Flavored Malt Beverage and Related Regulatory Amendments (2002R-044P), 194-237 [04-28460]

Agencies

• Alcohol and Tobacco Tax and Trade Bureau
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 70, Number 1 (Monday, January 3, 2005)]
[Rules and Regulations]
[Pages 194-237]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 04-28460]



[[Page 193]]

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Part III





Department of the Treasury





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Alcohol and Tobacco Tax and Trade Bureau



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27 CFR Parts 7 and 25



Flavored Malt Beverage and Related Regulatory Amendments (2002R-044P); 
Final Rule

Federal Register / Vol. 70 , No. 1 / Monday, January 3, 2005 / Rules 
and Regulations

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DEPARTMENT OF THE TREASURY

Alcohol and Tobacco Tax and Trade Bureau

27 CFR Parts 7 and 25

[TTB T.D.-21; Re: TTB Notice No. 4]
RIN 1513-AA12


Flavored Malt Beverage and Related Regulatory Amendments (2002R-
044P)

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

ACTION: Final rule; Treasury decision.

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SUMMARY: The Department of the Treasury and its Alcohol and Tobacco Tax 
and Trade Bureau adopt as a final rule certain proposed changes to the 
regulations concerning the production, taxation, composition, labeling, 
and advertising of beer and malt beverages.
    This final rule permits the addition of flavors and other 
nonbeverage materials containing alcohol to beers and malt beverages, 
but, in general, limits the alcohol contribution from such flavors and 
other nonbeverage materials to not more than 49% of the alcohol content 
of the product. However, if a malt beverage contains more than 6% 
alcohol by volume, not more than 1.5% of the volume of the finished 
product may consist of alcohol derived from flavors and other 
nonbeverage ingredients that contain alcohol. This final rule also 
amends the regulations relating to the labeling and advertising of malt 
beverages, and adopts a formula requirement for beers.
    We issue this final rule to clarify the status of flavored malt 
beverages under the provisions of the Internal Revenue Code of 1986 and 
the Federal Alcohol Administration Act related to the production, 
composition, taxation, labeling, and advertising of alcohol beverages. 
This final rule also will ensure that consumers are adequately informed 
about the identity of flavored malt beverages.

DATES: This rule is effective January 3, 2006.

FOR FURTHER INFORMATION CONTACT: Charles N. Bacon, Alcohol and Tobacco 
Tax and Trade Bureau, Regulations and Procedures Division, P.O. Box 
5056, Beverly Farms, MA 01915; telephone (978) 921-1840.

SUPPLEMENTARY INFORMATION:

Table of Contents

Notes to Readers
    A. ATF-TTB Transition
    B. Use of Plain Language
I. Background Information
II. TTB Notice No. 4
III. Discussion of Specific Proposals in TTB Notice No. 4
    A. Standard for Added Alcohol and Alcohol from Fermentation
    B. Proposed 0.5% Added Alcohol by Volume Standard for ``Beer'' 
under the IRC
    C. Proposed 0.5% Added Alcohol by Volume Standard for Malt 
Beverages under the FAA Act
    D. Alternative 51/49 (Majority) Alcohol Standard
    E. Proposed Alcohol Content Labeling Statement for Flavored Malt 
Beverages
    F. Use of Distilled Spirits Terms in Malt Beverage Labeling and 
Advertising
    G. Filing Formulas for Fermented Beverages
    H. Samples; Formulas and Samples for Imported Malt Beverages
    I. Other Issues Raised in Notice No. 4
IV. Rulemaking History
V. Comments Received in Response to Notice No. 4
    A. General Discussion of Comments
    B. Overview of Comments
    C. Summary of TTB Final Rule Decisions
VI. Comments on Whether the Rulemaking Is Necessary and Fair
    A. Is There a Need to Engage in Rulemaking on this Issue?
    B. Fairness and Notice Issues
VII. Regulatory Burden and Cost-Related Issues
    A. Costs of Complying with the Proposed 0.5% Standard
    B. Effect on Current Products and New Product Development
    C. Effect on Competition
    D. Effect on the Retail Licensing System and Overall Marketplace
    E. TTB Response
VIII. The 0.5% Standard vs. the 51/49 Standard--Other Issues
    A. Comments in Favor of the 0.5% Standard
    B. Comments in Favor of the 51/49 Standard
    C. TTB Response
IX. State Concerns
    A. Comments by State Regulatory Agencies
    B. Other Comments in Support of the 0.5% Standard
    C. Other Comments in Support of the 51/49 Standard
    D. TTB Response
X. Mandatory Alcohol Content Labeling for FMBs
    A. Comments Supporting the Proposal
    B. Other Comments
    C. TTB Response
XI. Use of Distilled Spirits Terms on Labels and in Advertisements
    A. Comments Received
    B. TTB Response
XII. New Formula Requirements
    A. Fermented Products Requiring Formulas under Sec.  25.55
    B. Standards for Formula Approval
    C. Alcohol Information in Formulas
    D. Reasonable Range of Ingredients
    E. Formula Confidentiality
    F. Standard Form for Formulas
    G. Formula Proceedings
    H. Placement in the CFR
XIII. Other Issues Raised by Commenters
    A. Information Quality Act
    B. ``Alcohol is Alcohol''
    C. Marketing of FMBs to Underage Drinkers
    D. More Explicit Labeling of FMBs
    E. Establishing Another Category of Alcohol Beverages
    F. Other Comments
XIV. Implementation Dates
    A. Effective Date for Compliance with the New Added Alcohol 
Standard
    B. Effect on Products in the Marketplace
    C. Additional TTB Comment on the Effective Date
XV. Comments on the Proposed Regulatory Text; Regulatory Text 
Changes
    A. Reference to Malt Beverage Standards, Sec. Sec.  7.10 and 
7.11
    B. Comments on Alcohol Flavoring Material Reference, Sec. Sec.  
7.11 and 25.15
    C. Malt Beverages Above 6.0% Alc/Vol; Status of ATF Ruling 96-1
    D. Changes to Sec.  7.31
    E. Reference to Standards for Beer, Sec. Sec.  25.11 and 25.15
    F. Other Sec.  25.15 Issues
    G. Comments on Formula Proposals, Sec. Sec.  25.55-25.58
XVI. Regulatory Analysis and Notices
    A. Executive Order 12866
    B. Regulatory Flexibility Act
    C. Paperwork Reduction Act
XVII. Drafting Information
XVIII. List of Subjects
XIX. Amendments to the Regulations

Notes to Readers

A. ATF-TTB Transition

    Effective January 24, 2003, section 1111 of the Homeland Security 
Act of 2002 (Public Law 107-296, 116 Stat. 2135), divided the Bureau of 
Alcohol, Tobacco and Firearms (ATF) into two new agencies, the Alcohol 
and Tobacco Tax and Trade Bureau (TTB) in the Department of the 
Treasury, and the Bureau of Alcohol, Tobacco, Firearms and Explosives 
in the Department of Justice. The regulation and taxation of alcohol 
beverages remains a function of the Department of the Treasury and is 
the responsibility of TTB. References to the former ATF and the new TTB 
in this document reflect the time frame, before or after January 24, 
2003.

B. Use of Plain Language

    In this document, ``we,'' ``our,'' and ``us'' refer to the 
Department of the Treasury and/or the Alcohol and Tobacco Tax and Trade 
Bureau (TTB). ``You,'' ``your,'' and similar words refer to members of 
the alcohol beverage industry and others to whom TTB regulations apply.

I. Background Information

    Flavored malt beverages are brewery products that differ from 
traditional malt beverages such as beer, ale, lager, porter, stout, or 
malt liquor in several respects. Flavored malt beverages

[[Page 195]]

exhibit little or no traditional beer or malt beverage character. Their 
flavor is derived primarily from added flavors rather than from malt 
and other materials used in fermentation. At the same time, flavored 
malt beverages are marketed in traditional beer-type bottles and cans 
and distributed to the alcohol beverage market through beer and malt 
beverage wholesalers, and their alcohol content is similar to other 
malt beverages--in the 4-6% alcohol by volume range.
    Although flavored malt beverages are produced at breweries, their 
method of production differs significantly from the production of other 
malt beverages and beer. In producing flavored malt beverages, brewers 
brew a fermented base of beer from malt and other brewing materials. 
Brewers then treat this base using a variety of processes in order to 
remove malt beverage character from the base. For example, they remove 
the color, bitterness, and taste generally associated with beer, ale, 
porter, stout, and other malt beverages. This leaves a base product to 
which brewers add various flavors, which typically contain distilled 
spirits, to achieve the desired taste profile and alcohol level.
    While the alcohol content of flavored malt beverages is similar to 
that of most traditional malt beverages, the alcohol in many of them is 
derived primarily from the distilled spirits component of the added 
flavors rather than from fermentation. A review of approved formulas 
showed that more than 99% of the alcohol in some flavored malt 
beverages was derived from added flavorings containing distilled 
spirits instead of from fermentation at the brewery.
    Flavored malt beverages are sold under many proprietary names and 
include alcohol beverages such as alcoholic lemonades, alcoholic colas, 
cooler-type products, and other flavored alcohol beverages. In recent 
years, brewers have partnered with distilled spirits producers in order 
to label flavored malt beverages using prominent distilled spirits 
brand names.
    In ATF Ruling 96-1 (ATF Quarterly Bulletin 1996-1, p. 49), our 
predecessor agency announced its intention to engage in rulemaking on 
the issue of whether it should consider the prohibition, restriction, 
or limitation of the use of flavor materials containing alcohol at any 
stage in the production of malt beverages. Pending rulemaking, the 
ruling held that for malt beverages with an alcohol content in excess 
of 6% alcohol by volume, a maximum of 1.5% alcohol by volume could be 
derived from alcohol flavoring materials. Six years later, in ATF 
Ruling 2002-2, ATF set forth guidance on the labeling and advertising 
of flavored malt beverages and again reiterated its intention to engage 
in rulemaking on the use of alcohol flavoring materials in the 
production of malt beverages.
    In the interim, State regulatory and taxation agencies started to 
express concerns about the status of flavored malt beverages, and these 
agencies requested that ATF or TTB take action to clarify the status of 
these products as either malt beverages or distilled spirits.
    In 2002, ATF examined the formulation of 114 alcohol beverage 
products labeled and marketed as flavored malt beverages. ATF undertook 
this study to find out how these products were produced, what 
ingredients were used, and from where the alcohol in them was derived. 
This study did not examine malt beverages labeled and marketed as 
flavored beers, flavored ales, and so forth (such as ``cherry beer'' or 
``pumpkin ale'') since these types of malt beverages typically have the 
character of malt beverages and their alcohol is derived primarily from 
fermentation. The major results of the study are set forth in the 
tables below:

    Table 1.--Alcohol Derived From Added Alcohol Flavoring Materials
------------------------------------------------------------------------
                                                              Number of
                                                               flavored
    Alcohol percentage derived from added alcohol favors         malt
                                                              beverages
------------------------------------------------------------------------
0-25%......................................................            4
26-0%......................................................            0
51-75%.....................................................           >5
76-100.....................................................          105
                                                            ------------
Maximum alcohol derived from added alcohol flavors: 99.98%.   Total: 114
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    Table 2.--Volume of Beer Base Present in Flavored Malt Beverages
------------------------------------------------------------------------
                                                              Number of
  Volume of flavored malt beverage derived from fermented      flavored
                         beer base                               malt
                                                              beverages
------------------------------------------------------------------------
0-25%......................................................           95
26-50%.....................................................            4
51-75%.....................................................            1
76-100%....................................................           14
------------------------------------------------------------------------

    ATF concluded that the great majority of the alcohol in most 
flavored malt beverages was not derived from fermentation of malt and 
grain. Instead, most of the alcohol in these products was derived from 
distilled spirits contained in added alcohol flavors. ATF found that 
over 75% of the alcohol in most of the flavored malt beverages studied 
was derived from alcohol flavoring materials and that in some cases 
this figure rose to more than 99%. In contrast, the alcohol derived 
from flavors constituted 50% or less of the overall alcohol in only 4 
of the 114 products studied.
    Based on the study's results, ATF also concluded that most flavored 
malt beverages contained very little actual beer base. Only 15 out of 
the 114 flavored malt beverages studied contained 51% or more by volume 
fermented beer; the remaining volume of those 15 products consisted of 
flavors, water, and other ingredients. Two of the flavored malt 
beverages studied contained only 1% fermented beer by volume.

II. TTB Notice No. 4

    On March 24, 2003, we proposed a number of regulatory changes 
concerning beer and malt beverages in TTB Notice No. 4 (published in 
the Federal Register at 68 FR 14292; corrected at 68 FR 15119). Among 
other things, Notice No. 4 solicited comments on whether certain 
products marketed as flavored malt beverages should be classified as 
malt beverages or distilled spirits products under the Federal Alcohol 
Administration Act (FAA Act) and the Internal Revenue Code of 1986 
(IRC). We recognized that the answer to this question would affect the 
rate of tax applicable to these products, the premises on which they 
may be produced, and the way that the products are labeled, advertised 
and marketed. Furthermore, their classification as malt beverages or as 
distilled spirits under Federal law could affect State oversight and 
control of these products, since many States follow the Federal 
classification of alcohol beverages.
    Notice No. 4 included a proposal to limit the quantity of alcohol 
derived from added flavors or other ingredients containing alcohol to 
less than 0.5% alcohol by volume. The notice also requested comments on 
an alternative standard requiring that a malt beverage derive a minimum 
of 51% of its alcohol content from fermentation at the brewery, thus 
allowing no more than 49% of the alcohol content to be derived from 
added flavors containing alcohol.
    As discussed below, Notice No. 4 also included proposed amendments 
to the regulations involving the filing of formulas, and the labeling 
and advertising of malt beverages.

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III. Discussion of Specific Proposals in TTB Notice No. 4

A. Standard for Added Alcohol and Alcohol From Fermentation

    In Notice No. 4, we proposed to delineate how much of the alcohol 
content of a beer or malt beverage must be derived from fermentation at 
the brewery, and how much of the product's alcohol content may be 
derived from alcohol added through the use of flavors and other 
ingredients containing alcohol.
    Neither the IRC nor the FAA Act provides specific limits on the 
quantity of flavors that may be added to beer or malt beverages; nor 
does either statute set forth how much of the alcohol content of those 
products must result from fermentation at the brewery. While neither 
statute expressly sanctions the direct addition of distilled spirits or 
other alcohol to beer or malt beverages, TTB and its predecessor 
agencies, as set forth in ATF Rulings 96-1 and 2002-2, have 
historically allowed flavors, including flavors containing alcohol, to 
be added to these products.
    In Notice No. 4, TTB suggested that the definition of ``beer'' in 
the IRC, which refers to beer, ale, porter, stout, and ``other similar 
fermented beverages,'' requires that a product derive a substantial 
portion of its alcohol from fermentation at a brewery since the 
definition does not contemplate a product that derives most of its 
alcohol content from distilled spirits. As the ATF study referred to 
above demonstrated, few products marketed as flavored malt beverages 
derive a substantial portion, or even a bare majority, of their alcohol 
content from fermentation.
    We also stated that a similar standard should apply to the 
definition of a ``malt beverage'' under the FAA Act. The FAA Act 
defines a malt beverage as a product made from the fermentation of 
malted barley with the addition of hops. While the definition in the 
FAA Act allows for the addition to malt beverages of ``other wholesome 
food products'' such as flavors, we stated that we do not believe that 
Congress intended for these added materials to represent the dominant 
source of a product's alcohol content.

B. Proposed 0.5% Added Alcohol by Volume Standard for ``Beer'' Under 
the IRC

    In Notice No. 4, TTB proposed adding to the regulations a new Sec.  
25.15 (27 CFR 25.15) that would have the effect of treating as a 
distilled spirits product any fermented product that contains 0.5% or 
more alcohol by volume derived from flavors, taxpaid wine, or other 
ingredients containing alcohol. As a consequence of the proposed new 
section, those products would be taxed and classified as distilled 
spirits. This proposed section also would allow the use of barley malt, 
malted grains other than barley, unmalted grains, sugars, syrups, 
molasses, honey, fruit, fruit juice, fruit concentrate, herbs, spices 
and other food materials in the production of a beer. It did not 
provide any standards for the use of these ingredients.
    In Notice No. 4, TTB noted that this 0.5% alcohol standard had long 
been used to determine whether a beverage is considered an alcohol 
beverage. For example, many beverages, including juice, soft drinks, 
and soda, contain a small amount of alcohol derived from the use of 
flavoring materials containing distilled spirits. As long as the 
overall alcohol content of the product is below 0.5% alcohol by volume, 
these products are not considered alcohol beverages, and are not taxed 
as such. If the alcohol content of the a product reaches 0.5% alcohol 
by volume, the product would be subject to the tax imposed on distilled 
spirits products, since it would fall within the statutory definition 
of a distilled spirits product.

C. Proposed 0.5% Added Alcohol by Volume Standard for Malt Beverages 
Under the FAA Act

    In Notice No. 4, TTB proposed adding to the regulations a new Sec.  
7.11 (27 CFR 7.11) that would classify a fermented product as a malt 
beverage only if it contains less than 0.5% alcohol by volume derived 
from flavors or other ingredients containing alcohol. This proposed 
section would also have explicitly permitted filtration or other 
processing to remove color, taste, aroma, bitterness, or other 
characteristics derived from fermentation. We specifically solicited 
comments on this proposed standard and on any other standard that might 
be consistent with the FAA Act definition of a malt beverage.
    Notice No. 4 noted that the FAA Act's definition of ``malt 
beverage'' was intended to cover all products made by brewers at the 
time of the enactment of that Act in 1935. As already noted above, this 
definition requires that a malt beverage be made from the fermentation 
of malted barley with hops, with or without the addition of ``other 
wholesome food products.'' For years, brewers have used many 
substances, including starches, sugars, honey, fruits, flavors 
(including those containing alcohol), colors, and adjuncts to aid in 
fermentation, clarification, and preservation of malt beverages. TTB 
and its predecessor agencies have allowed these ingredients in malt 
beverage products.
    TTB and its predecessor agencies have rarely examined the question 
of what constitutes ``wholesome food products'' under the FAA Act, 
other than to state that the ingredients added to malt beverages must 
be recognized as safe for food use by the Food and Drug Administration 
and must have some intended purpose in malt beverage production. We and 
our predecessor agencies have considered flavorings containing 
distilled spirits to be wholesome food products and have allowed their 
use in producing malt beverages.
    The use of flavors containing distilled spirits can introduce a 
significant amount of distilled spirits into a malt beverage. Adding 
alcohol or distilled spirits in this fashion reduces the need to use 
fermented malt in the production of a malt beverage in order to attain 
alcohol content. When carried to extremes, this practice results in a 
product in which most of the alcohol content is derived from added 
flavors rather than from fermentation at a brewery.
    Based on the above considerations, we stated in Notice No. 4 our 
belief that the definition of a malt beverage in the FAA Act supports 
limiting the amount of alcohol that is not ``made by the alcoholic 
fermentation * * * of malted barley with hops.'' Further, we stated our 
belief that labeling a beverage that derives most of its alcohol 
content from added alcohol flavors as a malt beverage is inherently 
misleading since consumers expect that malt beverages derive a 
significant portion of their alcohol content from fermentation of 
barley malt and other ingredients at the brewery.

D. Alternative 51/49 (Majority) Alcohol Standard

    Although Notice No. 4 stated that both the IRC and the FAA Act 
would support a 0.5% added alcohol standard, it also stated that the 
IRC would support the issuance of a regulation requiring that a beer or 
malt beverage product must derive a majority of its alcohol content 
from fermentation at the brewery. Accordingly, TTB sought comments on 
both the 0.5% standard and a 51/49 standard, which would allow up to 
49% of the alcohol in a beer or malt beverage to be derived from 
flavors or other materials containing alcohol.

[[Page 197]]

E. Proposed Alcohol Content Labeling Statement for Flavored Malt 
Beverages

    In Notice No. 4, TTB suggested that, due to the unique character of 
these new types of flavored malt beverages, many consumers have limited 
experience with them. At the same time, due to their label appearance 
and the use of the brand names of well-known distilled spirits 
products, TTB believed that consumers are likely to be confused as to 
the actual alcohol content of the products. TTB suggested that 
consumers are likely to assume that some flavored malt beverages are 
high in alcohol content like the distilled spirits products whose brand 
names they bear. Likewise, while other brands of flavored malt 
beverages are not labeled with distilled spirits brand names, their 
labeling or packaging, which often resembles that of nonalcoholic 
beverages such as juices, sodas, bottled water, and energy drinks, is 
likely to confuse consumers as to their identity as alcohol beverages.
    To avoid consumer confusion over the alcohol content in flavored 
malt beverages, we proposed the addition of a new paragraph (a)(5) in 
Sec.  7.22, (27 CFR 7.22), setting forth a mandatory requirement to 
state on the brand label the alcohol content of any malt beverage that 
contains any alcohol derived from added flavors or other ingredients 
containing alcohol. We suggested that this requirement would help 
consumers identify these products as alcohol beverages and would help 
consumers to understand that their alcohol content is similar to that 
of traditional malt beverages. This alcohol content labeling would also 
draw attention to any flavored malt beverages that might lie outside 
the customary 4 to 6% alcohol by volume range for malt beverages. For 
example, if a flavored malt beverage contained 10% alcohol by volume, 
alcohol content labeling would inform consumers about this important 
fact.
    Since there is no provision in the TTB regulations that uniquely 
identifies flavored malt beverages, we proposed that the mandatory 
alcohol content labeling apply to any malt beverage that contains 
alcohol from a source other than fermentation at the brewery. For 
example, if a brewer adds a flavoring containing alcohol to a malt 
beverage, whether it is labeled as a flavored malt beverage, as a 
flavored beer or ale, or as a specialty malt beverage product, the 
requirement to display alcohol content on the brand label would apply. 
We proposed no changes to the form of the alcohol content statement, to 
the tolerances provided in 27 CFR 7.71, or to the type size 
requirements in 27 CFR 7.28.

F. Use of Distilled Spirits Terms in Malt Beverage Labeling and 
Advertising

    Notice No. 4 pointed out that some newer flavored malt beverages 
use the names of well-known brands of distilled spirits as part of 
their own brand names. The labels of these flavored malt beverage 
brands are often designed to resemble the labels of the distilled 
spirits brand used in their names. In addition, when first introduced, 
some of these flavored malt beverages bore label statements referring 
to the class and type of distilled spirits used in producing the 
nonbeverage-flavoring component. For these reasons, a number of State 
regulatory and taxing authorities questioned the classification of 
flavored malt beverages and requested that we take action to clarify 
their status as either malt beverages or distilled spirits.
    As previously noted, ATF Ruling 2002-2 clarified permissible 
labeling and advertising practices for flavored malt beverages, and 
gave brewers and importers labeling guidelines to prevent the 
misleading impression that flavored malt beverages are distilled 
spirits or contain distilled spirits. Notice No. 4 proposed to 
incorporate the holdings of the ruling in a new 27 CFR 7.29(a)(7) for 
labeling purposes and a new 27 CFR 7.54(a)(8) for advertising purposes. 
These proposed provisions would add to the malt beverage regulations 
language similar to that found in the FAA Act wine regulations 
regarding distilled spirits statements. The proposed language would 
prohibit labeling and advertising statements that imply that malt 
beverages are similar to distilled spirits or that malt beverage 
products are made with, or contain, distilled spirits.
    The two new provisions in question would allow the use of a brand 
name of a distilled spirits product as the brand name of a malt 
beverage. However, the proposed provisions would have the effect of 
prohibiting the use of a distilled spirits brand name in any other malt 
beverage labeling or advertising context. The use of a cocktail name as 
a brand name or fanciful name would be permitted if the malt beverage's 
overall formulation, label, or advertisement did not present a 
misleading impression about the identity of the product.

G. Filing Formulas for Fermented Beverages

    Notice No. 4 noted that the TTB regulations at 27 CFR 25.62 and 
25.67 require brewers to file a statement of process with TTB's 
National Revenue Center in Cincinnati, Ohio, as part of the Brewer's 
Notice for any fermented beverage that the brewer intends to market 
under a name other than ``beer,'' ``lager,'' ``ale,'' ``porter,'' 
``stout,'' or ``malt liquor.'' Under 27 CFR 25.76, a brewer must file 
an amended Brewer's Notice if there are changes to an approved 
statement of process. When a brewer files a statement of process with 
the National Revenue Center, a specialist at TTB's Advertising, 
Labeling and Formulation Division in Washington, DC, examines the 
proposed statement of process to ensure that authorized materials will 
be used, to determine the correct class and type, and to ensure that 
the fermented product may be made at a brewery.
    Notice No. 4 proposed significant changes to the filing 
requirements described above. These changes included the removal of 
Sec. Sec.  25.62(a)(7), 25.67 and 25.76 and the addition of new 
Sec. Sec.  25.55 through 25.58 (27 CFR 25.55 through 25.58). These 
changes would:
     Replace the statement of process requirements found at 
Sec. Sec.  25.62(a)(7) and 25.67 with a formula requirement;
     Describe more clearly the fermented products for which a 
formula is necessary;
     Require brewers to provide specific information about 
ingredients, processes, and alcohol content in formulas;
     Allow brewers to file formulas directly with the 
Advertising, Labeling and Formulation Division in Washington, DC;
     Permit brewers to produce certain fermented beverages 
solely for research and product development purposes without having to 
receive formula approval;
     Allow brewers to file formulas to cover production at 
multiple breweries; and
     Allow brewers to file superseding formulas.
    Proposed Sec.  25.55 would require the filing of a formula with TTB 
for specified products made at a brewery, including sak[eacute], 
flavored sak[eacute], and sparkling sak[eacute]. A formula also would 
be required for products to which any coloring or natural or artificial 
flavors are added, or for any product to which fruits, herbs, spices or 
honey are added. This new section also would require the filing of a 
formula for any fermented product that undergoes special processing or 
filtration, or undergoes any other process not used in traditional 
brewing. The proposed Sec.  25.55 text included examples of processes 
that would require the filing of a formula, including reverse osmosis, 
ion exchange treatments, filtration that changes the

[[Page 198]]

character of beer or removes material from beer, concentration or 
reconstitution of beer, and freezing or superchilling of beer. However, 
the proposed Notice No. 4 text would not require filing a formula for 
traditional brewing processes such as pasteurization, filtration prior 
to bottling, filtration in lieu of pasteurization, centrifuging (for 
clarification), lagering, carbonation and the like.
    Notice No. 4 also proposed more specific requirements for the 
information required in formulas, especially in the realm of flavoring 
materials and special processes. Proposed Sec.  25.57 spelled out in 
more detail the information required in formulas, and included 
requirements found in ATF Rulings 94-3 (which concerned the production 
of ice beer), 96-1, and 2002-2. In keeping with the current practice of 
listing ranges of ingredients in statements of process, proposed Sec.  
25.57(a)(1) would permit brewers to indicate a ``reasonable range'' of 
ingredients used in formulas. However, in order to establish a useful 
limit, Notice No. 4 requested comments on how to define a ``reasonable 
range'' for the quantity of ingredients used in making fermented 
products. Also in keeping with current policy that permits using 
special processes in making fermented products, the proposed Sec.  
25.57 text specifically permitted such special processes, but required 
brewers to describe them in detail in their formulas.
    As noted in Notice No. 4, Sec.  25.67 requires brewers to file a 
statement of process prior to producing any fermented product at the 
brewery that is not to be marketed under a traditional designation. 
This regulation does not provide any exception permitting research or 
development of fermented products without a statement of process. With 
the removal of Sec.  25.67, a brewer could produce certain fermented 
beverages for research and development purposes under proposed Sec.  
25.55(c)(2) without receiving formula approval; however, a brewer could 
not sell or market such products until receiving formula approval.
    Proposed Sec.  25.55(e) stated that previously approved statements 
of process would remain valid after adoption of the new regulation, 
provided that the finished product is in compliance with any new 
requirements relating to the definition of beer.
    The proposed formula regulations did not specify any Government 
form to be used for their filing. TTB also solicited comments on 
whether the proposed regulations on the preparation and filing of 
formulas would be easier and less confusing than the present statement 
of process requirement.

H. Samples; Formulas and Samples for Imported Malt Beverages

    Notice No. 4 also included a proposed new section, Sec.  25.53 (27 
CFR 25.53), specifically authorizing a TTB officer at any time to 
require the submission of samples. This section recognized TTB's 
authority to require a brewer to submit a sample of a beer or a 
material used in producing a beer. For example, we occasionally examine 
samples of beer or ingredients in connection with our review of 
statements of process or formulas and in order to determine the proper 
tax classification of fermented products.
    Finally, Notice No. 4 also included a proposed amendment to Sec.  
7.31 (27 CFR 7.31) to reflect TTB's statutory authority to require an 
importer to submit a formula for a malt beverage, or a sample of a malt 
beverage or materials used in producing a malt beverage, in connection 
with the filing of a certificate of label approval on TTB Form 5100.31. 
This proposal recognized the fact that, occasionally, TTB has had to 
examine a statement of process or analyze samples of a malt beverage in 
order to determine the proper classification of a product, whether a 
particular product is a malt beverage, or whether a product is 
correctly labeled under the part 7 regulations.

I. Other Issues Raised in Notice No. 4

    In addition to the very specific proposals made by Notice No. 4, 
TTB requested comments and information on a number of general topics 
relating to the production and labeling of flavored malt beverages.
    TTB requested comments on the proposed 0.5% added alcohol standard 
for beer. Specifically, we solicited information regarding any studies, 
laboratory trials, or other empirical data that may have existed for 
added alcohol in flavored malt beverages. We also sought comments on 
how adoption of the proposed standard would affect the taste, shelf 
life, stability, or other characteristics of flavored malt beverages. 
In addition, we sought comments on whether production practices are 
available to produce flavored malt beverages with the desired product 
profile that would comply with the proposed standard. We also solicited 
comments relating to the effect of the proposed regulation on the 
viability of products currently on the market. Notice No. 4 further 
stated that we were particularly interested in comments addressing 
whether products on the market could be made under the proposed 0.5% 
added alcohol standard.
    Finally, as previously noted, TTB requested comments on whether 
another standard, such as a standard requiring that a minimum of 51% of 
the alcohol in a malt beverage be derived from fermentation at the 
brewery (in other words, setting a maximum limit of 49% for the alcohol 
content derived from added flavors or other materials), would be more 
appropriate than the proposed 0.5% added alcohol standard. We asked for 
supporting data, facts, or studies to back up any suggestions or 
comments for different added alcohol standards. Since we recognized 
that any new standard would constitute a substantial change from 
existing regulations and policy, we also sought comments on the amount 
of time needed to comply with any new rule limiting the amount of 
alcohol that may be added to products taxed as beer. Notice No. 4 
encouraged comments on the amount of time necessary to develop and 
implement new formulas for these products and the possible costs 
involved.

IV. Rulemaking History

    Notice No. 4 provided for the submission of comments through June 
23, 2003. At the request of the E. & J. Gallo Winery, on June 2, 2003, 
we published Notice No. 10 (68 FR 32698) to extend the period for the 
submission of comments for an additional 120 days, until October 21, 
2003.
    In Notice No. 4 we stated our intention to place all comments on 
the TTB Web site on the Internet. We stated that the names of 
commenters would be included in the posting of comments on our Web 
site, but that street addresses, telephone numbers, or e-mail addresses 
would be deleted on these postings. We did state that this information 
would appear on copies of comments available in the TTB reference 
library in Washington, DC.
    Due to the large number of comments, we were unable to redact 
street address, telephone number, or e-mail address information from 
the comments we posted on our Web site. Redacting this information from 
the large number of comments received would have prevented us from 
posting comments on the Web site in a timely manner. Therefore, we 
issued TTB Notice No. 23 on December 2, 2003 (68 FR 67388). This notice 
advised the public of our inability to redact the information from 
comments posted on the Web site and provided an opportunity for 
commenters to request that we redact this information from their 
individual

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comments if we received their request to do so by December 23, 2003.

V. Comments Received in Response to Notice No. 4

A. General Discussion of Comments

    Before the close of the comment period, TTB received over 15,000 
comments in response to Notice No. 4. Of these, over 14,000 consisted 
of variations on several form letters, which were submitted by mail, 
facsimile transmission, or e-mail.
    In addition, we received over 1,000 comments after the close of the 
comment period. Due to the large volume of comments received in 
response to Notice No. 4, and because of the need to provide 
expeditious guidance to State regulatory agencies, the industry, and 
consumers on this issue, we determined that it was not practical to 
consider the late-filed comments.
    Most of the comments focused on the proposed 0.5% standard or the 
51/49 standard for beer and malt beverages. In particular, the ``form 
letter'' comments, which made up the vast majority of the comments, 
generally commented for or against the proposed rule, and either 
explicitly or implicitly commented on the standard for added alcohol. 
The hundreds of comments received from State legislators also focused 
primarily on this issue. While Notice No. 4 solicited comments on 
whether there was a different standard that would be appropriate, only 
a few comments addressed this question.
    Furthermore, only a small percentage of the total comments focused 
on issues such as alcohol content statements or formula requirements. 
Accordingly, the following breakdown of comments focuses on the 
commenters' position on the proposed 0.5% standard.

B. Overview of Comments

    In the following comment discussion, the abbreviations ``FMB'' and 
FMBs'' are used in place of ``flavored malt beverage(s).''
1. Form Letters
    Of the over 14,000 form letter submissions referred to above, over 
8,000 supported adoption of the proposed 0.5 percent standard and over 
5,000 opposed adoption of that standard. The submissions in support of 
the proposed rule (or specifically in support of the 0.5 percent 
standard) break down as follows:
     Over 5,000 e-mail comments came from individuals who 
identified themselves as employees of one major U.S. brewer and its 
subsidiaries. These commenters stated that the proposed standard is the 
best way to maintain clear distinctions between beer and liquor 
(distilled spirits) and to preserve the flavored malt beverage 
category.
     Over 2,000 comments were received from beer distributors 
across the United States. Many of these commenters stated that the 
proposed rule is consistent with the historical interpretation of what 
constitutes beer and other malt beverages. They suggested that beer is 
a unique product that has been regulated and taxed differently from 
other alcohol beverages throughout our Nation's history. The commenters 
advocated adopting the proposed 0.5% standard in order to ensure the 
integrity of beer and the brewing process. They also stated that the 
proposed rule would help maintain an orderly marketplace and avoid 
costly and confusing disruptions in State licensing, taxation, and 
distribution policies, any of which would deal a blow to beer 
wholesalers.
     Approximately 900 comments were received from individuals 
who identified themselves as employees of another major brewer. These 
comments supported the proposed rule as a clarification that will 
ensure that if FMBs were sold as malt beverages, they would be made 
according to traditional brewing methods and practices. The commenters 
suggested that without the proposed rule, retailers and wholesalers 
would face a patchwork of individual State laws and regulations.
     Over 170 submissions came from beer consumers located 
primarily in two States. Many of these commenters stated that the 
proposed rule would provide a clear understanding to legislators, State 
and Federal regulators, and beer consumers as to what beer is and what 
beer is not.
     More than 50 employees of a domestic subsidiary of a 
foreign brewer expressed their support for the proposed rule. They 
suggested that the proposed rule would maintain an orderly marketplace, 
meet consumer expectations for consistent products, and help sustain 
the long-term development of the product category. These commenters 
suggested that the reformulated products would be consistent with State 
tax, license, and distribution laws, allowing wholesalers and retailers 
to continue their operations. Furthermore, they stated that without a 
standard, individual States would adopt their own regulations and 
create a patchwork of different standards.
    The submissions in opposition to the 0.5 percent standard break 
down as follows:
     Over 4,000 e-mail submissions came from consumers of FMBs. 
These comments opposed the proposed rule and suggested that there was 
no need to amend the regulations. Many of the commenters stated that 
they like FMBs just the way they are and that the proposed changes will 
be expensive and will result in increased costs to consumers.
     Over 600 comments came from employees of a large producer 
of FMBs. These commenters opposed the proposed rule and suggested TTB 
instead adopt the ``51% compromise.'' The commenters suggested that 
compliance with the proposed standard would cost millions of dollars in 
new equipment purchases, reformulation of products, and development of 
new processes. They urged TTB to adopt regulations that promote fair 
competition and provide a level playing field, and they suggested the 
proposed rule would mark a dramatic change in how these products have 
been produced, marketed, and sold for 30 years. Finally, the commenters 
stated that the proposed rule could regulate FMBs out of the 
marketplace, depriving consumers of a drink they enjoy, costing 
millions in tax revenue, and resulting in the loss of thousands of 
jobs.
     Over 400 small retailers located across the United States 
expressed their opposition to the ``new regulations'' and ``rule 
changes.'' Many of these retailers asked TTB to reach a ``compromise'' 
that would allow FMBs to remain in existence. The commenters suggested 
that the regulatory changes would raise the price of FMBs, sabotage 
this category of products by making it impossible or costly to sell 
them, and adversely impact small businesses.
     More than 40 comments were received from employees of FMB 
distributors. These commenters opposed the 0.5 percent standard and 
urged TTB to adopt a ``more reasonable'' majority standard instead. The 
commenters focused on the potential impact of the proposed rule on the 
future of FMB producers and the businesses that rely on the viability 
of these products.
2. Other Comments
    FMB Producers. We received comments from several major producers of 
FMBs. The Beer Institute submitted a comment in support of the proposed 
0.5% standard, on behalf of Anheuser-Busch, Miller Brewing Company 
(``Miller''), and Coors Brewing Company (``Coors''). The Beer Institute 
stated that these three senior and sustaining members produce or import 
well over 75% of the beer and other malt beverages sold in the United 
States,

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including many successful FMB brands. In addition, these three brewers 
each submitted individual comments in support of the proposed 0.5% 
standard.
    These commenters argued that the proposed 0.5% standard is 
consistent with TTB's statutory authority and will preserve the 
integrity of the products known as beer or as malt beverages. More 
importantly, these commenters suggested that only a 0.5% standard would 
maintain an orderly marketplace and foreclose actions by individual 
States, which could adopt their own potentially differing and 
conflicting standards. Anheuser-Busch and Miller stated that they could 
take steps to reformulate their products within the 0.5% standard and, 
in fact, have produced FMBs that achieve the same taste and appearance 
as existing products.
    The Flavored Malt Beverage Coalition (FMBC) submitted a comment on 
behalf of its members: City Brewing Company; Diageo North America, 
Inc.; High Falls Brewing Company; Mark Anthony Brands, Inc.; Pernod 
Ricard USA; Todhunter International; and United States Beverage LLC. 
The FMBC stated that, together, its members marketed and/or produced 
approximately 56% of the FMBs sold in the United States in 2002. The 
FMBC also stated that its members, as companies that collectively spent 
hundreds of millions of dollars to develop products now threatened by a 
change in Federal policy, have a particular interest in the outcome of 
the rulemaking.
    The FMBC, and several of its individual members, questioned TTB's 
statutory authority to impose restrictions on the current practice but 
also stated that, as a matter of policy, they would support a final 
rule that adopts the 51/49 standard. Furthermore, these commenters 
raised a number of legal challenges to the basis for the proposed rule, 
and they argued that the proposed 0.5% standard was not supported by 
either the consumer protection rationale or the need to take action 
before the States do so.
    Several of these commenters stressed the economic impact of the 
proposed rule. Many FMB producers suggested that the proposed 0.5% 
standard would require reformulation of popular FMB products, with a 
potentially adverse impact on consumer acceptance of those products. 
The FMBC submitted an economic study indicating that adoption of the 
proposed rule would have an adverse impact on the FMB industry, 
amounting to over $600 million over the next 4 years. Comments from a 
few small brewers that produce and bottle FMB products indicated that 
their survival would be in jeopardy under the proposed rule.
    Brown-Forman Corporation (``Brown-Forman''), the producer of an FMB 
known as Jack Daniel's Country Cocktails, also commented in favor of 
the 51/49 standard. Finally, E. & J. Gallo Winery (Gallo), which 
produces 13 FMB products, submitted a comment in which it took no 
position on whether it preferred the 0.5% standard or the 51/49 
standard.
    Other Comments from the Beer Industry. The National Beer 
Wholesalers Association (NBWA) and the Brewer's Association of America 
(BAA) both commented in favor of the proposed 0.5% standard. TTB also 
received many comments from craft brewers, beer wholesalers, employees 
of the major brewers, and others in the beer industry supporting the 
proposed rule. Many of these comments suggested that FMBs are not beer 
or malt beverages as consumers understand these terms and that the 
proposed rule would preserve the integrity of the malt beverage 
category. Some brewers suggested that competition from FMB producers is 
hurting the beer industry.
    Consumer/Taxpayer Groups. The Center for Science in the Public 
Interest (CSPI), the Pacific Institute for Research and Evaluation, and 
several other associations commented in favor of the proposed rule. 
CSPI stated that the use of popular, well-known distilled spirits brand 
names in the advertising and labeling of malt beverage products 
misleads consumers. CSPI also suggested that these ``alcopops'' are 
extremely popular with underage drinkers, and that since most 
``alcopop'' products currently do not comply with the 0.5% standard, 
classifying and taxing them as distilled spirits products would help 
reduce youth access to such products by placing them in liquor stores 
in many States rather than in grocery and convenience stores.
    The National Consumers League (NCL) commented against the 0.5% 
standard, stating that it opposed the perpetuation of policies that 
differentiate malt-based alcohol beverages from distilled alcohol 
beverages, and suggesting that ethyl alcohol is the same, regardless of 
whether it is in beer, wine, or distilled spirits. NCL agreed, however, 
that requiring compliance with a ``majority'' standard will ensure that 
an FMB actually contains malt, and in a significant concentration. 
While NCL questioned whether source of alcohol is in any way material 
to consumer choice, it concluded that FMB compliance with the majority 
rule would ensure that consumers are not deceived as to product 
content.
    TTB also received comments opposing the proposed rule from taxpayer 
and citizen organizations. These commenters suggested that the proposed 
rule would limit consumer choice, decrease competition, and waste 
taxpayer dollars. The commenters stated that the Government should 
accommodate legitimate consumer, industry, and employment needs. They 
suggested that the majority standard would achieve these goals better 
than the proposed 0.5% standard.
    State Regulatory Agencies and Lawmakers. TTB received comments from 
31 State regulatory or tax agencies and one county liquor commission. 
Most of these comments specifically supported the proposed rule. The 
remaining comments generally supported the concept of a uniform 
standard for FMBs, without specifically supporting the proposed 0.5% 
standard. Two States simply provided information about their State 
laws, without taking a position on the standard. We also received 
comments in support of the proposed rule from three Governors, one 
Lieutenant Governor, and over 200 State legislators. A smaller number 
of State legislators commented in favor of the 51/49 standard.
    Some comments that specifically favored the proposed rule suggested 
that, in many States, malt beverages containing distilled spirits would 
be classified as spirits rather than malt beverages. Several States 
indicated that if TTB does not take expeditious action on this issue, 
they would go ahead and issue their own standards. Other States, 
however, simply stressed the need for a uniform standard and urged TTB 
to take expeditious action to create a standard for FMBs.
    Members of Congress. We received comments in favor of the proposed 
rule from nine members of the United States House of Representatives. 
We received comments in favor of the 51/49 (or majority) standard from 
28 members of the House of Representatives and eight United States 
Senators.
    Many of the members of Congress who commented in favor of the 51/49 
standard expressed concern about the negative economic impact that the 
proposed rule would have on employers and jobs within their districts 
or States. Many of these comments noted that existing FMB products were 
formulated in reliance on the longstanding policies of our predecessor 
agency.
    Miscellaneous comments. We received a comment from the Flavor and 
Extract Manufacturers Association of the U.S. (FEMA), the national 
trade

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association of companies that create and manufacture flavors for use in 
a wide variety of products, including FMBs. FEMA urged TTB to 
reconsider the proposed 0.5% standard, stating that it would 
significantly restrict the amount of alcohol contributed to the 
finished product from flavors and thus make it technically impossible 
for flavor chemists to satisfy the consumer desire for the distinctive, 
fresh, fruity malt beverages currently being sold.
    We received a few comments suggesting revisions to the system of 
taxing alcohol beverages as a way to take care of the classification 
issue posed by FMBs. These comments could not be adopted without 
legislative amendments to the IRC. Since the rest of the comments 
focused primarily on the two standards that we aired in Notice No. 4, 
the 0.5% standard and the 51/49 standard, our discussion of the 
comments will focus on those two standards.
    A small number of commenters focused on the remaining issues raised 
for comment in Notice 4. While we received several comments from States 
and consumer groups in support of the proposed mandatory alcohol 
content labeling for FMBs, many comments from industry members 
suggested that FMBs were being unfairly singled out, and that any such 
requirement should apply to all malt beverages or to none. We also 
received a few comments in opposition to the proposed limitations on 
the use of distilled spirits terms in malt beverage labeling and 
advertising. Some of these commenters claimed that the proposed 
restrictions violated the First Amendment.
    Finally, we received a small number of comments from brewers and 
brewery trade associations regarding the proposed new formula filing 
requirements. These commenters generally favored the new requirements, 
but they expressed concerns regarding certain aspects of the proposal 
and requested that TTB clarify some of the proposed formula 
requirements.

C. Summary of TTB Final Rule Decisions

    After carefully analyzing the comments, which are discussed in 
greater detail below, we are adopting the proposals set forth in Notice 
No. 4 with certain important modifications. The final rule adopts the 
less stringent ``51/49 standard'' (allowing up to 49% of the alcohol 
content to come from flavors and other nonbeverage ingredients) for 
beers and malt beverages. We are providing affected industry members 
one year to reformulate their FMB products or otherwise conform to the 
standards adopted in the final rule. In reaching these decisions, we 
note that Executive Order 12866 provides that, when an agency 
determines that a regulation is the best available method of achieving 
an objective, it shall design its regulation in the most cost-effective 
manner to achieve that objective.
    The comments on Notice No. 4 have persuaded us that implementation 
of the proposed 0.5% standard might impose economic burdens on a sector 
of the FMB industry and have adverse effects on the viability of small 
brewers who produce FMBs, as well as their ability to compete within 
the malt beverage industry.
    We believe that adoption of the alternative ``51/49 standard'' for 
beers and malt beverages would achieve the important regulatory goals 
of protecting the revenue, ensuring that consumers have adequate 
information about the identity of FMB products, and establishing a 
Federal standard for such products, while at the same time reducing the 
compliance costs to the FMB industry. It is noteworthy that, with the 
exception of one producer that remained neutral on this issue, comments 
from the producers of FMBs all supported either the more restrictive 
0.5% standard or the more liberal 51/49 standard. Thus, most of the FMB 
industry expressed support for creating some type of standard for FMBs 
that would set a limit on the alcohol derived from added flavors.
    The final rule also adopts the other proposals aired in Notice 4, 
with certain modifications in response to the comments. We are adopting 
the proposed mandatory alcohol content labeling requirements, as we 
have concluded that this requirement will provide consumers important 
information about these FMBs. Since we specifically stated in Notice 
No. 4 that we were not proposing mandatory alcohol content labeling for 
all malt beverage products, comments advocating such a position were 
considered to be outside the scope of the current rulemaking. We may 
consider such a proposal in the future.
    We are also adopting the labeling and advertising proposals, with 
modifications to respond to the First Amendment concerns raised by 
several commenters. As modified, the regulation will prohibit the use 
of labeling or advertising statements, designs, devices, or 
representations that tend to create a false or misleading impression 
that the malt beverage contains distilled spirits or is a distilled 
spirits product. These modifications clarify that we are only 
prohibiting labeling and advertising statements that are false or tend 
to mislead consumers.
    Finally, we have modified the language of the formula regulations 
in response to several comments about whether the proposed requirements 
were overly burdensome. For example, we are no longer requiring 
formulas to disclose the alcohol content of the product at each interim 
stage of production. We have also clarified the language of these 
provisions in response to several technical comments.

VI. Comments on Whether the Rulemaking Is Necessary and Fair

    In this section, we discuss some of the general issues raised by 
commenters regarding the need for engaging in rulemaking and the 
fairness of the proposed change in agency policy.

A. Is There a Need To Engage in Rulemaking on This Issue?

    The first issue presented is whether there is a need to engage in 
rulemaking at all. Many commenters suggested that TTB should not amend 
its regulations in any manner, but should instead allow the continued 
production of FMBs according to current policy. Other commenters 
supported the idea of rulemaking on FMBs.
1. Comments Opposed to Rulemaking
    As indicated above in the comment overview, TTB received over 4,000 
e-mail comments that questioned the need for rulemaking on FMBs. These 
comments came from consumers who stated that they enjoyed drinking 
FMBs, and that they opposed the proposed regulation, which would 
mandate changes in the way those products were made. The commenters 
stated that they liked FMBs the way they are, that the changes would be 
expensive, and that consumers will end up paying more under the 
proposed rule.
    Many of these commenters suggested that the Federal Government 
should not waste tax dollars on ``trivial'' issues such as how FMBs are 
made, and that companies should make changes that consumers want, not 
what the Government demands. Finally, many of these comments suggested 
that the Government should focus on bigger issues, such as job 
creation, improving the economy, and fighting terrorism. These comments 
did not directly address the 51/49 standard.
    A few comments were also received from organizations representing 
taxpayer and citizen groups, including Americans for Tax Reform, the 
National Taxpayers Union, and Citizens Against Government Waste. One of 
these commenters stated that the proposed

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rule would limit consumer choice, decrease competition, and waste 
taxpayer dollars. This commenter suggested that the Government should 
accommodate legitimate consumer, industry, and employment needs before 
engaging in rulemaking. Another commenter expressed concerns that the 
0.5% standard would force either a significant tax increase and/or a 
change in the production process for FMBs. It should be noted that 
while these comments generally criticized the proposed rule, they 
expressed a preference for either the 51/49 standard or some compromise 
over the 0.5% standard.
2. Comments Supporting Rulemaking
    TTB also received approximately 11,000 comments urging that TTB set 
a limit on the quantity of alcohol derived from added flavors in malt 
beverages. While these comments were divided over whether the limit 
should be set at the 51/49 standard or the proposed 0.5% standard, 
these commenters believed that it was important that TTB set a standard 
and clarify the classification of these products as malt beverages or 
distilled spirits. It should be noted that we received comments in 
support of setting a standard from the beer industry, producers of 
flavored malt beverages, consumers, members of Congress and other 
elected officials, and State regulatory agencies.
    These commenters supported the setting of a uniform Federal 
standard for a variety of reasons. Some commenters expressed concern 
that current labels mislead consumers. Many consumers and brewers 
suggested that the Federal government has the responsibility to 
maintain a distinction between traditional beer products and distilled 
spirits, and that the line between these two well-established 
categories should not be blurred by allowing the production of malt 
beverages that derive most of their alcohol content from the distilled 
spirits components of added flavors.
    Many commenters expressed concern that, in the absence of a Federal 
standard, the States would each set their own standards, leaving 
members of the beer industry facing a confusing patchwork of regulatory 
standards. Finally, of the FMB producers who commented on this issue, 
almost all supported action to set a standard to limit the quantity of 
alcohol derived from added flavors. While one major FMB producer 
expressed neutrality on the issue, the rest favored either the proposed 
0.5% standard or the 51/49 standard.
3. TTB Response
    We acknowledge that FMBs are a popular category of alcohol beverage 
and that many consumers enjoy drinking these products. We recognize the 
concerns of many consumers that proposed regulatory changes may 
increase the cost of these beverages, and we have given serious 
consideration to cost issues in drafting this final rule. We have also 
given serious consideration to the issues of decreased competition and 
consumer choice.
    Nonetheless, after reviewing the thousands of comments received in 
response to this notice, we believe more strongly than ever that 
rulemaking on this issue is necessary. The overwhelming majority of the 
State regulatory agencies that commented on FMBs urged TTB to adopt a 
Federal standard for these products in order to avoid a patchwork of 
inconsistent State requirements. In addition, comments from the beer 
industry overwhelmingly favored the adoption of a Federal standard, 
including many commenters who pointed to the importance of maintaining 
a distinction between malt beverages, in which alcohol is derived from 
fermentation, and distilled spirits, in which alcohol is derived from 
distillation.
    Treasury and TTB believe it is important, in order to protect both 
the revenue and the consumer, to set a limit on the use in FMBs of 
alcohol not derived from fermentation at the brewery and prevent the 
unlimited use of alcohol derived from distilled spirits in FMB 
production. Thus, we do not adopt the views of those commenters who 
urged that TTB take no action on this matter.

B. Fairness and Notice Issues

1. Comments Received
    Many commenters argued that it is unfair for TTB to change a policy 
upon which brewers and importers have relied for several decades. These 
commenters made the following arguments:
     Since the 1950s, TTB and its predecessor agencies have 
required the review and approval of a statement of process (SOP) for 
any beer produced with flavors. By reviewing and approving SOPs for the 
various FMBs on the market today, TTB has accepted them as beer and 
malt beverages, and has endorsed the use of nonbeverage flavors up to 
the quantities indicated in the SOPs.
     Our predecessor agencies have officially recognized the 
use of flavoring materials in the production of malt beverages since 
the Internal Revenue Service issued Revenue Procedure 71-26 over 30 
years ago.
     In 1980, ATF issued Industry Circular 80-3, which advised 
brewers that adjunct materials listed in the beer industry's Adjunct 
Report (later referred to as the Adjunct Reference Manual (ARM)), were 
suitable for use in beer and cereal beverages when used in