[Federal Register Volume 77, Number 120 (Thursday, June 21, 2012)]
[Rules and Regulations]
[Pages 37287-37305]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-15190]
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DEPARTMENT OF THE TREASURY
Alcohol and Tobacco Tax and Trade Bureau
27 CFR Parts 40, 41, 44, and 45
[Docket No. TTB-2009-0002; T.D. TTB-104; Re: T.D. TTB-78, Notice No. 95
and Notice No. 98; T.D. TTB-80; T.D. TTB-81 and Notice No. 99]
RIN 1513-AB72
Implementation of Statutory Amendments Requiring the
Qualification of Manufacturers and Importers of Processed Tobacco and
Other Amendments Related to Permit Requirements, and the Expanded
Definition of Roll-Your-Own Tobacco
AGENCY: Alcohol and Tobacco Tax and Trade Bureau, Treasury.
ACTION: Final rule; Treasury decision.
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SUMMARY: The Alcohol and Tobacco Tax and Trade Bureau is making
permanent, with some changes, temporary regulatory amendments
promulgated in response to certain changes that the Children's Health
Insurance Program Reauthorization Act of 2009 made to the tobacco
provisions of the Internal Revenue Code of 1986. The regulatory
amendments adopted in this final rule include permit and related
requirements for manufacturers and importers of processed tobacco,
requirements for manufacturers of tobacco products who also manufacture
processed tobacco, and regulations related to the expansion of the
definition of roll-your-own tobacco.
DATES: Effective June 21, 2012, the temporary regulations published in
the Federal Register at 74 FR 29401 on June 22, 2009, at 74 FR 37551 on
July 29, 2009, and at 74 FR 48650 on September 24, 2009 are adopted as
final, and these regulations will no longer have a sunset date of June
22, 2012. The amendments to 27 CFR parts 40 and 41 contained in this
rule are effective June 21, 2012.
FOR FURTHER INFORMATION CONTACT: Amy Greenberg, Regulations and Rulings
Division, Alcohol and Tobacco Tax and Trade Bureau 1310 G St. NW., Box
12, Washington, DC 20005; phone (202) 453-1039, ext. 099.
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
manufacturers and importers of tobacco products, processed tobacco, and
cigarette papers and tubes, and to export warehouse proprietors who
hold such products, upon which tax has not been paid, pending export.
The Alcohol and Tobacco Tax and Trade Bureau (TTB) administers chapter
52 of the IRC pursuant to section 1111(d) of the Homeland Security Act
of 2002, codified at 6 U.S.C. 531(d). The Secretary has delegated
various authorities through Treasury Department Order 120-01 (Revised),
dated January 21, 2003, to the TTB Administrator to perform the
functions and duties in the administration and enforcement of this law.
Section 5701 of the IRC (26 U.S.C. 5701) sets forth the excise tax
rates that apply to domestic and imported tobacco products and
cigarette papers and tubes. Section 5702 of the IRC (26 U.S.C. 5702)
defines tobacco products as cigars, cigarettes, smokeless tobacco, pipe
tobacco, and roll-your-own tobacco and separately defines each of these
terms. That section also defines other relevant terms, such as
``manufacturer of tobacco products,'' ``importer,'' and ``export
warehouse proprietor.''
Sections 5712 and 5713 of the IRC (26 U.S.C. 5712 and 5713) provide
that manufacturers and importers of tobacco products and processed
tobacco and export warehouse proprietors must obtain a permit to engage
in such businesses. Section 5712 also allows for the promulgation of
regulations to prescribe minimum manufacturing and activity
requirements for such permittees. Sections 5721, 5722, and 5741 of the
IRC (26 U.S.C. 5721, 5722, 5741) authorize the promulgation of
regulations to require inventories, reports, and recordkeeping,
respectively. Section 5723 of the IRC (26 U.S.C. 5723) includes
authority to promulgate regulations regarding standards for packages,
and for marks, labels, and notices on such packages of tobacco
products, processed tobacco, and cigarette papers and tubes.
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), and 45 (removal of
tobacco products and cigarette papers and tubes, without payment of
tax, for use of the United States). These regulatory provisions are
administered by 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 (``CHIPRA''). Section 701 of CHIPRA amended the IRC to
increase the Federal excise tax rates on tobacco products and cigarette
papers and tubes. Section 701 also imposed a floor stocks tax on such
articles held for sale on the effective date of the tax rate increases
(April 1, 2009). On March 31, 2009, TTB published in the Federal
Register (74 FR 14479) a temporary rule, T.D. TTB-75, to amend the TTB
regulations to reflect the section 701 changes. On July 22, 2010, TTB
published in the Federal Register (75 FR 42605) T.D. TTB-85 which
adopted those temporary regulations as a final rule. The section 701
statutory and regulatory changes are not the subject of this document.
[[Page 37288]]
Section 702 of CHIPRA also made some significant changes to the
IRC, some of which are reflected in the description of TTB's authority
above. These changes were principally with regard to ``roll-your-own
tobacco'' and ``processed tobacco.'' Section 702 amended the definition
of ``roll-your-own tobacco'' in section 5702 of the IRC by including in
its scope tobacco for making cigars and tobacco for use as wrappers of
cigars and cigarettes. Section 702 of CHIPRA also set forth a statutory
framework for regulating ``processed tobacco'' by:
Amending section 5702 of the IRC to add a definition of
``manufacturer of processed tobacco'';
Amending sections 5712 and 5713 of the IRC to require that
manufacturers and importers of processed tobacco, like manufacturers
and importers of tobacco products, apply for and obtain a permit before
commencing such businesses. Section 702 included a transitional rule
under which manufacturers and importers of processed tobacco who were
engaged in such a business on April 1, 2009, and who file a permit
application with TTB on or before June 30, 2009, could continue in
business pending final TTB action on the application;
Amending sections 5721, 5722, and 5741 to make
manufacturers and importers of processed tobacco subject to the
inventory, reporting, and recordkeeping regulatory authority already
applicable to manufacturers and importers of tobacco products; and
Amending section 5723 of the IRC to make processed tobacco
subject to the packaging (including mark, label, and notice) regulatory
authority already applicable to tobacco products and cigarette papers
and tubes.
The changes made by section 702 of CHIPRA clearly brought processed
tobacco within the statutory and regulatory framework administered by
TTB under chapter 52 of the IRC but did not establish processed tobacco
as a commodity subject to excise tax. The regulatory actions taken by
TTB in response to these statutory changes are outlined below.
Publication of Temporary Regulations and Notices of Proposed Rulemaking
On June 22, 2009, TTB published in the Federal Register (74 FR
29401) a temporary rule, T.D. TTB-78, setting forth amendments to parts
40, 41, 44, and 45 of the TTB regulations to reflect the changes made
by section 702 of CHIPRA; those temporary regulations went into effect
on the date of publication. On the same day, TTB published in the
Federal Register (74 FR 29433) a notice of proposed rulemaking, Notice
No. 95, that invited comments from the public on the amendments
contained in that temporary rule.
The principal regulatory changes contained in the T.D. TTB-78
temporary rule are as follows:
Numerous provisions within parts 40, 41, and 44 were
amended by the inclusion of references to ``processed tobacco'' to
reflect the entry of that commodity into the regulatory framework
administered by TTB.
A new subpart L was added to part 40 and a new subpart M
was added to part 41, setting forth qualification, operation, and
related requirements for manufacturers and importers of processed
tobacco. These provisions included permit application, recordkeeping,
reporting, and minimum activity requirements. Inventory requirements
also were included for manufacturers of processed tobacco.
Definitions of ``manufacturer of processed tobacco'' and
of ``processed tobacco'' were added to Sec. Sec. 40.11 and 41.11 to
assist in distinguishing between activities related to farming and the
handling of processed tobacco, which do not fall under the regulatory
provisions, and activities related to the processing of tobacco, which
must be undertaken in compliance with statutory and regulatory
requirements.
The definition of ``roll-your-own tobacco'' in Sec. Sec.
40.11 and 41.11 was amended to reflect the expanded definition of that
term in section 5702 of the IRC, and corresponding changes were made to
the notice requirements for roll-your-own tobacco specified in
Sec. Sec. 40.216b and 41.72b.
In Sec. Sec. 40.11 and 41.11 the definition of
``package'' was revised, and a definition of ``packaging'' was added,
in order to make clear that ``processing of tobacco'' does not include
placing processed tobacco in consumer packaging. A manufacturer of
processed tobacco may not place processed tobacco in a consumer package
because to do so would result in a product that fits the definition of
a taxable commodity. Accordingly, such packaging may not occur on the
premises of a person who is qualified only as a manufacturer of
processed tobacco but may only be undertaken on the bonded premises of
a tobacco product manufacturer.
Sections 40.25a and 41.30, which specify the tax rates
that apply to pipe tobacco and roll-your-own tobacco, were amended by
the addition of standards for distinguishing between these two classes
of tobacco products on the basis of their packaging and labeling,
including rules under which a product is deemed to be (and thus subject
to the tax rate applicable to) roll-your-own tobacco.
The notice requirements for pipe tobacco in Sec. Sec.
40.216a and 41.72a were amended by removing ``Tax Class L'' as a
specified designation on a pipe tobacco package, thus leaving ``pipe
tobacco'' as the only specified designation.
The notice requirements for roll-your-own tobacco in
Sec. Sec. 40.216b and 41.72b were amended by removing ``Tax Class J''
as a specified designation on a roll-your-own tobacco package (thus
leaving ``roll-your-own tobacco'' and ``cigarette tobacco'' as
specified designations) and, to reflect the expanded definition of
``roll-your-own tobacco'' mentioned above, by adding ``cigar tobacco,''
``cigarette wrapper,'' and ``cigar wrapper'' as specified designations.
Sections 40.216c and 41.72c were revised to set forth a
use-up period, until August 1, 2009, for the removal of pipe tobacco
and roll-your-own tobacco in packages that bore the ``Tax Class L'' and
``Tax Class J'' designations.
On July 29, 2009, TTB published in the Federal Register (74 FR
37551) a temporary rule, T.D. TTB-80, to correct several inadvertent
errors that appeared in the T.D. TTB-78 temporary rule; these
corrections were effective on the date of publication. Subsequently, on
August 25, 2009, TTB published in the Federal Register (74 FR 42812) a
notice of proposed rulemaking, Notice No. 98, to reopen the comment
period specified in Notice No. 95 in order to extend that comment
period for an additional 60 days, that is, until October 20, 2009.
During the initial Notice No. 95 comment period, TTB received three
comments requesting an extension of the package use-up period beyond
the August 1, 2009, date specified in T.D. TTB-78. One commenter also
pointed out that the temporary regulations set forth additional factors
related to the packaging of the pipe tobacco and roll-your-own products
that bears on the classification of those products, but those
provisions were not subject to a use-up period in the temporary
regulations. The commenter asked that TTB provide a use-up provision
that applied to both the classification and the notice-related
packaging provisions. On September 24, 2009, TTB published in the
Federal Register (74 FR 48650) a temporary rule, T.D. TTB-81, which:
(1) Further amended Sec. Sec. 40.216c and 41.72c, discussed above, in
order to extend the specified use-up period for packages bearing the
``Tax Class L'' and ``Tax Class J'' designations to March 23, 2010;
[[Page 37289]]
(2) amended Sec. Sec. 40.25a and 41.30, discussed above, in order to
delay application of the new standards for distinguishing between pipe
tobacco and roll-your-own tobacco, also to March 23, 2010; and (3)
corrected two minor errors of omission in the T.D. TTB-78 regulatory
texts. These regulatory amendments took effect on the date of
publication. Also on September 24, 2009, TTB published in the Federal
Register (74 FR 48687) a notice of proposed rulemaking, Notice No. 99,
inviting the submission of public comments, until November 23, 2009, on
the additional regulatory amendments contained in T.D. TTB-81.
Discussion of Comments
Comment Overview
TTB received 19 responses to the solicitation of comments regarding
the temporary regulations contained in T.D. TTB-78 and 1 response to
the solicitation of comments regarding the regulatory amendments
contained in T.D. TTB-81. TTB had also received 2 comments to an
earlier temporary rule (T.D. TTB-75, implementing the new tax rates and
floor stocks tax imposed by CHIPRA) that are relevant to the issues
raised in T.D. TTB-78.
The 19 responses to the publication of T.D. TTB-78 included
comments submitted by or on behalf of the following industry members,
trade organizations, consulting firms, and law firms: R.J. Reynolds
Tobacco Co. (R.J. Reynolds), John Middleton Co., National Tobacco Co.
LP (National Tobacco), Altadis USA, Inc., Universal Leaf Tobacco Co.,
Inc., Schweitzer-Mauduit International, Inc. (Schweitzer-Mauduit), the
Pipe Tobacco Council, Inc., Customs Advisory Services, Inc., Venable,
LLP, the law offices of Barry Boren, and the companies of the Altria
Group, Inc., consisting of John Middleton Co., Philip Morris USA, Inc.
and U.S. Smokeless Tobacco Manufacturing Co. LLC (the Altria Group).
The comment received in response to T.D. TTB-81 was submitted on behalf
of the Campaign for Tobacco-Free Kids. The two comments received in
response to T.D. TTB-75 and referenced below were submitted on behalf
of Domestic Tobacco Co., and National Tobacco.
Two individuals submitted comments that were not pertinent to the
regulations at issue and therefore are outside the scope of this final
rule. One comment discussed techniques for quitting smoking and the
other discussed subsidies for health insurance. These comments are not
discussed further in this document. Descriptions of the remaining
comments, along with TTB's responses, are set forth below, with the
exception of the comments on the package use-up period that were
addressed in T.D. TTB-81.
General Comments
Comment
The Altria Group commented that TTB should, in the future, consult
with industry through roundtable discussions, or stakeholder meetings,
prior to issuing ''this type of broad regulatory program.'' National
Tobacco commented that TTB should consider establishing an advisory
committee, consisting of a panel of industry experts, for providing TTB
with industry input on a variety of issues, including distinguishing
between pipe tobacco and other tobacco products and simplifying the
recordkeeping requirements.
TTB response: Because of the short time period between enactment of
CHIPRA and the effective date of its provisions, expedited adoption of
the implementing regulations was necessary and precluded advanced
consultation with industry. Moreover, publication of the notice
inviting comments on the temporary provisions is an effective means to
obtain public input to be taken into account at the final rule stage.
With regard to the suggestion that TTB set up an advisory group,
TTB agrees that obtaining input from the regulated industry as well as
other members of the public, prior to rulemaking, is valuable. TTB
often receives and considers information from industry members, State
and Federal regulators, and other interested parties, which assists in
the development of policy positions. TTB is also currently evaluating
additional ways of obtaining input from all interested parties beyond
notice and comment rulemaking and ad hoc communications.
Specifically in regard to the distinction between pipe tobacco and
roll-your-own tobacco, TTB has found that the publication of an advance
notice of proposed rulemaking (Notice No. 106, 75 FR 42659, published
in the Federal Register on July 22, 2010) and the reopening of the
comment period for that rulemaking (in Notice No. 120, 76 FR 52913,
published in the Federal Register on August 24, 2011) has been an
effective method of receiving thoughtful and substantive written
comments from industry members and other interested parties.
Definitions of ``Processed Tobacco,'' ``Package,'' and ``Packaging''
Comment
National Tobacco requested that TTB amend the definition of
``processed tobacco'' in Sec. Sec. 40.11 and 41.11 in such a way that
the permit requirement would not apply when processed tobacco is used
in the flavoring industry, in ceremonial Native American and other
religious activities, in chemical extractive industries, in
pharmaceuticals, and in agricultural pesticides and fertilizer.
TTB response: TTB believes that the legislation is concerned with
processed tobacco that could be used to make a tobacco product. At this
point, TTB has no regulatory standard that would distinguish the
``processed tobacco'' that could be used to make a tobacco product from
``processed tobacco'' that could not be used to make a tobacco product.
However, TTB does make a determination on a case-by-case basis,
considering the particular circumstances of a processing operation and
consistent with the statutory language. TTB will consider future
amendments to the regulations in this matter.
Comment
R.J. Reynolds expressed concern that the definition of ``package''
treats all packages of processed tobacco weighing 10 pounds or less as
a taxable product. R.J. Reynolds asserted that this does not account
for the ``legitimate needs'' companies have of shipping small samples
of processed tobacco and proposed that TTB amend the definitions of the
terms ``package'' and ``processed tobacco'' to better accommodate such
shipments. Specifically, R.J. Reynolds proposed that the second
sentence of the definition of package in Sec. 40.11 be revised to read
as follows: ``For purposes of this definition, a container of processed
tobacco, the contents of which weigh 10 pounds or less, that is removed
within the meaning of this part and offered for sale or delivery to the
ultimate consumer is deemed to be a taxable tobacco product as
referenced with this part.'' [Emphasis in the original.] R.J. Reynolds
also suggested that TTB consider package graphics (that is, markings
and designations) and the way that the product is marketed and offered
for sale.
TTB response: The issue R.J. Reynolds raised of shipping small
samples of processed tobacco is addressed below in the recordkeeping
and reporting requirements section of this comment discussion. With
regard to the specific
[[Page 37290]]
language proposed by R.J. Reynolds, TTB believes that adopting the
proposal would be problematic as it would only recognize a container as
a ``package,'' and therefore, a taxable commodity, if the container is
actually offered for sale or delivery to the consumer by the
manufacturer. This would be inconsistent with the statutory language
for pipe tobacco and roll-your-own tobacco which only requires that the
packaging of a product make it suitable for use and likely to be
offered to, or purchased by, consumers.
With regard to the proposal that TTB consider package graphics and
marketing in determining when processed tobacco is deemed a taxable
product, TTB believes that the consideration of package graphics, along
with physical characteristics, is appropriate for further consideration
and notice and comment in a separate rulemaking action. Setting forth
specific, potentially limiting, standards for package graphics in this
final rule without providing the general public, including other
industry members, an opportunity to comment on such standards would not
be appropriate. Similarly, how a product is marketed and offered for
sale also warrants further consideration and notice and comment.
Comment
The Altria Group requested clarification of the last sentence of 27
CFR 40.61(c), which states: ``For the purposes of this section, the
activity of packaging processed tobacco may be sufficient to qualify as
a manufacturing activity.'' The emphasis was added by the commenter who
asserted that this phrase is vague and discretionary, both for those
who seek to obtain permits and for those who might contract with such
entities for packaging services. The Altria Group expressed concern
that, as written, Sec. 40.61(c) ``could be interpreted to allow a
permit for the packaging of pipe tobacco or snuff (loose tobacco that
could be called processed tobacco), but not the packaging of cigarettes
or cigars (clearly fashioned into an actual product).'' The commenter
stated that if TTB intended for the tobacco to be considered processed
tobacco until it is put into a package, then the Bureau should clarify
that intent in the regulations.
TTB response: The regulatory text at Sec. 40.61(c), as amended by
T.D. TTB-78, states that the activity of packaging processed tobacco
may be sufficient to qualify as a manufacturing activity, for the
purposes of requiring the packager to obtain a permit as a tobacco
product manufacturer. The text is not ambiguous as to whether it
applies to cigars and cigarettes. It should be noted that the activity
of packaging cigars and cigarettes is not sufficient to qualify a
person as a manufacturer of tobacco products as both cigars and
cigarettes already clearly meet all the considerations in the
applicable statutory definitions (at 26 U.S.C. 5702(a) and (b),
respectively) prior to their packaging. A cigar or cigarette is
distinguishable as a roll of tobacco wrapped in paper, tobacco, or a
substance not containing tobacco, before the products are put up in
consumer packages.
Single Entities Operating Multiple Locations Under the Same Permit
Comment
Two industry members (National Tobacco and Schweitzer-Mauduit) and
Customs Advisory Services Inc. suggested that TTB allow a single legal
entity to operate multiple factories under a single permit for the
manufacture of processed tobacco. National Tobacco argued that
``[r]equiring separate permits for each location is anachronistic in an
age when central recordkeeping and global information sharing are the
norm.'' National Tobacco further suggested that the ``person'' who must
qualify for a permit under Sec. 40.61(a) should refer to an
individual, company, corporation, partnership, or other legal entity,
rather than to a location. Schweitzer-Mauduit requested clarification
of its understanding that the TTB regulations require ``one application
for permit and one monthly report from each corporation that
manufactures processed tobacco at more than one facility.'' R.J.
Reynolds asked whether a manufacturer of tobacco products could store
processed tobacco in warehouse facilities not located in the vicinity
of its manufacturing facilities or whether those facilities had to be
located in the vicinity of the factory. Customs Advisory Services Inc.
asserted that ``[c]onfusion exists in the trade regarding the number of
permits required and the tobacco reporting requirements for companies
operating multiple factories for the manufacture of processed
tobacco,'' and that the reporting requirements for intercompany
movements of tobacco between factories and storage warehouses operated
by the same legal entity are not clearly described by the regulations.
The commenter recommended that the regulations be clarified to allow a
single legal entity to operate multiple facilities under a single
permit.
Finally, National Tobacco extended the suggestion of a single
permit to cover multiple locations to also apply to manufacturers of
tobacco products. Specifically, National Tobacco suggested that TTB
also amend Sec. Sec. 40.61 and 40.62 to allow each manufacturer of
tobacco products to obtain a single permit covering multiple locations,
as well as the importation of tobacco products, to eliminate any
duplication of records that results from operating under multiple
permits.
TTB response: The issue of allowing the permit of a manufacturer of
tobacco products to cover multiple manufacturing locations and also
importation is not an issue appropriate for resolution in this final
rule document because it was not raised in, and goes beyond the scope
of, T.D. TTB-78. With regard to the comment that a person, rather than
a location, must qualify for a permit, TTB points out that the IRC at
26 U.S.C. 5712 and 5713 requires that the determination of whether an
applicant is qualified to obtain a permit depends on, among other
factors, consideration of the premises. In very general terms, section
5712 requires that an application for a permit be evaluated on three
factors: (1) The premises upon which business will occur, (2) the
proposed business activities, and (3) the person intending to engage in
such business. Specifically, section 5712 provides that an application
for a permit may be rejected and the permit denied if the Secretary
finds that ``the premises on which it is proposed to conduct the
business are not adequate to protect the revenue.'' This provision
obligates TTB to evaluate the premises upon which business is proposed
to be conducted in order to determine whether to issue a permit.
Similarly, an existing permit may be revoked or suspended under 26
U.S.C. 5713 if the permittee has failed to maintain the premises in
such manner as to protect the revenue. As a result, a permit authorizes
a person to engage in business only at a specific location. The
location where business may take place under the permit may be changed,
where authorized under the TTB regulations, but the permit continues to
be tied to a specific location under the statute.
TTB agrees with the comments that point out that TTB needs to
address the activities that may be undertaken on, and the boundaries
of, the physical premises delineated by the permit of a manufacturer of
processed tobacco. In considering this matter, TTB reviewed the
regulations that apply to the premises of manufacturers of tobacco
products to determine whether and to
[[Page 37291]]
what extent those provisions may be appropriate to the activities of
manufacturers of processed tobacco. The regulations at Sec. 40.72(a)
specifically prescribe the scope and use of a tobacco product
manufacturer's premises. Under that section, the premises used by a
manufacturer of tobacco products for the factory are to be used
exclusively for the purposes of manufacturing and storing tobacco
products; storing materials, equipment, and supplies related thereto or
used or useful in the conduct of the business; and carrying on
activities in connection with business of that manufacturer. Further,
Sec. 40.69 addresses premises that incorporate portions of buildings
and multiple non-contiguous buildings, and when diagrams of such
premises must be submitted to TTB. Under that section, the premises
used by a manufacturer of tobacco products may consist of more than one
building, or portions of buildings, which need not be contiguous but
must be located in the same city, town, or village. Where not so
located, the appropriate TTB officer may authorize the inclusion of
buildings, or portions of buildings, that are so conveniently and
closely situated to the general factory premises as to present no
jeopardy to the revenue or hindrance to the administration of the
regulations. The buildings or portions of buildings must be described
in the application for permit and the regulations require the
submission of a diagram in certain circumstances. If the factory
premises are to be changed to an extent that will make inaccurate the
description of the factory set forth in the last application, Sec.
40.114 requires that a manufacturer of tobacco products submit an
application for an amended permit before changes are made to the
premises.
The current regulations described above speak to the delineation of
the factory premises of a manufacturer of tobacco products but the
temporary regulations do not, as the commenters point out, address
issues regarding the factory premises of a manufacturer of processed
tobacco. In addition, since publication of the temporary regulations,
TTB has fielded a number of questions from industry members regarding
whether the existing concepts applicable to the premises of
manufacturers of tobacco products apply to the premises of
manufacturers of processed tobacco.
TTB believes that the provisions of Sec. 40.72(a) regarding the
activities that may take place on the factory premises of a
manufacturer of tobacco products are appropriate to apply to the
factory premises of manufacturers of processed tobacco, with some
modification. Similar to the provisions set forth for manufacturers of
tobacco products, for manufacturers of processed tobacco, the premises
must be used for the manufacturing and storing of, in this case,
processed tobacco; storing materials, equipment, and supplies related
to the processing of tobacco or used or useful in the conduct of the
business; and carrying on activities in connection with business of the
manufacturer of processed tobacco. Just as with the manufacturing of
tobacco products, TTB believes that any activity related to the
business of processing tobacco must be undertaken only on premises
delineated by a TTB permit. The physical premises delineated by the
permit must include all buildings or portions of buildings in which
such activities take place. TTB believes that in the context of a
manufacturer of taxable tobacco products, it is necessary and
appropriate to require that only buildings in close proximity to the
factory be included as part of the factory in which such products are
manufactured. In that context, extending the factory premises to
include buildings not within geographic proximity would allow for the
inappropriate deferral or ``downstreaming'' of the payment of tax
beyond the point of manufacture. The same consideration does not apply
to processed tobacco, and in that context TTB believes that extending
the factory premises to allow for it to include all buildings, even
those not within geographic proximity, would allow for more efficient
recordkeeping and reporting, as described in several comments, without
any readily-apparent revenue or administrative burden consequence.
Therefore, this final rule provides that the factory premises of a
manufacturer of processed tobacco may consist of more than one
building, or portions of buildings, which need not be contiguous nor
must they be located in the same city, town, village, or State. The
manufacturer of processed tobacco in its permit application must
identify and describe all buildings or portions of buildings where any
activity related to the processing of tobacco, as described under Sec.
40.11, takes place and also where any processed tobacco is stored
pending removal for transfer to another entity. The manufacturer must
also designate a central location as a repository of records sufficient
to incorporate all activities involved under the permit.
As a result, TTB sets forth in this final rule a new section, Sec.
40.502, which in paragraph (a) is similar to the regulations at Sec.
40.72 regarding what buildings and activities are to be covered by the
factory premises and what location information must be submitted with
the permit application. Section 40.502 differs from Sec. 40.69 in that
it provides that the buildings that make up a factory for manufacturing
processed tobacco need not be within a certain proximity to each other;
and, in paragraph (b), mirrors the regulations at Sec. 40.114
regarding changes (extensions and curtailment) of factory premises. A
paragraph (b) is added to require that manufacturers of processed
tobacco operating under a permit issued prior to the effective date of
this final rule submit the required location information within 180
days of the effective date. In addition, the requirements set forth at
Sec. 40.521 regarding the records that a manufacturer of processed
tobacco must keep are amended to include records of transfers between
buildings that are covered under the same permit but that are not
located in the same city, town, village, or State.
TTB believes that this new section, Sec. 40.502, provides a result
consistent with that requested by the commenters, and adds
clarification with regard to the point at which TTB F 5250.2 (Report of
Removal, Transfer, or Sale of Processed Tobacco) must be submitted,
that is, when a ``removal,'' for purposes of the reporting requirement,
takes place.
Similar considerations also apply to importers of processed
tobacco. Under the IRC at 26 U.S.C. 5702(k), an importer of processed
tobacco is any person in the United States to whom any processed
tobacco manufactured in a foreign country, Puerto Rico, the Virgin
Islands, or a possession of the United States is shipped or consigned.
An importer of processed tobacco may obtain release from customs
custody of processed tobacco and store the tobacco until it is sold or
transferred to another entity. Such a sale or transfer must be reported
on TTB F 5250.2, in accordance with Sec. 41.262(d). As a result, this
final rule amends the TTB regulations at Sec. Sec. 41.237 and 41.253
to specifically require that the application for a permit to be an
importer of processed tobacco set forth the location to be used as the
principal business office and the locations in which the importer
stores processed tobacco and that any change in the designated
locations be submitted to TTB as an amendment to the importer's permit.
This final rule also adds a new Sec. 41.264 to specify that the
importer of processed tobacco is subject to inventory requirements at
the same times as those
[[Page 37292]]
required of manufacturers of processed tobacco under Sec. 40.523, that
is, at the time of commencing business, at the time of transferring
ownership, at the time of changing the location, at the time of
concluding business, and at such other time as any appropriate TTB
officer may require. These new provisions provide that an importer of
processed tobacco holding a permit issued prior to the effective date
of the final rule has 180 days to submit to TTB the information
regarding the location and inventory now required. The recordkeeping
requirements applicable to importers of processed tobacco, set forth at
Sec. 41.261, are also amended to require that the records of an
importer of processed tobacco include information on transfers between
buildings that are covered under the same permit but that are not
located in the same city, town, village, or State.
Use of Factory Premises for Other Business
Comment
National Tobacco suggested that TTB amend 27 CFR 40.47 and 40.72 to
authorize the storage and manipulation of non-tobacco smoking products
such as tobacco-free herbal hookah/shisha on the premises of tobacco
product manufacturers. National Tobacco commented that tobacco-free
herbal hookah/shisha is typically marketed and distributed through the
same channels as tobacco products, and thus is an appropriate adjunct
to a line of smoking products. National Tobacco stated that TTB's
regulations are not clear as to whether herbal hookah/shisha would be
regarded as materials or supplies related to a permit holder's tobacco
business.
TTB response: TTB believes this issue is beyond the scope of the
temporary rule, as it does not relate to the CHIPRA-related regulatory
changes. However, TTB notes that Sec. 40.47(a) provides that a TTB-
permitted manufacturer of tobacco products that wishes to engage in any
other business on the premises of a tobacco factory may apply to TTB to
do so. TTB frequently receives requests from manufacturers of tobacco
products to operate varied businesses on their premises. These requests
are evaluated on an individual, case-by-case basis. This process
eliminates the need for TTB to amend the regulations to authorize each
type of ``other business.'' The process set forth at Sec. 40.47(a) is
appropriate and adequate to address the scenario described in the
comment. A specific regulatory amendment is unnecessary.
Recordkeeping and Reporting Requirements
Comment
R.J. Reynolds, Universal Leaf Tobacco Co. Inc., and Schweitzer-
Mauduit all suggested that TTB consider accepting reports
electronically.
TTB Response: TTB recognizes the value of accepting reports
electronically, and we intend to do so as resources and logistics
allow.
Comment
Altadis USA, Inc. proposed that the records required under
Sec. Sec. 40.182 and 40.521 should be monthly records, rather than
daily records. According to the commenter, daily reconciliation of
processing runs is impossible, and monthly, rather than daily,
recordkeeping ``makes sense in light of current monthly reporting
requirements already in place for manufacturers with respect to shipped
tobacco products, and is consistent with the good business practices
endorsed by TTB in the temporary rule.'' Additionally, Altadis USA,
Inc. asserted that the recordkeeping requirements in Sec. Sec. 40.182
and 40.521 should only apply to leaf tobacco that is received at a
facility and that leaves the facility in the form of a tobacco product,
or, under Sec. 40.521, is otherwise removed from the facility. Altadis
USA, Inc. stated that ``the requirements of the temporary rule will not
achieve the intended result; indeed the information will be either
misleading or meaningless,'' explaining in this regard that it is not
technologically feasible to measure quantities of processed tobacco at
every stage of the manufacturing process because no product exists
during the intermediate steps of processing.
The Altria Group similarly argued that the Sec. Sec. 40.182 and
40.521 daily recordkeeping requirements for manufacturers of tobacco
products who also process tobacco are unduly burdensome, although,
beyond that, the incremental addition of a monthly report and
documentation of transfers from the permitted facility are not
significantly onerous. They suggested that it would be appropriate, and
would impose a more reasonable burden, to require recordkeeping for all
transfers of processed tobacco from the permitted facility by the
manufacturer but only require submission of the reports to TTB for
shipments to unpermitted facilities. The Altria Group asserts that
jeopardy to the revenue comes when processed tobacco is transferred to
a nonpermitted manufacturer in an untracked manner.
According to R.J. Reynolds and National Tobacco, TTB F 5250.2
(Report of Removal, Transfer, or Sale of Processed Tobacco) imposes a
significant administrative burden on industry members. To remedy this,
R.J. Reynolds recommended that TTB exempt from the TTB F 5250.2
reporting requirements both shipments of processed tobacco to
government agencies and export shipments of processed tobacco.
Additionally, the commenter suggested that TTB change the reporting
deadline in Sec. 40.522(d) from the close of business the day after
the transfer to one week after the transfer.
Schweitzer-Mauduit and Universal Leaf Tobacco Co. Inc. requested
that TTB eliminate the requirement to provide details on export
shipments of processed tobacco. In support of this, Universal Leaf
Tobacco Co. Inc., asserted the following: Exports are non-taxable;
permitted manufacturers of processed tobacco maintain export records on
their premises that provide sufficient information regarding export
movement; and processed tobacco movements are tracked through other TTB
forms as well as by other Federal agencies. These two commenters
recommended that TTB require submission of TTB F 5250.2 on a monthly,
rather than daily, basis. Universal Leaf Tobacco Co. Inc., further
suggested amending TTB F 5250.2, and the related regulations, to allow
for aggregate reporting of multi-container shipments to a single
recipient within any 10 business day period. Customs Advisory Services
Inc. also proposed that recordkeeping related to shipments of processed
tobacco for export should be done on a daily basis, with summary
reporting on a monthly basis. In addition, they proposed that TTB
accept commercial records, such as invoices and bills of lading in lieu
of the recordkeeping requirements specified in Sec. Sec. 40.521(b) and
41.261(b), and the reporting requirements specified in Sec. Sec.
40.522 and 41.262.
TTB response: Based on these comments, TTB has concluded that it
would be appropriate to revise the recordkeeping requirements in
Sec. Sec. 40.182 and 40.521 to remove the requirement that tobacco
product manufacturers and processed tobacco manufacturers maintain
daily processed tobacco records. Tobacco product manufacturers will be
required to account for processed tobacco on hand at the beginning and
end of each month and will also be required to account for, and provide
dates for, receipts of processed tobacco, use of processed tobacco in
the manufacture of tobacco products, and any loss or destruction of
processed tobacco. Manufacturers of
[[Page 37293]]
processed tobacco and manufacturers of tobacco products who are
required to obtain authorization to engage in another business within
the factory under Sec. Sec. 40.47(b) and 40.72(b) will also still be
required to maintain records of the date on which processed tobacco is
received at the factory, removed from the factory, or lost or
destroyed. The records of removals must still be made for each day by
the close of the business day following the day on which the removal
occurs. TTB believes that these changes address the concerns of the
commenters regarding the recordkeeping burden, without jeopardizing the
revenue.
In addition, TTB has reinstituted in this final rule a requirement
that was removed by T.D. TTB-78 that manufacturers of tobacco products
maintain records of tobacco received and disposed of. Prior to CHIPRA,
the requirement set forth at Sec. 40.182 regarding records of
``tobacco,'' would have included records of what would now be
considered ``processed tobacco'' as well as of tobacco that had not yet
been processed. In T.D. TTB-78, TTB amended Sec. 40.182 to reflect the
new category of ``processed tobacco'' by replacing references to
``tobacco'' with the term ``processed tobacco.'' Records of tobacco
(unprocessed) were no longer required. However, TTB experience since
the publication of the temporary rule has shown that the absence of
such records hinders TTB's ability to determine whether the volume of
products manufactured in a factory is consistent with the amount of
tobacco received, used, and disposed of by the manufacturer. As a
result, this final rule amends the recordkeeping requirements set forth
at Sec. 40.182 to require that the records of manufacturers of tobacco
products include the quantity of tobacco (unprocessed) on hand at the
beginning of each month and the quantity received, used, removed, lost,
and destroyed during the month. Section 40.521 is also amended to
extend this requirement to manufacturers of processed tobacco.
TTB does not concur with the suggestion by Altadis USA, Inc. that
recordkeeping should only apply to leaf tobacco that is received in the
factory and that is removed from the factory in the form of a tobacco
product. TTB believes that the type of recordkeeping recommended by the
commenters is the same recordkeeping that was in place prior to the
statutory amendments of CHIPRA, that is, before TTB was mandated by
Congress to regulate processed tobacco. The regulation of processed
tobacco consistent with the goals of CHIPRA, that is, to prevent its
being provided to entities operating illicit manufacturing operations,
requires that manufacturers of tobacco products who remove processed
tobacco for shipment to other entities be required to keep records of
such shipments and that those records be made available to TTB. Thus,
records of the movement of processed tobacco from a tobacco product
manufacturer's facility, and not only records related to tobacco
products, are necessary. However, TTB believes that changing the
recordkeeping requirements as described above, from a daily to a
monthly or situation-specific accounting of certain processed tobacco,
may also address the concerns raised in this comment to the extent that
it reduces the burden of accounting for processed tobacco within a
continuous manufacturing process.
With regard to exports of processed tobacco, TTB agrees that
submission of the TTB F 5250.2 may not be necessary in some cases. We
are amending the regulations at Sec. Sec. 40.522 and 41.262 to provide
that manufacturers and importers that remove processed tobacco for
export may, in lieu of submitting the TTB F 5250.2 by the close of
business the day after the removal, submit a monthly summary report of
removals upon written approval of the appropriate TTB officer. A
manufacturer or importer that wishes to operate under such an
alternative must apply for authorization to do so by submitting a
written request to the appropriate TTB officer. The request must be
accompanied by an example of the format intended for the monthly
summary report. Such exporters are still required to maintain on their
premises records of all export shipments, including records of the
circumstances surrounding those shipments. At this time, we believe
that if manufacturers and importers of processed tobacco maintain
records related to export transactions on their premises, which must be
made available to TTB for review upon request, TTB will have sufficient
access to information related to exports to follow potential leads for
diversion and thus protect the revenue. We note that manufacturers and
importers of processed tobacco will, except in certain cases discussed
below, still be responsible for submitting TTB F 5250.2 for all other
(domestic) removals by the close of the business day following the
removal, sale, or transfer. We believe that to do otherwise, such as to
delay reporting by one week or longer to allow for aggregate reporting
to a single recipient, would remove an important enforcement tool, that
is, timely and detailed information about shipments of processed
tobacco to entities not operating under a TTB permit.
With regard to recordkeeping, as is general practice, TTB will
consider requests for alternate methods or procedures related to
records of processed tobacco, provided that the proposed alternate
method or procedure is consistent with the effect intended by the
required procedure and it provides equivalent protection of the
revenue. However, for clarity, a new sentence is added to Sec. Sec.
40.521(c) and 41.261(c) specifically providing industry members with
the option of applying for an alternate method or procedure with regard
to recordkeeping related to shipments using commercial carriers.
Comment
TTB received comments from the Altria Group and Customs Advisory
Services Inc. requesting clarification of whether importers of
processed tobacco may receive domestic processed tobacco and, if so,
how such receipts should be reflected in the required records and
reports. The Altria Group also asked TTB to clarify the recordkeeping
and reporting requirements for importers of processed tobacco who are
also manufacturers of tobacco products.
Customs Advisory Services Inc. requested clarification of the
meaning of the recordkeeping requirements at Sec. 41.261(a)(2) that
apply to importers of processed tobacco. That paragraph requires
importers of processed tobacco to maintain records of the date and
quantity of processed tobacco received ``otherwise than through
importation.'' Customs Advisory Services Inc. asserts that, when that
section is viewed alongside the monthly report form (TTB F 5220.6), it
is unclear whether Line 8 of TTB F 5220.6, which requires accounting of
tobacco products and processed tobacco ``received from other sources,''
would cover processed tobacco received from a domestic manufacturer or
processed tobacco received from another importer. Customs Advisory
Services Inc. recommended that TTB expand and clarify the scope of
Sec. 41.261(a)(2) and provide separate lines on TTB F 5220.6 ``to show
imported tobacco received from other importers of processed tobacco and
processed tobacco received from domestic producers of processed
tobacco.'' Finally, Customs Advisory Services Inc. recommended that TTB
modify the removals section of the monthly report required of the
domestic manufacturer of processed tobacco (TTB F 5250.1) to provide a
specific line for reporting removals of processed tobacco
[[Page 37294]]
shipped to an importer of processed tobacco. The commenter believes
that the failure to account for these removals would result in
substantial quantities of processed tobacco not being reported.
With regard to the issue of an importer of processed tobacco also
being a manufacturer of tobacco products, the Altria Group states that
it is unclear whether the recordkeeping and reporting requirements for
an importer of processed tobacco that is also a manufacturer of tobacco
products apply with regard to the imported tobacco consumed in the
company's manufacturing operations. According to the Altria Group, to
the extent that the temporary regulations are intended to apply to such
internal consumption, they are unduly burdensome for the importer,
stating in this regard as follows: ``Where a large volume of tobacco is
imported and the vast majority is consumed in the manufacturing process
of the importer, it is an onerous requirement to record and report each
and every transaction of transfer to the manufacturing facility.'' The
Altria Group further asserts that the TTB regulations, presumably in
Sec. 41.261, do not clearly state whether records must be maintained
for the transfer of imported processed tobacco from storage to the
manufacturing facility, suggesting that TTB require recordkeeping and
reporting only of transfers of imported processed tobacco outside the
company.
Finally, R.J. Reynolds stated that, like manufacturers of processed
tobacco, importers of processed tobacco should be required to complete
the TTB F 5250.2 (Report of Removal, Transfer, or Sale of Processed
Tobacco).
TTB response: Regarding the transfer of domestic processed tobacco
to an importer of processed tobacco, we agree that the regulations in
question are ambiguous and, therefore, in this final rule we are
amending Sec. Sec. 40.521(a)(4) and (a)(5) and 40.522(d) setting forth
recordkeeping and reporting requirements to specifically incorporate
language showing that a manufacturer of processed tobacco may transfer
domestic processed tobacco to an importer of processed tobacco. Such
transfers are recorded and reported in the same way that transfers of
processed tobacco are made from a manufacturer of processed tobacco to
another manufacturer of processed tobacco or to a manufacturer of
tobacco products or an export warehouse proprietor. In addition, in
response to Customs Advisory Services Inc.'s suggestion, we intend to
amend TTB F 5250.1 to specifically provide for the reporting of
removals of processed tobacco shipped to an importer of processed
tobacco.
We do not believe at this time that Sec. 41.261(a)(2) needs to be
amended to clarify its scope with regard to an importer of processed
tobacco receiving processed tobacco from a domestic manufacturer of
such tobacco. The regulatory text currently requires that records be
maintained reflecting the date and quantity of processed tobacco
``received otherwise than through importation,'' and that phrase
includes any receipt such as the type in question. Similarly, we do not
believe that TTB F 5220.6 needs immediate amendment to provide for
receipts from domestic manufacturers of processed tobacco or from other
importers, as it currently requires accounting of processed tobacco
``received from other sources'' and this phrase also includes any
receipt that is not a direct importation. However, we do intend to
provide clarifying instructions to TTB F 5220.6 after publication of
this final rule.
In addition, TTB acknowledges that there is no line on the monthly
report of importers of processed tobacco (TTB F 5220.6) specifically
dedicated to reporting the amount of imported processed tobacco
consumed in the manufacturing process, as noted in the Altria Group's
comments. TTB regulations consider importing and manufacturing to be
two distinct businesses whose operations are covered by two separate
permits, with their own respective recordkeeping and reporting
requirements. Accordingly, where processed tobacco is imported by the
same entity that uses it in the manufacture of tobacco products, to
create a complete record, the importation must be reflected in the
records and on the monthly report of the importer, under that
importer's permit number, and such report and records also must show
the processed tobacco as transferred to the records associated with the
permit of the manufacturer, even if the entity that holds the importer
permit and the manufacturing permit are the same entity.
In response to the Altria Group's comments that this is an
``unreasonable burden'' on importers of processed tobacco who are also
manufacturers of tobacco products, we note that the recordkeeping and
reporting requirements for manufacturers of tobacco products who import
tobacco for use in such manufacture are similar in scope to the
requirements that were in effect prior to the amendments made in
response to CHIPRA. Previous regulations at Sec. Sec. 40.181-40.183
required that a manufacturer of tobacco products maintain records of
the date and quantity of all tobacco other than tobacco products
received, together with the name and address of the person from whom
received. The new provisions require accounting for processed tobacco,
but also require records that connect the processed tobacco imported
under an importer's permit to that transferred to and used by a
manufacturer of tobacco products under a different permit. We believe
this tracking of processed tobacco between the importation and the use
in manufacture is necessary to regulate processed tobacco as required
by CHIPRA.
In response to R.J. Reynolds' suggestion that TTB require importers
of processed tobacco to submit TTB F 5250.2 when they make shipments to
entities that do not possess a permit, we note that the regulations
already require such submissions. Section 41.262(d) requires an
importer who transfers or sells processed tobacco to someone other than
a person holding a TTB permit to report such sale or transfer on TTB F
5250.2 by the close of the business day on the day following the
transfer or sale.
Comment
We received five comments from industry members requesting that TTB
revise the regulations to allow an exemption from certain reporting and
recordkeeping requirements related to shipments of processed tobacco as
samples or for experimental and other small quantity purposes, or allow
an exemption from the requirement that a manufacturer of tobacco
products must obtain authorization to operate as a manufacturer of
processed tobacco if that manufacturer removes processed tobacco for
purposes other than destruction. A few comments addressed in particular
that portion of the definition of ``package'' in Sec. 40.11 that
provides that a container of processed tobacco weighing 10 pounds or
less (including any non-tobacco ingredients or constituents), that is
removed within the meaning of that term in the regulations, is deemed
to be a package for sale or delivery to the ultimate consumer.
Schweitzer-Mauduit and R.J. Reynolds both asserted that the ``10
pounds or less'' weight specified in the Sec. 40.11 definition is
unduly restrictive because manufacturers ship small amounts of
processed tobacco that are samples for testing or analysis and thus are
not intended to be used as roll-your-own tobacco, pipe tobacco, or any
other taxable tobacco product. Similarly, National Tobacco asserted
that most shipments of processed tobacco are ``of
[[Page 37295]]
a limited noncommercial nature, such as test samples to labs, batch
samples for export, batch samples from new importers, samples direct
from farmers for evaluation.'' National Tobacco recommended that TTB
require weekly rather than daily reporting of such transfers, or, as an
alternative, that TTB create an exception to the reporting requirement
for sample shipments of a certain weight, for example, two pounds.
In addition to the transfer of samples of processed tobacco for
experimental purposes, Universal Leaf Tobacco Co. Inc., commented that
``the sale of processed tobacco is often carried out through the
delivery of a representative sample of the processed tobacco to a
prospective buyer'' as a ``slice'' of processed tobacco, which
typically weighs between 5 and 10 pounds. Universal Leaf Tobacco Co.
Inc., explained that the samples are extremely small portions of the
processed tobacco being sold and are not fit for direct consumption in
the marketplace; they therefore requested that the regulations be
amended to exclude samples from the reporting requirements on TTB Forms
5220.6, 5250.1, and 5250.2. R.J. Reynolds alternatively suggested that
TTB add lines to the monthly report, TTB F 5250.1, to report tobacco
shipped as samples to potential customers or government agencies not
intended for sale and tobacco shipped off of the premises for
experimental purposes.
In its comments, the Altria Group claimed that because there is no
tax on processed tobacco, there is no immediate jeopardy to the revenue
related to the transfer of processed tobacco unless the processed
tobacco is transferred to an unpermitted facility. Accordingly, the
comment suggested that TTB exempt manufacturers of tobacco products
that also manufacture processed tobacco from the requirement to obtain
authorization to engage in either the removal of processed tobacco for
experimental purposes or the transfer of processed tobacco between
permitted facilities, by providing manufacturers of processed tobacco
with exceptions similar to those provided for manufacturers of tobacco
products, such as the experimental purposes provision in Sec. 40.232,
and the exemption for transfer in bond (between permitted facilities)
provided for in Sec. 40.233. The Altria Group stated that these
provisions provide an opportunity for a manufacturer to test machinery
using tobacco products, conduct testing of tobacco products, and
transfer tobacco products among permitted facilities for product
development or other legitimate business purposes without payment of
tax so long as certain records are maintained. With regard to removals
for experimental purposes, the Altria Group suggested that the
manufacturer of tobacco products be exempt from the requirement to
obtain authorization to operate as a manufacturer of processed tobacco
under 27 CFR 40.72(b) if that manufacturer removes processed tobacco
for experimental purposes or for transfers between permitted
facilities. The comment recommended requiring recordkeeping of all such
transfers and also requiring that the processed tobacco either be
destroyed in the testing process or be returned to the manufacturer for
documented destruction. The Altria Group also proposed that a
manufacturer submit to TTB an initial notice that the manufacturer
intended to engage in such transfer activities.
TTB response: TTB believes that the basic point made by these
commenters is valid. Accordingly, in this final rule document we have
amended Sec. 40.72(b) to provide that a manufacturer of tobacco
products that processes tobacco on the factory premises solely for use
in the manufacture of tobacco products under that permit and that
removes the processed tobacco from those premises only for purposes
related to the business of a manufacturer of tobacco products, and not
for purposes related to the business of a manufacturer of processed
tobacco, may engage in those operations without obtaining prior
authorization from TTB. Under the new text of Sec. 40.72(b)(2),
removals of processed tobacco that are considered removals for purposes
related to the business of a manufacturer of tobacco products, and
therefore do not require TTB authorization, include removals of samples
for soliciting orders of tobacco products and removals of processed
tobacco for destruction, for scientific testing or testing of
equipment, and for transfer between permitted premises of the same
manufacturer. A manufacturer of tobacco products who engages in any of
these removals and who maintains adequate records of the disposition of
such processed tobacco may engage in such removals without first
obtaining authorization from TTB. Any removal not adequately supported
by records and any other type of removal other than those listed will
be treated as a removal related to the business of a manufacturer of
processed tobacco, for which the manufacturer of tobacco products must
first obtain authorization to engage in another business within the
factory under Sec. 40.47 and keep records and submit reports under
Sec. Sec. 40.521 and 40.522, unless the manufacturer can show to the
satisfaction of the appropriate TTB officer that the removal is
connected with the business of a manufacturer of tobacco products. In
this final rule TTB has amended Sec. Sec. 40.47(b), 40.202(b), and
40.491 to conform to the changes made in Sec. 40.72(b).
TTB also amended Sec. 40.522(d) to provide exceptions from the
reporting of certain removals on TTB F 5250.2. TTB F 5250.2 is used by
a manufacturer or importer to report certain removals of processed
tobacco; the form must be submitted to TTB by the close of the business
day on the day following the removal. Under the temporary regulations,
Sec. 40.522(d) requires manufacturers to report on TTB F 5250.2 any
removals of processed tobacco for shipment to any person not holding a
TTB permit as a manufacturer of processed tobacco, a manufacturer of
tobacco products, or an export warehouse proprietor. The final
regulations no longer require manufacturers of tobacco products to
report removals of processed tobacco to entities not holding such
permits if those removals are for purposes related to the business of a
manufacturer of tobacco products, such as removals for destruction, for
scientific testing or testing of equipment, for soliciting orders of
tobacco products, or for transfer between permitted premises of the
same manufacturer. These exceptions to the reporting requirement are
described in Sec. 40.72(b)(2). In addition, manufacturers of processed
tobacco will not be required to report on TTB F 5250.2 any removals of
processed tobacco for destruction, scientific testing, or testing of
equipment that result in the destruction of the processed tobacco or
the return of the tobacco to the factory premises. Similarly, TTB has
added a new paragraph Sec. 41.262(d)(3) stating that an importer of
processed tobacco that ships or transfers processed tobacco for
scientific testing which results in the destruction of the processed
tobacco is not required to report such shipment or transfer on TTB F
5250.2. Manufacturers and importers must still report such removals on
their respective monthly reports.
Comment
We received two additional comments from R.J. Reynolds regarding
recordkeeping and reporting requirements for manufacturers of processed
tobacco. R.J. Reynolds requested confirmation that physical possession
(and not ownership) of
[[Page 37296]]
processed tobacco is the primary criterion used to identify the permit
holder responsible for reporting the associated activity. Additionally,
R.J. Reynolds asked that TTB acknowledge the likelihood of variations
in the weight of processed tobacco as it is blended with other
ingredients and as it gains and loses moisture due to the atmospheric
conditions of the manufacturing process. R.J. Reynolds asks that TTB
provide guidance on how these variations are to be reported.
TTB response: In response to the first point, as a general
principle, TTB agrees that physical possession and control over the
removal of the processed tobacco triggers the recordkeeping and
reporting requirements, rather than only legal ownership of the
processed tobacco. The permittee is responsible for the physical
movement of the processed tobacco and the permittee who removes the
processed tobacco from its factory is responsible for reporting the
transfer. With regard to the second point, we acknowledge that there
can be significant variations in the weight of processed tobacco.
Because the variation in the weight of processed tobacco is specific to
each industry member's manufacturing process, any standardized guidance
by TTB would be too limiting on industry members to include in this
final rule or too general to account for individual variations.
Accordingly, manufacturers of processed tobacco should maintain records
supporting any variations in weight throughout their manufacturing
process.
Comment
Universal Leaf Tobacco Co. Inc., requested that TTB remove the
signature requirement from TTB F 5250.2 because no signature is
required under the pertinent regulatory provisions at Sec. 40.521.
Schweitzer-Mauduit and Universal Leaf Tobacco Co. Inc., requested that
TTB remove the requirement for personal information about the person
picking up the processed tobacco for delivery, that is, lines 16, 17
and 18 of TTB F 5250.2. These lines require the person be identified by
name, address, and government-issued identification number (such as a
driver's license number) and that the vehicle be identified by license
tag number. According to Universal Leaf Tobacco Co. Inc., ``this
requirement infringes on certain privacy matters.'' Schweitzer-Mauduit
asserts that such collection of information is burdensome for its
employees, while the drivers about whom information is collected find
the inquiry intrusive and objectionable.
TTB response: With regard to the requirement that TTB F 5250.2 bear
a signature, the IRC at section 6061 provides that any return,
statement, or other document required to be made under any provision of
the internal revenue laws or regulations shall be signed in accordance
with forms or regulations prescribed by the Secretary of the Treasury.
The TTB regulations at 27 CFR 40.41 provide that the appropriate TTB
officer is authorized to prescribe all forms required by part 40 and
that all of the information called for in each form shall be furnished
as indicated by the headings on the form and by the instructions on or
pertaining to the form. In addition, Sec. 40.41 states that
information called for in each form shall be furnished as required by
part 40 and that, when a return, form, claim, or other document called
for under part 40 is required by part 40, or by the document itself, to
be executed under penalties of perjury, it shall be executed under
penalties of perjury. The same provisions apply to part 41, with regard
to importers, under Sec. 41.21. The form itself is required under
Sec. Sec. 40.522(d) and 41.262(d), which state, in pertinent part,
that the TTB F 5250.2 must be submitted ``in accordance with the
instructions on the form.'' Accordingly, the signature requirement need
not be specifically restated in the regulations.
Also, information about the driver and vehicle involved in the
removal of processed tobacco from the regulated premises provides TTB
with information that has been found effective in tracking processed
tobacco and preventing diversion to illegal manufacturers. TTB believes
that the information we require at that point is the minimum necessary
to ensure protection of the revenue by tracking processed tobacco. It
remains the position of TTB that both importers and manufacturers must
provide TTB with certain information regarding the person involved in
the delivery of the processed tobacco to a person who does not have the
appropriate TTB permit. The information that we are requiring is
consistent with similar recordkeeping required under the Contraband
Cigarette Trafficking Act (CCTA), 18 U.S.C. chapter 114, which deals
primarily with contraband cigarettes and smokeless tobacco and is
administered by the Department of Justice, Bureau of Alcohol, Tobacco,
Firearms, and Explosives (ATF). However, in considering these comments,
TTB has determined that, rather than the personal address of the person
picking up the shipment, a more appropriate requirement would be the
business address of the company for which the driver works. As a
result, in the final rule, the word ``business'' is added in Sec. Sec.
40.521(b)(2) and 41.261(b)(2) to clarify that records of the business
address of the driver picking up the processed tobacco must be kept,
rather than the driver's personal address. Further, in this final rule
both Sec. Sec. 40.521 and 41.261 have been amended to specify that an
alternate method may be approved for the collection of such information
in the case of shipments by common carrier. Section 41.261 has also
been amended to incorporate some technical changes for clarity and for
consistency with the language contained in Sec. 40.521.
Comment
Customs Advisory Services Inc. recommended that the inventory
reporting requirement be clarified, specifically with regard to how
often TTB F 5210.9 (Inventory--Manufacturer of Tobacco Products or
Processed Tobacco) must be submitted. The commenter points to the
temporary regulations at 27 CFR 40.523 that require a manufacturer to
make an inventory ``at the time of commencing business, at the time of
transferring ownership, at the time of changing location of the
factory, at the time of concluding business, and at such other time as
any appropriate TTB officer may require,'' and asserts that reporting
of inventory only upon the opening and closing of business operations
``could be meaningless reporting for companies with ongoing
operations'' but that the phrase ``* * * and at such other time as any
appropriate TTB officer may require'' is vague and undefined.
R.J. Reynolds asserted that there are ``major inconsistencies''
within the proposed regulations regarding the reporting of inventories.
Under Sec. 40.523, a manufacturer of processed tobacco operating under
the transitional rule set forth in Sec. 40.493 must make a true and
accurate inventory on TTB F 5210.9 within 10 days of the date of TTB's
written acknowledgement of the receipt of the application filed under
Sec. 40.492. R.J. Reynolds points out that importers of processed
tobacco are not required to provide a similar inventory and, as these
entities could easily have inventory in their possession, a similar
reporting should be required. In addition, R.J. Reynolds believes that,
because the date of the initial inventory and the dates that must be
covered by a manufacturer's first monthly reports do not correspond,
the relationship between the two types of reports is unclear.
[[Page 37297]]
TTB response: With regard to the comments from Customs Advisory
Services Inc., under Sec. 40.523, the phrase ``at such other time as
any appropriate TTB officer may require'' provides TTB with the
authority to require an inventory when necessary, for example, in
connection with an audit or investigation of an industry member, which
is the most common use by TTB of the authority to require an inventory.
The same language appears in Sec. 40.201 which sets forth inventory
requirements for manufacturers of tobacco products and has been an
effective tool for TTB in regulating the industry without the burden of
monthly inventories. Neither the regulatory text at Sec. 40.523 nor
the form TTB F 5210.9 mentions a requirement to submit to TTB an
inventory monthly and none is deemed necessary for TTB purposes.
In response to R.J. Reynolds' comments, we agree that for the same
reasons a manufacturer of processed tobacco must perform an inventory
at specified times, an importer of processed tobacco should also
perform an inventory. The omission of this requirement was an
oversight. Importers of tobacco products are not currently required to
submit inventories because the products that they store and ship could
only be taxpaid tobacco products, the tracking of which has been seen
as needing less regulatory oversight. However, importers of processed
tobacco must account for all processed tobacco imported and also must
report on the TTB F 5250.2 processed tobacco shipped to a non-
permittee. The inadvertent omission of an inventory requirement for
importers of processed tobacco in the temporary regulations is
corrected in this final rule through the addition of a new section 27
CFR 41.264 that mirrors the inventory requirement applicable to
manufacturers of processed tobacco appearing at Sec. 40.523. TTB
authority to require such inventories is set forth in the Internal
Revenue Code of 1986 at 26 U.S.C. 5721, and applies equally to
manufacturers and importers of processed tobacco.
With regard to the other comments related to TTB F 5250.1 and TTB F
5210.9, we have addressed issues relating to the use of those forms
with individual industry members, on a case-by-case basis, since the
publication of T.D. TTB-78, and we do not believe that any further
regulatory action is necessary on these points.
Applicants for Permits To Manufacture Processed Tobacco
Comment
Two commenters suggested that we amend our regulations to address
whether, and to what extent, TTB will consider specific factors when
evaluating a tobacco processor's permit application.
The Law Offices of Barry Boren asserted that the regulations
addressing ``Investigation of Applicant'' at 27 CFR 40.498(b) and
41.238(b) imply a life-time ban from obtaining a permit for applicants
with a felony conviction. The commenter stated that, in the past, TTB
has determined that a felony conviction should not necessarily be a
life-time ban to obtaining a permit and that, rather than a life-time
ban, five years is a ``reasonable ban'' in such cases so long as the
agency does not have other reasons for denying an application for a
permit.
Venable, LLP requested that TTB amend its regulations to clarify
that we will only deny a permit to an applicant based on the conduct of
an officer, director, or principal stockholder of a company, and only
if that person is actively involved in the day-to-day management or
operations of the applicant. Venable, LLP referenced two Federal cases
from the 1930s to demonstrate that TTB's predecessors, such as the
Internal Revenue Service, ``primarily based their decisions to deny a
permit to an applicant on the level of involvement of the officer,
director, or principal stockholder at issue in the day-to-day
management or operations of the applicant.'' Venable, LLP also
described the standards for denial of permits applied by other Federal
agencies. Venable, LLP suggested that TTB adopt a ``present
responsibility'' standard, in which ``[t]he government frequently finds
that companies are `presently responsible' so long as the officer does
not control or manage the day-to-day operations of the company, or
where the company has instituted sufficient controls to prevent the
officer from becoming involved in future government contracts.'' In
evaluating an officer's conduct, Venable, LLP recommended that TTB
consider mitigating factors, including: (1) The nexus between the
activity for which the officer, director, or principal stockholder is
under indictment and the applicant's business operations; (2) whether
the officer, director, or principal stockholder is involved in the day-
to-day management or operations of the applicant; (3) the applicant's
cooperation with TTB and willingness to take actions to address TTB's
concerns; (4) the applicant's willingness to implement remedial or
monitoring measures determined necessary by TTB; (5) whether the
applicant has, or will shortly, implement policies to prevent the
future occurrence of offenses; and (6) the likelihood that any legal
proceedings against an officer, director, or principal stockholder are
likely to be resolved in the person's favor.
Venable, LLP also requested that TTB consider extending the
transitional rule under Sec. 40.493, which provides that manufacturers
and importers of processed tobacco already in operation who applied to
TTB for a permit by June 30, 2009, could continue to engage in that
business pending final action by TTB on the permit application.
Venable, LLP stated that the purpose of transitional rule was ``to
ensure that long-standing manufacturers and processors that have
operated successfully and in compliance with the law are not unfairly
denied the right to continue their business.'' The commenter suggested
an extension to this rule to stay denial of any processed tobacco
manufacturer's or importer's permit application until there is a final
administrative and/or judicial review of their application, or a final
resolution of any judicial proceedings involving an officer, director,
or principal shareholder of the company.
TTB response: First, the regulations at Sec. Sec. 40.498(b) and
41.238(b) repeat the standards of review that TTB may use to deny a
permit under 26 U.S.C. 5712; the regulatory and statutory texts state
that a permit may be denied if TTB finds that the applicant is, by
reason of his business experience, financial standing or trade
connections or by reason of previous or current legal proceedings
involving a felony violation of any other provision of Federal criminal
law related to tobacco products, processed tobacco, cigarette paper, or
cigarette tubes, not likely to maintain operations in compliance with
the provisions of title 26, United States Code, chapter 52, or has been
convicted of a felony violation of any provision of Federal or State
criminal law relating to tobacco products, processed tobacco, cigarette
paper or cigarette tubes, or has failed to disclose any material
information required or made any material false statement in the
application for permit. The fact that a permit may now be denied for
reasons related to a felony conviction does not imply that the permit
will necessarily be denied for such a conviction or that such a
conviction will result in a life-time ban from obtaining a TTB permit.
Rather, as has been the case historically, TTB believes that an
individual, case-
[[Page 37298]]
by-case determination is necessary for each applicant, given the
variability of circumstances. TTB will apply these provisions, as it
has applied the provisions related to determining qualification for a
permit, by considering all relevant factors. A five-year limitation, as
suggested by Mr. Boren, would eliminate TTB's flexibility to
individually evaluate each applicant's particular situation. With
regard to the mitigating factors suggested by Venable, LLP, although it
would not be appropriate to include specific mitigation standards in
the regulations, those suggested by Venable, LLP are factors that TTB
could reasonably consider when evaluating an application for a permit.
Section 702 of CHIPRA merely adds manufacturers and importers of
processed tobacco to the list of persons in sections 5712 and 5713(a)
of the IRC who must apply for and obtain a permit from TTB in order to
engage in business, while it amends sections 5721, 5722, 5723, and 5741
to add references to processed tobacco with regard to requirements for
making inventories, keeping records, packaging and labeling, and
reporting. As a result, the same regulatory authority in these areas
applies to activities involving tobacco products and processed tobacco.
As for the request that TTB stay the denial of any processed
tobacco manufacturer or importer permit application, TTB has no
authority to extend the statutory transitional rule reflected in Sec.
40.493. However, TTB does have an administrative process in place in 27
CFR part 71, consistent with Federal administrative law, through which
an applicant for a permit may contest TTB's denial of a permit
application. Under 27 CFR 71.59, an applicant may request a hearing
before an administrative law judge, within 15 days of receipt of notice
of the contemplated disapproval of the application. Thus, TTB's
regulations already provide an appropriate administrative process for
all permits administered under TTB's authority under the IRC.
Roll-Your-Own and Pipe Tobacco Issues
Comment
John Middleton Co. asserted that the regulations addressing the
packaging of pipe tobacco, specifically 27 CFR 40.25a(b)(3)(i), are not
authorized by CHIPRA because CHIPRA only mentions pipe tobacco in
reference to its tax rate increase. That section deems a product to be
roll-your-own tobacco rather than pipe tobacco if the package does not
bear the declaration ``pipe tobacco'' in a specified manner everywhere
on the package that the brand name appears. These comments were made in
the context of a request for an extension of the time manufacturers and
importers could use up existing packaging before being required to come
into compliance with the new packaging standards. John Middleton Co.,
along with the rest of the Altria Group companies, further argued that
the temporary regulations place an onerous burden on pipe tobacco
products because ``the focus on regulation of the pipe tobacco industry
is not anticipated, authorized or required by the CHIPRA legislation
nor is there anything in CHIPRA that would have alerted manufacturers
of pipe tobacco that such requirements would be forthcoming.''
TTB response: First, TTB notes that the package use-up period was
extended from the original date of August 1, 2009, until March 23, 2010
(see T.D. TTB-81, 74 FR 48650). With regard to the certain points made
about the classification of pipe tobacco and roll-your-own tobacco
based on package statements, although CHIPRA did not specifically
highlight pipe tobacco beyond the section 701 tax rate increase, as
noted in T.D. TTB-78, TTB determined that because of the revenue
implications resulting from the tax rate changes made by CHIPRA, there
was a need for more regulatory detail to clarify the difference between
the two products. Further, as described above, the statutory
definitions of pipe tobacco and roll-your-own tobacco both require
consideration of the packaging and labeling of the product--
specifically, whether the packaging or labeling causes it to be
``suitable for use and likely to be offered to, or purchased by,
consumers as'' tobacco to be smoked in a pipe or as tobacco for making
cigarettes or cigars or for use as wrappers thereof. In T.D. TTB-78,
TTB set forth regulations regarding how that statutory language would
be applied. Those regulations were promulgated under 26 U.S.C. 5723(a)
and (b), which provide the authority to prescribe regulations regarding
the packaging and labeling of tobacco products, and under 26 U.S.C.
7805(a), which confers on the Secretary of the Treasury the broad
authority to prescribe ``all rules and regulations as may be necessary
by reason of any alteration of law in relation to internal revenue.''
Comment
TTB received two comments that requested that we define
``conspicuousness'' as it is used in Sec. 40.25a(b)(3)(i). That
regulatory provision refers to a package that does not bear the ``pipe
tobacco'' declaration ``in substantially the same conspicuousness of
type and background as the brand name,'' the result of which is that
the package would be deemed roll-your-own tobacco rather than pipe
tobacco for tax purposes.
The Law Offices of Barry Boren suggested that, because the term
``conspicuousness'' is not defined in TTB's regulations, TTB should
adopt the definition of conspicuousness used in the U.S. Customs and
Border Protection (CBP) regulations, noting in this regard that in 19
CFR 134.1(k), ``conspicuous'' is defined as ``capable of being easily
seen with normal handling of the article or container.'' By adopting
the same conspicuous standard as CBP, TTB would ``help manufacturers
and importers better understand their obligations under the statute and
promote compliance and enforcement,'' and prevent confusion and
unintentional noncompliance, which would result from agencies adopting
different definitions and policies for the same term. Further, TTB
should adopt a policy that articles need not be marked in the most
conspicuous place but must be marked in any conspicuous place. Finally,
the commenter suggested that TTB adopt provisions from the CBP
regulations at 19 CFR 134.41 regarding the methods and manner of
marking.
National Tobacco suggested that, due to the inherently ambiguous
nature of the ``conspicuousness'' standard in Sec. 40.25a(b)(3)(i),
TTB should set up a process allowing tobacco companies to get prompt,
advance TTB approval of new packaging designs. Under this approval
process, packaging designs submitted to TTB for review would be deemed
approved if TTB did not specify any objections within a 15-day time
period. Alternatively, TTB should further define ``conspicuousness'' by
specifying a minimum font size for the term ``pipe tobacco'' relative
to the font size of the product brand name each time the brand name
appears on the packaging.
National Tobacco also suggested that TTB clarify Sec.
40.25a(b)(3)(ii), under which processed tobacco removed from a factory
in a package is deemed to be roll-your-own tobacco if the package or
accompanying materials bear any representation that would suggest a use
other than as pipe tobacco. National Tobacco asks that TTB state that
the term ``accompanying materials'' used in that section includes any
point of sale advertising and all other printed product communications
issued by the manufacturer of pipe tobacco products.
[[Page 37299]]
TTB response: TTB does not believe that it is appropriate to define
the word ``conspicuousness'' in this final rule because any attempt to
do so without first going through a period of public notice and comment
could prove to be unnecessarily limiting. The current regulatory text
in Sec. 40.25a(b)(3)(i) allows for sufficient flexibility depending on
the design and size of the package, and TTB believes this is the
preferable approach at this time. In this regard, TTB notes that, after
the enactment of CHIPRA, Congress passed and the President signed the
Family Smoking Prevention and Tobacco Control Act (Pub. L. 111-31)
affecting the graphics and warning statements required to appear on
certain tobacco products. These additional issues now faced by the
tobacco industry regarding packaging and labeling requirements
underscore our belief that a flexible approach, particularly with
regard to size and placement of certain information on a tobacco
product package, is necessary for the near future. Rather than
establishing a new process of review and prior approval by TTB of each
tobacco product package, TTB will consider whether clarifying the
conspicuousness standard in future guidance is needed.
With regard to the request that TTB amend Sec. 40.25a to specify
what may be ``accompanying materials,'' we agree with the comment. The
final regulations at Sec. 40.25a(b)(3)(ii) and Sec. 41.30(b)(3)(ii)
provide that ``accompanying materials'' includes, but is not limited
to, any point of sale advertising or other printed product
communications issued by the manufacturer or importer of pipe tobacco
products. In addition, the inclusion of cigarette papers or tubes in a
package bearing a ``pipe tobacco'' declaration will suggest a use other
than pipe tobacco.
Comment
We received a comment from Geoffrey Ranck of Domestic Tobacco Co.,
recommending that TTB add a line to the monthly report required of
importers of tobacco products or processed tobacco (TTB F 5220.6) to
account for cigar tobaccos (filler, binder, and cigar wraps) separately
from roll-your-own tobacco. Mr. Ranck noted that, although CHIPRA
amended the definition of roll-your-own tobacco so that cigar tobacco
must now be included in the accounting of roll-your-own tobacco, cigar
tobacco is still considered to be distinct from traditional roll-your-
own cigarette tobacco by the U.S. Department of Agriculture (USDA) in
its implementation of the Fair and Equitable Tobacco Reform Act
(commonly referred to as the ``Tobacco Buyout'') and by the various
states in their implementation of the Master Settlement Agreement.
TTB response: Although the categories on TTB F 5220.6 correspond
directly to the types of tobacco products recognized under the IRC
definitions (small cigarettes, large cigarettes, small cigars, large
cigars, snuff, chewing tobacco, pipe tobacco, and roll-your-own
tobacco), we recognize that other Federal agencies have different
definitions of these tobacco products. Mr. Ranck's suggestion has merit
and, when updating TTB F 5220.6, TTB will explore the extent to which
such a change would meet the needs of industry members and be
consistent with and facilitate reporting required by other Federal
agencies or the Master Settlement Agreement.
Comment
Two commenters addressed the designations that must appear on
tobacco product packages, under Sec. 40.216b and 41.72b, to identify
those products for tax purposes. National Tobacco noted that the
temporary regulations removed ``Tax Class L'' and ``Tax Class J'' as
approved designations for packages of pipe tobacco and roll-your-own
tobacco, respectively, and suggested that TTB also eliminate all ``Tax
Class'' designations for the other tobacco products in favor of
accurate descriptive terms. This would remove ``Class A'' and ``Class
B'' as alternatives for the term ``small cigarette'' and ``large
cigarette,'' ``Tax Class C'' as an alternative for the term ``chewing
tobacco'' and ``Tax Class M'' as an alternative designation for
``snuff''. National Tobacco and the Law Offices of Barry Boren
requested that TTB also authorize the use of a number of designations
for roll-your-own tobacco in addition to those prescribed in Sec.
40.216b and 41.72b. The Law Offices of Barry Boren stated that the
labeling requirements proposed for cigar wrappers are unduly
restrictive; that cigar wrappers have been known throughout the
industry and the general public under names such as ``cigar wrappers,''
``cigar wraps,'' ``blunts,'' ``leaf wraps'' and ``flat wraps;'' and
that any of these names should be acceptable for marking purposes.
National Tobacco proposed adding ``tobacco cones'' and ``cigar tubes''
as designations, stating that the use of the term ``roll-your-own
tobacco'' to designate such products may cause confusion between
products used for making cigars and products used for making
cigarettes, particularly because roll-your-own tobacco used for making
cigarettes is subject to State excise taxes and the payment obligations
of the Master Settlement Agreement.
TTB Response: First, TTB notes that the designations required on
tobacco product packages are intended to identify the product for
purposes of Federal excise tax. The designation indicates the tax
category under which the taxpayer removed the product domestically or
obtained release of an imported product. The regulations have
traditionally allowed industry members a choice between using a
descriptive term and using a ``Tax Class'' reference. For example,
under the previous version of Sec. 40.216a, a package of pipe tobacco
had to bear either the designation ``pipe tobacco'' or the designation
``Tax Class L.'' Although we agree that descriptive terms for all
tobacco products may be preferable in some regards, the removal of the
options to use ``Tax Class L'' to designate pipe tobacco and ``Tax
Class J'' to designate roll-your-own tobacco was specific to those
products and to the ways those products are defined by statute. The
designations ``Tax Class L'' and ``Tax Class J'' were removed as
authorized designations because the IRC definitions, as discussed
above, require consideration of the packaging and labeling of pipe
tobacco and roll-your-own tobacco--specifically as to whether
packaging, labeling, appearance, or type of the tobacco, cause the
product to be ``suitable for use and likely to be offered to, or
purchased by, consumers'' as either of those products. The statutory
definitions of the other products do not require a similar
consideration of the packaging and labeling. Accordingly, because TTB
does not have a compelling reason to adopt the requested change within
the scope of administration and enforcement of the Federal excise tax,
and because the alternative notices are currently in use by industry
members, it would not be appropriate to adopt the proposed changes in
this final rule without notice to, and opportunity for comment by,
industry members.
With regard to the designations authorized for roll-your-own
tobacco, under the temporary regulations, the following terms may be
used: ``roll-your-own tobacco,'' ``cigarette tobacco,'' ``cigar
tobacco,'' ``cigarette wrapper,'' and ``cigar wrapper.'' TTB believes
these alternative designations are sufficient for administering and
enforcing the Federal excise tax provisions. The designations are used
for tax purposes and are not intended to reflect the scope of terms
used for marketing the product. TTB notes that the regulations do not
prohibit additional terms from appearing on tobacco product packages
[[Page 37300]]
that also bear one of the prescribed designations. Such additional
information may appear so long as it does not contradict or conflict
with the tax designation.
Comments To Be Addressed in a Future Rulemaking
TTB received additional comments that relate to pipe tobacco and
roll-your-own tobacco issues, particularly with regard to
distinguishing between the two products for tax purposes. Comments from
the South Dakota Attorney General's Office, National Tobacco, the Law
Offices of Barry Boren, Altadis USA, Inc., and the Campaign for
Tobacco-Free Kids suggested that TTB clarify the characteristics that
distinguish pipe tobacco from roll-your-own tobacco to prevent
mislabeling of roll-your-own tobacco as pipe tobacco. Altadis USA, Inc.
expressed concern about ``massive tax cheating in the form of
misclassification of RYO tobacco as pipe tobacco'' and submitted a
``Draft Revision of Temporary/Proposed Regulation on Classification of
Pipe Tobacco and Roll-Your-Own Tobacco.''
The Pipe Tobacco Council, National Tobacco, and Altadis USA, Inc.
requested that TTB ``grandfather'' pipe tobacco brands that were on the
market prior to the enactment of CHIPRA in 2009. Although various
``grandfather'' proposals have been suggested to TTB, they differ in
details. In general, under those various proposals, brands that were
marketed as pipe tobacco prior to a certain date, for example, April 1,
2009, would continue to be deemed pipe tobacco after that date so long
as the product remained sufficiently similar to the product that was
produced under that brand name before April 1, 2009. As a result, under
the various proposals, any standards that TTB might find to distinguish
between pipe tobacco and roll-your-own tobacco would not be applied to
``grandfathered'' brands.
The Pipe Tobacco Council also expressed concern about the
importation of cut tobacco that was not put up into consumer packages,
specifically that there would be a disparity in treatment between
packaged and unpackaged imported tobacco. The Pipe Tobacco Counsel
recommended that cut tobacco imported under a certain subheading of the
Harmonized Tariff Schedule of the United States (HTSUS) be categorized
as roll-your-own tobacco, with excise tax due upon release from customs
custody. That subheading (2403.10.30.90) applies, in general terms, to
smoking tobacco that is to be used in products other than cigarettes
and that is not prepared for marketing to the ultimate consumer in the
form and package in which it's imported.
The issues involved in distinguishing between pipe tobacco and
roll-your-own tobacco merit separate treatment. To obtain public input
specifically on those issues, TTB published in the Federal Register on
July 22, 2010 (75 FR 42659), an advance notice of proposed rulemaking,
Notice No. 106, referred to earlier in this comment discussion. After
the close of the Notice No. 106 comment period, TTB received a request
to meet with an industry member and its legal representation to present
TTB with a proposal to use certain physical characteristics to
distinguish between pipe tobacco and roll-your-own tobacco that differ
from the standards proposed by the other commenters. That new proposal,
which was submitted as a slide presentation, is now posted with the
comments on Notice No. 106 as Comment 23 and may be viewed at the
Regulations.gov Web site (www.regulations.gov) within Docket No. TTB-
2010-0004. Through publication in the Federal Register of Notice No.
120 on August 24, 2011 (76 FR 52913), TTB reopened the public comment
period for Notice No. 106, until October 24, 2011, in order to provide
an opportunity for public feedback to the new proposal. TTB is
currently reviewing the comments and determining the appropriate
rulemaking action in response.
Other Changes to the Temporary Regulations
In addition to those changes noted in the above discussion of
comments, this final rule document makes the following changes to the
temporary regulations published in T.D. TTB-78 and T.D. TTB-81:
In Sec. Sec. 40.11 and 41.11, the definition of
``package'' is amended to provide for several exceptions to the
statement that ``[a] container of processed tobacco, the contents of
which weigh 10 pounds or less (including any non-tobacco ingredients or
constituents), that is removed within the meaning of this part, is
deemed to be a package offered for sale or delivery to the ultimate
consumer.'' Those exceptions are provided to recognize that
manufacturers and importers of processed tobacco may remove processed
tobacco in small amounts for purposes related to the business of a
manufacturer or importer of processed tobacco; the exceptions allow the
removal of such small amounts without that removal being deemed a
removal of a taxable product and thus triggering the tax. The
exceptions are similar to those provided to manufacturers of tobacco
products who remove tobacco products without payment of tax for
specified purposes. The definition of ``package'' is also amended to
add references to Sec. 40.25a and 41.30, respectively, to direct the
reader to the tax rates that apply to processed tobacco that is placed
into a package and removed. Also, in Sec. Sec. 40.11 and 41.11, TTB is
amending the definition of ``packaging'' to clarify that, when used in
the context of an action, the term ``packaging'' refers to the activity
of placing processed tobacco or a tobacco product in a package. This
differentiates the use of the verb form of ``packaging'' from that of
the noun form, as both appear in the regulatory text.
In Sec. Sec. 40.25a(b)(2) and 41.30(b)(2), a sentence has
been added that mirrors text in the definition of ``package'' in
Sec. Sec. 40.11 and 41.11 described in the first bullet above.
Specifically Sec. Sec. 40.25a(b)(2) and 41.30(b)(2) now state that a
container of processed tobacco, the contents of which weigh 10 pounds
or less (including any added non-tobacco ingredients or constituents),
that is removed within the meaning of this part, is deemed to be a
package offered for sale or delivery to the ultimate consumer. The same
exceptions are provided in those regulatory sections to recognize that
manufacturers and importers of processed tobacco may remove processed
tobacco in small amounts for purposes related to the business of a
manufacturer or importer of processed tobacco; the exceptions allow the
removal of such processed tobacco without that removal being deemed a
removal of a taxable product and triggering the tax. The added text in
Sec. Sec. 40.25a(b)(2) and 41.30(b)(2) is for ease of reference.
In Sec. 40.256, the reference to ``Sec. 40.61(b)'' is
corrected, so that it reads ``Sec. 40.61(c).''
In Sec. 40.521(a), TTB is removing the requirement to
keep records showing the quantity of processed tobacco processed,
because we believe this requirement could result in counting the same
tobacco multiple times where the tobacco is subject to more than one
processing activity.
In Sec. 40.521, paragraphs (b)(6) and (b)(7) are removed,
thereby removing the requirement that manufacturers of processed
tobacco obtain a declaration by the purchaser of the processed tobacco
of the specific purposes for the purchase and a declaration by the
purchaser of the name and address of the principal if the purchaser is
acting as an agent. TTB has not to date obtained any useful information
from
[[Page 37301]]
such requirements. Corresponding changes are made to the recordkeeping
requirements applicable to importers of processed tobacco at Sec. Sec.
41.261(b)(6) and (b)(7).
In Sec. 40.531, which concerns approvals of alternate
methods or procedures for manufacturers of processed tobacco, TTB is
amending paragraph (a)(2) by adding a reference to affording equivalent
security to the revenue, as an additional condition for TTB approval.
A new Sec. 41.203a is added to correct an oversight.
Importers of tobacco products are subject, under 26 U.S.C. 5713(b), to
the same permit suspension and revocation provisions as those in the
regulations applicable to manufacturers of tobacco products and
processed tobacco and to importers of processed tobacco, at 27 CFR
40.332, 40.528, and 41.273 respectively. However, no such provision
mirroring this statutory text appears in the current regulations
applicable to importers of tobacco products. The new section sets forth
permit suspension and revocation provisions for importers of tobacco
products that mirror the permit suspension and revocation provisions
for importers of processed tobacco in Sec. 41.273.
In 27 CFR 41.232, TTB is adding language to clarify that,
although the permit of an importer of tobacco products can be amended
to allow for the importer to import processed tobacco under the same
permit, that importer qualifies to do so only when TTB authorization of
the amendment is received in response to the application.
Finally, TTB has made several non-substantive editorial
changes to improve the readability and the clarity of the regulatory
texts that appear in this document.
Adoption of Final Rule
Based on the foregoing, TTB has determined that the temporary
regulations published in T.D. TTB-78 and T.D. TTB-81 should be adopted
as a final rule with the changes discussed above.
Regulatory Flexibility Act
We certify that these regulations will not have a significant
economic impact on a substantial number of small entities. The
regulatory obligations and relevant collections of information which
are the subject of this rule derive directly from the Internal Revenue
Code of 1986, as amended, and the regulations in this rule concerning
these obligations and collections merely implement and provide
necessary standards for complying with the statutory requirements.
Likewise, any secondary or incidental effects, and any reporting,
recordkeeping, or other compliance burdens flow directly from the
statute. Accordingly, a regulatory flexibility analysis is not
required.
Paperwork Reduction Act
TTB has provided estimates of the burden that the collection of
information contained in these regulations imposes, and the estimated
burden has been reviewed and approved by the Office of Management and
Budget (OMB) in accordance with the Paperwork Reduction Act of 1995 (44
U.S.C. 3507) and assigned control numbers 1513-0024, 1513-0032, 1513-
0033, 1513-0035, 1513-0068, 1513-0070, 1513-0078, 1513-0106, 1513-0107,
and 1513-0130. TTB notes that this final rule contains a number of
amendments to the regulations that alleviate the recordkeeping and
reporting required by the temporary rule that this document replaces.
In several provisions, alternate procedures are provided that allow for
monthly summary reporting rather than daily or per-shipment reporting,
and in two provisions, the requirement to record certain information
has been removed. In addition, this final rule allows manufacturers of
processed tobacco to submit one permit application to cover all
locations at which they conduct business, rather than one application
for each location. This final rule does, however, add an additional
requirement that manufacturers and importers of processed tobacco
submit location information to TTB as part of the permit application.
This information was not previously specifically required under the
regulations but could have been required by TTB under its authority to
require submission of any ``additional information'' required to
determine whether an applicant is entitled to a permit. (Set forth at
27 CFR 40.497 and 41.237.). This final rule reinstitutes recordkeeping
of certain unprocessed tobacco and also extends certain inventory
requirements to importers of processed tobacco.
Under the Paperwork Reduction Act of 1995, an agency may not
conduct or sponsor, and a person is not required to respond to, a
collection of information unless it displays a valid OMB control
number. Comments concerning suggestions for reducing the burden of the
collections of information in this document should be directed to Mary
A. Wood, Alcohol and Tobacco Tax and Trade Bureau, using any of these
points of contact:
P.O. Box 14412, Washington, DC 20044-4412;
202-453-2686 (facsimile); or
[email protected] (email).
Effective Date
This document finalizes temporary regulations that were effective
on June 22, 2009, which implemented changes made to the Internal
Revenue Code of 1986 by the Children's Health Insurance Program
Reauthorization Act of 2009. Because industry members have been
operating for almost three years under the temporary regulations
finalized in this document, and because many of the final regulations
set forth in this document lessen reporting and recordkeeping burdens
for industry members, TTB finds good cause under 5 U.S.C. 553(d)(3) to
dispense with the effective date limitation in 5 U.S.C. 553(d). This
final rule will be effective on June 21, 2012.
Executive Order 12866
It has been determined that this rule is not a significant
regulatory action as defined in E.O. 12866. Therefore, it requires no
regulatory assessment.
Drafting Information
This document was drafted by several members of the Regulations and
Rulings Division, Alcohol and Tobacco Tax and Trade Bureau, with
assistance from personnel in other divisions within TTB.
List of Subjects
27 CFR Part 40
Cigars and cigarettes, Claims, Electronic funds transfers, Excise
taxes, Imports, Labeling, Packaging and containers, Processed tobacco,
Reporting and recordkeeping requirements, Surety bonds, Tobacco
products.
27 CFR Part 41
Cigars and cigarettes, Claims, Customs duties and inspection,
Electronic funds transfers, Excise taxes, Imports, Labeling, Packaging
and containers, Puerto Rico, Reporting and recordkeeping requirements,
Surety bonds, Tobacco, Virgin Islands, Warehouses.
The Regulatory Amendment
For the reasons discussed in the preamble, the temporary
regulations published in the Federal Register at 74 FR 29401 on June
22, 2009, as T.D. TTB-78, the temporary regulations published in the
Federal Register at 74 FR 37551 on July 29, 2009, as T.D. TTB-80, and
the temporary regulations published in the Federal Register at 74 FR
48650 on September 24, 2009, as T.D. TTB-81, are adopted as final, with
[[Page 37302]]
the changes as discussed above and set forth below:
PART 40--MANUFACTURE OF TOBACCO PRODUCTS, CIGARETTE PAPERS AND
TUBES, AND PROCESSED TOBACCO
0
1. The authority citation for part 40 continues to read as follows:
Authority: 26 U.S.C. 448, 5701-5705, 5711-5713, 5721-5723, 5731-
5734, 5741, 5751, 5753, 5761-5763, 6061, 6065, 6109, 6151, 6301,
6302, 6311, 6313, 6402, 6404, 6423, 6676, 6806, 7011, 7212, 7325,
7342, 7502, 7503, 7606, 7805, 31 U.S.C. 9301, 9303, 9304, 9306.
Sec. 40.11 [Amended]
0
2. In Sec. 40.11:
0
a. The definition of ``package'' is amended by adding, after the word
``part,'' the words ``for any purpose other than destruction, export,
delivery as a sample to a manufacturer of processed tobacco or tobacco
products for the purpose of soliciting orders of processed tobacco, or
scientific testing or testing of equipment which results in the
destruction of the processed tobacco or the return of the processed
tobacco to the factory premises,'' and by adding, at the end, the
sentence, ``For appropriate tax rate, see Sec. 40.25a.'';
0
b. The definition of ``packaging'' is amended by removing the word
``The'' and adding, in its place, the words, ``When used in the context
of an action, the''; and
0
c. The definition of ``sale price'' is amended by adding, after the
words ``sold by the'', the words ``U.S.''.
Sec. 40.25a [Amended]
0
3. In Sec. 40.25a:
0
a. Paragraph (b)(2) is amended by adding a sentence at the end to read
as follows: ``A container of processed tobacco, the contents of which
weigh 10 pounds or less (including any added non-tobacco ingredients or
constituents), that is removed within the meaning of this part for any
purpose other than destruction, export, delivery as a sample to a
manufacturer of processed tobacco or tobacco products for the purpose
of soliciting orders of processed tobacco, or scientific testing or
testing of equipment which results in the destruction of the processed
tobacco or the return of the processed tobacco to the factory premises,
is deemed to be a package offered for sale or delivery to the ultimate
consumer.''
0
b. Paragraph (b)(3)(ii) is amended by adding two sentences at the end
to read as follows: ``The term `accompanying materials' includes, but
is not limited to, any point of sale advertising or other printed
product communications issued by the manufacturer or importer of pipe
tobacco products. In addition, the inclusion of cigarette papers or
tubes in a package bearing a `pipe tobacco' declaration will suggest a
use other than pipe tobacco.''
0
4. In Sec. 40.47, paragraph (b) is revised to read as follows:
Sec. 40.47 Other businesses within factory.
* * * * *
(b) Processed tobacco. A manufacturer of tobacco products may
engage in certain activities related to processed tobacco without an
approval under paragraph (a) of this section. Section 40.72(b)
specifies the activities and circumstances that do not require
authorization to engage in another business as well as those activities
and circumstances that do.
0
5. In Sec. 40.72, paragraph (b) is revised to read as follows:
Sec. 40.72 Use of factory premises.
* * * * *
(b) Processed tobacco. (1) A manufacturer of tobacco products that
processes tobacco or receives processed tobacco on its factory premises
solely for use in the manufacture of tobacco products under its permit,
that removes processed tobacco from the factory premises only for
purposes related to its business of manufacturing tobacco products as
set forth in (b)(2) of this section, and that maintains records
sufficient to show the final disposition of any processed tobacco
removed from the factory premises may engage in such activities on the
factory premises under the authority of its existing permit without
prior authorization from TTB under Sec. 40.47. If a manufacturer of
tobacco products removes processed tobacco for purposes other than
those specified in paragraph (b)(2) of this section, that manufacturer
must obtain prior authorization from TTB in accordance with Sec. 40.47
and must keep records and submit reports as prescribed in Sec. Sec.
40.521 and 40.522.
(2) The following activities are considered to be activities
related to the manufacture of tobacco products: Removal of samples of
processed tobacco for the purpose of soliciting orders of tobacco
products; removal of processed tobacco for destruction; removal of
processed tobacco for scientific testing or testing of equipment which
results in the destruction of the processed tobacco or the return of
the processed tobacco to the factory premises; and transfer of
processed tobacco between permitted premises of the same manufacturer.
Any removal of processed tobacco other than those listed above requires
the manufacturer to first obtain authorization to engage in another
business within the factory under Sec. 40.47 and to keep records and
submit reports under Sec. Sec. 40.521 and 40.522, unless the
manufacturer can show to the satisfaction of the appropriate TTB
officer that the removal is connected with the business of a
manufacturer of tobacco products rather than with the business of a
manufacturer of processed tobacco.
0
6. Section 40.182 is revised to read as follows:
Sec. 40.182 Record of tobacco and processed tobacco.
(a) Except as provided in paragraph (b) of this section, a
manufacturer of tobacco products must maintain a record that shows the
total quantity in pounds of all:
(1) Processed tobacco on hand at the beginning of each month;
(2) Processed tobacco received, together with the name and address
of the person from whom received and the date of receipt;
(3) Processed tobacco used in the manufacture of tobacco products,
together with the date of use;
(4) Processed tobacco lost, together with the date and other
circumstances of the loss;
(5) Processed tobacco destroyed, together with the date and other
circumstances of the destruction;
(6) Processed tobacco removed, together with the date of the
removal and reason for the removal; and
(7) Tobacco (unprocessed) on hand at the beginning of each month
and used in the manufacture of tobacco products, lost, destroyed, or
removed during each month.
(b) A manufacturer of tobacco products that is required to obtain
authorization to engage in another business within the factory under
Sec. Sec. 40.47(b) and 40.72(b) must keep records as prescribed in
Sec. 40.521, in addition to those required elsewhere in this part.
(Approved by the Office of Management and Budget under control
number 1513-0068)
0
7. In Sec. 40.202, paragraph (b) and the parenthetical OMB approval
are revised to read as follows:
Sec. 40.202 Reports.
* * * * *
(b) Report of processed tobacco. In addition to complying with the
requirements set forth in this part relating to the reporting of
tobacco products, a manufacturer of tobacco products that is required
to obtain authorization to engage in another
[[Page 37303]]
business within the factory under Sec. Sec. 40.47(b) and 40.72(b) must
also make and submit reports as prescribed in Sec. 40.522.
(Approved by the Office of Management and Budget under control
number 1513-0033)
Sec. 40.256 [Amended]
0
8. In Sec. 40.256, the first sentence is amended by removing the
reference ``Sec. 40.61(b)'' and adding, in its place, the reference
``Sec. 40.61(c)''.
0
9. Section 40.491(b)(3) is revised to read as follows:
Sec. 40.491 Factory premises.
* * * * *
(b) * * *
(3) Any person that holds a TTB permit for the manufacture of
tobacco products and that removes processed tobacco from the factory
must apply for authorization to engage in that activity, when required
to do so under Sec. 40.47.
0
10. A new Sec. 40.502 is added under the undesignated center heading
``Qualification Requirements for Manufacturers of Processed Tobacco''
to read as follows:
Sec. 40.502 Factory premises.
(a) General. The premises used by a manufacturer of processed
tobacco to conduct such business must be described on its permit and
such premises must include any physical location or building used for:
Manufacturing and storing processed tobacco; storing materials,
equipment, and supplies related to or used in the manufacturing and
storage of processed tobacco; and carrying on activities in connection
with the manufacturing and storage of processed tobacco. The premises
may consist of more than one building, or portions of buildings, which
need not be contiguous or located in the same city, town, village, or
State. The manufacturer must designate a central location as a
repository for the records required under this subpart. The application
for the permit filed under Sec. 40.492 must describe the buildings or
portions of buildings by street address (number, street, city or
equivalent, and State). The permit application must include a diagram,
in duplicate, showing the following information, if applicable:
(1) The identification of each building by a letter, number, or
similar designation if the factory is in more than one building and
each building is not identifiable by a separate street address; and
(2) The particular floor or floors, or room or rooms, comprising
the factory if the factory consists of, or includes, a portion of a
building or portions of buildings.
(b) Permits issued prior to June 21, 2012. A manufacturer of
processed tobacco operating under a permit issued prior to June 21,
2012, must submit the information required under paragraph (a) of this
section within 180 days after June 21, 2012.
(c) Extension or curtailment of factory. If a manufacturer of
processed tobacco wishes to change the premises delineated by its
permit to an extent that would be inconsistent with the description or
diagram of the premises that was submitted with the manufacturer's last
permit application, the manufacturer must submit an application on TTB
Form 5200.16 for, and obtain, an amended permit before the change in
the premises occurs. The application must describe the proposed change
in the premises and must be accompanied by a new diagram if required
under paragraph (a) of this section.
0
11. Section 40.521 is revised to read as follows:
Sec. 40.521 Record of tobacco and processed tobacco.
(a) Every manufacturer of processed tobacco and every manufacturer
of tobacco products required to obtain authorization to engage in
another business within the factory under Sec. Sec. 40.47(b) and
40.72(b) of this part must keep records of operations and transactions
that show the total quantity of all:
(1) Processed tobacco on hand at the beginning of each month;
(2) In the case of a manufacturer of tobacco products, processed
tobacco used in the manufacture of tobacco products during each month;
(3) Processed tobacco received, together with the date of receipt
and the name and address of the person from whom it was received;
(4) Processed tobacco removed from the factory for shipment to a
person holding a TTB permit as a manufacturer of processed tobacco, as
a manufacturer of tobacco products, as an importer of processed
tobacco, or as an export warehouse proprietor, together with the date
of removal and the name and address of the person to whom shipped or
delivered;
(5) Processed tobacco removed from the factory for shipment, other
than for export, to a person not holding a TTB permit as a manufacturer
of processed tobacco, as a manufacturer of tobacco products, as an
importer of processed tobacco, or as an export warehouse proprietor,
together with the date of removal;
(6) Processed tobacco removed from the factory for export, together
with the date of removal;
(7) Processed tobacco removed for any purpose not referred to in
paragraphs (a)(4), (5), (6), and (7) of this section, together with the
date of removal;
(8) Processed tobacco lost, together with the date and other
circumstances of the loss;
(9) Processed tobacco destroyed (either on factory premise or
removed from factory premises for destruction), together with the date
and other circumstances of the destruction;
(10) Processed tobacco transferred between buildings that are
covered under the same permit but that are not located in the same
city, town, village, or State; and
(11) Tobacco (unprocessed) on hand at the beginning of each month
and used in the manufacture of tobacco products, lost, destroyed, or
removed during each month.
(b) Any manufacturer of processed tobacco and any manufacturer of
tobacco products that are required to obtain authorization to engage in
another business within the factory under Sec. Sec. 40.47(b) and
40.72(b) and that engage in removals of processed tobacco described in
paragraph (a)(5) or (a)(6) of this section must also keep records that
show the following information about each such removal:
(1) The full name and business address (including city and State)
of the purchaser (if there is a purchaser) and the full name and
business address of the recipient, or personal address if the purchaser
or recipient is not a business;
(2) The full name, business address (including city and State), and
driver's license number of the person picking up the processed tobacco
for delivery;
(3) The license number of the vehicle in which the processed
tobacco is removed from the manufacturer's premises;
(4) The street address of the destination (not including any in-
transit stops) of the processed tobacco; and
(5) The quantity of processed tobacco in the shipment;
(c) The entries in the records of removals required under this
section must be made for each day by the close of the business day
following the day on which the removal occurs. There is no particular
format prescribed for the records required under this section (and
commercial records may be used) although the required information must
be readily ascertainable from the records kept. In the case of a
removal under paragraph (a)(5) or (a)(6) of this section that involves
shipment by a common carrier, the appropriate TTB officer may
[[Page 37304]]
approve an alternate method or procedure pursuant to Sec. Sec. 40.45
or 40.531 through which the manufacturer may keep records regarding the
common carrier and its means of tracking (including pick up and
delivery) of the shipment in lieu of the information required by
paragraphs (b)(2) and (b)(3) of this section.
0
12. In Sec. 40.522, paragraph (d) is revised to read as follows:
Sec. 40.522 Reports.
* * * * *
(d) Reports of removals. (1) Except as otherwise provided in
paragraphs (d)(2) or (d)(3) of this section, a manufacturer who removes
processed tobacco for export or for shipment to someone other than a
person holding a TTB permit as a manufacturer of processed tobacco, as
a manufacturer of tobacco products, as an importer of processed
tobacco, or as an export warehouse proprietor must report each such
removal on TTB F 5250.2 by the close of the next business day following
the day of removal, in accordance with the instructions on the form.
(2) In the case of removals for export, as an alternative to the
procedure prescribed in paragraph (d)(1) of this section, the
manufacturer may submit to TTB a monthly summary report of such
removals in a format approved by the appropriate TTB officer. Prior to
the use of such an alternate procedure, the manufacturer must obtain
written approval from the appropriate TTB officer.
(3) A manufacturer of tobacco products who removes processed
tobacco for any of the purposes related to the manufacture of tobacco
products set forth under Sec. 40.72(b)(2) is not required to report
such removals on TTB F 5250.2. Records of such removals must still be
kept pursuant to Sec. 40.521.
* * * * *
Sec. 40.531 [Amended]
0
13. In Sec. 40.531, paragraph (a)(2) is amended by removing the word
``, and'' at the end and adding in its place, the words ``and affords
equivalent security to the revenue; and''.
PART 41--IMPORTATION OF TOBACCO PRODUCTS, CIGARETTE PAPERS AND
TUBES, AND PROCESSED TOBACCO
0
14. The authority citation for part 41 continues to read as follows:
Authority: 26 U.S.C. 5701-5705, 5708, 5712, 5713, 5721-5723,
5741, 5754, 5761-5763, 6301, 6302, 6313, 6402, 6404, 7101, 7212,
7342, 7606, 7651, 7652, 7805; 31 U.S.C. 9301, 9303, 9304, 9306.
Sec. 41.11 [Amended]
0
15. In Sec. 41.11, the definition of ``package'' is amended by adding,
after the word ``part'' the words ``for any purpose other than
destruction, export, delivery as a sample to a manufacturer of
processed tobacco or tobacco products for the purpose of soliciting
orders of processed tobacco, or for scientific testing or testing of
equipment that results in the destruction of the processed tobacco or
the return of the processed tobacco,'' and by adding, at the end, the
sentence, ``For appropriate tax rate, see Sec. 41.30.''; and the
definition of ``packaging'' is amended by removing the word ``The'' and
adding, in its place, the words, ``When used in the context of an
action, the''.
Sec. 41.30 [Amended]
0
16. In Sec. 41.30:
0
a. Paragraph (b)(2) is amended by adding a sentence at the end to read
as follows: ``A container of processed tobacco, the contents of which
weigh 10 pounds or less (including any added non-tobacco ingredients or
constituents), that is removed within the meaning of this part for any
purpose other than destruction, export, delivery as a sample to a
manufacturer of processed tobacco or tobacco products for the purpose
of soliciting orders of processed tobacco, or for scientific testing or
testing of equipment that results in the destruction of the processed
tobacco or the return of the processed tobacco, is deemed to be a
package offered for sale or delivery to the ultimate consumer.''
0
b. Paragraph (b)(3)(ii) is amended by adding two sentences at the end
to read as follows: ``The term `accompanying materials' includes, but
is not limited to, any point of sale advertising or other printed
product communications issued by the manufacturer or importer of pipe
tobacco products. In addition, the inclusion of cigarette papers or
tubes in a package bearing a `pipe tobacco' declaration will suggest a
use other than pipe tobacco.''
0
17. New Sec. 41.203a, is added immediately before the undesignated
center heading ``Required Records and Reports'' to read as follows:
Sec. 41.203a Suspension and revocation of permit.
When the appropriate TTB officer has reason to believe that an
importer of tobacco products has not in good faith complied with the
provisions of 26 U.S.C. chapter 52, and regulations thereunder, or with
any other provision of 26 U.S.C. with intent to defraud, or has
violated any condition of the permit, or has failed to disclose any
material information required or made any material false statement in
the application for the permit, or is, by reason of previous or current
legal proceedings involving a felony violation of any other provision
of Federal criminal law relating to tobacco products, processed
tobacco, cigarette paper, or cigarette tubes, not likely to maintain
operations in compliance with 26 U.S.C. chapter 52, or has been
convicted of a felony violation of any provision of Federal or State
criminal law relating to tobacco products, processed tobacco, cigarette
paper, or cigarette tubes, the appropriate TTB officer shall issue an
order, stating the facts charged, citing such person to show cause why
the permit should not be suspended or revoked. Such citation shall be
issued and opportunity for hearing afforded in accordance with part 71
of this chapter, which part is applicable to such proceedings. If,
after hearing, the Administrative Law Judge, or on appeal, the
Administrator, finds that such person has not shown cause why the
permit should not be suspended or revoked, such permit shall be
suspended for such period as the appropriate TTB officer deems proper
or shall be revoked.
0
18. In Sec. 41.232, paragraph (b) is amended by adding, before the
period, the words, ``and receiving TTB authorization''.
0
19. Section 41.237 is amended by designating the existing text as
paragraph (a), adding a heading to newly designated paragraph (a), and
adding a new paragraph (b). The additions read as follows:
Sec. 41.237 Additional information.
(a) General. * * *
(b) Business premises. Every person that files an application for a
permit required by Sec. 41.231 as an importer of processed tobacco
must furnish, with its application for the permit, the address to be
used as the principal business office where the records and reports
required by the subpart must be maintained pursuant to Sec. 41.263.
The applicant must also include the location (by physical address or
other means if there is no physical address) of any premises used for
the storage of processed tobacco imported or received. For permits
issued prior to June 21, 2012, the permittee has 180 days from June 21,
2012, to submit the information required under this paragraph.
0
20. In Sec. 41.253, a sentence is added at the end to read as follows:
Sec. 41.253 Change in location or address.
* * * Whenever the importer wishes to change the location of the
premises
[[Page 37305]]
used for the storage of processed tobacco imported or received by the
importer to an extent that would be inconsistent with the location
information submitted with the importer's last permit application, the
importer must apply for, and obtain, an amended permit before such a
change in premises takes place.
0
21. In Sec. 41.261:
0
a. Paragraph (a)(2) is amended by adding at the end before the
semicolon the words ``, together with the name and address of the
person from whom it was received'';
0
b. Paragraph (a)(3) is amended by adding at the end before the
semicolon the words ``or exported'';
0
c. Paragraph (a)(5) is amended by removing the word ``Transferred'' and
adding, in its place, the words ``Except in the case of returns to
customs custody or exportations, transferred'';
0
d. Paragraph (a)(6) is amended by removing the period at the end and
adding in its place the word ``; and'';
0
e. New paragraph (a)(7) is added;
0
f. Paragraph (b)(1) is amended by removing the words ``address
(including city and State) of the purchaser (or recipient, if there is
no purchaser)'' and adding, in their place, the words ``business
address (including city and State) of the purchaser (if there is a
purchaser) or the full name and business address of the recipient (if
there is no purchaser), or personal address if the purchaser or
recipient is not a business'';
0
g. Paragraph (b)(2) is amended by adding before the word ``address''
the word ``business'';
0
h. Paragraph (b)(5) is amended by removing the semicolon and adding in
its place a period;
0
i. Paragraphs (b)(6), (b)(7), and (d) are removed; and
0
j. Paragraph (c) is revised.
The revision and addition read as follows:
Sec. 41.261 Records.
(a) * * *
(7) Transferred between buildings that are covered under the same
permit but that are not located in the same city, town, village, or
State.
* * * * *
(c) The entries in the records required under this section must be
made for each day by the close of the business day following the day on
which the transfer or sale occurs. There is no particular format
prescribed for the records required under this section (and commercial
records may be used), although the required information must be readily
ascertainable from the records kept. In the case of a removal under
paragraph (a)(5) of this section that involves shipment by a common
carrier, the appropriate TTB officer may approve an alternate method or
procedure pursuant to Sec. 41.26 of this part through which the
importer may keep records regarding the common carrier and its means of
tracking (including pick up and delivery) of the shipment in lieu of
the information required by paragraphs (b)(2) and (b)(3) of this
section. No records are required to be kept under this part regarding
processed tobacco within customs custody, although this will not
preclude TTB review of records related to such processed tobacco as may
be appropriate for purposes of the enforcement of the provisions of
this part.
* * * * *
0
22. In Sec. 41.262, paragraph (a) is amended by adding at the end of
the paragraph the sentence, ``The importer need not include in the
reports under this part information regarding processed tobacco that is
in customs custody.''; and paragraph (d) is revised to read as follows:
Sec. 41.262 Reports.
* * * * *
(d) Reports of sales and transfers. (1) Except as otherwise
provided in paragraph (d)(2) of this section, an importer that exports
processed tobacco or transfers or sells processed tobacco to someone
other than a person holding a permit as an importer or manufacturer of
processed tobacco or tobacco products or as an export warehouse
proprietor must report each such exportation, sale, or transfer on TTB
F 5250.2 by the close of the next business day following the day of
exportation, sale, or transfer, in accordance with the instructions on
the form.
(2) In the case of removals for export, as an alternative to the
procedure prescribed in paragraph (d)(1) of this section, the importer
may submit to TTB monthly summary reports of such removals in a format
approved by the appropriate TTB officer. Prior to the use of such an
alternate procedure, the importer must obtain written approval from the
appropriate TTB officer.
(3) An importer that ships or transfers processed tobacco for
scientific testing or testing of equipment which results in the
destruction of the processed tobacco or the return of the processed
tobacco is not required to report such shipment or transfer on TTB F
5250.2.
* * * * *
0
23. New Sec. 41.264 is added immediately after Sec. 41.263, to read
as follows:
Sec. 41.264 Inventories.
Every importer of processed tobacco must provide a true and
accurate inventory of any processed tobacco stored on premises
designated pursuant to Sec. 41.237. The importer must make such an
inventory at the time of commencing business, at the time of
transferring ownership, at the time of changing the location of
facilities in which processed tobacco is stored, at the time of
concluding business, and at such other time as the appropriate TTB
officer may require. A specific format is not prescribed. For permits
issued prior to June 21, 2012, the permittee has 180 days from June 21,
2012, to make an inventory as required under this paragraph.
Signed: April 12, 2012.
John J. Manfreda,
Administrator.
Approved: June 12, 2012.
Timothy E. Skud,
Deputy Assistant Secretary (Tax, Trade, and Tariff Policy).
[FR Doc. 2012-15190 Filed 6-20-12; 8:45 am]
BILLING CODE 4810-31-P