary (Tax, Trade, and Tariff Policy) .
[FR Doc. 2010-17957 Filed 7-21-10; 8:45 am]
BILLING CODE 4810-31-P