[Federal Register Volume 77, Number 120 (Thursday, June 21, 2012)]
[Rules and Regulations]
[Pages 37287-37305]
From the Federal Register Online via the Government Printing 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
     formcomments@ttb.gov (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