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, 29401-29420 [E9-14546]

Agencies

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

[Federal Register Volume 74, Number 118 (Monday, June 22, 2009)]
[Rules and Regulations]
[Pages 29401-29420]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-14546]


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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-78; Re: Notice No. 95]
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: Temporary rule; Treasury decision.

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SUMMARY: This temporary rule amends the Alcohol and Tobacco Tax and 
Trade Bureau regulations to implement certain changes made to the 
Internal Revenue Code of 1986 by the Children's Health Insurance 
Program Reauthorization Act of 2009. The principal changes involve 
permit and related requirements for manufacturers and importers of 
processed tobacco and an expansion of the definition of roll-your-own 
tobacco. We also are soliciting comments from all interested parties on 
these amendments through a notice of proposed rulemaking published 
elsewhere in this issue of the Federal Register.

DATES: Effective Dates: This temporary rule is effective June 22, 2009, 
through June 22, 2012.

FOR FURTHER INFORMATION CONTACT: Amy R. Greenberg, Regulations and 
Rulings Division, Alcohol and Tobacco Tax and Trade Bureau (202-927-
8210).

SUPPLEMENTARY INFORMATION:

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 and cigarette papers 
and tubes and to export warehouse proprietors who hold such products, 
upon which tax has not been paid, pending export. Section 5702(c) of 
the IRC (26 U.S.C. 5702(c)) defines tobacco products as cigars, 
cigarettes, smokeless tobacco, pipe tobacco, and roll-your-own tobacco. 
Each of these terms is also separately defined in section 5702.
    Sections 5712 and 5713 of the IRC (26 U.S.C. 5712 and 5713) require 
manufacturers and importers of tobacco products and export warehouse

[[Page 29402]]

proprietors to 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, and 
5741) authorize the promulgation of regulations to require inventories, 
reports, and recordkeeping, respectively.
    Regulations implementing the provisions of chapter 52 of the IRC 
are contained in 27 CFR parts 40 (manufacture of tobacco products and 
cigarette papers and tubes), 41 (importation of tobacco products and 
cigarette papers and tubes), 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 
regulations are administered by the Alcohol and Tobacco Tax and Trade 
Bureau (TTB).

Children's Health Insurance Program Reauthorization Act of 2009

    On February 4, 2009, President Obama signed into law the Children's 
Health Insurance Program Reauthorization Act of 2009, Pub. L. 111-3, 
123 Stat. 8 (``the Act'').
    Section 701 of the Act 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 to amend the TTB regulations to reflect the section 
701 changes.
    Section 702 of the Act included amendments to the IRC to extend 
permit, inventory, reporting, and recordkeeping requirements to 
manufacturers and importers of processed tobacco even though such 
processed tobacco is not subject to excise tax under the IRC. Section 
702 of the Act also amended the definition of ``roll-your-own tobacco'' 
generally to include cigar wrapper and filler. This document amends the 
TTB regulations to reflect these changes made by section 702 of the 
Act.

Regulation of Manufacturers and Importers of Processed Tobacco

    The Act amended sections 5712 and 5713 of the IRC by adding 
references to ``processed tobacco'' after the words ``tobacco 
products,'' thereby requiring manufacturers and importers of processed 
tobacco, like manufacturers and importers of tobacco products, to apply 
for and obtain a permit before commencing such business. In addition, 
the Act amended section 5702 of the IRC by adding a new subsection (p) 
to define ``manufacturer of processed tobacco.'' Under this new 
definition, a manufacturer of processed tobacco is any person who 
processes any tobacco other than tobacco products; however, under the 
statutory definition the processing of tobacco does not include the 
farming or growing of tobacco or the handling of tobacco solely for 
sale, shipment, or delivery to a manufacturer of tobacco products or 
processed tobacco.
    Section 702 of the Act also included a transitional rule under 
which manufacturers and importers of processed tobacco who are engaged 
in such a business on April 1, 2009, and who file an application with 
TTB before June 30, 2009, may continue in business pending final action 
from TTB on that application. Finally, section 702 of the Act amended 
the IRC by extending to manufacturers and importers of processed 
tobacco provisions related to inventories (section 5721), reports 
(section 5722), records (section 5741), and packages, marks, labels, 
and notices (section 5723).

General Approach to This Temporary Rule

    Congress mandated regulation of processed tobacco to strengthen the 
enforcement authority for the Federal excise tax on tobacco products, 
which significantly increased under the Act (See Joint Committee on 
Taxation, Description of the Revenue Provisions of the Children's 
Health Insurance Program Reauthorization Act of 2009, (JCX-1-09), 
January 13, 2009). The Act provides enforcement mechanisms to assist in 
preventing the diversion of tobacco materials to illegal manufacturers. 
In promulgating these regulations, TTB has carefully considered how to 
effectively prevent diversion without creating undue administrative 
burdens by building on TTB regulations already applicable to 
manufacturers and importers of tobacco products and to proprietors of 
export warehouses (as that term is defined in 26 U.S.C. 5702(h)). The 
discussion below focuses on the manufacturer and importer provisions of 
parts 40 and 41 of the TTB regulations. A discussion of other changes 
to parts 44 and 45 is included later in the ``Part by Part Discussion 
of Regulatory Amendments'' section of this preamble.

Definition of Processed Tobacco

    This temporary rule amends Sec. Sec.  40.11 and 41.11 by adding a 
definition of ``processed tobacco.'' In addition to specifying what the 
processing of tobacco does not include, the new definition in each case 
specifies those activities that we consider to be ``processing'' 
activities. In this regard, we consider the processing of tobacco to 
include stemming (the removal of the stem from the tobacco leaf), 
fermenting, threshing, cutting, and flavoring the tobacco, as well as 
combining the stemmed tobacco with other non-tobacco ingredients. We do 
not believe that curing and baling are processing activities within the 
intent of the Act.
    In addition, in Sec. Sec.  40.11 and 41.11 we have revised the 
definition of ``package'' and added a new definition of ``packaging'' 
in order to make clear that ``processing'' does not include consumer 
packaging of processed tobacco. The term ``package'' is revised to mean 
the immediate container in which tobacco products, processed tobacco, 
or cigarette papers or tubes are put up by the manufacturer and offered 
for sale or delivery to the ultimate consumer. The definition further 
provides that a container of processed tobacco, the contents of which 
weigh 10 pounds or less (including any added non-tobacco ingredients or 
constituents) will be deemed to be in a package offered for sale or 
delivery to the ultimate consumer. This change is intended to reduce 
the potential for diversion of processed tobacco from permitted 
manufacturers. Thus, under these definitions, the placing of processed 
tobacco in a consumer package may not occur on the premises of a person 
who is qualified only as a manufacturer of processed tobacco, because 
such packaging creates a tobacco product, a taxable commodity that may 
be produced only on the bonded premises of a tobacco product 
manufacturer.

Permits and Authorizations

    Under the regulations adopted in this temporary rule, any person 
who engages in the business of manufacturing or importing processed 
tobacco must obtain TTB approval as follows:
     A person who processes tobacco and who does not also 
manufacture tobacco products must obtain a permit as a manufacturer of 
processed tobacco.
     A person who holds a TTB permit as a manufacturer of 
tobacco products, who processes tobacco solely for use in the 
manufacture of tobacco products under that permit, and who does not 
remove the processed tobacco from the

[[Page 29403]]

premises except for destruction, is not required to obtain 
authorization from TTB to engage in the manufacture of processed 
tobacco.
     A person who holds a TTB permit as a manufacturer of 
tobacco products is required to obtain TTB authorization to remove 
processed tobacco for purposes other than destruction. Such activity is 
considered an ``other business'' and is governed by the provisions of 
27 CFR 40.47.
     A person who imports processed tobacco, and who does not 
also import tobacco products under a TTB permit, must obtain a permit 
to import processed tobacco.
     A person who imports processed tobacco, and who also 
imports tobacco products under a TTB permit as an importer of tobacco 
products, is required to amend the existing importer permit to 
authorize the importer to engage in the importation of processed 
tobacco under that permit.
     A person who is qualified as a manufacturer of cigarette 
papers and tubes in accordance with 27 CFR 40.391, and who also 
processes tobacco, must obtain a TTB permit as a manufacturer of 
processed tobacco.
     A person who produces processed tobacco solely for his or 
her own personal use and consumption is not considered to be a 
manufacturer of processed tobacco for purposes of the new requirements.
    A transitional rule applies both to applicants for permits as 
manufacturers or importers of processed tobacco and to persons who are 
only required to obtain authorization under an existing permit. Persons 
to whom the transitional rule applies (that is, persons who are engaged 
in business on April 1, 2009, and who apply for a permit or 
authorization before June 30, 2009), will receive a written 
acknowledgment from TTB upon receipt of the application. The 
acknowledgment will provide an identifying number that can be used by 
the applicant, similar to a permit number, for purposes of showing that 
the holder is authorized to engage in such business pending action on 
the application. Anyone required to obtain a permit or authorization, 
and to whom the transitional rule does not apply, must obtain a permit 
before commencing operations.
    The Act did not impose an excise tax on the manufacture or 
importation of processed tobacco and therefore did not provide for the 
making of a bond to cover such activities. Accordingly, the regulations 
contained in this temporary rule do not require a bond of manufacturers 
or importers of processed tobacco or additional bond coverage of 
existing tobacco product manufacturers who process tobacco.

Issuance and Duration of a Permit

    Under the regulations adopted in this temporary rule, a permit to 
manufacture processed tobacco will be issued without an expiration 
date; retention of the permit is conditioned upon continued compliance 
with the provisions of chapter 52 of the IRC and the regulations 
promulgated thereunder including the minimum manufacturing and activity 
requirement as discussed later in this preamble. A permit to import 
processed tobacco will be valid for a period of three years from the 
date shown on the permit, with the possibility of renewal of the permit 
if the importer applies to TTB for renewal within 30 days of the 
permit's expiration date. These new permit provisions for manufacturers 
and importers of processed tobacco mirror the existing provisions for 
manufacturers and importers of tobacco products. The three-year permit 
period for importers of tobacco products was included in the 
regulations when Congress, in the Balanced Budget Act of 1997, extended 
permit requirements to importers. The three-year duration was 
determined by the Bureau of Alcohol, Tobacco and Firearms (ATF), TTB's 
predecessor agency, to be a reasonable method to avoid the 
proliferation of numerous unused permits, which would pose 
administrative difficulties and thus potential jeopardy to the revenue 
through unnecessarily diverted agency resources. (See preamble for T.D. 
ATF-422, 64 FR 71947, published in the Federal Register on December 22, 
1999.) TTB believes that this rationale still applies and therefore 
should apply equally to permits for importers of processed tobacco.
    As noted above, an importer of tobacco products may apply to amend 
the existing permit to obtain authorization to import processed tobacco 
under that permit. Such authorization expires when the permit expires. 
TTB continues to believe that a limited-duration permit is not 
necessary for manufacturers of tobacco products or processed tobacco. 
We note in this regard that the business of a manufacturer requires 
significant capital commitments for premises and equipment (and, in the 
case of the manufacturer of tobacco products, bond coverage) in order 
to obtain a permit. Therefore, because a manufacturer of tobacco 
products or processed tobacco is much less likely to choose to obtain 
(or be able to obtain) a permit without making such commitments, it is 
also less likely that a manufacturer would seek to qualify for a permit 
that would subsequently go unused.

Minimum Manufacturing and Activity Requirements

    Section 5712 of the IRC, which applies to manufacturers and 
importers of processed tobacco as a result of the changes made by the 
Act, provides, among other things, that an application for such a 
permit may be denied if the activity proposed to be carried out does 
not meet such minimum capacity or activity requirements as the 
Secretary of the Treasury may by regulation prescribe. Congress enacted 
this provision to ensure that those who apply for a permit and operate 
under that permit are actually engaged in the bona fide business of 
manufacturing or importing and in a way that will adequately protect 
the revenue and comply with applicable law and regulations.
    As noted above, a permit as an importer of processed tobacco will 
be issued for a three-year period. However, notwithstanding the reasons 
for the three-year duration of a permit as explained above, TTB 
believes that there could be a significant number of speculative 
processed tobacco importer permits applications that lead to the 
issuance of permits under which no activity takes place. TTB does not 
believe that it is appropriate to devote agency resources to permit 
renewals in such cases. Accordingly, the regulations in this temporary 
rule provide that an application for the renewal of a permit as an 
importer of processed tobacco may be rejected and the permit denied if 
no activity has taken place or been reported under such permit for a 
period of one year immediately prior to the application for renewal.
    The regulations in this temporary rule also provide that a permit 
as a manufacturer of processed tobacco may be suspended or revoked for 
non-use if no activity has taken place or been reported under such 
permit for a period of one year. This provision clarifies the TTB 
position that any minimum activity requirement promulgated pursuant to 
section 5712 is a continuing condition of a manufacturer's permit.

Records, Reports, and Inventories

    As noted above, the Act extends inventory, reporting, and 
recordkeeping requirements to manufacturers and importers of processed 
tobacco. Accordingly, the regulations in this temporary rule generally 
require manufacturers and importers of processed tobacco to take 
inventory, report, and keep records in a manner similar to that 
required for

[[Page 29404]]

manufacturers and importers of tobacco products, and in a manner that 
is consistent with good business practice. The new regulations in this 
temporary rule also recognize that there may be circumstances involved 
in a manufacturer's or importer's business that require enhanced 
recordkeeping and reporting. Such circumstances include, for example, 
the transfer of processed tobacco to a person who does not hold a TTB 
permit as a tobacco product manufacturer and therefore is not subject 
to the statutory and regulatory provisions administered by TTB.
    As noted above, the Act extended the provisions of the IRC to 
processed tobacco in order to strengthen enforcement authority over 
tobacco products and thus prevent the diversion of materials used for 
making tobacco products to unauthorized manufacturers who would not be 
accountable to TTB. However, the IRC as amended by the Act places no 
limitations on the persons to whom manufacturers or importers of 
processed tobacco may transfer or sell processed tobacco. TTB believes 
that unregulated transfers or sales of processed tobacco to persons who 
do not hold TTB permits could lead to processed tobacco falling into 
the hands of persons who would be unknown and unaccountable to TTB, 
including illegal manufacturers. In order to better regulate processed 
tobacco and to minimize its transfer to unauthorized manufacturers, the 
new regulations in this temporary rule require more detailed records of 
those who transfer or sell processed tobacco to persons who do not have 
TTB permits as a manufacturer or importer of tobacco products or of 
processed tobacco, or as an export warehouse proprietor. The new 
regulations also include a requirement to file a report with TTB 
covering all such transfers or sales. These reports must include 
detailed information regarding the persons and circumstances involved 
in the transfer or sale of processed tobacco, and the reports must be 
filed by the close of the business day following such action.

Roll-Your-Own Tobacco

Expansion of the Definition

    Prior to the changes made by the Act, the IRC at 26 U.S.C. 5702(o) 
defined the term ``roll-your-own tobacco'' to mean ``any tobacco which, 
because of its appearance, type, packaging, or labeling, is suitable 
for use and likely to be offered to, or purchased by, consumers as 
tobacco for making cigarettes.'' Section 702(d) of the Act amended the 
definition by adding at the end ``or cigars, or for use as wrappers 
thereof.'' The principal effect of this change is to extend the Federal 
excise tax, permit, and related statutory provisions applicable to 
manufacturers and importers of roll-your-own tobacco to manufacturers 
and importers of tobacco for making cigars and for use as wrappers of 
cigarettes or cigars. The amendment made by section 702(d) applies to 
articles removed (that is, removed from the factory or from internal 
revenue bond under IRC section 5704 under regulations prescribed by the 
Secretary, or released from customs custody) after March 31, 2009. 
There is no transitional rule with regard to the permit requirement for 
persons affected by this statutory change; any person engaged in the 
business of manufacturing or importing any product that falls within 
the new statutory definition of roll-your-own tobacco is required, as 
of April 1, 2009, to have a TTB permit.
    Further, as a result of the Act, the products that were 
incorporated into the definition of roll-your-own (products commonly 
referred to as ``cigar tobacco'', ``cigarette wrapper'' or ``cigar 
wrapper'') must now comply with the package, mark, label, and notice 
requirements set forth in parts 40, 41, and 44. Under 27 CFR 40.216b 
and 41.72b, packages of roll-your-own tobacco must bear a notice that 
includes the designation of the product for tax purposes. Prior to the 
amendments of this temporary rule, the permissible designations were 
``roll-your-own tobacco,'' ``cigarette tobacco,'' and ``Tax Class J.'' 
We are amending this notice requirement to add as permissible 
designations on packages of roll-your-own tobacco the following: 
``Cigar tobacco,'' ``cigarette wrapper,'' and ``cigar wrapper,'' and 
are removing the words ``Tax Class J'' as a permissible designation as 
discussed later in this preamble. In addition, to allow sufficient time 
for affected manufacturers and importers to comply with the packaging 
requirements, we are amending 27 CFR 40.216c and 41.72c to provide that 
packages of roll-your-own tobacco to which one of the new designations 
applies (that is, cigar tobacco, cigarette wrapper, or cigar wrapper) 
may be removed, until August 1, 2009, without being in compliance with 
the notice requirements of Sec. Sec.  40.216b and 41.72b. With this 
amendment, we are also removing from Sec. Sec.  40.216c and 41.72c 
existing text, now obsolete, which provided a use-up period for roll-
your-own tobacco packages removed in the year 2000.

Distinguishing Between Roll-Your-Own Tobacco and Pipe Tobacco

    The tax rate increases adopted in section 701 of the Act resulted 
in a significant difference between the rate of tax imposed on roll-
your-own tobacco ($24.78 per pound) and the rate of tax imposed on pipe 
tobacco ($2.8311 per pound); prior to the amendments made by the Act, 
the two rates were the same. While the definition of roll-your-own 
tobacco was amended by the Act as noted above, no change was made to 
the definition of pipe tobacco, which reads, ``any tobacco which, 
because of its appearance, type, packaging, or labeling, is suitable 
for use and likely to be offered to, or purchased by, consumers as 
tobacco to be smoked in a pipe.''
    Currently, the TTB regulations contain no standards to 
differentiate between roll-your-own tobacco and pipe tobacco beyond a 
repeat of the statutory definitions; when the tax rates on the two 
products were the same, TTB and its predecessor agencies considered it 
to be sufficient to require manufacturers and importers to meet certain 
notice requirements, as discussed below.
    However, because of the revenue implications resulting from the tax 
rate changes made by the Act, including the creation of a new incentive 
for industry members to present a product as, and thus pay the tax at 
the lower rate for, pipe tobacco, TTB recognizes that there is now a 
heightened need for more regulatory detail to clarify the difference 
between the two products. We are currently evaluating analytical 
methods and other standards to differentiate between roll-your-own 
tobacco and pipe tobacco, and we may publish rulemaking proposals on 
this subject for public comment in the near future.
    We note that the definitions of pipe tobacco and roll-your-own 
tobacco both require consideration of the packaging and labeling of the 
product in order to determine its classification for tax purposes. In 
this temporary rule we are amending the classification and notice 
provisions of the tobacco product manufacturer and importer regulations 
in parts 40 and 41 to more clearly differentiate, on the basis of 
packaging and labeling, between these two types of taxable products. 
The nature of, and reasons for, these changes are discussed below.
    Sections 40.25a and 41.30, which set forth the tax rates for pipe 
tobacco and roll-your-own tobacco, are amended by designating the 
existing text as paragraph (a) with the heading ``tax rates'' and 
adding a new paragraph (b), with the heading ``classification,'' that: 
(1) Provides that pipe tobacco and roll-

[[Page 29405]]

your-own tobacco must be put up in packages that conform to the 
applicable package and package notice requirements; (2) provides that 
any tobacco that has been processed and that is removed in a package 
that does not bear a notice prescribed under parts 40 or 41 will be 
deemed to be roll-your-own tobacco; and (3) provides that, even though 
tobacco that has been processed is removed in a package that bears the 
notice required for pipe tobacco, it will be deemed to be roll-your-own 
tobacco if either the package does not bear the words ``pipe tobacco'' 
wherever the brand name appears or the package or accompanying 
materials bear any representation suggesting a use other than as pipe 
tobacco.
    In addition, the notice requirements for pipe tobacco in Sec. Sec.  
40.216a and 41.72a are amended by removing from paragraph (a) the last 
sentence and thereby providing that only the words ``pipe tobacco'' 
will be permissible as a designation on a package of pipe tobacco and 
that the designation ``Tax Class L'' may no longer be used as an 
alternative designation. Similarly, in the notice requirements for 
roll-your-own tobacco in Sec. Sec.  40.216b and 41.72b, paragraph (a) 
is amended by removing the reference to ``Tax Class J'' and also by 
adding ``cigar tobacco,'' ``cigarette wrapper,'' and ``cigar wrapper'' 
as permissible designations (as discussed above). Thus, in the case of 
roll-your-own tobacco, the only permissible package designations will 
be ``roll-your-own tobacco,'' ``cigarette tobacco,'' ``cigar tobacco,'' 
``cigarette wrapper,'' or ``cigar wrapper.'' Finally, Sec. Sec.  
40.216c and 41.72c are revised to set forth a new use-up period, until 
August 1, 2009, for packages that contain the ``Tax Class L'' or ``Tax 
Class J'' designations, which are no longer permissible under the 
notice requirements adopted in this temporary rule.
    The changes to Sec. Sec.  40.25a and 41.30 described above are 
intended to address two distinct but related tax rate issues. The first 
issue relates to the significant difference between the rates 
applicable to pipe tobacco and to roll-your-own tobacco and the 
resulting incentive for a taxpayer to classify a product as pipe 
tobacco rather than as roll-your-own tobacco. The amendments are tied 
to the revised notice requirements for pipe tobacco and roll-your-own 
tobacco because the way those notices appear on the package goes 
directly to the inquiry required under each statutory definition, that 
is, whether, because of the packaging or labeling of the product, the 
product is ``likely to be offered to, or purchased by, consumers as'' 
tobacco to be smoked in a pipe or tobacco for making cigarettes or 
cigars. The circumstances in which a product is deemed to be roll-your-
own tobacco rather than pipe tobacco in the amended texts are intended 
to ensure that the tax collected on the product is consistent with the 
way the product is presented to the consumer.
    The second issue regarding the changes to Sec. Sec.  40.25a and 
41.30 relates to the fact that ``processed tobacco'' is not subject to 
tax. TTB believes that it is essential to recognize that there will be 
a point at which tobacco will have been processed in such a way that it 
is no longer the untaxed commodity but rather has become a taxable 
``tobacco product.'' For example, activities such as cutting and 
flavoring are processes that would result in a ``tobacco product'' 
(such as roll-your-own tobacco) but for the fact that it is not in a 
consumer package. Thus, under the regulatory texts in this temporary 
rule, processed tobacco that is removed from a factory or imported in a 
package with a content of 10 pounds or less will be deemed to be roll-
your-own tobacco for permit and tax purposes unless the package fully 
complies with the notice requirements for pipe tobacco or for the other 
non-cigarette and non-cigar tobacco products (that is, smokeless 
tobacco, also referred to as snuff and chewing tobacco).
    The removals of the ``Tax Class L'' and ``Tax Class J'' 
designations were done in order to ensure that the packaging and 
labeling of the two products convey the type of tobacco contained 
inside; as noted above, the notice requirements speak directly to the 
consideration of the effect the packaging or labeling of a product has 
on how a product is likely to be offered to or purchased by consumers. 
Because specific references to the contents are now required, continued 
use of the tax class designations would be inappropriate. The addition 
of references to ``pipe tobacco,'' ``cigarette wrapper,'' and ``cigar 
wrapper'' is simply intended to conform the texts to the addition of 
the words ``or cigars, or for use as wrappers thereof'' at the end of 
the statutory definition of roll-your-own tobacco.

Effect on Manufacturers and Importers of Tobacco Products

Minimum Manufacturing and Activity Requirement

    As noted above, the regulations adopted in this temporary rule 
provide that the permit of a manufacturer of processed tobacco may be 
suspended or revoked, and a processed tobacco importer's application 
for permit renewal may be rejected, if there has been no activity or if 
no activity has been reported under that permit for one year prior to 
the application for renewal. TTB believes that the rationale for such 
provisions applies equally to importers and manufacturers of tobacco 
products because, as noted above, the intention of the limited-duration 
permit was to ensure that only those engaged in bona fide business were 
issued, and continue to hold, a TTB permit. TTB has found that unused 
permits are not uncommon and that they cause unnecessary administrative 
burden and divert resources from enforcement activities related to 
persons actually engaged in the businesses that TTB regulates. 
Accordingly, we are also amending the regulations applicable to 
manufacturers and importers of tobacco products in Sec. Sec.  40.61 and 
41.202, respectively, to state that such permits may be subject to 
suspension or revocation, or in the case of importers may not be 
renewed for non-use. We are also adding in part 40, for clarification 
and cross-reference purposes, a new Sec.  40.256 to provide that the 
minimum activity requirement set forth in Sec.  40.61 is a continuing 
condition for retention of a manufacturer's permit.

Recording of Processed Tobacco

    Section 40.182 has required manufacturers of tobacco products to 
account for all tobacco, other than tobacco products, that is received, 
shipped, lost, and destroyed. This temporary rule amends Sec.  40.182 
to require manufacturers to account on a daily basis for processed 
tobacco and amends Sec.  40.201 to require that inventories include 
both tobacco products and processed tobacco. The recording of other 
tobacco is not required. Specifically, the revised Sec.  40.182 text 
provides that a manufacturer of tobacco products who processes tobacco 
on the factory premises solely for use in the manufacture of tobacco 
products under that permit, and who does not remove processed tobacco 
from the factory premises for any purpose other than destruction, must 
maintain daily records that show the total quantity in pounds of all 
processed tobacco on hand, received, used in the manufacture of tobacco 
products, lost, and destroyed. A manufacturer of tobacco products who 
removes processed tobacco from the factory for any purpose other than 
for destruction must keep the same records and submit the same reports 
as those required for manufacturers of processed tobacco.

[[Page 29406]]

Part by Part Discussion of Regulatory Amendments

    This temporary rule adds new subpart L to part 40 and new subpart M 
in part 41 to set forth the qualification and other requirements 
applicable to manufacturers and importers of processed tobacco 
discussed above. This temporary rule also makes a number of conforming 
changes to parts 40, 41, 44, and 45, including amendments to the 
definitions of ``export warehouse proprietor'', ``package'', ``removal 
and remove'', and ``roll-your-own tobacco'', and the addition of 
definitions of ``processed tobacco'' and ``manufacturer of processed 
tobacco'', and the addition of references to ``processed tobacco'', 
where appropriate. The following additional points are noted regarding 
the regulatory amendments contained in this document:

Part 40

    In Sec.  40.11, we are replacing the definition of ``permit 
number'' with a more general definition that would be equally 
applicable to permits issued to manufacturers and importers of 
processed tobacco and to permits issued to manufacturers and importers 
of tobacco products. This change does not affect existing permit 
holders.
    Section 40.61 describes general qualification requirements for 
manufacturers of tobacco products. In addition to including the 
amendment regarding minimum activity discussed above, we are revising 
the text for the following reasons:
    First, we believe that it is appropriate to specify that a 
proprietor of a customs bonded warehouse is not required to qualify for 
a permit as a manufacturer with respect to the operations of such 
warehouse. This exemption appears in the IRC at 26 U.S.C. 5702(d) and 
the amendment merely reflects the statutory language.
    Second, we are adding a provision to clarify that a retailer such 
as a tobacconist may, without triggering a TTB permit requirement, take 
a taxpaid tobacco product out of the package and place it into a 
different container for sale directly to a consumer; this amendment 
reflects the language that appears in 26 U.S.C. 5751(a)(3).
    Finally, we have placed the existing minimum manufacturing and 
activity provisions in new paragraph (c) and added a new provision 
stating that the activity of packaging processed tobacco alone may be 
sufficient to qualify a person as a manufacturer of tobacco products. 
We believe this position is necessary to implement the amendments made 
by the Act, under which processing of tobacco may result in a product 
that, except for the fact that it is not in a package, would qualify as 
a taxable tobacco product. It is the position of TTB that the placing 
of processed tobacco in a container that meets the definition of a 
``package'' under amended Sec. Sec.  40.11 and 41.11 indicates a clear 
intent to create a taxable commodity because, in fact, a taxable 
commodity is what results from such a packaging operation. Accordingly, 
such packaging may only occur on the premises of a bonded manufacturer 
of tobacco products. Thus, because packaging of processed tobacco 
results in a consumer-ready, taxable, tobacco product, we believe that 
the activity of packaging processed tobacco alone may be sufficient to 
qualify a person as a manufacturer of a taxable tobacco product. 
Without this provision, TTB would have an inadequate regulatory basis 
for controlling the diversion of processed tobacco that needs only to 
be packaged in order to be consumer-ready. However, the same rationale 
does not apply to the packaging of cigarettes and cigars, because the 
statutory definitions of the two products are met for tax purposes 
prior to the placing of the products in packages.
    In Sec.  40.47, concerning other businesses within a factory, we 
have amended references to ``factory'' and to ``manufacturer'' to 
specify that the former refers to the factory of a manufacturer of 
tobacco products and the latter to a manufacturer of tobacco products. 
These amendments clarify that the provisions of Sec.  40.47 apply to 
the factory of a manufacturer of tobacco products and not to the 
factory of a manufacturer who only processes tobacco. We have also 
removed the requirement that the application for authorization to 
engage in an ``other business'' be submitted in triplicate, as multiple 
copies of the submission are no longer necessary. Finally, we have 
included text that applies the transitional rule to manufacturers of 
tobacco products who also process tobacco and remove it for purposes 
other than destruction. Such a manufacturer who is engaged in the 
business of processing tobacco on April 1, 2009, and who submits an 
application for authorization under Sec.  40.47 before June 30, 2009, 
may continue to engage in such business pending TTB action on the 
application.
    In Sec.  40.61, we have also removed the statement that repackaging 
and relabeling alone do not qualify as a manufacturing activity. We 
believe this statement is unnecessary and could be misleading. 
Repackaging (that is, the removal of a tobacco product from the package 
in which it was removed from the factory or released from customs 
custody upon determination of tax, and the placement of that tobacco 
product into another package to be offered for sale to a consumer) may 
only occur under TTB authorization in accordance with Sec.  40.217.
    We are amending Sec.  40.72, concerning the use of factory premises 
to specifically address the use by a manufacturer of tobacco products 
of the factory premises for processing of tobacco. The amendment 
clarifies that a manufacturer of tobacco products who processes tobacco 
solely for use in the manufacture of tobacco products under an existing 
permit, who does not remove the processed tobacco for any purpose other 
than destruction, and who maintains records with respect to the 
disposition of the processed tobacco are not required to apply for TTB 
authorization under Sec.  40.47. If any of these conditions are not 
met, that manufacturer must apply for authorization under Sec.  40.47.
    In Sec.  40.202, we are replacing the obsolete text of paragraph 
(b), which concerns the report of wholesale prices of large cigars 
removed before January 1, 1991, with new text setting forth a 
requirement to keep records and submit reports when processed tobacco 
is removed from the factory premises other than for destruction.
    In Sec.  40.211, we are adding a statement to reflect the language 
that appears in 26 U.S.C. 5751(a)(2) and (3), to the effect that no 
person may purchase, receive, possess (except for personal 
consumption), offer for sale, or sell or otherwise dispose of, after 
removal, any tobacco products that are not put up in packages or that 
are put up in packages not bearing the marks, labels, and notices, as 
required under 27 CFR part 40. That statutory prohibition is not 
reflected elsewhere in the TTB regulations and, due to the new 
significance placed on the packaging of products in the amendments made 
by this temporary rule, we believe an explicit statement in the 
regulations would be helpful to industry members.
    We are also adding a new Sec.  40.257 to alert manufacturers of 
tobacco products to the provisions related to processed tobacco. The 
new section acts merely as a readers guide.

Part 41

    Section 41.71, concerning tobacco product packages, is amended in 
the same manner and for the same reason as the amendment to Sec.  
40.211 described above. That is, a statement is added to reflect the 
language that appears in 26

[[Page 29407]]

U.S.C. 5751(a)(2) and (3), to the effect that no person may purchase, 
receive, possess (except for personal consumption), offer for sale, or 
sell or otherwise dispose of, after removal, any tobacco products that 
are not put up in packages or that are put up in packages not bearing 
the marks, labels, and notices, as required under 27 CFR part 41.
    We have removed Sec.  41.192, which provided a transitional rule 
for the implementation of the permit requirement for importers of 
tobacco products prescribed in T.D. ATF-422 (64 FR 71951, published in 
the Federal Register on December 22, 1999) because it is no longer 
needed. For the same reason, in Sec.  41.201, we are removing the 
reference to temporary permits issued under former Sec.  41.192.
    We have removed Sec.  41.205 because that regulation was 
promulgated pursuant to the Contraband Cigarette Trafficking Act (18 
U.S.C. 2342). The authority to promulgate regulations under the 
Contraband Cigarette Trafficking Act now rests with the Bureau of 
Alcohol, Tobacco, Firearms, and Explosives at the Department of 
Justice, not with TTB.
    We have revised Sec. Sec.  41.206, 41.207, and 41.208, concerning 
reports and records, for organizational and editorial reasons and to 
remove obsolete text. In Sec.  41.206, we have removed the requirement 
that the first reports submitted by an importer cover all months 
beginning January 1, 2000, as this requirement arose from a prior 
transitional rule. We have also removed Sec.  41.207 and included its 
provisions, with some editorial changes, in Sec.  41.208 in order to 
have a single section covering the retention and maintenance of 
records.

Part 44

    We have removed Sec.  44.90, concerning restrictions relating to 
operations at an export warehouse premises, and have included its 
terms, with modifications, in new Sec.  44.141a. The new section, under 
the heading ``Use of premises'', reflects the new definition of 
``export warehouse'' by providing that an export warehouse premises may 
only be used for the storage of non-taxpaid tobacco products and 
cigarette papers and tubes, and for the storage of processed tobacco, 
pending export.

Part 45

    We have conformed Sec. Sec.  45.45a, 45.45b, and 45.45c to the 
revised notice and use-up provisions for pipe tobacco and roll-your-own 
tobacco as discussed above for parts 40 and 41.

Temporary Rule

    Based on the April 1, 2009, effective date of the new permit 
provisions applicable to manufacturers and importers of processed 
tobacco and the expanded definition of roll-your-own tobacco, also 
effective April 1, 2009, TTB believes that proper administration and 
enforcement of those requirements necessitates the immediate adoption 
of implementing regulations as a temporary rule. TTB believes that such 
implementing action ensures that affected industry members will have 
timely knowledge of the regulatory requirements.

Public Participation

    For submitting comments, please refer to the notice of proposed 
rulemaking on this subject published in the ``Proposed Rules'' section 
of this issue of the Federal Register.

Regulatory Flexibility Act

    We certify that this temporary rule will not have a significant 
economic impact on a substantial number of small entities. Accordingly, 
a regulatory flexibility analysis is not required. The regulatory 
obligations and relevant collections of information 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. Pursuant to 26 U.S.C. 7805(f), this 
temporary regulation will be submitted to the Chief Counsel for 
Advocacy of the Small Business Administration for comment on its impact 
on small businesses.

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.
    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, at any of these 
addresses:
     P.O. Box 14412, Washington, DC 20044-4412;
     202-927-8525 (facsimile); or
     formcomments@ttb.gov (e-mail).

Executive Order 12866

    This is not a significant regulatory action as defined in E.O. 
12866. Therefore, it requires no regulatory assessment.

Inapplicability of Prior Notice and Comment and Delayed Effective Date 
Procedures

    Because this document implements provisions of a law that are 
effective on April 1, 2009, and because immediate guidance is necessary 
to implement these provisions, it is found to be impracticable to issue 
this Treasury decision with notice and public procedure under 5 U.S.C. 
553(b).
    Pursuant to the provisions of 5 U.S.C. 553(d)(2), and (d)(3), we 
are issuing these regulations without a delayed effective date. TTB has 
determined that this regulation is an interpretative rule that 
implements Public Law 111-3 as provided for in section 553(d)(2). TTB 
also has determined that good cause exists to provide industry members 
with immediate guidance on procedures to apply for and obtain a permit 
for operations as importers and manufacturers of processed tobacco and 
to clarify the difference between certain taxable commodities that are 
subject to different tax rates, in accordance with section 553(d)(3).

Drafting Information

    Amy R. Greenberg of the Regulations and Rulings Division, Alcohol 
and Tobacco Tax and Trade Bureau, drafted this document. Other 
employees of the Alcohol and Tobacco Tax and Trade Bureau also 
participated in its development.

List of Subjects

27 CFR Part 40

    Cigars and cigarettes, Claims, Electronic funds transfers, Excise 
taxes, Imports, Labeling, Packaging and containers, Reporting and 
recordkeeping requirements, Surety bonds, Tobacco.

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

[[Page 29408]]

recordkeeping requirements, Surety bonds, Tobacco, Virgin Islands, 
Warehouses.

27 CFR Part 44

    Aircraft, Armed forces, Cigars and cigarettes, Claims, Customs 
duties and inspection, Excise taxes, Exports, Foreign trade zones, 
Labeling, Packaging and containers, Reporting and recordkeeping 
requirements, Surety bonds, Tobacco, Vessels, Warehouses.

27 CFR Part 45

    Administrative practice and procedure, Authority delegations 
(Government agencies), Cigars and cigarettes, Excise taxes, Labeling, 
Packaging and containers, Reporting and recordkeeping requirements, 
Tobacco.

Amendments to the Regulations

0
For the reasons set forth in the preamble, title 27, chapter I, of the 
Code of Federal Regulations is amended as follows:

PART 40--MANUFACTURE OF TOBACCO PRODUCTS, CIGARETTE PAPERS AND 
TUBES, AND PROCESSED TOBACCO

0
1. The authority citation for part 40 is revised to read as follows:

    Authority:  26 U.S.C. 5142, 5143, 5146, 5701-5705, 5711-5713, 
5721-5723, 5731, 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.


0
2. The heading to part 40 is revised to read as set forth above.


0
3. Section 40.1 is revised to read as follows:


Sec.  40.1  Manufacture of tobacco products, cigarette papers and 
tubes, and processed tobacco.

    This part contains regulations relating to the manufacture of 
tobacco products, cigarette papers and tubes, and processed tobacco; 
the payment by manufacturers of tobacco products and cigarette papers 
and tubes of internal revenue taxes imposed by 26 U.S.C. chapter 52; 
and the qualification of and operations by manufacturers of tobacco 
products, cigarette papers and tubes, and processed tobacco.


0
4. In Sec.  40.11:
0
a. The definition of ``Export warehouse'' is amended by removing the 
words ``tobacco products and cigarette papers and tubes'' and adding, 
in their place, the words ``tobacco products or cigarette papers or 
tubes or any processed tobacco'';
0
b. The definition of ``Factory'' is amended by adding after the words 
``tobacco products'' the words ``or processed tobacco,'';
0
c. New definitions of ``Manufacturer of processed tobacco'', 
``Packaging'', and ``Processed tobacco'' are added in appropriate 
alphabetical order;
0
d. The definitions of ``Package'' and ``Permit number'' are revised;
0
e. The definition of ``Removal or remove'' is amended by adding after 
the words ``tobacco products or cigarette papers or tubes'' the words 
``, or any processed tobacco''; and
0
f. The definition of ``Roll-your-own tobacco'' is amended by adding at 
the end before the period the words ``or cigars, or for use as wrappers 
of cigars or cigarettes''.
    The revisions and additions read as follows:


Sec.  40.11  Meaning of terms.

* * * * *
    Manufacturer of processed tobacco. Any person who processes any 
tobacco other than tobacco products.
* * * * *
    Package. The immediate container in which tobacco products, 
processed tobacco, or cigarette papers or tubes are put up by the 
manufacturer and offered for sale or delivery to the ultimate consumer. 
For purposes of this definition, 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.
    Packaging. The act of placing processed tobacco or a tobacco 
product in a package.
    Permit number. The identifying number and/or letters that are 
assigned to a TTB permit by the appropriate TTB officer.
* * * * *
    Processed tobacco. Processed tobacco is any tobacco that has 
undergone processing, but does not include tobacco products. For 
purposes of this definition, the processing of tobacco does not include 
the farming or growing of tobacco or the handling of tobacco solely for 
sale, shipment, or delivery to a manufacturer of tobacco products or 
processed tobacco, nor does the processing of tobacco include curing, 
baling, or packaging activities. For purposes of this definition, the 
processing of tobacco includes, but is not limited to, stemming (that 
is, removing the stem from the tobacco leaf), fermenting, threshing, 
cutting, or flavoring the tobacco, or otherwise combining the tobacco 
with non-tobacco ingredients.
* * * * *

0
5. Section 40.25a is amended by revising the section heading, 
designating the existing text as paragraph (a), adding a heading to 
newly designated paragraph (a), and adding a new paragraph (b). The 
revision and additions read as follows:


Sec.  40.25a  Pipe tobacco and roll-your-own tobacco tax rates and 
classification.

    (a) Tax rates. * * *
    (b) Classification. (1) Pipe tobacco and roll-your-own tobacco, 
before removal subject to tax, must be put up in packages that conform 
to the requirements of Sec. Sec.  40.211 and 40.212, and of Sec.  
40.216a or Sec.  40.216b as appropriate.
    (2) Any tobacco that has been processed and that is removed in a 
package, as that term is defined in Sec.  40.11, that does not bear the 
notice for smokeless tobacco prescribed in Sec.  40.216 or the notice 
for pipe tobacco prescribed in Sec.  40.216a is deemed to be roll-your-
own tobacco and subject to tax at the rate applicable to roll-your-own 
tobacco.
    (3) Any tobacco that has been processed and that is removed in a 
package, as that term is defined in Sec.  40.11, is deemed to be roll-
your-own tobacco and subject to tax at the rate applicable to roll-
your-own tobacco, even though the package bears the notice required for 
pipe tobacco under Sec.  40.216a, if:
    (i) The package does not bear the declaration ``pipe tobacco'' in 
direct conjunction with, parallel to, and in substantially the same 
conspicuousness of type and background as the brand name each time the 
brand name appears on the package; or
    (ii) The package or accompanying materials bear any representation 
that would suggest a use other than as pipe tobacco. (26 U.S.C. 5702 
and 5723)

0
6. Section 40.47 is revised to read as follows:


Sec.  40.47  Other businesses within factory.

    (a) General. The appropriate TTB officer may authorize such other 
businesses within the factory of a manufacturer of tobacco products as 
he finds will not jeopardize the revenue, will not hinder the effective 
administration of this part, and will not be contrary to law. A 
manufacturer of tobacco products who wishes to engage in another 
business within the factory must submit a written application to do so 
to the appropriate TTB officer. Except as otherwise provided in 
paragraph (b)

[[Page 29409]]

of this section, a manufacturer of tobacco products may not engage in 
such other business until the application is approved by the 
appropriate TTB officer. The manufacturer must retain as part of its 
records any authorization provided under this section.
    (b) Processed tobacco. A manufacturer of tobacco products who 
removes processed tobacco for purposes other than destruction must 
apply for and obtain TTB authorization to engage in another business 
within the factory, in accordance with paragraph (a) of this section. 
Such manufacturer who is engaged in the processing of tobacco on April 
1, 2009, and who applies for authorization before June 30, 2009, may 
continue to engage in such activity pending TTB action on the 
application.

Subpart E--[Heading Amended]

0
7. The heading for subpart E is amended by adding at the end the words 
``of Tobacco Products''.

0
8. Section Sec.  40.61 is revised to read as follows:


Sec.  40.61  Qualification.

    (a) General. Except as otherwise provided in paragraph (b) of this 
section, every person who manufactures tobacco products must qualify 
for, and obtain, a permit as a manufacturer of tobacco products in 
accordance with the provisions of this part.
    (b) Exceptions. The following persons are not considered to be 
engaged in the business of manufacturing tobacco products for purposes 
of this part:
    (1) A person who produces tobacco products solely for that person's 
own consumption or use;
    (2) A proprietor of a customs bonded manufacturing warehouse with 
respect to the operation of such warehouse;
    (3) A retailer of tobacco products, such as a tobacconist, who 
takes taxpaid tobacco products out of the package, as that term is 
defined in Sec.  40.11, in front of waiting customers and places the 
tobacco products into a different container for immediate delivery to 
those customers; or
    (4) A person whose operations are limited to, and who holds a 
permit as, a manufacturer of processed tobacco.
    (c) Minimum manufacturing and activity requirements. A permit to 
manufacture tobacco products will only be granted to those persons 
whose principal business activity under such permit will be the 
manufacture of tobacco products. A permit will not be granted to any 
person whose principal business activity under such permit will be to 
receive or transfer tobacco products in bond. As a minimum activity 
requirement, in order to qualify for a permit, the quantity of tobacco 
products manufactured under the permit must be equivalent to, or 
exceed, the quantity to be transferred or received in bond under the 
permit. For the purposes of this section, the activity of packaging 
processed tobacco may be sufficient to qualify as a manufacturing 
activity.

0
9. Section 40.72 is revised to read as follows:


Sec.  40.72  Use of factory premises.

    (a) General. Unless otherwise authorized by the appropriate TTB 
officer as provided in Sec.  40.47, the premises used by a manufacturer 
of tobacco products for his factory shall 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 the manufacturer of tobacco products.
    (b) Manufacturers who process tobacco. (1) A manufacturer of 
tobacco products who processes tobacco on the factory premises solely 
for use in the manufacture of tobacco products under that permit, who 
does not remove processed tobacco from the factory premises for any 
purpose other than destruction, and who maintains adequate records with 
respect to the disposition of the processed tobacco in accordance with 
Sec.  40.182, may engage in such operations under the authority of its 
existing permit on the factory premises and without application for 
such authorization from TTB. If any of these conditions is not met, the 
manufacturer must, in order to engage in the processing of tobacco 
under the existing permit, obtain 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) A manufacturer of tobacco products who removes processed 
tobacco from the factory premises for any purpose other than 
destruction must obtain authorization of that activity 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.

Subpart F--[Heading Amended]

0
10. The heading for subpart F is amended by adding at the end the words 
``of Tobacco Products''.

Subpart H--[Heading Amended]

0
11. The heading for subpart H is amended by adding at the end the words 
``of Tobacco Products''.

0
12. Section 40.182 is revised to read as follows:


Sec.  40.182  Record of processed tobacco.

    (a) A manufacturer of tobacco products who processes tobacco on the 
factory premises solely for use in the manufacture of tobacco products 
under that permit, and who does not remove processed tobacco from the 
factory premises for any purpose other than destruction, must maintain 
a daily record that shows the total quantity in pounds of all processed 
tobacco:
    (1) On hand;
    (2) Received, together with the name and address of the person from 
whom received;
    (3) Used in the manufacture of tobacco products;
    (4) Lost, together with the circumstances of the loss; and
    (5) Destroyed, together with the circumstances of the destruction.
    (b) In addition to the recordkeeping and reporting requirements set 
forth elsewhere in this part, a manufacturer of tobacco products who 
removes processed tobacco from the factory premises for any purpose 
other than for destruction must keep records and submit reports as 
prescribed in Sec. Sec.  40.521 and 40.522.

(Approved by the Office of Management and Budget under control 
number 1513-0068)


Sec.  40.201  [Amended]

0
13. The first sentence in Sec.  40.201 is amended by adding after the 
words ``all tobacco products and'' the word ``processed''.

0
14. In Sec.  40.202, paragraph (b) and the Office of Management and 
Budget control number reference are revised to read as follows:


Sec.  40.202  Reports.

* * * * *
    (b) Report of processed tobacco removed. In addition to the 
recordkeeping and reporting requirements set forth elsewhere in this 
part, a manufacturer of tobacco products who removes processed tobacco 
from the factory premises for any purpose other than destruction must 
record and report those removals in accordance with Sec.  40.522 of 
this part.

(Approved by the Office of Management and Budget under Control No. 
1513-0033)
* * * * *

0
15. Section 40.211 is amended by adding a sentence at the end of the

[[Page 29410]]

section and by revising the statutory citations. The addition and 
revision read as follows:


Sec.  40.211  Package.

    * * * No person may purchase, receive, possess (except for personal 
consumption), offer for sale, or sell or otherwise dispose of, after 
removal, any tobacco products that are not put up in packages bearing 
the marks, labels, and notices, as required under this part.

(26 U.S.C. 5723 and 5751)


Sec.  40.216a  [Amended]

0
16. In Sec.  40.216a, paragraph (a) is amended by removing the last 
sentence.

0
17. In Sec.  40.216b, paragraph (a) and the Office of Management and 
Budget control number reference are revised to read as follows:


Sec.  40.216b  Notice for roll-your-own tobacco.

    (a) Product designation. Every package of roll-your-own tobacco, 
before removal subject to tax, must have adequately imprinted on it, or 
on a label securely affixed to it, the applicable designation ``roll-
your-own tobacco'', ``cigarette tobacco'', ``cigar tobacco'', 
``cigarette wrapper'', or ``cigar wrapper''.
* * * * *
(Approved by the Office of Management and Budget under control 
number 1513-0091)


0
18. Section 40.216c is revised to read as follows:


Sec.  40.216c  Package use-up rule.

    (a) A manufacturer of pipe tobacco or roll-your-own tobacco may 
remove packages of such products bearing the designation ``Tax Class 
L'' (to designate pipe tobacco) or ``Tax Class J'' (to designate roll-
your-own tobacco) only if such packages were in use prior to April 1, 
2009, and such manufacturer may continue to remove packages bearing 
those designations until August 1, 2009.
    (b) A manufacturer may, until August 1, 2009, remove roll-your-own 
tobacco for which the applicable designation is ``cigar tobacco,'' 
``cigarette wrapper,'' or ``cigar wrapper'' even if the packages of 
such products do not meet the requirements of Sec.  40.216(b).

0
19. The undesignated center heading before Sec.  40.251 is amended by 
removing the words ``Tobacco Products'' and adding, in their place, the 
word ``Operations''.

0
20. A new Sec.  40.256 is added at the end of subpart H to read as 
follows:


Sec.  40.256  Minimum manufacturing and activity requirements.

    The minimum manufacturing and activity requirement prescribed in 
Sec.  40.61(b) of this part is a continuing condition of a 
manufacturer's permit, that is, a permit to manufacture tobacco 
products is conditioned upon a person's principal business activity 
being the manufacture of tobacco products. A permit may be suspended, 
and subsequently revoked, if the person's principal business activity 
under such permit is to receive or transfer tobacco products in bond, 
or if the person has no activity under such permit for a period of one 
year. As a minimum activity requirement, the quantity of tobacco 
products manufactured under the permit must exceed the quantity 
transferred or received in bond under the permit.

0
21. A new Sec.  40.257 is added at the end of subpart H to read as 
follows:


Sec.  40.257  Processed tobacco.

    A manufacturer of tobacco products may be required to obtain 
authorization from the appropriate TTB officer with regard to the 
activities involving processed tobacco. See Sec.  40.72. Such 
manufacturers also must maintain records and may be required to submit 
reports regarding such activities. See Sec. Sec.  40.182 and 40.202.

0
22. A new subpart L, consisting of Sec. Sec.  40.491 through 40.534, is 
added to read as follows:

Subpart L--Manufacture of Processed Tobacco

Sec.

Qualification Requirements for Manufacturers of Processed Tobacco

40.491 Persons required to qualify.
40.492 Application for permit.
40.493 Transitional rule.
40.494 Corporate documents.
40.495 Articles of partnership or association.
40.496 Trade name certificate.
40.497 Additional information.
40.498 Investigation of applicant.
40.499 Notice of contemplated disapproval.
40.500 Issuance of permit.
40.501 Retention of permit and supporting documents.

Changes After Qualification

40.511 Change in name.
40.512 Change in ownership or control.
40.513 Change in location or address of factory.

Operations by Manufacturers of Processed Tobacco

40.521 Record of processed tobacco.
40.522 Reports.
40.523 Inventories.
40.524 Retention of documents.
40.525 Discontinuance of operations.
40.526 Minimum manufacturing and activity requirements.
40.527 Authorization to package processed tobacco.
40.528 Suspension and revocation of permit.

Other Provisions Related to Manufacturers of Processed Tobacco

40.531 Alternate methods or procedures.
40.532 Emergency variations from requirements.
40.533 Penalties and forfeitures.
40.534 Power of attorney.

Subpart L--Manufacture of Processed Tobacco

Qualification Requirements for Manufacturers of Processed Tobacco


Sec.  40.491  Persons requi