[Federal Register: January 3, 2005 (Volume 70, Number 1)]
[Rules and Regulations]
[Page 193-237]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr03ja05-14]
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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
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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
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Number of
flavored
Alcohol percentage derived from added alcohol favors malt
beverages
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0-25%...................................................... 4
26-0%...................................................... 0
51-75%..................................................... >5
76-100..................................................... 105
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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
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Number of
Volume of flavored malt beverage derived from fermented flavored
beer base malt
beverages
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0-25%...................................................... 95
26-50%..................................................... 4
51-75%..................................................... 1
76-100%.................................................... 14
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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,
[[Page 200]]
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
[[Page 201]]
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 accordance
with the conditions described in the report. That Adjunct Report, as
well as all subsequent editions of the ARM, lists ethyl alcohol as a
permitted additive for use in flavoring beer, without any limitations.
Several commenters stated that they have relied on these policies
to create beverages that consumers enjoy and that they have invested
millions of dollars promoting those brands.
Some commenters argued that the industry had ample warning that
TTB's predecessor agency was contemplating a limitation on the use of
flavors containing alcohol in the production of beer and malt
beverages. These commenters noted that in 1996 ATF notified the
industry, through ATF Ruling 96-1, that rulemaking limiting the alcohol
contribution from flavors in FMBs under 6% alc/vol was forthcoming.
This ruling clearly stated that TTB would initiate future rulemaking to
consider the prohibition, restriction, or limitation on alcohol derived
from the distilled spirits components of added flavors, a statement
that was reiterated in ATF Ruling 2002-2.
However, commenters who opposed the proposed 0.5% standard
suggested that ATF's actions after 1996 sent mixed signals to the
industry. For example, a U.S. Senator stated that although the Bureau
in 1996 suggested that rulemaking ``in the near future'' might limit
the use of flavors in such products, it abandoned that rulemaking
project and did not even mention it in the unified regulatory agenda
that every Federal agency must publish on a semi-annual basis. Another
U.S. Senator noted that although the 1996 ruling mentioned rulemaking,
no such rulemaking proposal appeared until 2003. The Senator suggested
that:
In the intervening 7-year time period, manufacturers have relied
on the existing law and the Bureau's formula approvals to invest
hundreds of millions of dollars in the formulation and marketing of
new products. These investments have created hundreds of jobs and a
vibrant fast-growing U.S. market sector in which tens of millions of
cases of FMBs have already been sold. Without a reasonable public
health or safety rationale, it does not seem prudent or fair to
revise these rules dramatically at this stage of the game.
[[Page 203]]
Accordingly, the Senator urged TTB to adopt the 51/49 standard, as it
would ``accomplish the same goals and have a lesser impact on these
products and the industry that produces them.''
Other members of Congress made similar comments. A letter signed by
26 members of the House of Representatives supported the ``majority''
standard, stating that over the past 5 years, ``hundreds of millions of
dollars have been invested in the development of the FMB category.
These investments, and the thousands of jobs created, were all made on
the reliance of long-standing federal policy and rules.'' The letter
suggested that Notice No. 4 intends to ``change the established rules
mid-stream on those who have successfully created the category. This is
especially troubling in that it threatens to stifle the only growth
sector in the brewing industry over the last several years.''
Diageo stated that, in the summer of 2000, company officials met
with ATF representatives and revealed Diageo's plans to enter the FMB
market in the near future in reliance on existing policy. Diageo stated
that company officials advised ATF that it would reconsider these plans
if ATF planned to place new limits on the use of flavors in FMBs
containing not more than 6% alc/vol. Diageo also stated that, after the
meeting, ATF officials indicated that the agency did not plan to change
existing policy towards FMB formulation. Diageo claims that, in
reliance on those assurances, Diageo introduced Smirnoff Ice in
December 2000.
The FMBC also stated that a number of its members had received
assurances from ATF, in the summer of 2000, that ATF planned no change
in policy towards the addition of alcohol to FMBs containing 6% alcohol
by volume or less. The FMBC stated that it sought these assurances
after an ATF official sent a letter indicating that the Bureau was
considering rulemaking, which might limit the alcohol from added
flavors to no more than 25% of the total alcohol content of the
product.
A commenter pointed out that although ATF Ruling 96-1 stated that
ATF would undertake rulemaking to limit alcohol from flavors in beer
and malt beverages, ATF labeling and formula specialists never
qualified approvals of statements of process or labels by stating that
the approval was conditioned on future rulemaking. Instead, these
commenters claimed that ATF continued to approve statements of process
and labels without qualification. Another commenter stated that ATF
personnel did not immediately implement the provisions in ATF Ruling
96-1 that require explicit ingredient listing and alcohol content
information in statements of process, but instead delayed enforcement
of these provisions until the issuance of ATF Ruling 2002-2 in 2002.
2. TTB Response
TTB agrees with the commenters who note that for many years ATF and
its predecessors allowed brewers to use alcohol-flavoring ingredients,
without limitation, when producing malt beverages. Our predecessor
agencies approved statements of process and certificates of label
approval for these products and, before 1996, never suggested that
there was any limit on the use of flavoring materials in FMBs.
Accordingly, we acknowledge that the FMB industry relied on existing
policies in formulating these products.
It is important to note, however, that we know of no evidence that
would suggest that producers of FMBs in the 1970s or 1980s were using
nonbeverage flavors in their products at the high levels disclosed in
the 2002 ATF study. To the best of our knowledge, the production of
FMBs that derived the majority (and in some cases, up to 99%) of their
alcohol content from added flavors is a trend that began in the 1990s.
As the trend accelerated, ATF concluded that it was necessary to
reevaluate the prior policy and consider the need for placing limits on
the quantity of alcohol derived from added flavors. Furthermore, many
State regulatory agencies began requesting that ATF create a Federal
standard for the production of FMBs because of the confusion caused by
the marketing and labeling of these products.
Agencies may change policies, as long as the agency follows the
appropriate procedures under the Administrative Procedure Act. The
Supreme Court has recognized that ``[r]egulatory agencies do not
establish rules of conduct to last forever.'' (See American Trucking
Assns., Inc. v. Atchison, T. & S. F. R. Co., 387 U.S. 397, 416 (1967).)
The Court has also stated that agencies must be given ample latitude to
``adapt their rules and policies to the demands of changing
circumstances.'' (See Permian Basin Area Rate Cases, 390 U.S. 747, 784
(1968).) Furthermore, the Court has recognized that ``[a]n agency's
view of what is in the public interest may change, either with or
without a change in circumstances. But an agency changing its course
must supply a reasoned analysis * * *.'' (See Motor Vehicle Mfrs. Ass'n
v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 57 (1983), quoting
Greater Boston Television Corp. v. FCC, 143 U. S. App. D. C. 383, 394,
444 F.2d 841, 852 (1970) (footnote omitted), cert. denied, 403 U.S. 923
(1971).)
New manufacturing processes and marketing trends created a need for
TTB and our predecessor agency to reevaluate longstanding policies on
the use of flavors containing alcohol in the production of beer and
malt beverages. As the above-cited cases demonstrate, an agency may
make changes in policy, as long as the interpretation of the applicable
statutes and the rest of the administrative record reflects reasoned
deliberation.
Finally, even if the agency in the two rulings referred to by the
commenter had not given notice of its intention to engage in rulemaking
on this issue, and even if the agency sent mixed signals on this issue
prior to 2002, an agency is not precluded from engaging in rulemaking
simply because it would change even a longstanding policy. By
publishing a notice of proposed rulemaking and soliciting comments on
this issue, we have clearly met the notice and comment requirements of
the Administrative Procedure Act (APA). Notice No. 4 provided specific
notice of the proposed changes to the industry and the public, and we
provided the industry and the public almost 7 months to submit comments
on those proposed changes.
As reflected in this discussion of comments, we have carefully
considered the comments from all interested parties, and we have given
full consideration to options that would minimize any adverse economic
impact flowing from the rule and that would afford industry members an
adequate period of time to reformulate their products, if necessary. In
crafting a standard on the use of flavors containing alcohol in the
production of FMBs, we have also taken into consideration past and
current agency policy. Accordingly, we have taken fairness and equity
into consideration in drafting the final rule.
VII. Regulatory Burden and Cost-Related Issues
One of the most important issues raised in the comments is the
difference in regulatory burdens and costs associated with the proposed
0.5% standard and the 51/49 standard. Opponents of the proposed 0.5%
standard gave more weight to this issue than did supporters of that
standard. However, many commenters who would be directly impacted by
the proposed 0.5% standard urged TTB to adopt the 51/49 standard
instead because it would be less costly and because it would not
distort competition in the FMB market.
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The major issues raised by commenters on both sides of this question
are summarized below.
A. Costs of Complying With the Proposed 0.5% Standard
1. Comments in Support of the 0.5% Standard
Many industry members who commented in support of the 0.5% standard
downplayed the importance of economic issues. For example, the Beer
Institute stated that the economic well being of certain sectors of the
economy should not be a consideration in straightforward application of
properly enacted Federal statutes. It also suggested that some of the
comments were based on erroneous information that was provided to
retailers, notably the false threat that FMBs will disappear from the
marketplace if the proposed TTB standard is finally adopted. Instead,
the Beer Institute suggested that these products would continue either
as distilled spirits products or as reformulated FMBs.
Some individual FMB producers also suggested that the economic
issues were not significant. Anheuser-Busch acknowledged that, as with
any new process, there may be associated transition costs, and it
stated that even the 51/49 standard would require process changes and
associated transition costs for most producers. Anheuser-Busch
commented that it expected the total cost impact across the company's
system to be minimal, ranging between a small investment in capital and
a net cost savings due to process and material changes. In either case,
the brewer did not anticipate that the slight change in cost would
impact FMB prices for its wholesalers, retailers or consumers.
Miller commented that there are costs that have been, and will be,
incurred as a result of the proposed new standard; however, it accepted
those costs as a part of doing business in a regulated industry.
Neither brewer submitted an estimate of the costs they expected to
incur; nor did they explain precisely how they would reformulate their
products to minimize the cost of compliance.
Some supporters of the 0.5 percent standard commented that the
standard would not adversely affect wholesalers or retailers, and that
in fact, the standard will bring clarity to the marketplace and
preserve the FMB category for wholesalers and retailers. Without a
clear standard, these commenters believe that the States would take
action and may ultimately classify these products as distilled spirits.
Such reclassification would negatively affect wholesalers and retailers
because in certain States they would no longer be able to sell these
products.
2. Comments Opposed to the 0.5% Standard
Opponents of the proposed 0.5% standard submitted a great deal of
data about the estimated economic impact of the proposed rule. 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. Other commenters argued that the
proposed 0.5% standard would have negative cost implications for the
industry, the public, and the Federal Government, as set forth below.
Consumer Prices. Many commenters expressed concerns that the cost
of FMB products would rise if the proposed rule were adopted. As
previously noted, several thousand consumers commented against the
proposed rule on various grounds, including the concern expressed by
many that the 0.5% standard would result in higher prices for
consumers.
Disruption to Existing Businesses. The FMBC commented that the
proposed 0.5% standard would profoundly threaten the FMB business of
its members. It stated that these companies had relied on longstanding
Federal policies to create beverages that consumers enjoy and had
invested millions of dollars in promoting these brands. The FMBC
suggested that any change would disrupt and possibly damage the
business of its members; however, they were willing to adjust to a
majority standard. The FMBC argued that the proposed 0.5% standard
presented a much more dire threat to the business investment of its
members, without a sound policy justification behind it.
Research and Development Costs. Many commenters suggested that
compliance with a new standard would force brewers to incur extensive
upfront manufacturing costs for research and development to create new
formulations for existing products. According to these commenters, the
0.5 percent standard would require most manufacturers to reformulate
their existing products. They stated that reformulation would be quite
costly in that it would require large amounts of capital to purchase
new equipment, investment in expensive technologies and treatment
processes, and to advertise the newly reformulated products.
Loss of Sales Due To Reformulation. Several FMB producers commented
that even if they can reformulate their products to comply with the 0.5
percent standard, they believe they may not be able to achieve the same
taste profile as their existing products. They indicate that this would
cause them to lose customers, thereby reducing their sales and revenue.
ECS Study. The FMBC contracted with Economic Consulting Services,
LLC (ECS) to conduct an economic assessment of the impact that both the
0.5 percent standard and the majority standard would have on the
domestic industry. The ECS assessment relied on information available
to the public as well as information it obtained by surveying the
FMBC's members. Sales by the members of the FMBC comprise approximately
56 percent of the FMB market.
The ECS found that, for various reasons, the FMBC's members
unanimously responded that they would choose to reformulate their
products to comply with either standard rather than sell them as
distilled spirits specialty products. They expected substantial costs
associated with reformulating current products to comply with either
standard. ECS estimated losses based on expected loss in volume,
expected upfront capital costs, expected upfront research and
development and test marketing costs, expected losses in operating
income, and expected capital losses. ECS then extrapolated the data
they obtained from FMBC members to the entire FMB industry based on
market share data.
Specifically, the ECS estimated the cost to comply over the next
four years to be:
Costs To Comply (in Millions) Over 4 Years
------------------------------------------------------------------------
Majority 0.5%
Costs to standard Standard
------------------------------------------------------------------------
FMBC Members...................................... 186.2 340.5
Entire FMB Industry............................... 332.5 608.1
Federal Taxes Foregone............................ 139.1 291.8
------------------------------------------------------------------------
ECS indicated that the 0.5 percent standard imposes significantly
higher costs because it ``would drive several of the products off
retailer shelves completely, denying the producers, distributors and
retailers a source of business and profits and denying customers a
product they have come to enjoy.''
Indirect Costs. Several commenters focused on the indirect costs
associated with the proposed rule. For example,
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some commenters suggested that Federal Government's revenue collections
would suffer because the 0.5% standard would cause sales of FMB
products to decline. Several FMB wholesale distributors and other
commenters expressed concern that the 0.5 percent standard would cause
existing FMBs to be reclassified as distilled spirits, with the result
that wholesale distributors would no longer be permitted to distribute
them in certain States. These commenters also noted that this
reclassification would affect retailers because, in many States, only
State stores can sell distilled spirits.
Effect on Small Businesses. Many commenters suggested that the
proposed 0.5% standard would have adverse effects on small businesses.
Some of these commenters suggested that the costs of complying with any
new standard would hurt small companies the most since larger companies
possess economy of scale advantages.
TTB received a few comments from companies that identified
themselves as small brewers that would be adversely impacted by the
proposed rule. It should be noted that, pursuant to the regulations
issued by the Small Business Administration, a small brewer is one that
has no more than 500 employees. (See 13 CFR 121.201). These commenters
urged TTB to adopt the 51/49 standard. They suggested that the proposed
rule would have a disproportionately large impact on small businesses
because they are less able to adapt to the new technology necessary to
comply with the proposed 0.5% standard.
Mark Anthony Brands (MAB), a member of the FMBC, is the national
distributor and marketer of several popular FMB products. MAB and its
production affiliate, Mark Anthony Brewing, Inc., contract with four
U.S. co-packing facilities to produce its FMB products. [In this
document, references to ``co-packing'' cover situations where one
brewer produces and bottles for another brewer pursuant to a contract
or where a brewer uses another brewer's premises under an alternating
proprietor arrangement.] MAB suggested that TTB should abandon the 0.5%
proposal in favor of the majority standard because the latter did not
threaten the competitive viability of small companies like MAB and its
co-packers. MAB suggested that the 0.5% standard would threaten the
viability of the few regional breweries that currently co-pack FMB
products for MAB and others.
City Brewing Company stated that it owns and operates a 5-million
barrel capacity brewery in La Crosse, Wisconsin, which employs 350
people. The brewery was closed in 1999, but resumed operations in 2000
capitalized with funds contributed by employees and local investors. It
adopted a contract-brewing business strategy because the beer brands
formerly produced by the brewery were purchased and are now controlled
by a major brewery. City Brewing Company stated that the consolidation
of U.S. breweries had virtually eliminated all excess brewing capacity
for beer marketers other than the largest U.S. brewers. The brewery
stated that it has been profitable since resuming operation, but it
expressed concerns that the proposed rule might result in a loss of
business for FMB producers, which would have a significant negative
impact on the brewery.
A small brewery in North Carolina, Carolina Beer & Beverage
Company, stated that adoption of the 0.5% standard would have a
``profound adverse impact'' on both this brewery and similar small
brewers. The brewery urged adoption of the majority standard instead.
Carolina Beer & Beverage stated that 70% of its revenues are derived
from FMBs, and it noted that it had invested significant amounts of
capital and resources in order to produce FMBs that comply with
longstanding Federal policies. This brewery suggested that if TTB
adopted the 0.5% standard, it was unlikely that it could to maintain
its competitiveness in the FMB industry and that such a standard could
even threaten the company's ability to stay in business.
In addition, many distributors commented on the adverse impact of
the 0.5% standard. For example, United States Beverage, a small
distributor located in Connecticut, commented that it employs 85 people
and that FMB products support over 70% of its revenues. This commenter
stated that the proposed 0.5% standard would have ``devastating''
effects on the industry. United States Beverage also suggested that
while reformulation might be only an inconvenience to the largest
brewers, it would be an ``operational impossibility'' for a smaller
brewer.
B. Effect on Current Products and New Product Development
In Notice No. 4, TTB sought comments relating to the effect of the
proposed regulations on the viability of products currently on the
market. We stated we were particularly interested in comments
addressing whether products on the market could be made under the
proposed standard. Additionally, we sought comments on how the adoption
of the 0.5% added alcohol standard would affect taste, shelf life,
stability, or other characteristics of these products. We also sought
comments on whether production practices are available to produce FMBs
with the desired product profile and still comply with the proposed
standard. Finally, we sought comments as to whether another standard,
such as the 51/49 standard, would be more appropriate for these
products.
1. Comments Supporting the 0.5% Standard
Anheuser-Busch commented that it is capable of producing FMBs under
the 0.5% standard and is preparing to do so. The brewer stated that its
brew masters have already developed reformulated products that will be
indistinguishable from the current FMB products they produce and sell.
Anheuser-Busch indicated that these reformulated products would have
the same clarity, aroma, and taste profile of their current products.
Anheuser-Busch further stated that reformulation could be done and that
no FMB producer should lead TTB to believe otherwise.
Miller also commented that its products could be produced under the
proposed standard without compromising their taste or their high
quality standards. Furthermore, the brewer indicated that it has
successfully produced prototype products that comply with the 0.5%
standard and has tested the acceptability of these products with expert
tasters and others. These tests confirm that the reformulated product
satisfies the taste profile of the original product.
Miller further stated that shelf life and product stability are not
expected to be barriers to complying with the new standards. Miller
stated that:
Shelf life will be reduced to that of a traditional beer, i.e.,
approximately four months which is a significant reduction from the
six to 12 month shelf life currently applicable to Flavored Malt
Beverages produced today. Because it will be consistent with
traditional beers, however, we do not anticipate shelf life or
product stability to be an insurmountable problem with the
reformulated products.
Other commenters stated that since certain brewers have already
demonstrated their ability to produce FMBs in accordance with the 0.5%
standard, they believe that these products will be available to
wholesalers and retailers in all States with no interruption and no
discernable taste differences.
Coors commented that the 0.5% standard ``is also fair because it
does not prohibit any current product. Just because many of the current
`flavored
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malt beverages' may need to be reclassified as distilled spirits does
not mean that the TTB proposed regulation will `kill the category,' as
some might claim.'' Coors suggested that under the proposed rule,
products containing 0.5% or more alcohol from the distilled spirits
components of added flavors could continue to be produced, but would be
regulated as distilled spirits products.
2. Comments Supporting the 51/49 Standard
While the major brewers claimed that product reformulation under
the 0.5% standard would not be a problem, as previously noted in this
preamble, other FMB producers suggested that this would have a
significant impact on their businesses, resulting in higher costs for
research and development, new equipment, and marketing, and the
possibility of reduced sales due to consumer rejection of reformulated
products.
Furthermore, several members of Congress expressed concerns about
the costs of reformulation and the possible risks posed by such
reformulations to the FMB industry. For example, one U.S. Senator
stated:
If the new formulation standards increase the costs of producing
FMBs, and alter their taste such that consumers are reluctant to
purchase them, the FMB market will decline. This decline in
profitability will surely drive some FMB manufacturers out of the
market, and reduce competition in the marketplace.
This Senator urged adoption of the 51/49 standard. Another Senator
suggested that the proposed standard ``would likely change the taste
and character of FMBs--products which have attained broad consumer
loyalty. There is no doubt that this outcome would provide FMB's rivals
with a distinct competitive advantage.''
Numerous State lawmakers opposed to the 0.5% standard commented
that if TTB establishes the 0.5% standard, it would force FMB brewers
to make costly changes to their current production processes. They
indicated that TTB's adoption of the 0.5% standard would force FMB
brewers to increase the amount of malted barley and other traditional
ingredients used in an FMB, probably resulting in very differently
tasting products.
As indicated earlier in this comment discussion, the Flavor and
Extract Manufacturers Association of the United States (FEMA) urged TTB
to reconsider the proposed 0.5% standard because it would significantly
restrict the amount of alcohol contributed to the finished product from
flavors, thus making it impossible for flavor chemists to satisfy the
consumer desire for the distinctive FMBs currently sold.
FEMA noted that flavors contain ethyl alcohol because it is a safe,
economical, and effective extraction medium for fruits, nuts, and
botanicals, as well as a diluent for polar and non-polar flavor
chemicals. FEMA also stated that fruit essences and distillates, which
are used extensively in the creation of natural fruit flavors, contain
an appreciable amount (up to 20-25%) of naturally occurring ethyl
alcohol.
FEMA stated that, because of their composition, alcohol beverages
require higher flavor loads to deliver pleasing characterizing flavors.
It stated that while many non-alcoholic beverages use emulsions to
deliver flavor systems, this is not possible in alcohol beverages
because the destabilizing effect of the ethyl alcohol will produce
precipitation and oil separation in the final beverage. According to
FEMA, this means that the higher flavor level and the dependence on
ethyl alcohol as the only reliable solvent makes it necessary to exceed
the 0.5% limitation to manufacture acceptable and stable products.
FEMA noted that the ATF study referenced in Notice No. 4 found that
most FMBs formulated their products in accordance with ATF Ruling 96-1.
FEMA stated this has resulted in the evolution of beverages that
deliver to the consumer a clean, pleasant flavor and that have a
reasonable shelf life. FEMA further stated that producers have used
various treatments to reduce the inherent bitterness and off-flavor
characteristics associated with fermented malt beverages. FEMA
suggested that if TTB limits the contribution of alcohol from flavors
to less than 0.5%, that restriction would negatively impact the taste
of FMBs and limit the shelf life of these products.
FEMA noted that malt-based beverages require a higher percentage of
flavor addition than other alcohol beverages due to the more pronounced
organoleptic properties of the malt base itself. Malt-based products
have an aftertaste that is difficult to overcome. The aftertaste and
malty off-characters tend to accentuate with increased exposure to
heat. Limiting the amount of alcohol derived from flavor severely
limits the opportunity to use vanilla, cocoa, coffee, and other
botanical extracts that often require usage levels of 3% or higher in
the finished products.
In conclusion, FEMA stated that limiting the contribution of
alcohol content by flavors to less than 0.5% would change the overall
taste profile of these products, and the consumer will ultimately
receive a different tasting, less acceptable beverage. The change in
flavor will be caused by a combination of increased malt base
percentages and off-flavor contributed by the malt. FEMA stated that
limiting either the ingredients that may be used in flavors or the
alcohol contributions from flavors would make it impossible for
manufacturers to continue producing many of the malt beverages being
sold today and would severely limit the flavor industry's opportunity
for new product development.
3. Neutral Comment
Finally, Gallo stated that it had conducted a study involving the
aging of reformulated products under normal conditions to determine the
impact of the proposed changes to the alcohol source standards on FMBs.
Gallo studied two of its 13 FMB products, comparing their current
formulation with both standards aired in Notice No. 4. Due to the
limited time available, Gallo noted that it was only able to evaluate
these products as they would age under normal shipping and storage
conditions 3\1/2\ months after production.
After evaluating the results, Gallo determined that the study was
inconclusive. According to Gallo, it appeared that the change in malt
percentage impacted each product differently. Gallo concluded that
``[t]he indication is that all of our products must be studied
individually to understand the full impact of the proposed change.
There was no time to explore this issue in time for these comments.''
Gallo stated that, in light of the inconclusive results from the study,
it took no position on the proposed definitions for beer and malt
beverages.
Gallo did indicate that it plans to continue to produce and market
FMBs under either of the standards aired for comment in Notice No. 4.
However, it pointed out that either new standard would require Gallo to
invest in new equipment to produce additional volumes of malt base.
Either standard would also force Gallo to develop new malt fermentation
techniques and production techniques to provide a malt base that
results in products with a flavor and taste profile that meets current
consumer expectations. This, Gallo noted, might require development of
new technology and different equipment.
C. Effect on Competition
1. Comments in Support of the 0.5% Standard
Many small craft brewers expressed support for the 0.5% standard
based on their view that the arrival of FMBs in
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the marketplace has had a negative effect on sales of traditional malt
beverage products. Some commenters suggested that TTB should adopt the
0.5% standard for added alcohol because this action would benefit small
brewers who generally do not produce FMBs.
Many small brewers and their employees expressed their concern that
the arrival of FMBs during the past years has weakened the brewing
industry. They explained that over the past 25 years there has been a
major revitalization of the brewing industry, with smaller brewers and
brewpubs now found in every State and metropolitan area and in many
small towns. They indicated that the number of microbreweries closing
since the arrival of the newer FMBs has exceeded the number of
microbreweries opening--reversing the trend and weakening the industry.
One small brewer stated that he expects to compete with other
quality small brewers in the region, but would not like to see huge
corporations with unlimited legal and marketing funds compete against
him with products that are not real beer. Another small brewer
commented that if he can make a wonderful tasting product with this
standard, then the larger competitors could do it also. A third brewer
indicated that the manner of FMB production explained in Notice No. 4
avoids many of the costs associated with the volume demands of beer
production and storage. He indicated that he believes this results in
an unfair competitive advantage over traditional and craft brewers.
2. Comments in Support of the 51/49 Standard
Many opponents of the 0.5% standard suggested that adoption of the
standard would have an anti-competitive effect. For example, the FMBC
suggested that support for the 0.5% standard appeared to come from the
many industry members who, for competitive reasons, would benefit from
the complete demise of the FMB category or would derive a competitive
advantage from a 0.5% rule. The FMBC stated that the 0.5% standard, if
adopted, would give a competitive advantage to some FMB producers at
the expense of others. In support of this claim, the FMBC pointed out
that America's largest brewer claimed that it could already produce
FMBs meeting the 0.5% standard without compromising product taste or
availability. The FMBC stated that this illustrates that, if adopted,
the standard would adversely affect competition by forcing competitors
to acquire technologies and capabilities similar to those apparently
possessed today by the largest brewers. The FMBC added that the
marketplace, not the Government, should determine the industry's
winners and losers. The FMBC urged TTB to avoid crafting a rule that
hands a competitive advantage to some FMB producers at the expense of
others.
Mark Anthony Brands (MAB) stated that:
[F]ederal policies favoring competition demand that TTB consider
anticipated anti-competitive effects in choosing between policy
alternatives and seek to adopt that alternative which promotes
competitive outcomes. The 0.5% standard would favor larger
companies, particularly America's (and the world's) largest brewers,
and would therefore decrease competition in the FMB market segment.
MAB accordingly urges TTB to reject the proposed 0.5% standard in
favor of one that allows FMB producers to compete on a level playing
field and supports future competition.
MAB suggested that Federal policy strongly favors marketplace
competition and discourages the unhealthy concentration of market power
in the hands of a few dominant players. MAB also argued that ensuring
competition in the alcohol beverage industry played an important role
in motivating Congress to enact the FAA Act, and it cited a provision
of the legislative history of the FAA Act, which indicated that its
promoters wanted to ``enable small units to get into the liquor
industry.'' MAB also noted that the burdens of regulation fall
disproportionately on small companies, citing a provision of the
legislative history of the Regulatory Flexibility Act which recognized
that even if actual regulatory costs are equal between competing large
and small firms, small firms have fewer units of output over which to
spread such costs and are thus unable to take advantage of the
economies of scale.
As noted earlier in this comment discussion, MAB argued that TTB
should abandon the 0.5% proposal in favor of the majority standard. MAB
stated that the past two decades have seen the concentration of brewing
capacity in the United States into a very small number of hands and
that while America is home to over 1,400 breweries, the three largest
brewers own the facilities responsible for producing over 90% of
domestic beer and malt beverages. Noting that most other brewers are
small ``micro'' and ``regional specialty'' operations that produce
their own products, the commenter argued that these small brewers would
not have the capacity to produce a successful new brand. MAB suggested
that because of the costs of a new brewery, combined with the high
failure rate of new products, production capacity presents a formidable
barrier to entry to the U.S. beer market.
Accordingly, MAB stated that the ``few remaining `old regional'
brewers today represent the only realistic way to quickly access
significant production capacity in the U.S.'' MAB argued that the
demise of America's ``second-tier'' brewers over the past 10 years has
taken vast amounts of brewing capacity off-line, and that a few old
regional breweries, which currently co-pack FMB products for MAB and
others, own the remaining excess U.S. brewing capacity. MAB concluded
that a decline in FMB sales would ``likely'' cause these brewers to
close their doors altogether and that this resulting loss of production
capacity in the United States would add costs and drive jobs overseas.
MAB also suggested that the 0.5% standard represented a ``win-win''
scenario for the largest brewers if they indeed possess the technology
to produce FMBs under that standard that achieve the same taste profile
as existing products. MAB stated that this technology would allow them
to dominate the FMB category with their products. On the other hand, if
consumers reject FMBs produced under the 0.5% standard, MAB stated that
``the largest brewers will benefit because the elimination of the FMB
category will protect their extensive investments in the production and
distribution of traditional beer and malt beverage products.''
Several members of Congress indicated that the 0.5% standard seems
designed to distort the existing market by providing an artificial
competitive advantage for companies that currently dominate the
domestic beer industry but that have introduced under-performing and
less popular FMB products.
We also received a comment from the British Embassy suggesting that
the proposed rule would place an unfair competitive disadvantage on
companies based in the United Kingdom (U.K.), including the U.S. market
leader, threatening jobs in the U.K. and the United States, as well as
thousands of dollars in investment.
D. Effect on the Retail Licensing System and Overall Marketplace
1. Comments in Support of the 0.5% Standard
Many commenters stated that the 0.5% standard would ensure product
integrity, preserve long standing distinctions imposed on beer, wine,
and spirits, and provide a uniform and
[[Page 208]]
consistent classification system on which States, wholesalers,
retailers, and consumers can rely. They stated that, if adopted, the
standard would help to maintain an orderly marketplace, meet consumer
expectations for consistent products, and help sustain the long-term
development of the FMB category.
According to several commenters, implementation of the 0.5%
standard would avoid costly and confusing disruptions in State
licensing, taxation, and distribution policies. Several retailers and
wholesalers feared that any other standard could have significant
consequences for the industry and for thousands of alcohol beverage
licensees, most of which are small businesses. Without a clear
standard, some commenters believed that the States would take action
and may ultimately classify these products as distilled spirits. Such
reclassification would negatively affect beer wholesalers and retailers
because in certain States they would no longer be able to sell these
products.
2. Comments in Support of the 51/49 Standard
In opposition to the 0.5% standard, several FMB wholesalers
expressed concern that the standard would cause TTB to reclassify
existing FMBs as distilled spirits. Some commenters expressed a fear
that if TTB reclassifies these products, certain States will no longer
permit beer wholesalers to distribute them. Some commenters pointed out
that this reclassification would also affect retailers because in many
States only State-operated stores can sell distilled spirits.
Many commenters, chiefly wholesalers and their employees, as well
as employees of FMB producers, expressed the fear that they will lose
their jobs if TTB approves the 0.5% standard. One industry association
cautioned that approval of this standard would cost jobs in production
facilities all across the country. Another commenter pointed out that
thousands of businesses rely on sales of FMBs for revenue, from the
product itself and from secondary sales. The commenter indicated that,
if implemented, Notice No. 4 would threaten sales and put further
pressure on small businesses already pushed to the brink.
Diageo explained that its products have generated numerous jobs
throughout the country. Diageo noted that it not only employs numerous
production and sales employees, but also generates work for numerous
suppliers in areas such as glassware and packaging materials. Diageo
stated that two of its facilities are involved in the production of
FMBs and contract production has occurred at five non-Diageo facilities
during the past three years.
A U.S. Senator commented that FMB bottling facilities provide jobs
and millions in dollars to local economies through wages, taxes,
services purchased, and other means. He stated that any regulation that
threatens the market position of these products puts those jobs at
risk. Other U.S. Senators commented that this proposal could have a
profound and devastating impact on employees in their States and across
the nation. Two U.S. Senators indicated that FMBs constitute a booming
industry that has brought a direct benefit to their State, and they do
not wish to see its growth and associated jobs curtailed in such an
unnecessary fashion.
A wholesaler expressed concern over some small brewers' claims that
the 0.5% standard will not harm America's small brewers. This commenter
asserted that these small brewers have never produced an FMB product
and have no intention of competing in the FMB category in the future.
Since these small brewers have no stake in the outcome of this proposed
rulemaking, their claims should not be considered as authoritative.
Other commenters pointed out that it is not the job of TTB to favor one
industry over another.
E. TTB Response
1. Regulatory Burdens and Costs Imposed by the Proposed Rule
When we issued Notice No. 4, we certified that the proposed rule
would not have a significant impact on a substantial number of
entities. We stated our belief that 10 or fewer qualified small
breweries manufacture FMBs subject to the rule. We asked any small
brewery that believed it would be significantly affected by this rule
to let us know and tell us how it would affect them. We also certified
that the proposed rule was not a significant regulatory action, as
defined by Executive Order 12866, because it would not have an annual
effect of $100 million or more on the United States economy.
After reviewing the comments, we have not changed our position on
these matters. We do not believe that the proposed rule would have had
a significant economic impact on small businesses, within the meaning
of the Regulatory Flexibility Act. While we received many comments
suggesting that there would be numerous indirect effects on wholesalers
and retailers of FMBs, we received only a few comments from brewers
that identified themselves as small businesses producing FMBs that
would be adversely impacted by the proposed 0.5% standard.
Nor do we believe that the proposed rule would have been a
significant regulatory action within the meaning of Executive Order
12866, notwithstanding the suggestion to the contrary in the ECS Study.
The primary data for the analysis in that study comes from FMBC
members. Because much of the economic data submitted by FMBC members is
proprietary and confidential, TTB cannot verify the accuracy of the
figures.
Furthermore, we are concerned that certain parameter assumptions
and calculations in the ECS study are questionable and could lead to an
overstatement of loss. For example, since the study separately included
estimates of declines in Federal corporate tax revenue, it should have
presented its estimates of declines in profits net of taxes. Under the
0.5% standard, ECS calculated that Federal corporate tax revenue would
decline by $94 million in present value due to reduced profits for FMBC
firms over the period 2004-2007. Accordingly, the expected after-tax
decline in profits for FMBC firms would be $247 million rather than the
$341 million decline in profits listed in the study. The study's use of
discount rates of 20 and 30 percent to account for the increased
uncertainty of future income appears to assume a large risk-premium.
The treatment of capital expenditures is unclear, and the measurement
of capital stock and capital losses is questionable.
Furthermore, there is a methodological flaw in deriving private and
public loss totals because the ECS study looked at FMB operations in
isolation, without accounting for the potential for increased sales of
other types of alcohol beverages. For example, we do not agree that
either the proposed 0.5% standard or the 51/49 standard would result in
significant losses of Federal tax revenues as a result of lowered sales
of FMBs. Even if the reformulation of popular FMB products results in
lowered sales for these products, it does not necessarily follow that
the Federal Government would lose tax revenues as a result. Because of
changes in consumer preference and other factors, the relative market
share of specific products often fluctuates. However, it is logical to
assume that most of the FMB consumers who might abandon their favorite
products as a result of changes in taste profile would substitute other
alcohol beverages for them.
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Thus, it is unlikely that any changes in the relative market share
of FMB products would result in a significant net loss of the Federal
excise taxes collected on alcohol beverages. Furthermore, because many
FMB producers also manufacture other types of alcohol beverages, losses
in sales of FMB products may be offset by increased sales of other
types of alcohol beverages.
Finally, we do not believe that the economic impact on FMBC members
can necessarily be extrapolated to the rest of the FMB industry based
simply on market share. In fact, the FMBC, as well as other commenters
opposed to the proposed 0.5% standard, have argued in this rulemaking
proceeding that the 0.5% standard would benefit America's largest
brewers at the expense of their competitors. The comments show that the
expected costs of compliance vary from producer to producer. For
example, as previously noted, Anheuser-Busch commented that it expected
the total cost impact to be minimal and did not anticipate the ``slight
change in cost'' to impact FMB prices for wholesalers, retailers, or
consumers. Opponents of the 0.5% standard cannot argue with any
consistency that the standard would unfairly benefit their competitors,
while still maintaining that those competitors would suffer the same
costs and losses as they would.
Nonetheless, after carefully considering all of the comments on
this issue, TTB is persuaded that implementation of the proposed 0.5%
standard might impose economic burdens on a sector of the FMB industry
and adversely affect the viability of some small brewers who produce
FMBs, as well as their ability to compete within the beer industry.
The comments indicated that while some brewers would be able to
reformulate without incurring significant costs, many producers of FMBs
believe that reformulation of their products to comply with a 0.5%
standard would result in significant costs. The FMB producers that
commented on this issue indicated that they would reformulate their
products as FMBs rather than produce them as distilled spirits
products. Accordingly, the costs associated with the 0.5% standard are
not connected with the higher Federal excise tax imposed on distilled
spirits products. Instead, these costs are brought about by the need to
conduct research and development, and to invest in new equipment and
technology necessary to produce FMBs that meet the 0.5% standard. Many
FMB producers indicated that the costs of complying with a 51/49
standard would be significantly lower. Those FMB producers that
commented in favor of the 0.5% standard did not specifically address
the relative costs of the two standards, although one brewer noted that
either standard would impose some costs.
In addition to the costs associated with producing new FMBs that
met the new standards, many FMB producers expressed concerns that they
would not be able to achieve the same taste profile under the proposed
0.5% standard, and that the 51/49 standard would afford them more
flexibility in meeting the expectations of consumers in this area.
These producers are concerned that if they attempt to reformulate their
products in accordance with the 0.5% standard, consumers will not
accept the reformulated products and product sales will go down,
possibly resulting in the disappearance of some current FMB products
from the marketplace.
A comment from FEMA supported this concern, noting that the 0.5%
standard would make it impossible for manufacturers to continue
producing many of the malt beverages being sold today and would
severely limit the flavor industry's opportunity for new product
development. We also find persuasive the comment from Gallo, which did
not take a position on the 0.5% or 51/49 standard, but which noted the
difficulty of predicting the impact of either standard on the taste
profile and shelf life of FMB products.
Although the number of small brewers affected by this rule is not
large, we note that several commenters indicated that there are fewer
regional brewers with excess production capacity in the United States
today than in the past. Many commenters indicated that the proposed
0.5% standard could have a significant impact on those regional brewers
that co-pack FMBs for other companies. In particular, we are concerned
that the economic impact of the proposed rule may be disproportionately
borne by those small brewers who lack the economies of scale possessed
by their larger competitors, and who would be less able to absorb the
costs associated with reformulation of products in accordance with the
more stringent 0.5% standard.
As a related matter, TTB is concerned that the proposed 0.5% rule
might affect the ability of some small brewers to compete within the
brewing industry. It should be noted that we do not agree with those
comments that suggested that one of the purposes of the proposed rule
was to protect either large or small brewers from competition with
producers of FMBs. It is not TTB's intention in this rulemaking action
to favor any one segment of the FMB or beer industry over another, to
remove competition in the marketplace, or to destroy a particular
category of malt beverages simply because it is preferred by many
consumers over more traditional brewery products. Our statutory mission
under the FAA Act is to promote fair competition within the malt
beverage industry, not to favor one segment of the industry over
another. Accordingly, the purpose of the final rule is to treat all
segments of the beer and FMB industries in a fair and even fashion.
2. Options To Reduce Regulatory Burdens and Costs
Even if a rule is not a significant regulatory action, Executive
Order 12866 requires us to design the regulation in the most cost-
effective manner to achieve the regulatory objective.
We have considered several options to reduce the regulatory burdens
and economic costs imposed by the proposed rule. One of those options
is to exempt small businesses from the requirements of the rule.
However, this option is not viable for several reasons. First, one of
the primary purposes of the rule is to enhance consumer protection;
this purpose would be defeated by an exemption for small businesses.
Furthermore, some small brewers who produce FMBs do so under contract
with larger companies, and allowing an exemption for these companies
would raise significant fairness issues. Finally, and most important,
since the IRC does not authorize such a difference in tax treatment for
small producers of FMBs, we do not believe we have statutory authority
to implement such an exemption by regulation.
A second option we considered was the delay of the effective date
of the final rule in order to provide adequate time for the industry to
make the necessary changes to product formulation. As discussed in more
detail later in this document, we have delayed the implementation of
the final rule for one year. We believe this one-year delayed effective
date will provide ample time for the FMB industry to conform to the
requirements of the final rule.
The final option we considered was adoption of the 51/49 standard
instead of the 0.5% standard. Based on the information in the
rulemaking record, we have concluded that compliance with the 51/49
standard will be significantly less burdensome and costly than
compliance with the 0.5% standard. Furthermore, based on the
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comments, it appears that adoption of the 51/49 standard would not
adversely affect the ability of small brewers to compete in the FMB
marketplace and would reduce the impact of the changes needed to
reformulate existing products to comply with the final rule.
As we considered the comments and weighed the relative merits of
the 0.5% standard and the 51/49 standard, we also considered the issues
of costs and other regulatory burdens. As shown in the remainder of
this document, we have tried to address these issues at each step, so
that our final rule will achieve the goals of this rulemaking process--
protecting the revenue, ensuring that FMB labels provide the consumer
with adequate information about the identity of the product and do not
mislead consumers, and setting a Federal standard for the use of added
alcohol flavors in malt beverage products--while minimizing unnecessary
costs and other regulatory burdens on the affected industry.
For these and other reasons set forth later in this document, we
have concluded that we should adopt the 51/49 standard for beers under
the IRC and for malt beverages under the FAA Act. TTB believes that by
allowing FMBs to comply with the less stringent 51/49 standard rather
than the proposed 0.5% standard, we meet the goals of this rulemaking
proceeding and, at the same time, lessen the potential economic costs
and other regulatory burdens imposed on members of the FMB industry.
The other reasons for adopting the 51/49 standard are set forth
elsewhere in this preamble.
VIII. The 0.5% Standard vs. the 51/49 Standard--Other Issues
A. Comments in Favor of the 0.5% Standard
1. Consistency With the IRC and the FAA Act
Many commenters found support for the proposed 0.5% standard in the
IRC provisions establishing 0.5% as a dividing point between products
subject to tax under the IRC and those that are not subject to tax. For
example, the Beer Institute noted that the IRC ``clearly provides the
Secretary with broad authority to issue and enforce regulations, to
classify products for tax purposes, and to establish a workable
administrative system to collect taxes.'' The Beer Institute stated
that classifying intoxicating liquors based on the 0.5% cutoff has a
long history, dating back to 1902 and continuing through Prohibition.
Miller commented that the ``use of what could be characterized as a de
minimis threshold such as 0.5% is a common sense approach to the
regulation of alcohol beverages considering that small amounts of
alcohol are present in many other beverage products such as juice, soft
drinks, soda, and non-alcoholic beers made by brewers.''
Several commenters noted that the IRC and FAA Act definitions of
``beer'' and ``malt beverage,'' respectively, contemplate that the
alcohol content in those products must be derived from fermentation,
not from added distilled spirits. Coors argued that while some may
argue that there is a difference between combining distilled spirits
``directly'' with a malt base and doing so ``indirectly'' through the
addition of flavors, it believed that ``this is a distinction without a
difference. Congress clearly intended to classify any alcoholic
beverage that contains a mixture or dilution of distilled spirits as
`distilled spirits.' ''
Several brewers commented that neither law nor good policy
supported the 51/49 standard. Coors suggested that while the proposed
0.5% standard allowed the addition of a de minimis amount of flavors, a
51/49 rule went beyond the allowance of a de minimis quantity of
flavors. Anheuser-Busch stated that neither the FAA Act nor the IRC
provided a basis for TTB to adopt the 51/49 standard, arguing that
``[t]he difference of only a couple of drops between a product that is
`mostly' a beer versus `mostly' a distilled spirit would make a mockery
of the law, public policy and the many years of distinction between
malt beverages and distilled spirits.''
2. Consumer Deception or Confusion
Many commenters supported the proposed 0.5% standard based on the
premise that it would reduce consumer confusion. These commenters
included consumers, State senators and representatives, beer
distributors, merchandisers, Members of Congress, State governors,
State ABC commissions, breweries, national associations, State
licensing and taxing authorities, State coalitions, and industry
members.
As indicated in the comment overview, several thousand commenters
stated that the establishment of a 0.5 percent standard would eliminate
consumer confusion, preserve the integrity of the beer category, or
provide beer consumers with a clear understanding of the product. Many
commenters suggested that it was important to define the difference
between beer and other alcohol beverages, such as distilled spirits.
For example, we received thousands of comments suggesting that the
proposed 0.5% standard was the best way to maintain ``clear
distinctions between beer and liquor.''
Many commenters agreed that TTB has a responsibility to protect
consumers through accurate labeling, to ensure that products labeled as
``flavored malt beverages'' are truly products that have alcohol
obtained by the fermentation of malt. Others believed the proposed rule
would promote consistency in consumer expectations, clarify Federal
public policy, and end any confusion that may linger from the past or
that may arise from alternative proposals.
Several commenters suggested that, in the absence of a national
standard, States would enact differing standards under which the same
product may be sold as a ``beer'' in one State and as a ``distilled
spirits'' product in another State. The commenters suggested that these
inconsistent standards would confuse consumers.
Many commenters focused on industry and consumer understanding of
the terms ``beer'' and ``malt beverage.'' For example, the Brewers'
Association of America (BAA), a 62-year-old trade association
representing the interests of more than 1,400 small American breweries,
submitted a comment in support of the 0.5% standard. The BAA stated:
The perception of the general public is that beer is a beverage
with malt flavor and hop bitterness, flavor and aroma. Many small
brewers currently produce flavored malt beverages that have these
characteristics. The products currently classified as FMBs and
recently analyzed by TTB display none of these characteristics, and
should not be considered or taxed as beer.
Many commenters stated that many FMBs do not meet the traditional
definition of beer or ale and thus blur the line between spirits-based
beverages and traditional beers and ales. Others argued that the
consumer does not expect beer to contain added distilled alcohol from
outside sources. Some suggested that it was deceptive to characterize
FMBs as malt beverages since many FMBs do not resemble or taste like
beer.
3. Preserving the Integrity of Beer
Many commenters stated that beer and malt beverages are unique
beverages with a unique history. We received thousands of comments from
the beer industry urging TTB to maintain this distinction by adopting
the 0.5% standard. These commenters noted that Federal and State
governments have historically regulated and taxed beer and malt
beverages differently from
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distilled spirits. These commenters suggested that the 0.5% standard
was the only way to maintain the integrity of beer and the brewing
process.
Many commenters were of the opinion that the 0.5 percent standard
will ensure that FMBs are produced as traditional malt beverages using
traditional brewing methods and processes. A large number of commenters
stated that the classification of FMBs as beer threatens beer culture
in the United States. In this regard, they pointed out that beer has
unique attributes as a beverage--including malt-flavor, hop-bitterness,
and aroma. Many of these commenters argued that the integrity of beer
and the brewing process must be preserved.
Some commenters suggested that beer and FMBs are produced
differently and should be categorized separately in the alcohol
beverage market. Many commenters pointed to the history of alcohol
beverages in the United States as evidence of the longstanding
distinction between malt beverages and distilled spirits. They stated
that these differences are well defined by the taxation structures at
the State and Federal levels and these differences should be
maintained.
B. Comments in Favor of the 51/49 Standard
1. TTB's Statutory Authority Under the IRC and the FAA Act
Several FMB producers suggested that TTB lacks statutory authority
to impose a 0.5% limit on the use of alcohol derived from flavoring
materials in the production of FMBs. It should be noted that while
these commenters also believe TTB lacks authority to impose any limits
on the use of alcohol derived from flavoring materials in the
production of malt beverages, they nonetheless supported the 51/49
option as a matter of policy.
Authority Under the IRC. Several commenters stated that the current
definition of the term ``beer'' in the IRC, at 26 U.S.C. 5052, gives
brewers substantial discretion in formulating their products and places
no limits on the use of nonbeverage flavors in products taxed as beer.
They noted that prior IRC provisions included restrictions on producing
a beverage from nonbeverage articles such as flavors, and they
suggested that the current IRC's silence on the issue represents a
deliberate choice by Congress not to restrict flavor use in the
production of beer. Furthermore, the comments noted that the statutory
definitions of beer and malt beverages do not specify any minimum
amount of alcohol to be derived from fermentation. The FMBC suggested
that the IRC places a practical limit on the use of flavors because of
the unpleasant taste of nonbeverage flavors. The FMBC and Diageo both
argued that IRC section 5001(a)(2) does not apply to products
containing nonbeverage drawback flavors, and that it instead only
applies to products containing distilled spirits on which tax has not
been paid or determined.
Authority Under the FAA Act. Many commenters also noted that the
FAA Act does not place limits on the use of flavors in a malt beverage
but instead explicitly authorizes the use of ``wholesome food
products'' in malt beverage production (see 27 U.S.C. 211(a)(7)).
Furthermore, the comments suggested that since the Volstead Act
explicitly restricted the use of nonbeverage flavors to make a
beverage, the silence of the FAA Act indicates a deliberate choice by
Congress to allow the unlimited use of flavoring materials in malt
beverage production.
2. Standard Best Supported by Law
Many commenters suggested that if TTB has statutory authority to
impose a limit under the IRC or the FAA Act, the 0.5% standard has no
basis in Federal law; rather, the 51/49 standard is the proper
standard. These commenters pointed out that in Notice No. 4, TTB
indicated that IRC section 5052 also would support the issuance of a
regulation requiring that a beer or malt beverage must directly derive
a majority of its alcohol content from fermentation. The commenters
argued that since both the FAA Act and the IRC would support such a
standard, TTB did not provide sufficient reasons why it proposed the
much stricter 0.5% standard.
3. IRC Regulatory Policy
Many commenters suggested that the 51/49 standard would actually
protect the revenue by placing a meaningful limit on the addition of
alcohol flavorings to FMBs in a manner consistent with TTB's regulatory
policy. For example, one commenter argued that the 0.5% standard is
punitive and has no basis in recent TTB policy. This commenter
suggested that ATF Ruling 96-1 actually weakened the case for the 0.5%
standard since the ruling permits the addition of up to 1.5% alc/vol
derived from flavors in beer and malt beverages over 6.0% alc/vol. The
commenter stated that in view of this ruling, TTB has failed to present
evidence why a far stricter standard, 0.5%, should be used for the
definitions of beer and malt beverages.
Some commenters stated that the proposed 0.5% standard would
arbitrarily impose a more rigorous standard on FMBs and beer than TTB
imposes on other alcohol beverages. The commenters allege, as examples
of this disparity in treatment:
There is no regulatory restriction on the amount of
alcohol flavorings used in wine specialty products;
Fortified wine has less stringent standards for the
addition of distilled spirits to the wine base than the proposed 0.5%
standard;
Distilled spirits products may contain up to 50% wine on a
proof gallon basis;
Certain wines may be labeled with a varietal designation
if 51% of the grapes are of the labeled grape variety; and
A TTB regulation, 27 CFR 5.22(b), requires bourbon whiskey
to be produced from a fermented mash of not less than 51 percent corn.
The other 49 percent may come from any other grain.
Additionally, a number of commenters argued that TTB's general
policy on beer ingredients, allowing as little as 25% of the
fermentable ingredients to be from malted barley, is significantly more
lenient than the proposed 0.5% standard. Some commenters further noted
that to label a product ``beer,'' 50 percent of the fermentable base
must be a grain. Accordingly, these commenters argued that the 51/49
standard was more consistent with TTB's regulatory policies than the
0.5% standard.
4. Burden of Establishing Consumer Deception
In support of their position against the proposed 0.5% standard,
FMBC, as well as several FMB producers, argued that TTB failed to meet
its burden of establishing that consumer deception or confusion results
from use of the term ``malt beverage'' on the label of a product that
derives most of its alcohol from added flavors. These commenters
suggested that TTB must first produce evidence to back up its assertion
that use of the term ``malt beverage'' on a label leads consumers to
believe that a significant portion of the product's alcohol derives
from fermentation of barley malt and other ingredients at the brewery,
and must secondly demonstrate that the consumer confusion it asserts is
material in that it actually affects consumers' purchasing decisions.
FMBC suggested that TTB had not met either of those burdens in
Notice No. 4. This commenter argued that the notice contained no
evidence of consumer confusion, cited to no
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consumer survey, and did not point to a single consumer complaint about
the alcohol source in FMBs. FMBC suggested that a final rule could not
cure this deficiency as the APA requires TTB to provide the public an
opportunity to comment on the basis of new regulations. FMBC also
stated that Federal courts today virtually require survey evidence to
back up a claim of consumer confusion; mere assertions of
administrative expertise, without more, would not carry TTB's
evidentiary burden.
Finally, FMBC suggested that TTB bears an even heavier evidentiary
burden since Notice No. 4's assertion of confusion directly contradicts
its predecessor's pronouncements on the same subject. FMBC pointed out
that when TTB's predecessor agency, ATF, decided not to pursue further
rulemaking on the use of cocktail names on labels of malt beverage
coolers, it concluded, in a letter dated November 17, 1997, as follows:
Evidence introduced indicates that flavored malt beverages are
viewed by consumers as coolers or low alcohol refreshers, and not as
a distilled spirits product. Evidence introduced also indicates that
the presence of distilled spirits or any similarity of these
products to a distilled spirits drink is not a criteria in their
selection by consumers.
Accordingly, FMBC, like many other commenters, suggested that TTB's
statement in the preamble to Notice No. 4 was inconsistent with the
conclusion of its predecessor agency, reached just 6 years before, that
consumers did not care about the alcohol source of malt beverage
products. The commenters noted that ATF had reached this conclusion
after soliciting public comments on the use of cocktail names in the
labeling of malt beverages, and that its conclusion was consistent with
consumer surveys submitted by malt beverage producers in that
rulemaking proceeding.
5. Consumer Survey Conducted by the Luntz Research Companies
MAB retained the Luntz Research Companies (``Luntz'') to survey
consumer beliefs about the alcohol source in FMBs, and to ascertain
whether any of these beliefs were material to FMB purchasing decisions.
Luntz conducted 600 face-to-face interviews of FMB consumers in 3
metropolitan areas--Baltimore, Chicago, and San Diego. The purpose of
the survey was to determine if the term ``malt beverage'' led consumers
to believe erroneously that the alcohol in an FMB comes from a
fermentation process and whether consumer beliefs about the source of
alcohol in FMBs were likely to influence the purchasing decisions of
consumers.
To determine if the term ``malt beverage'' confused consumers, the
research group provided respondents with a bottle of the FMB ``Mike's
Hard Lemonade.'' The term ``malt beverage'' appeared prominently on the
front label. The survey asked the respondents to look at the bottle and
to state if they believed the alcohol came from a distillation or
fermentation process, or if they had no belief about the product's
alcohol source. The results were as follows:
[In percent]
------------------------------------------------------------------------
------------------------------------------------------------------------
No belief about the source of alcohol............................ 80
Alcohol comes from a distillation process........................ 11
Alcohol comes from a fermentation process........................ 9
------------------------------------------------------------------------
As noted in the table, the Luntz survey found that four out of five
FMB consumers had no belief about the alcohol source in an FMB product
after examining a bottle of a well-known FMB product prominently
labeled as a ``malt beverage.'' Consumers who had a belief about the
alcohol source roughly split into those who believed that it contained
alcohol from fermentation and those who believed that it contained
alcohol from distillation. Of the 9% of the respondents (54 out of 600)
who believed the product derived its alcohol from fermentation,
approximately 2% (14 out of 600) based this belief on the product's
labeling as a malt beverage. MAB asserted that the case law requires a
level of confusion far greater than 2% in order to find the existence
of consumer confusion in the marketplace.
To determine whether the source of alcohol in FMBs affected
purchasing decisions, the survey asked respondents to name the top two
most important reasons why they drink FMBs. The results were as
follows:
[In percent]
------------------------------------------------------------------------
------------------------------------------------------------------------
Taste/Flavor..................................................... 52
New/Different/Not Beer........................................... 28
Convenience/Availability......................................... 13
Refreshing/Thirst Quenching...................................... 12
Easy to Drink/No Alcohol Taste................................... 12
Females Like Them................................................ 9
Effect of Alcohol................................................ 6
Friends/Family Drink It.......................................... 7
Given to Me/Bought For Me........................................ 5
------------------------------------------------------------------------
The survey noted that not one of the 600 respondents stated that
the source of alcohol was an important reason for choosing an FMB.
The survey then provided the respondents with a list of nine
reasons why someone would choose an FMB, providing as one of the
reasons whether the alcohol comes from the fermentation or distillation
process. The respondents were asked to choose their top three reasons.
The results were as follows:
[In percent]
------------------------------------------------------------------------
------------------------------------------------------------------------
The Taste....................................................... 81
Alcohol Strength................................................ 47
Convenience..................................................... 42
Cost............................................................ 32
What My Friends/Family/Co-Workers are Drinking.................. 32
Advertising and Marketing....................................... 21
The Design of the Packaging and Bottle.......................... 9
The Image I Want to Portray to People........................... 8
Whether the Alcohol Comes from a Fermentation or Distillation 0.2
Process........................................................
------------------------------------------------------------------------
MAB suggested that the Luntz survey demonstrates that alcohol
source is totally immaterial to the purchasing decisions of FMB
consumers. When asked for their top two reasons for choosing an FMB,
not a single respondent gave alcohol source as a reason. Indeed, taste-
related responses topped consumers' criteria for selection, followed by
the FMB's difference from beer and its convenience. Even when presented
with a list of 9 reasons for selecting an FMB that included alcohol
source, just one respondent chose alcohol source as a reason for
selecting an FMB. MAB suggested that this evidence conclusively
demonstrates that alcohol source is not material to consumers'
purchasing decisions, and that to label an FMB as a ``malt beverage''
is not misleading as a matter of law.
6. Standard That Best Prevents Consumer Deception
Some commenters suggested that adoption of the 51/49 standard would
better prevent consumer deception than implementation of the proposed
0.5% standard. The FMBC suggested that if TTB was concerned about
consumer confusion, it had failed to bear its burden of establishing
why the 0.5% standard prevents consumer deception better than a
majority or 51/49% standard. As noted earlier in the comment overview,
the National Consumers League (NCL) made a similar comment, noting that
requiring that the product derive a majority of its alcohol content
from malt fermentation would assure that an FMB actually contains a
significant concentration of malt. The NCL also questioned whether
source of alcohol was in any way material to consumer choice, and urged
more complete labeling information on alcohol beverage containers.
[[Page 213]]
As noted earlier in this comment discussion, several commenters
pointed out that TTB and its predecessor agency had adopted
``majority'' or ``predominance'' standards for other products. These
commenters noted that wine can constitute up to 50% of a distilled
spirits product; thus, nonbeverage flavors should be able to contribute
up to half (or 49%) of the alcohol content of a malt beverage product.
7. Preserving the Integrity of Beer
The FMBC noted that several supporters of the 0.5% standard cast
themselves as defenders of ``traditional'' and ``age-old'' production
techniques, but suggested that the brewing industry ``long ago departed
from the brewing methods employed at the time current federal and state
alcohol control laws were enacted.'' The FMBC suggested that several
techniques currently used by brewers are not specifically authorized by
law such as the use of high-tech enzymes to enhance fermentation, the
use of ``high-gravity'' brewing to produce a high-alcohol product to
which water is added just before packaging to make beer, new
fermentation techniques that have pushed the upper strength limit of
beer to 25% alcohol by volume, and the thousands of adjuncts authorized
by the ARM.
The FMBC argued that ``tradition'' arguments play upon the real
differences in taste and appearance between conventional beers and
FMBs. However, the FMBC asserted that Federal policy long ago abandoned
any taste, aroma, or color criterion for products classified as beer or
malt beverages. Finally, the FMBC noted that supporters of the 0.5%
standard claim that brewers can produce, under the 0.5% standard, FMBs
that look and taste exactly like FMBs on the market today. Thus,
claimed the FMBC, ``in a wonderfully ironic twist, supporters of the
0.5% standards wrap themselves in the banner of brewing tradition while
championing a rule that will accelerate the development and deployment
of high-technology processes necessary to produce an FMB under the
Notice 4 standard.''
C. TTB Response
1. Statutory Authority
In the preamble to Notice No. 4, TTB set forth, in great detail,
its authority to engage in rulemaking to place limits on the use of
alcohol derived from flavoring materials in the production of malt
beverages. After carefully considering the comments to the contrary, we
have concluded that we have authority, under both the IRC and the FAA
Act, to issue regulations that establish those limits.
Statutory Definitions. Fermentation is the process by which yeast
converts sugar into alcohol and carbon dioxide. Both the definition of
``beer'' under IRC section 5052 and the definition of ``malt beverage''
under the FAA Act focus on fermentation as the source of the alcohol in
these products.
The study conducted by ATF in 2002 established that for many FMB
products, the major source of alcohol was distilled alcohol rather than
fermented alcohol. The results of this study raised the question:
Should a product that derives the majority (in some cases up to 99%) of
its alcohol from the distilled spirits components of added flavors
qualify as a ``beer'' under the IRC, and as a ``malt beverage'' under
the FAA Act? TTB concluded that Congress never intended to allow such
products to qualify as beers or malt beverages. At the same time,
neither statutory definition explicitly excludes beverages that contain
alcohol in addition to that produced during their fermentation.
Accordingly, we proposed a regulation that would allow only less than
0.5% alcohol by volume derived from flavors, and we also sought
comments on an alternative proposal that would require that at least
51% of the alcohol in a beer or malt beverage must be derived from
fermentation at the brewery.
After carefully considering the comments on this issue, as well as
the statutes that provide us with authority to issue regulations on
standards for beer and malt beverages, we have concluded that we have
statutory authority to limit the alcohol that may be added to ``beers''
under the IRC, and to ``malt beverages'' under the FAA Act, and to
ensure that they derive most of their alcohol from fermentation at a
brewery rather than from the distilled spirits components of added
flavors.
Authority Under the IRC. TTB does not agree with those commenters
who suggested that malt beverages may contain unlimited quantities of
distilled alcohol from added flavors without falling under the
statutory definition of a distilled spirit. One commenter argued that
the provisions of IRC section 5001(a)(2) apply only to products
containing distilled spirits on which the tax has not been paid.
Because the distilled spirits used in nonbeverage drawback products are
tax determined or taxpaid, the commenter argued that this section does
not apply to products containing flavors.
TTB does not agree with this interpretation of the IRC. Section
5001(a)(2) provides as follows:
(2) Products containing distilled spirits. All products of
distillation, by whatever name known, which contain distilled
spirits, on which the tax imposed by law has not been paid, and any
alcoholic ingredient added to such products, shall be considered and
taxed as distilled spirits.
The commenter misreads this section by suggesting that the critical
issue is whether the distilled spirits contained in the product have
been taxpaid. Instead, the statute clearly imposes a tax on all
products of distillation that contain distilled spirits, as long as the
tax imposed by law on the finished product has not been paid.
This provision of the IRC must be read in conjunction with other
IRC requirements. Subject to certain exceptions not relevant here, a
person who manufactures, mixes, or otherwise processes distilled
spirits is a processor within the meaning of IRC section 5002(a)(5).
The definition of a ``processor'' does not revolve around whether the
distilled spirits in question are taxpaid or not, and neither does the
imposition of tax under section 5001(a)(2). The critical issue is not
whether the original distilled spirits used in the product were
taxpaid; instead, the issue is whether the final product has been
taxpaid as a distilled spirits product.
Furthermore, IRC section 5002(a)(8) defines the term ``distilled
spirits'' to mean ``that substance known as ethyl alcohol, ethanol, or
spirits of wine in any form (including all dilutions and mixtures
thereof from whatever source or by whatever process produced).'' The
application of this definition does not depend upon whether the spirits
are taxpaid or not.
TTB also believes that those commenters who questioned TTB's
authority under the IRC are overlooking our broad authority over the
production of flavoring materials under the nonbeverage drawback
provisions of the IRC. This authority includes the ability to ensure
that nonbeverage flavors are not being misused as the primary source of
alcohol in beverage products such as malt beverages.
Pursuant to section 5132 of the IRC (26 U.S.C. 5132), the Secretary
has authority to issue ``rules and regulations * * * to secure the
Treasury against frauds.'' This authority is not new, and it has been
used in the past to issue regulations placing a 2\1/2\ percent limit on
the quantity of nonbeverage drawback flavors used in the production of
distilled spirits products. (See T.D. 5573.) Congress recognized this
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regulatory limit when it enacted section 5010 of the IRC in 1980,
limiting the quantity of flavors eligible for a tax credit in distilled
spirits products to 2\1/2\ percent. Our broad authority to limit the
use of drawback flavors in the production of alcoholic beverages also
allows us to place limits on the use of such flavors in the production
of beer.
Authority Under the FAA Act. The FAA Act also gives the Secretary
of the Treasury authority to issue regulations to prevent deception in
the labeling and advertising of malt beverages and to ensure that
labels provide consumers with adequate information about the identity
and quality of malt beverages. (See 27 U.S.C. 205(e).) One of the
questions raised by this rulemaking process is whether the term ``malt
beverage'' is an accurate description of a product that derives up to
99% of its alcohol from the distilled spirits components of added
flavors. Our authority under the FAA Act requires us to issue
regulations setting forth standards for terms such as ``malt beverage''
to ensure that use of this designation on alcohol beverage labels does
not mislead consumers but instead provides consumers with adequate
information about the identity and quality of the product.
Accordingly, TTB has concluded that it has authority, under both
the IRC and the FAA Act, to set limits on the quantity of non-fermented
alcohol, derived from added flavors, that is used in the production of
flavored malt beverages.
2. Which Standard Is Better Supported Under the IRC?
In Notice No. 4, we stated that we believed that the IRC would
support either the proposed 0.5% standard or the alternate 51/49
standard. After carefully examining the comments, we have concluded
that valid arguments may be made in favor of both standards.
The primary argument in favor of the 0.5% standard is that it
establishes a de minimis standard for the addition to beer of flavors
containing alcohol. Essentially, the use of this a standard treats
beers in the same way that soft drinks and other non-alcoholic products
are treated; they may contain less than 0.5% added alcohol from
flavors.
The arguments against the 0.5% standard are both practical and
statutory. We are not starting from a blank slate; instead, we are
facing a marketplace in which many of the most popular FMB products
derive the vast majority of their alcohol content from added flavors.
The policies of TTB and its predecessor agencies have allowed this
practice for years. We have allowed the use of non-beverage flavors in
the production of beer, wine, and distilled spirits. The IRC does not
require us to adopt a 0.5% standard. Accordingly, companies that have
invested millions of dollars in reliance on the existing policy argued
that if TTB has discretion to implement either standard, the Bureau
should choose the standard that imposes the least burden on FMB
producers.
After carefully considering the comments, we agree with those
commenters who stated that TTB has some discretion in this area. Beers
subject to taxation under the IRC are not nonalcoholic beverages like
soft drinks; thus, the 0.5% limit on added alcohol in nonalcoholic
products does not apply to beers, which are already being taxed under
the IRC. However, our authority under the IRC includes the authority to
set standards for the production of beer and for the use of nonbeverage
flavors in beer production, to ensure that the revenue is adequately
protected.
3. Which Interpretation Is Consistent With Our Regulatory Policy and
Practice?
After careful consideration of the comments, we have concluded that
it is necessary, for purposes of implementing the relevant statutes, to
adopt a limit on the use of alcohol derived from flavoring materials in
the production of beer. As explained below, we believe that the 51/49
standard interprets the statutes as issue in a way most consistent with
our regulatory policy on revenue classification issues.
The unlimited use of flavors containing alcohol in the production
of FMBs poses a threat to the revenue. Once FMBs start deriving 51%, or
75%, or even 99% of their alcohol content from the distilled spirits
components of added flavors, it can be argued that these products are
properly classified as distilled spirits rather than as beers. As
previously noted, the IRC definitions of these terms make it clear that
beers are products of fermentation, and distilled spirits are generally
products of distillation. The tax rate on beer is significantly lower
than the tax rate on distilled spirits. Accordingly, allowing such
products to be produced at a brewery and taxpaid as beers rather than
distilled spirits renders meaningless the distinction between distilled
spirits products and beers.
Clearly, a standard must be established in order to avoid the
current situation whereby a product deriving as much as 99% of its
alcohol content from the distilled alcohol component in added flavors
is classified, and taxpaid, as a beer. Furthermore, if we do not adopt
a limit on the use of added flavors containing alcohol, it is very
possible that producers will find new ways to take advantage of this
policy, by producing at breweries more and more products that used to
be produced at distilled spirits plants. Accordingly, we believe that,
at a minimum, the alcohol derived from added flavors and other
nonbeverage ingredients must be restricted to less than half the
alcohol content of the finished FMB product.
We are persuaded by the comments that suggested that the proposed
0.5% limit was not the appropriate standard, notwithstanding its
historical use to distinguish alcohol beverages from non-alcoholic
beverage products, because we are dealing here with a taxable
commodity--beer--not a nonalcoholic beverage such as a soda or juice.
In other words, when we use the 0.5% limitation to limit the use of
alcohol from flavorings in nonalcoholic beverages, we are drawing a
line between products that are subject to tax under Chapter 51 of the
IRC and those that are not. However, FMBs are clearly subject to tax
under Chapter 51; the only question is whether they are appropriately
taxed as beers or distilled spirits.
While either the proposed 0.5% standard or the 51/49 standard would
be consistent with the statutory language, we have concluded that the
51/49 limit is more consistent with TTB regulatory policy and practice.
As previously noted, the revenue issue posed is how to ensure that we
maintain a meaningful distinction between beer and distilled spirits
under the IRC. Because the statute does not provide us with specific
guidance on this issue, we are guided by our regulatory policy on
similar classification issues.
With regard to those commenters who argued that the proposed limits
on the use of alcoholic flavorings in the production of beer are
inconsistent with our treatment of wines under the IRC, and who
suggested that the regulations do not place limits on the use of
flavors containing alcohol in the production of wine, we believe that
these statements are not entirely accurate. In the first place, it
should be noted that the statutes and regulations governing the
production of wine under the IRC differ significantly from the statutes
and regulations governing the production of beer under the IRC. While
the IRC does not specifically authorize the direct addition of
distilled spirits to beer, it does specifically authorize the addition
of wine spirits to wines. (See 26 U.S.C. 5373.) Thus, many wines
contain distilled alcohol from wine spirits.
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Secondly, the IRC regulations governing the production of wine do
place limits on the use of essences containing spirits. In particular,
the regulations provide that where an essence contains spirits, use of
the essence may not increase the volume of the wine more than 10
percent nor its alcohol content more than four percent by volume. (See
27 CFR 24.85.) Thus, the regulations do place limitations on the use of
essences containing spirits in the production of wine. As previously
noted, there is a 2\1/2\% limit on the use of drawback flavors eligible
for credit in the production of distilled spirits products under 26
U.S.C. 5010.
TTB believes that because of the different statutory provisions,
our treatment of the use of flavors in wines and distilled spirits does
not provide clear guidance as to how to limit the use of alcohol
derived from flavors in beer production. However, we believe that a
more analogous regulatory provision concerns the use of wine in
distilled spirits products. Regulations issued under both the FAA Act
and the IRC define the term ``distilled spirits'' to exclude mixtures
of distilled spirits and wine, bottled at 48 degrees proof or less, if
the mixture contains more than 50 percent wine on a proof gallon basis.
(See 27 CFR 5.11 and 19.11.) This longstanding distinction signifies
the intent to distinguish between two categories of taxable alcohol
beverages, wine and distilled spirits, based on a predominance
standard.
4. Reasons for Adoption of the 51/49 Standard Under the IRC Regulations
After carefully considering the record, TTB has concluded that the
51/49 standard is most consistent with our regulatory policy on revenue
classification issues. Accordingly, we are adopting the 51/49 standard
in the regulations setting forth the standards, under the IRC, for
addition of flavoring materials that contain alcohol to beer.
As noted previously, TTB has determined that the adoption of the
0.5% standard for all beers under the IRC would impose additional
economic costs and regulatory burdens on the beer industry. Since we
have concluded, after careful analysis of the record, that either
interpretation is allowed under the relevant statutes, we are adopting
the alternative that is less costly to the industry, and imposes fewer
regulatory burdens.
It should be emphasized that adoption of this standard reflects a
decision on a tax classification issue, and will in no way reduce the
tax liability of brewers that utilize the maximum amount of flavors in
the FMBs that they produce. Brewers will pay the same tax rate on beer
regardless of whether the beer derives 10% or 49% of its alcohol
content from added flavors. Because beer is taxed on a volume basis, a
brewer derives no tax advantage by increasing the flavors content of
the product to the maximum allowed by the regulations. Thus, the 51/49
standard will accord maximum flexibility to the industry in formulating
their products according to the taste preferences of their consumers,
without jeopardizing the revenue.
Accordingly, TTB is amending the proposed regulation in 27 CFR
25.15 to provide that flavors and other nonbeverage ingredients
containing alcohol may contribute no more than 49% of the overall
alcohol content of the finished beer.
5. FAA Act, Consumer Deception
After carefully considering all the comments on this issue, TTB has
concluded that current FMB labels do not provide consumers with
adequate information about the product. For this reason, we have
decided to set new standards for use of the designation ``malt
beverage'' on labels.
TTB concludes that the term ``malt beverage'' does not accurately
describe a product that derives up to 99% of its alcohol content from
the distilled spirits components of nonbeverage flavoring materials.
However, it is important to stress that this in no way means that
producers of FMBs currently on the market have intentionally misled
consumers by using this term on labels. Instead, these producers have
relied on the policies of TTB and our predecessor agency. Accordingly,
the focus of TTB is on which standard for FMBs will best achieve our
statutory mandate of ensuring that malt beverage labels adequately
inform consumers about the identity of the product.
Consistency With 1997 Decision on Cocktail Names. We do not believe
that our predecessor agency's 1997 decision not to pursue further
rulemaking on the use of cocktail names in the labeling or advertising
of malt beverages precludes us from making this decision. In the first
place, we recognize that we are changing longstanding policy with
regard to the labeling of FMB products; that is why we engaged in
notice and comment rulemaking before implementing this change.
Secondly, the proposed and final rules are consistent in many respects
with ATF's 1997 decision about cocktail names. As set forth later in
this document, the regulations in this final rule continue to allow the
use of a cocktail name as a brand name or fanciful name of a malt
beverage, provided that the overall label does not present a misleading
impression about the identity of the product.
Consumer Survey Conducted by the Luntz Companies. We have carefully
reviewed the results of the consumer study conducted by Luntz. The
commenter that submitted this study argues that it establishes two
essential points: alcohol source is immaterial to consumers, and
consumers are not confused about the source of alcohol in an FMB
product. We disagree.
First, we will address the materiality issue. Other commenters have
raised this issue as well, noting that in 1997 our predecessor agency
concluded that there was evidence indicating that similarity to
distilled spirits products was not a major factor in consumers'
purchasing decisions with regard to FMB products. A major producer of
FMB products has submitted new consumer evidence, the Luntz survey,
which purports to establish that the source of alcohol in an FMB is not
a material factor in a consumer's decision to purchase the product.
Accordingly, several commenters have argued that TTB can justify action
based on consumer deception only if consumers are being misled in a
material fashion.
TTB does not agree that the Luntz survey conclusively establishes
that consumers do not care whether the product is a result of
fermentation or distillation. Furthermore, we do not agree that we are
required to conduct consumer surveys to find out if alcohol source is a
material issue to consumers before setting standards that distinguish
malt beverages from distilled spirits products.
Since the enactment of the FAA Act in 1935, we and our predecessor
agencies have issued regulations setting class and type designations or
standards of identity for wines, distilled spirits, and malt beverages.
These standards of identity are largely based on industry and consumer
understanding of the meaning of certain terms. The FAA Act provides us
with authority to issue labeling regulations that will prevent consumer
deception and provide the consumers with adequate information about the
identity and quality of the product. (See 27 U.S.C. 205(e).)
The FAA Act provides for three broad categories of alcohol
beverages: distilled spirits, wines, and malt beverages. The
classification of a product within one of these categories is the most
fundamental decision that must be made before the product can be
properly labeled or advertised under the Act. To say that consumers do
not care whether the alcohol in a product comes from
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fermentation or distillation is equivalent to saying that consumers do
not care whether the product is a distilled spirits product or a malt
beverage. Yet, our most basic responsibility under the FAA Act labeling
provisions is to provide the consumer with adequate information about
the identity of the product. There can be no question that the starting
point of this responsibility is informing the consumer whether the
beverage is a wine, malt beverage, or distilled spirits product.
In Federal Security Administrator v. Quaker Oats Co., 318 U.S. 218
(1943), the Supreme Court upheld revised standards of identity for
``farina'' and ``enriched farina'' under the Federal Food, Drug and
Cosmetic Act. A manufacturer had challenged these standards, alleging
that under the revised standards, its product, previously marketed as
farina enriched with Vitamin D, would qualify as neither farina nor
enriched farina. The Court of Appeals found that the Administrator's
findings as to probable consumer confusion in the absence of prescribed
standards of identity were speculative and conjectural, in the absence
of evidence that the respondent's product had in fact confused or
misled anyone. The Supreme Court overturned this decision, stressing
the deferential nature of its review of the Administrator's decision.
The Supreme Court rejected the argument that the Administrator relied
on speculative and conjectural testimony as to whether the marketing of
products that do not conform to standards of identity would tend to
confuse and mislead consumers, finding that:
The exercise of the administrative rule-making power necessarily
looks to the future. The statute requires the Administrator to adopt
standards of identity [which], in his judgment, ``will'' promote
honesty and fair dealing in the interest of consumers. Acting within
his statutory authority he is required to establish standards which
will guard against the probable future effects of present trends.
(See 318 U.S. at 228.)
Similarly, our authority under the FAA Act requires us to prescribe
labeling regulations that will ensure that consumers are adequately
informed as to the identity and quality of alcohol beverages.
Although the Quaker Oats case deals with the Federal Food, Drug and
Cosmetic Act (FD&C Act), rather than the FAA Act, many of the Court's
observations about the FD&C Act are equally applicable to the FAA Act.
For example, the Court noted that ``the text and the legislative
history of the present statute plainly show that its purpose was not
confined to a requirement of truthful and informative labeling.'' (See
318 U.S. at 230.) The Court held that ``provisions for standards of
identity thus reflect a recognition by Congress of the inability of
consumers in some cases to determine, solely on the basis of
informative labeling, the relative merits of a variety of products
superficially resembling each other.'' (See 318 U.S. at 230-231.) In
the same way, regardless of whether we have consumer surveys
establishing that consumers care whether a product derives its alcohol
from distilled spirits or beer, it is our responsibility to ensure that
the label truthfully and adequately describes the contents of the
product. In order to do this, we must establish basic standards for use
of the terms ``distilled spirits'' and ``malt beverage'' on alcohol
beverage labels.
The second issue addressed by the Luntz survey is whether current
labels mislead consumers, and whether they provide adequate information
about the identity of the product. MAB argues that consumers are not
confused about the source of alcohol based on the fact that of the 20
percent of consumers that had a belief about the source of alcohol,
less than half believed that the alcohol came from fermentation, and
slightly more than half believed that it came from distillation. TTB
draws very different conclusions from this survey.
The survey was conducted for a ``hard lemonade'' product labeled as
a ``flavored malt beverage.'' Yet 80% of the respondents, after reading
the label, had no belief whatsoever as to whether the product was
derived from fermented alcohol or distilled alcohol. This would seem to
indicate that the vast majority of the respondents were very confused
as to the classification of this FMB product.
Because the vast majority--80%--of the respondents had no belief on
this issue whatsoever, and the remaining respondents were almost evenly
divided on the question, the survey clearly does not establish that
current FMB labels provide consumers with adequate information about
the identity of the product. Indeed, the only thing that is clear from
the results of the survey is that, of the 600 FMB consumers that
participated in the survey, only a very small percentage (11%)
recognized that the alcohol in the product might come from distillation
rather than fermentation. Thus, to the extent that the survey's results
establish anything at all, they would appear to resoundingly support
the conclusion that there is significant confusion among FMB consumers
about the identity of these products.
As previously noted, TTB does not agree that it needs to conduct a
consumer survey to establish standards for the use of labeling terms
based on consumer and industry understanding of the terms. As the U.S.
Court of Appeals for the D.C. Circuit has recognized, ``while consumer
surveys conducted by independent experts may arguably constitute the
best way to establish consumer understanding and preference * * * such
surveys are not the exclusive form of probative evidence of public
perception.'' (See FTC v. Brown & Williamson Tobacco Corp., 778 F.2d
35, 41 (D.C. Cir. 1985).) Our conclusion in this matter is bolstered by
comments from beer and malt beverage industry members urging us to
preserve the integrity of the beer and malt beverage classifications by
establishing limits on the use of flavors containing alcohol.
Based on the above analysis, TTB concludes that current FMB labels
may mislead or confuse consumers by labeling as ``malt beverages''
products that derive up to 99% of their alcohol content from added
flavors rather than from fermentation at the brewery. We believe that
our statutory mandate to prevent consumer deception, and to ensure that
alcohol beverage labels provide consumers with adequate information
about the identity of the product, support an amendment to the
regulations that would limit the quantity of alcohol derived from
flavors in a malt beverage product.
6. Reasons for Adopting the 51/49 Standard for FMBs
After careful consideration of the record, we have decided to adopt
the 51/49 standard for malt beverages under the FAA Act. We agree with
those commenters who suggested that the 51/49 standard is consistent
with certain other limits in our FAA Act labeling regulations. See, for
example, 27 CFR 5.11 (the definition of the term ``distilled spirits''
excludes mixtures containing wine, bottled at 48[deg] proof or less, if
the mixture contains more than 50 percent wine on a proof gallon basis)
and 27 CFR 5.22(b)(1)(i) (the standard of identity for ``bourbon
whisky'' provides, among other things, that it must be produced from a
mash of not less than 51 percent corn). We believe the 51/49 standard
will adequately inform consumers about the identity of the product.
Furthermore, as noted previously, adoption of the 51/49 standard for
FMBs will minimize economic costs and regulatory burdens placed on
members of the FMB industry.
[[Page 217]]
IX. State Concerns
As noted in the preamble to Notice No. 4, one of our concerns in
this rulemaking process has been to provide a Federal standard for the
guidance of State regulatory agencies. Several State regulatory and
taxation agencies expressed concerns to TTB about FMBs and requested
that TTB take action to clarify their status as either malt beverages
or distilled spirits. Many States have urged us to define FMBs and
establish regulatory limits on the addition of alcohol to beer and malt
beverages through the use of flavors. In the absence of such a Federal
definition and regulation, several States have said that they will
develop their own definitions for FMBs.
TTB received more than 650 comments addressing the creation of a
Federal standard for beer or malt beverages or addressing Federal-State
relationship issues. Thirty-one State liquor control boards, revenue
departments, or other State agencies having jurisdiction over alcohol
beverages, as well as one county liquor commission, submitted comments.
Twenty-four of these comments supported the proposed rule. Of the
remaining 8 comments, 6 supported the concept of a uniform standard for
flavored malt beverages and 2 provided information about State laws
without expressing an opinion on the TTB proposals.
We also received comments in support of the proposed rule from
three Governors, one Lieutenant Governor, and many State legislators. A
smaller number of State legislators commented in favor of the 51/49
standard.
A. Comments by State Regulatory Agencies
1. Federal Leadership Role
Several State regulatory agencies commented that it was only in the
last year that they became aware of the actual composition of flavored
malt beverages and that is up to TTB to establish a national standard.
Some stated that a Federal definition for beer and malt beverages would
ease the burden on State regulators by providing a uniform definition.
Several of these agencies also commented that individual State
governments do not have the time or resources necessary to establish
definitions of beer or malt beverages, or to properly identify new
alcohol beverages. They suggested that the Federal Government has these
resources. For example, the Delaware Alcoholic Beverage Control
Commissioner noted that ``[i]f a national standard for these beverages
is established, state legislatures and administrators can make an
informed decision as to whether it is in the state's interest to comply
with or deviate from the national standard.'' The Washington State
Liquor Control Board commented that ``[a]ddressing these issues at the
federal level will ensure consistency and preclude the various states
from having to create separate regulations.''
2. Need for Expeditious Action
Many States urged TTB to resolve the issue expeditiously. For
example, the Superintendent of the Idaho Liquor Dispensary did not
express support for either the 0.5% standard or the 51/49 standard, but
urged TTB ``to take action to reach a decision on a standard.'' The
Director of Minnesota's Alcohol and Gambling Enforcement Division also
did not express a preference for either standard but noted that the
introduction of FMBs into the marketplace ``has been a complicated and
confusing situation for regulators as well as the consuming public''
and stated that the Federal efforts to establish a uniform national
standard were of great importance to the State. The Director of
Oklahoma's Alcoholic Beverage Laws Enforcement Commission expressed his
appreciation of Federal efforts to clarify issues concerning FMBs.
3. Importance of Consistent Federal Standard
Many States noted the importance of a consistent Federal standard.
For example, the Director of the Montana Department of Revenue
supported the proposed 0.5% standard, noting that Montana, ``like many
other states, believe[s] it could be detrimental to both regulatory
agencies and the industry if there are inconsistent classifications of
these products in different states.''
4. States That Follow the Federal Standard
Many commenters stated that State governments have traditionally
followed Federal policy in the taxation, licensing, and distribution of
alcohol beverages. For example, the Kentucky Alcoholic Beverage Control
Board stated that the ``Board has long felt that this standard should
be set by the Federal Regulatory Authorities, not the individual
states. Such Policy consistency is important because while states enjoy
regulatory power over alcohol, most follow federal regulatory
guidelines.''
Some comments from States indicated that they would follow the
Federal standard regardless of what decision is reached by TTB. For
example, a comment from the California Department of Alcoholic Beverage
Control indicated that California had ``always deferred to your
agency's professional expertise concerning the classification of
alcoholic beverages into one of three primary categories: beer, wine,
or distilled spirits'' and it intended to continue deferring to TTB's
classification of FMBs. A comment from the Comptroller of Maryland and
its Alcohol and Tobacco Tax Division supported the proposed 0.5%
standard but stated that Maryland ``adopts federal standards with
respect to labeling and content of alcoholic beverages'' and thus was
``prepared to apply whatever standards your agency ultimately
determines to be most appropriate.''
5. Possibility of Unilateral State Actions To Classify FMBs
Several State agencies commented that without prompt action by TTB,
it would be necessary for them to undertake this regulatory activity on
their own. For example, Maine's Department of Public Safety Liquor
Licensing Division commented that if TTB delays or fails to adopt the
proposed 0.5% standard, many States ``will find the need to act under
their independent authority to determine the alcohol beverage category,
label disclosures, tax, necessary wholesale and retail license
requirements in order to continue the selling of these products in
their state.''
Some States have already begun regulatory proceedings on this
issue. The Nebraska Liquor Control Commission commented that it has
already determined that FMBs containing more than 0.5% alcohol derived
from distillation should be classified as distilled spirits, and has
set a deadline for industry compliance with this standard. The
Tennessee Alcoholic Beverage Commission commented that it had already
conducted administrative proceedings on the classification issue and
that it believed that TTB's proposed 0.5% standard would be consistent
with the position taken at its hearing. The issuance of an order in
this matter is awaiting the TTB final rule.
Other States commented that they would defer action pending
completion of the TTB rulemaking proceedings. A comment from the
Virginia Department of Alcoholic Beverage Control noted that while
Virginia had accepted Federal classification of products in the past,
under State law a product containing alcohol from spirits and beer is
classified as a distilled spirits product, even if the majority of the
alcohol is contributed by beer. The commenter suggested that TTB's
recent study revealed that most FMBs were
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incorrectly classified in Virginia, and stated that the Department was
delaying action pending the outcome of the TTB rulemaking.
A comment from the Massachusetts Alcoholic Beverages Control
Commission expressed support for the proposed 0.5% standard, stating
that the Commission ``in the past has substantially deferred to federal
standards concerning the identity of a specific product, but the
information that has come to light recently during the review and
discussion of FMB is troubling to the Commission.'' This commenter
indicated that Massachusetts is deferring taking any action pending
completion of the TTB rulemaking process.
6. Tax Issues
Some State agencies focused on the taxation aspects of the proposed
0.5% standard, suggesting that taxing FMBs as distilled spirits would
have positive revenue effects. For example, a comment from the Maryland
Comptroller and Alcohol and Tobacco Tax Division suggested that it
seemed ``inherently unfair to tax a product as a `malt beverage' when
the majority of the alcohol by volume contained in the product is from
distilled spirits (flavoring or otherwise).'' Delaware's Office of
Alcoholic Beverage Control Commissioner commented in support of the
proposed regulation and stated that its concerns were not with
distribution, but with ``the tax issue and the substantial reduction in
the rate paid for beer * * * versus the rate paid for `low spirits' * *
*. Obviously, the amount of money in controversy is large for the
State, the industry, and the consumers.''
7. Consumer Deception
Several State agencies focused on the issue of consumer confusion
or deception. For example, a comment from Florida's Division of
Alcoholic Beverages and Tobacco supported the 0.5% standard as a
``positive step toward providing consumer information and avoiding
confusion.'' A comment from Kentucky's Alcoholic Beverage Control Board
stated that the proposed 0.5% standard ``maintains the clear
distinction between malt beverages and distilled spirits that were
becoming blurred in the minds of many regulators, including Kentucky.''
The Oregon Liquor Control Commission stated that while FMBs were made
in breweries, distributed through beer distribution channels, and taxed
as beer, they discovered that ``their alcohol is mainly or completely
from distilled spirits sources, and their appearance and taste usually
do not resemble beer. Customers, along with regulators, have been
unsure what this hybrid product really is.''
8. State Law Issues
In Notice No. 4, TTB solicited comments on whether States would
have to enact new legislation if TTB amended its regulations to
establish either the 0.5% standard or the 51/49 standard. Some States
advised that the proposed 0.5% standard would not require amendments to
State law, but they did not address the issue of whether a different
standard would be inconsistent with State law. For example, the
Oklahoma Alcoholic Beverage Laws Enforcement Commission advised that
under Oklahoma's constitution, alcohol beverages were taxed and
regulated based on whether the alcohol content of the product exceeds
3.2%, regardless of whether the alcohol content is derived from brewing
or distilling.
A comment from the Georgia Department of Revenue advised that the
proposed 0.5% standard would most likely cause the State to enact new
legislation, because Georgia's alcoholic beverage code did not
anticipate such products. However, this comment noted that, regardless
of the standard, it might be necessary for the State to enact
legislation in order to bring clarity to the issues of taxation and
distribution.
Only a few States indicated that adoption of a standard other than
the 0.5% standard would be inconsistent with State law. A comment from
the Virginia Department of Alcoholic Beverage Control stated that while
adoption of the proposed 0.5% standard would be consistent with State
law, any standard allowing a higher percentage of alcohol from a source
other than the brewing process would create a potential conflict with
current State law, which classifies products containing mixtures of
beer and distilled spirits as distilled spirits products, regardless of
whether the majority of the alcohol is contributed by the beer. The
Arkansas Alcoholic Beverage Control Division indicated that if TTB
allowed the use of distilled spirits products as a flavoring agent,
legislative changes would be required in Arkansas if this product was
to be sold by beer-only permittees.
B. Other Comments in Support of the 0.5% Standard
Hundreds of brewery employees submitted comments stating that
without the proposed 0.5% standard, brewers, wholesalers and retailers
may face a patchwork of individual State laws and regulations, where
the same product may ultimately be sold as ``beer'' in one State and as
``hard liquor'' in another. These comments suggested that this was
already happening in Nebraska and will almost certainly happen in other
States as well. Other commenters pointed out that such different
standards could result in subjecting a product to two entirely
different sets of laws and regulations regarding production,
distribution, place of sales, labeling, and advertising. Many
commenters stated that this discrepancy would jeopardize nationwide
marketing and distribution efforts by industry members.
A State lawmaker commented that clear definitions of alcohol
beverages are important for the State legislative process. Without
definitions, the State legislatures cannot study and act on beverage
alcohol issues in an educated and professional manner.
Several members of the beer industry supported the 0.5% standard as
being most likely to resolve the concerns of State administrators. For
example, the Beer Institute commented that the 0.5% standard is the
best option to maintain consistency among existing Federal and State
statutes and regulations. While noting that State officials must
utilize their respective definitions of alcohol beverages, the Beer
Institute suggested that almost all of the States that have reviewed
the issue can reconcile their statutes and regulations with the TTB
proposal, but that this is not true of alternative standards.
The Beer Institute suggested that implementation of an alternative
standard would:
unravel the consensus and relative stability that have been achieved
to date with respect to state statutes and regulations. The
alternative discussed in Notice No. 4, a standard permitting a 51-
49% blend of malt beverage and distilled alcohol would require many
changes in existing state tax and regulatory systems or even worse,
a return to state-federal conflicts and inconsistent regulation.
Anheuser-Busch predicted that:
there will be complete disorder in the nationwide marketplace if
FMBs are permitted to contain 49 percent distilled spirits alcohol
under federal law, yet most states would only permit 0.5% spirit
alcohol. A patchwork of states regulating identical products as
distilled spirits in most states, and as beer in others, would cause
havoc and tremendous consumer confusion.
As one example of the confusion that could be caused by differing State
classifications of the same product, the brewer noted that television
advertisements regularly cross State lines.
Anheuser-Busch also suggested that while the 51/49 standard is
nowhere to
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be found in State laws, many State laws incorporate a 0.5% alcohol by
volume threshold in their definitions of malt beverages and distilled
spirits; accordingly, adoption of the alternative 51/49 standard by TTB
would be disruptive to the system of State laws. The brewer suggested
there is no basis to support the alternative standard in existing State
laws, and that such action would create a conflict between Federal and
State law. Additionally, Anheuser-Busch stated that such Federal action
would trigger disruptive State action since many States would no longer
follow TTB guidance, but would instead have to develop and/or enforce
their own 0.5% standard, ``effectively ending federal leadership on the
most important alcohol regulation issues.''
Coors commented that the 0.5% proposal is consistent with TTB's
role under the 21st Amendment and noted that it is the only approach or
proposal consistent with the vast majority of the different State laws.
Accordingly, Coors suggested that the 0.5% proposal ``thus fulfills
TTB's role as a leader of the states' regulatory and tax collecting
organizations.'' Coors acknowledged that ``[e]xamples of differences in
the regulation of malt beverages at the state level do exist,'' but
suggested that ``only the TTB proposed regulation provides comity to
the states and a marketplace free from disruption * * *.'' Miller
suggested that, given the support of the States for the proposed 0.5%
standard and the reality of the FAA Act's penultimate provision,
``considering other standards would be detrimental to the creation of a
uniform standard.''
C. Other Comments in Support of the 51/49 Standard
Supporters of the 51/49 standard challenged those comments that
suggested that only the proposed 0.5% standard would meet the needs of
the States and result in a uniform Federal standard. These commenters
argued that while a national standard would be beneficial, TTB has
provided no evidence in Notice No. 4 as to why the proposed 0.5%
standard is the only way to accomplish this goal. Several commenters
stated there is no reason to assume the proposed 0.5% standard for
added alcohol is the only standard supported by the various State
authorities.
The FMBC noted that Federal law remains independent of State law
and that the views of State officials are not binding on TTB. The FMBC
stated that while it commended TTB for seeking to craft a national
standard to respond to State concerns, TTB should not regulate to the
``least common denominator'' and elevate the opinions of a few State
regulators above other considerations it must weigh.
The FMBC further stated that all States today classify FMBs as
``beer,'' ``malt beverages,'' or an equivalent statutory term. The FMBC
suggested that while definitions vary from State to State, many
resemble in material respects one of the two Federal definitions. Like
these Federal statutes, State statutes are silent on the issue of how
much alcohol nonbeverage flavors can contribute to a malt beverage or
beer. Accordingly, the FMBC argued that even assuming that this silence
could support the imposition of limits on the use of flavors, it would
allow State regulators to adopt either a majority standard, a 0.5%
standard, or some other standard.
The FMBC also challenged the characterization by other commenters
of State laws on this issue. The FMBC noted that some supporters of the
0.5% standard suggest that the presence of a 0.5% alcohol by volume
threshold in many State statutes requires those states to limit the
alcohol contribution of flavors to that de minimis amount. However, the
FMBC pointed out that these thresholds do not address the formulation
of products but instead constitute a threshold that divides taxable
alcohol beverages from products containing alcohol that are not subject
to taxation. The FMBC stated that it was aware of no State statute that
sets 0.5%--or any other figure--as the mandatory limit on the amount of
alcohol that flavors or other alcohol sources can contribute to a malt
beverage. The FMBC also noted that if such an interpretation prevailed,
many States would have to reclassify wines that derive alcohol from
flavors or spirits.
The FMBC argued that while some States have expressed support for
Notice No. 4, none to date had indicated that they could not accept a
majority standard. Finally, the FMBC stated that in 2002, the Joint
Committee of the States (a body that represents the interest of alcohol
regulators from both the ``control'' and ``open'' States) voted to
recommend that States support a position that more than 50% of the
volume of a finished FMB come from the product's beer/malt beverage
base. The FMBC suggested that such a standard would be more lenient
than the majority standard that FMBC can accept.
D. TTB Response
We agree with those commenters who suggested that the originally
proposed 0.5% standard would give States guidance in classifying FMBs.
However, we have concluded that the 51/49 standard would achieve the
same goal, with less cost to the industry, as discussed earlier in this
document. We agree with those commenters who suggested that the 51/49
standard will achieve our regulatory goal of establishing a uniform
standard that provides a meaningful distinction between FMBs and
distilled spirits products.
It is noteworthy that, while most of the comments from State
regulatory agencies supported the proposed rule, only a few of these
comments specifically opposed the majority standard. Several State
regulatory agencies did not specifically support either standard, but
simply supported TTB's action in trying to resolve this difficult issue
by setting a uniform standard.
Furthermore, while a few States suggested that any standard other
than 0.5% would be inconsistent with their State laws or regulations,
none of these comments pointed to laws that specifically restricted the
use of alcohol derived from nonbeverage flavors in FMB production. Like
Federal law, many State laws use 0.5% alcohol by volume as the dividing
point between products subject to tax and other regulations, and those
that are not. Similarly, some State laws classify mixtures of beer and
distilled spirits as distilled spirits products. However, we are not
aware of any current State statutes that specifically regulate flavor
use in FMB production, although at least two States have apparently
initiated administrative procedures to establish such a policy.
Several States have indicated that they will not follow TTB's lead
if we adopt an alternative to the 0.5% standard. Other States have
indicated that they will follow the Federal standard, regardless of
what it is. TTB's role is to provide Federal leadership on this issue.
However, it is up to the States to decide whether they want to follow
Federal standards or not.
Clearly, many brewers are concerned over facing a multitude of
different State laws and regulations. Pursuant to the 21st Amendment,
States have significant authority to regulate the sale and distribution
of alcohol beverages within their borders. Under the penultimate clause
of the FAA Act, Federal labeling and advertising regulations apply to
malt beverages only to the extent that the State has adopted similar
requirements for malt beverages sold within the State. Accordingly,
brewers, wholesalers and retailers must
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follow State laws on these issues, regardless of what standard TTB
adopts.
We recognize that our adoption of the 51/49 standard may mean that
some States will adopt a standard that differs from the Federal
standard. However, as many commenters noted, State requirements on
alcohol beverage classification issues already vary from State to
State. We do not believe that the adoption of a different standard by
some States will cause major problems to the beer industry; in any
case, it is beyond TTB's authority to control what the States choose to
do on this issue. We would note, however, that although TTB is adopting
the 51/49 standard for FMBs, brewers are free to adopt the stricter
0.5% standard for their own FMB products, thus ensuring compliance with
those State laws and regulations that are amended to incorporate this
standard. Finally, by adopting a one-year effective date provision for
this final rule, we hope to provide States with an adequate period of
time in which to decide whether they wish to follow the Federal rule or
not, and to make any corresponding changes in their own laws or
policies.
X. Mandatory Alcohol Content Labeling for FMBs
TTB received 31 comments expressing opinions about the proposed
mandatory alcohol content labeling for flavored malt beverages. Five
commenters were brewers, six were from State licensing or regulatory
agencies, seven were from interest groups, six were from individuals,
and smaller numbers were from other sources. Although we received
thousands of form letters supporting the Notice No. 4 proposals, none
of these letters specifically addressed alcohol content labeling.
A. Comments Supporting the Proposal
Miller supported the proposed alcohol content labeling requirement
for FMBs and other malt beverages that derive any alcohol from added
ingredients. Miller's comment stated that it would oppose a requirement
to label all malt beverages with an alcohol content statement. Miller
also commented that the regulations should provide flexibility by
allowing the alcohol statement on any label rather than on the brand
label (front label) as proposed. Miller commented that allowing the
alcohol content statement on any label is consistent with other
mandatory labeling requirements such as the Government warning label,
and that the proposed placement on the brand label is unnecessary since
there is no empirical evidence concerning consumer confusion over the
alcohol content of FMBs.
Two State liquor authorities supported the Notice No. 4 proposal to
require alcohol content labeling on FMBs and other malt beverages that
derive alcohol content from sources other than the brewing process.
They agreed that this alcohol content labeling is necessary because of
the similarity of some FMB labels to distilled spirits labels and
because of the need to distinguish FMBs from non-alcohol products. Both
States cited the importance to consumers of having alcohol content
information available on malt beverage labels.
B. Other Comments
Several commenters opined that the proposed alcohol labeling
requirement should not be restricted to FMBs and other products
containing added alcohol but should apply to all malt beverages. These
commenters generally stated that there was no reason to single out FMBs
for mandatory alcohol content labeling. Diageo commented that Notice
No. 4 provides no basis for requiring alcohol content statements only
on the labels of malt beverages that derive alcohol from added flavors
or other ingredients. Diageo stated that the intended alcohol content
labeling bears no relationship to its cited justification in Notice No.
4, where TTB stated that consumers may believe either that spirits-
branded malt beverages contain the same high alcohol content as
distilled spirits or that other FMBs may contain no alcohol due to
their unconventional appearance. As an example of the contradictory
policy this requirement would cause, Diageo asserted that the
regulations would not require alcohol content labeling on a product
with a distilled spirits brand name such as ``Jack Daniels Pilsner''
but would require alcohol content labeling on a traditional malt
beverage product made with alcohol flavoring materials like
``Strawberry Blonde Ale.'' Diageo further stated that they have placed
alcohol content on labels of their FMBs since 2000.
Brown-Forman also commented that TTB has no basis for treating FMBs
differently from other malt beverages. Brown-Forman argued that alcohol
content labeling is important consumer information that should be
required for all malt beverages. Gallo also supported extending alcohol
content labeling to all malt beverages but requested that it be
optional because of labeling prohibitions in Oklahoma and New York
State.
The FMBC commented that alcohol content is important consumer
information and that all of their member companies place that labeling
on their FMBs. This trade association noted that although nearly all
FMBs fall within a 5.0 to 5.5 percent alcohol by volume range, so-
called traditional malt beverages contain between 4% and 25% alcohol by
volume, a much wider range, making alcohol content labeling more
meaningful for so-called traditional malt beverages than for FMBs.
Since most malt beverage labels do not contain alcohol content
information, the FMBC claims that consumers are less informed and more
confused about the alcohol content of other malt beverages. The FMBC
therefore urged TTB to require alcohol content labeling on all malt
beverages.
CSPI similarly urged TTB to adopt alcohol content labeling for all
malt beverages, stating that there is no reason to require such
labeling only for FMBs and other malternative-type products, but not
for all malt beverages. Another consumer organization, the NCL, also
supported mandatory alcohol labeling for all malt beverages. The NCL
stated, ``Mandatory labeling will provide consumers with the
information they need to make better, more informed choices about
alcoholic beverage consumption.''
Anheuser-Busch opposed the proposal to require alcohol content
labeling on FMBs and other malt beverages containing alcohol from added
ingredients. Anheuser-Busch stated that consumers do not assume malt
beverages with distilled spirits brand names are higher in alcohol
content, noting also that most FMBs already have alcohol content
labeling. Anheuser-Busch further stated that any alcohol content
labeling should be at the discretion of the brewer and should not be
applied to only one kind of malt beverage.
C. TTB Response
The intent of TTB's proposal for alcohol content labeling was to
provide this important information to consumers who may not be familiar
with FMBs, or who may be misled by distilled spirits brand labels into
believing that their alcohol content is higher than of other malt
beverages. For the reasons outlined in the preamble to Notice No. 4,
TTB is adopting the amendment to Sec. 7.22(a) to require alcohol
content labeling on the brand labels of malt beverages that derive any
amount of alcohol from flavors or other ingredients containing alcohol.
TTB believes this requirement will provide consumers with better
information about these malt beverage products and will help prevent
consumer confusion over their identity. Moreover, this requirement
applies to
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the addition of flavors or other nonbeverage materials containing
alcohol at any step in the production process. At the same time, we are
modifying the new Sec. 7.22(a)(5) text to exclude from this
requirement the use of hop extract that contains alcohol since hops are
an essential ingredient in the production of malt beverages. It should
be noted, however, that TTB will count any alcohol contained in added
hop extract toward the 49% limitation under the 51/49 standard.
TTB notes that the final rule text, like the proposed rule text,
does not separate FMBs that derive a substantial portion (up to 49%) of
their alcohol content from added flavors from those traditional malt
beverages that contain small amounts of added alcohol from flavors.
Thus, this alcohol content labeling requirement applies to flavored
beers, flavored ales, and so forth that are produced using alcohol
flavorings.
While many comments supported alcohol content labeling for all malt
beverages, TTB is unable to issue such a broad regulation at this time.
In Notice No. 4, we specifically stated that we were not proposing to
require alcohol content statements on all malt beverage containers at
that time. Thus, we have not aired this issue for comment. We also
believe that such a requirement represents a significant departure from
past labeling requirements that, until the addition of Sec. 7.71 in
1993, actually prohibited the placement of alcohol content statements
on malt beverage labels (unless required by State law), due to the
prohibition within the FAA Act (this prohibition was found to be
unconstitutional in Rubin v. Coors Brewing Co., 514 U.S. 476 (1995)).
Thus, while we are not unsympathetic to the comments suggesting
mandatory alcohol content labeling for all malt beverages, we are not
in a position to implement such a rule without notice and public
comment. We also note that we have received several petitions from
various consumer and public interest groups for additional labeling
information on alcohol beverage containers, including alcohol content
labeling. TTB intends to pursue these labeling issues in future
rulemaking.
TTB acknowledges Gallo's comment regarding two States' prohibition
of alcohol content statements on malt beverage labels. Pursuant to the
penultimate paragraph of the FAA Act, the labeling requirements of the
FAA Act apply only to the extent that State law imposes similar
requirements on malt beverages sold within the State. Thus, brewers
have to comply with the labeling laws of the State in which the malt
beverages are being sold.
We recognize that brewers may be required to print different labels
for malt beverages intended for sale in those States in which alcohol
content statements on malt beverage labels are prohibited. However, TTB
does not believe this is a sufficient reason not to adopt mandatory
alcohol content labeling statements for malt beverages that derive
alcohol from flavors or other ingredients. Brewers have always been
required to conform labels to State requirements when those
requirements conflict with part 7 requirements under the FAA Act.
With regard to the requirement that the alcohol content statement
appear on the brand label, we have concluded that consumers are more
likely to notice the statement if it appears on the brand label.
Furthermore, this requirement is consistent with the regulations
applicable to the mandatory alcohol content statements for wine (see 27
CFR 4.32(a)(3) and distilled spirits (see 27 CFR 5.32(a)(3)).
XI. Use of Distilled Spirits Terms on Labels and in Advertisements
A. Comments Received
TTB received 10 comments addressing the proposed limitations on the
use of distilled spirits terms in malt beverage labeling and
advertising. Three of these comments came from brewers, two were from
State licensing and regulatory agencies, and the rest were from other
sources. The majority of the comments favored limiting the use of
distilled spirits terms on FMBs.
Several brewers requested assurances that the policy in ATF Ruling
2002-2, allowing the use of distilled spirits brand names on FMBs, will
continue. They commented that industry members have made large
investments in the labeling and advertising of these distilled spirits
brand names based on existing government policies.
Several commenters believed the proposed language of Sec. Sec.
7.29 and 7.54 is vague, and they requested clearer language that
directly addresses TTB's stated purpose. The Washington Legal
Foundation, a nonprofit public interest law and policy center,
submitted a comment in opposition to the proposed language, asserting
that the regulation would not accommodate the First Amendment rights of
malt beverage industry members to make truthful statements about their
products.
One commenter pointed out that the use of certain non-misleading
statements would be prohibited by the proposed limitations on the use
of distilled spirits terms on FMBs. This commenter cites a statement of
``having the color of dark rum'' as a truthful statement that describes
the color of an FMB product but which would be prohibited. Another
commenter cited the example of ``Beer aged in Bourbon Barrels'' as a
truthful, informative statement that would similarly be prohibited by
the proposed regulations.
B. TTB Response
We are incorporating the general holdings of ATF Ruling 2002-2 into
Sec. Sec. 7.29 and 7.54. However, in response to the comments received
on this issue, we are modifying the language of the regulation to
clarify that the regulation prohibits only those labeling and
advertising representations that tend to create a false or misleading
impression that the malt beverage contains distilled spirits or is a
distilled spirits product. In addition, we are keeping ``safe harbor''
provisions in Sec. Sec. 7.29 and 7.54 that incorporate the specific
practices that we do not consider misleading.
The proposed language in Sec. Sec. 7.29 and 7.54 was patterned
after the existing language in 27 CFR part 4, Labeling and Advertising
of Wine. In response to the issues raised by the commenters, we are
revising these sections to clarify that we are not banning truthful and
non-misleading speech about malt beverage products. Instead, we are
incorporating the holdings of ATF Ruling 2002-2, which were intended to
ensure that labeling and advertising statements comparing FMBs to
distilled spirits products do not mislead consumers.
ATF Ruling 2002-2 noted the existence of a recent trend in the
marketing of FMBs. Brewers and importers had begun to associate FMBs
with well-known brands of distilled spirits, by using distilled spirits
brand names as the brand names for FMB products; by using labeling and
packaging that resemble the labeling and packaging of well-known
distilled spirits brands; and by the use of specific distilled spirits
terms in describing flavorings added to malt beverages. The ruling
noted that these products were drawing media attention, in part because
of the impression given that these FMBs are made with distilled spirits
or contain distilled spirits. Certain FMBs were using labels that used
distilled spirits brand names or distilled spirits class and type
designations to describe a flavor element as part of the statement of
composition on the label. For example, these labels used a distilled
spirits brand name, and then stated ``Flavored malt beverage made with
natural flavors containing vodka'' or ``Flavored malt beverage with
natural flavors containing
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genuine [Distilled Spirits Brand Name].''
The ruling held that such statements were misleading. The labels
create the misleading impression that the product is made with, or
contains, distilled spirits. In fact, however, distilled spirits used
to manufacture flavors lose their class and type when blended with
other ingredients to make a flavor extract. Thus, it is misleading to
represent that the malt beverage contains a particular class or type of
distilled spirits, such as vodka, rum or tequila. Furthermore, this
kind of labeling created the misleading impression that the product
contained distilled spirits, or in fact was a distilled spirits
product.
Accordingly, the purpose of the ruling was to set forth specific
labeling and advertising statements that would be considered
misleading. The ruling held that the use of a brand name of a distilled
spirits product as the brand name of a malt beverage was not in itself
misleading. However, the use of a distilled spirits term found in the
standards of identity in 27 CFR part 5 (such as whisky, rum, vodka,
brandy, gin, and so forth) as the brand name for a malt beverage or as
part of the statement of composition or as the fanciful name of a malt
beverage, is misleading. The use of a cocktail term as the fanciful
name of a malt beverage would not be considered misleading if the
overall labeling and advertising does not create a misleading
impression about the identity of the product.
TTB still takes the view that the use of a distilled spirits brand
name as the brand name of an FMB is not inherently misleading.
Furthermore, we do not believe that the use of a cocktail name as part
of a fanciful name of an FMB is always misleading, as long as the
remaining labeling and advertising of the product do not create a
misleading impression as to the identity of the product. We are not
changing our position with respect to these issues.
In response to the concerns voiced by the commenters, we are
changing the wording of the amendments to Sec. Sec. 7.29 and 7.54
contained in the proposed rule. Instead of the specific prohibitions
proposed in those sections, we are adding the following to the
prohibited statements with respect to labeling and advertising of malt
beverages:
Any statement, design, device, or representation that tends to
create a false or misleading impression that the malt beverage
contains distilled spirits or is a distilled spirits product.
Because this language prohibits only labeling and advertising
statements that are false and misleading, it does not infringe upon the
First Amendment rights of producers and importers of FMBs. Information
on alcohol beverage labels is considered commercial speech. (See Rubin
v. Coors Brewing Co., 514 U.S. 476, 481 (1995).) The First Amendment
protects commercial speech only if that speech concerns lawful activity
and is not false or misleading. (See Central Hudson Gas & Electric
Corp. v. Public Serv. Comm'n, 447 U.S. 557, 563-564 (1980).) Similarly,
our statutory authority under the FAA Act is to ensure that labels
provide consumers with adequate information as to the quality and
identity of malt beverages, and to ensure that labels and
advertisements for such products do not tend to mislead consumers. (See
27 U.S.C. 205(e) and (f).) It is not TTB's intention to prohibit any
labeling or advertising statements that are truthful and non-
misleading.
The final rule regulatory texts incorporate the proposal to
prohibit the types of references to distilled spirits brand names and
class and type designations in FMB statements of compositions that were
addressed in ATF Ruling 2002-2. However, those texts will allow
truthful non-misleading statements that may draw similarities between
the taste or character of a malt beverage and the taste or character of
a distilled spirits product, but that do not imply in a false or
misleading fashion that the product contains distilled spirits or is a
distilled spirits product. Moreover, this general prohibition will not
prohibit truthful and non-misleading statements such as ``beer aged in
whiskey barrels'', provided that such a statement is not in the context
of implying that the FMB contains whisky as the result of the aging
process. Finally, this standard will not prohibit the use of cocktail
terms as a brand name or fanciful name on malt beverage labels or in
advertising provided the use of those terms does not draw a misleading
comparison between the two types of alcohol beverages. To the extent
that labeling or advertising comparisons between malt beverages and
distilled spirits are false or misleading in a manner that is not
covered by these new regulations, they would fall under the general
prohibition on the use of false or misleading statements in the
labeling or advertising of malt beverages. (See 27 CFR 7.29(a)(1) and
7.54(a)(1).)
ATF Ruling 2002-2 held that certain labeling and advertising
practices by themselves are not misleading if their use does not give a
misleading impression about the malt beverage. The ruling specifically
held that the use of a brand name of a distilled spirits product as the
brand name of a malt beverage is not in itself misleading. The ruling
further held that the use of a cocktail term as the brand name or
fanciful name of a malt beverage is not misleading if there is no
misleading impression about the identity of the product, based on the
overall labeling and advertising of the product.
Consistent with the proposed rule, and in response to the comments
that specifically request affirmation that the use of distilled spirits
brand names will be permitted, we are incorporating these ``safe
harbor'' provisions from the ruling into Sec. Sec. 7.29 and 7.54. We
are reconfiguring the text as three subparagraphs in Sec. 7.29(a)(7)
and Sec. 7.54(a)(8). Subparagraph (i) permits the truthful statement
of alcohol content in labeling and advertising in conformity with
existing requirements in Sec. 7.71. Subparagraph (ii) in each case
permits the use of a distilled spirits brand name as the brand name of
a malt beverage provided the overall label or advertisement does not
present a misleading impression about the identity of the product.
Similarly, subparagraph (iii) permits the use of a cocktail name as the
brand name or fanciful name of a malt beverage, with the same proviso.
XII. New Formula Requirements
TTB received a small number of comments from brewers and brewery
trade associations on the proposed new formula filing requirements that
would replace the existing statement of process. These commenters
generally favored the new formula filing requirements, but they
expressed concerns regarding certain aspects of the proposal and
requested that TTB clarify some of the proposed formula requirements.
A. Fermented Products Requiring Formulas Under Sec. 25.55
1. Comments Received
Several brewers and brewing industry trade associations commented
on the proposed requirements that would trigger the filing of a formula
by a brewer. These commenters requested that we more clearly
communicate which fermented products require filing formulas.
One brewer stated that because of the wording of the proposal, it
appears that most fermented products would require a formula. A brewery
trade association argued that the requirement to file formulas showing
special processing is so broad that the proposal would require brewers
to file formulas for most products. This association noted that many
traditional malt beverages contain
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fruits, herbs, spices, or honey and that the proposed requirement to
file a formula for fermented products containing any of these
ingredients would greatly increase the number of products for which a
formula is required. The association further alleged that products
containing some of these types of ingredients are considered
traditional malt beverages or beer and that, therefore, filing formulas
for them would simply increase the number of formulas filed without
assisting TTB in classifying them for tax purposes. One brewer and one
trade association suggested adding a paragraph to the formula
requirements in Sec. 25.55 to state that a formula is not required
when processes or ingredients are used in the production of traditional
beers.
One brewer commented that proposed Sec. 25.55 requires a formula
when honey is used but does not specifically require a formula when
maple syrup is added to beer. Further, this brewer commented that TTB
should rewrite Sec. 25.55 in the final rule to require formulas only
for beer made with the use of processes or ingredients that the TTB
Administrator has not declared as standard brewing processes or
ingredients. TTB would then implement this regulation by periodically
publishing a list of processes or ingredients declared to be
traditional and therefore not requiring the filing of a formula for
their use in beer production.
2. TTB Response
The formula requirement proposed in Sec. 25.55 would replace the
statement of process now required by Sec. 25.67. The existing section
currently requires brewers to file a statement of process whenever they
propose to produce a fermented product not marketed as ``beer,''
``ale,'' ``porter,'' ``stout,'' ``lager,'' or ``malt liquor.'' As
several commenters noted, some traditional malt beverage products are
made with added flavors but are marketed under those traditional
designations and not as flavored or specialty products. Because of the
present wording in Sec. 25.67, which uses the marketing designation as
the filing criterion, some brewers may not file a statement of process
for some fermented products that contain flavors or other materials.
While these fermented products do not require a statement of process
under Sec. 25.67, the proposed regulation would require a formula and
perhaps additional labeling for these traditional fermented products.
The intent of this proposal was not to require a statement of
process or formula for additional kinds of fermented products. Rather,
it was intended to clarify which fermented products require the filing
of a formula. Thus, in this final rule document, we have changed Sec.
25.55 in order to state more clearly when a brewer must file and
receive approval of a formula in order to produce a fermented product.
We have added a provision to this section that allows a brewer to
request information on whether a formula is required in specific
instances. Additionally we have amended this section to make it clear
that TTB approval of a formula is required prior to using it to produce
a fermented product.
Paragraph (a) of Sec. 25.55 lists processes, materials, or
specific types of fermented products that will require a brewer to file
a formula. Paragraph (a)(1) contains the general rule to file a formula
for a fermented product that is produced using certain processes. Based
on the comments to Notice No. 4, which indicated that the term
``special processing'' is so broad that formulas would be required for
most fermented products, we have changed the criteria in Sec.
25.55(a)(1) that trigger filing a formula. Section 25.55(a)(1) now
requires filing a formula for the use of any process, filtration, or
other method of manufacture that is not generally recognized as a
traditional process in the production of a fermented beverage
designated as ``beer,'' ``ale,'' ``porter,'' ``stout,'' ``lager,'' or
``malt liquor.'' We have also removed the language from this proposed
section that would have used a change in the character of beer or the
removal of material from beer as a criterion for the filing of a
formula since it is impossible to quantify these standards. Thus, under
Sec. 25.55(a)(1), the sole criterion for filing a formula for a
process depends on whether or not the process is traditionally used in
producing fermented products designated as beer, ale, and so forth.
Non-traditional processes such as ion exchange treatment, reverse
osmosis, concentration of beer, separation of beer into different
components, and filtration to substantially change the color, flavor,
or character of beer are processes that require the filing of a
formula. These processes are those specifically included in proposed
Sec. 25.55(a)(1) as requiring filing a formula. We note that these are
only examples, and the exclusion of a process from this listing does
not mean that its use in making a fermented product would not require
the filing of a formula.
Conversely, processes such as pasteurization, filtration prior to
bottling, filtration in lieu of pasteurization, centrifuging for
clarity, lagering, carbonation, blending, and so forth are clearly
traditional and their use does not require a formula. Subparagraph,
(a)(1)(ii) of Sec. 25.55 lists examples of these processes. These
processes were listed in the preamble to Notice No. 4 as examples of
traditional processes not requiring a formula. Other processes exist
that are considered traditional and will not require filing a formula.
Subparagraph (a)(1)(iii) of Sec. 25.55 provides that brewers may
request a determination from us as to whether a particular process used
in producing beer will require a formula. Procedures for requesting
this determination are contained in new paragraph (f) of Sec. 25.55.
Paragraphs 25.55(a)(2) through (a)(5) list the other instances when
a formula is required to produce a fermented product. These correspond
to those formula requirements in proposed Sec. 25.55(a).
Paragraph (a)(3) requires brewers to file formulas when they use
coloring or natural or artificial flavors in producing a fermented
product. Paragraph (a)(4) requires brewers to file a formula for any
fermented product to which fruit, fruit juice, fruit concentrate,
herbs, spices, honey, maple syrup, or other food materials are added.
In response to the above comments regarding the production of
traditional brewery products to which certain flavors or other material
are added without filing a statement of process, we have added a
reference to Sec. 25.55(f). This section permits brewers to request a
determination from us as to whether a particular ingredient used in
producing beer will require a formula.
3. New Procedural Requirements
New paragraph (f)(1) of Sec. 25.55 authorizes TTB to determine
whether the use of a particular process or a particular ingredient will
require the filing of a formula. Under Sec. 25.55(f)(2), a brewer may
request a determination on whether the use of a proposed process or a
proposed ingredient will require the filing of a formula. Paragraph
(f)(2)(i) sets forth the information that a brewer must submit to TTB
in order to request a determination as to whether a formula is required
when using a particular process. For use of a proposed process, the
brewer must submit a full description of the process, evidence of
whether the process is generally recognized as a traditional process in
the production of fermented beverages designated as beer, ale, and so
forth, and an explanation of the intended effect of the process.
Similarly, a brewer may request an exemption from the formula
filing
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requirement under Sec. 25.55(a)(3) and (a)(4) when certain flavors or
other ingredients are used in a fermented product. Under Sec.
25.55(f)(2)(ii), a brewer must submit information about the proposed
ingredient, including a description of the ingredient, evidence
establishing that the proposed ingredient is generally recognized as a
traditional ingredient in the production of a fermented beverage
designated as beer, ale, and so forth, and what effect the use of the
proposed ingredient has on the fermented product. However, there is no
exemption from the formula requirement in Sec. 25.55(a)(2) with
respect to the use of flavors and other ingredients containing alcohol,
because this information is essential for purposes of administering the
51/49 standard.
As suggested by the comments, there may be many fermented beverages
produced and marketed under the traditional designations of ``beer,''
``ale,'' and so forth that contain flavors or other ingredients and
which are produced without statements of process. The information
submitted by brewers under paragraph (f) will allow us to evaluate
whether or not these fermented products made with flavors or other
ingredients should be subject to the formula approval and possible
additional labeling provisions. TTB will give consideration to the past
usage of those flavors or other ingredients and to whether the
fermented products are considered to be traditional products that are
entitled to be marketed as ``beer,'' ``ale,'' and so forth without
formula approval and without additional labeling information. As part
of our evaluation, we will take into consideration the class and type
regulations in Sec. 7.24(a) that require that statements of class and
type conform to the designation of the product as known to the trade.
Additionally, Sec. 7.24(e) requires products designated as ``ale,''
``porter''' or ``stout'' to be produced without the use of coloring or
flavoring materials (other than those recognized in standard brewing
practices). We will consider these criteria when evaluating a request
for a determination on the use of flavors or other materials in
producing fermented products without obtaining a formula approval.
With respect to the use of processes, we recognize that the
listings in Sec. 25.55(a)(1)(i) are not complete and that brewers may
propose to use new processes in the production of fermented beverages.
Thus, a request to TTB under paragraph (f) of Sec. 25.55 will permit
us to determine, for example, whether a process may constitute
distillation, and whether a proposed process is appropriate for the
production of a fermented beverage that is to be sold under a
traditional designation such as ``beer'' or ``ale''.
We will maintain on the TTB Web site a list of new processes and
ingredients determined by TTB under Sec. 25.55(f) to require, or not
to require, the filing of a formula.
B. Standards for Formula Approval
1. Comments Received
The FMBC and one FMB producer commented that proposed Sec.
25.15(a) gives brewers a wide variety of ingredients for producing
beer. The FMBC agreed that the statutory definition of beer permits the
use of a wide range of fermentable materials at the brewery and that
this listing of ingredients reflects existing TTB policy. However, both
commenters stated that the proposed formula regulations provide no
standard for using these materials in producing beer. The FMBC
commented that proposed Sec. 25.15(a) appears to blur the distinction
between beer and wine since TTB taxes as wine products made primarily
from honey, fruit, fruit juice, and fruit concentrate, which are all
materials listed in proposed Sec. 25.15(a). These commenters requested
that TTB provide to the industry regulatory standards to as to when the
use of honey, fruit, and other materials would result in classification
of a product as a wine. As an example of a suggested standard, these
commenters cited TTB's unofficial policy that half of the fermentable
material in a beer must be derived from barley malt and other
fermentable grains. These commenters suggested that incorporating this
policy of ingredient use in the regulations would provide brewers with
necessary guidance in determining what fermented products qualify as a
beer, especially when other fermentable ingredients such as honey or
fruit are used.
The FMBC further commented that although Notice No. 4 stated that
one use of the formula submission is for TTB to evaluate whether a
certain process constitutes distillation, the actual proposed formula
regulations do not contain any standards that could be used for this
purpose. The FMBC stated that without such regulatory guidelines,
producers would be uncertain whether a proposed process constitutes
distillation and, further, that this lack of a standard will lead to
arbitrary and uneven decision-making. The FMBC therefore requested that
TTB seek comments on proposed regulations containing both criteria for
distillation and criteria that TTB will use in evaluating beer produced
by special processes.
2. TTB Response
TTB has not incorporated in this final rule its informal
administrative policy regarding the percentage of fermentable materials
in a beer that must be grain-based because we did not air this issue
for comment in Notice No. 4. However, we agree with the FMBC that the
proposed regulatory text did not adequately distinguish between
fermentable materials and fermentable adjuncts. The term ``beer'' is
defined in section 5052(a) of the IRC as:
beer, ale, porter, stout, and other similar fermented beverages
(including sak[eacute] or similar products) of any name or
description containing one-half of 1 percent or more of alcohol by
volume, brewed or produced from malt, wholly or in part, or from any
substitute therefor.
In 1889, the Commissioner of Internal Revenue stated that the term
``substitute for malt'' included rice, grain of any kind other than
malt, sugar, bran, glucose, and molasses.
The comment from the FMBC rightly pointed out that the proposed
language of new Sec. 25.15(a) seemed to authorize unlimited use of
materials such as honey and fruit as substitutes for malt. This was not
our intention. Accordingly, we have revised the language in paragraph
(a) of proposed Sec. 25.15. The first and second sentences of
paragraph (a) address the basic brewing materials, and we have revised
this list to conform the substitutes for malt to those specifically
listed in the Internal Revenue Commissioner's letter in 1889.
Accordingly, Sec. 25.15(a) lists the following materials as the only
permissible substitutes for malt: rice, grain of any kind, bran,
glucose, sugar, and molasses. We note the term ``grain of any kind''
includes both malted and unmalted grains.
The third sentence of paragraph (a) lists other materials that may
be used in brewing but that are not considered basic brewing
ingredients as contemplated by the IRC. Extensive use of those other
materials in fermentation could yield a fermented product that might be
considered wine rather than beer; thus, the revised text distinguishes
between those materials that we categorize as ``adjuncts'' and the
basic brewing materials covered by the first two sentences of Sec.
25.15(a).
In the absence of a regulatory standard, TTB will continue to rely
on its current administrative guideline, which requires at least 50% of
the fermentable material in an IRC ``beer'' to be one or more of the
following: barley
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malt, other malted grains, unmalted grains, rice, bran, sugars, or
molasses. Brewers may use the other materials listed in the third
sentence of Sec. 25.15(a) as fermentable adjuncts in the production of
a beer at a brewery. We will consider the comments summarized above as
suggestions for future amendments of the part 25 regulations, and we
may address this issue in the near future in connection with the
planned revision of the part 25 brewery regulations.
With regard to the FMBC comment requesting regulatory standards for
distillation and for the evaluation of other processes in producing
beer, TTB notes that Notice No. 4 did not propose to adopt either of
those standards. Moreover, determinations of whether distillation has
occurred are highly technical matters. The determination often depends
on laboratory examination of the process and the materials produced.
Therefore, we believe that it is preferable to continue to examine
processes on a case-by-case basis. However, we will consider these
comments as suggestions for future regulatory amendments.
C. Alcohol Information in Formulas
1. Comment Received
One brewer commented that since Notice No. 4 proposed limits on the
amount of alcohol that can be added to fermented beverages through the
use of flavors and other ingredients containing alcohol, it was
unnecessary to require detailed information about those ingredients in
formula submissions. This commenter stated that since the proposal
would limit the amount of added alcohol, the detailed information in
proposed Sec. 25.57 is not needed and should not be required.
Another brewer expressed its concern about the requirement to state
maximum volumes of flavoring materials in formulas. This brewer
commented that they need significant flexibility in the amounts and
types of flavorings to accommodate price changes or acceptability of
ingredients in foreign countries. Furthermore, they may use two or more
flavors alternatively in a formulation. Although, on examination, the
use of the maximum amounts of each flavor listed would appear to exceed
overall added alcohol limitations, this brewer stated this is not the
intention of using or listing alternative flavors in a formula. Thus,
this brewer requested that TTB add a provision in Sec. 25.57
specifying that the amount of alcohol contributed by all of the
flavoring material in a formulation will not exceed the overall limit
established by Sec. 25.15.
This brewer also commented that the requirement to state the
alcohol content of the fermented product at each step in production is
overly restrictive. This requirement, according to the commenter, would
eliminate streamlining of operations, forcing production by batches
rather than in-line blending and other methods. The commenter therefore
suggested requiring a single statement for alcohol content at the final
stage of production.
2. TTB Response
TTB will continue to require information about individual flavors
and other ingredients in fermented beverages, not only for tax
classification purposes under the IRC, but also for labeling purposes
under the FAA Act. Thus, we are retaining the requirement in Sec.
25.57 to provide information about separate flavors and other
ingredients. Additionally, we need to know at what stage in production
flavorings are added since this information impacts the classification
and labeling of the fermented product. Thus, we have amended Sec.
25.57(a)(2) to require brewers to state the point of production'during,
before, or after fermentation'that flavors are added.
We do agree that brewers need flexibility to use alternate
ingredients in producing fermented beverages and that brewers should
not be required to file new or amended formulas every time they make
slight changes in the use of flavors or in the ratio of certain flavors
used in a product. Nevertheless, we again emphasize that the proposed
formula requirements are intended to clarify existing statement of
process requirements and are not intended to impose new requirements on
brewers.
It is our intention to permit the use of alternate or optional
flavors in producing fermented products, and, to this end, we have
added the following sentence at the end of proposed Sec. 25.57(a)(1):
``You may include optional ingredients in a formula if they do not
impact the labeling or identity of the finished product.'' We have also
clarified our position on alcohol content contributed by alternative
flavors and other nonbeverage ingredients containing alcohol in a
formula by adding the following sentences at the end of Sec.
25.57(a)(3)(iv): ``You are not required to list the alcohol
contribution of individual flavors and other nonbeverage ingredients
containing alcohol. You may state the total alcohol contribution from
these ingredients to the finished product.'' We believe the addition of
these sentences to Sec. 25.57 will make it clear that the use of
alternative ingredients is permitted and that it is not necessary to
list the alcohol contribution of each individual ingredient in the
formula.
We also have removed the proposed requirement in Sec. 25.57(c) for
listing in a formula the alcohol content of a fermented beverage at
every step in production. We agree with the commenter that this
requirement is burdensome and not useful in evaluating a formula. This
paragraph now requires listing only the alcohol content of the
fermented product after fermentation and the alcohol content of the
finished product.
D. Reasonable Range of Ingredients
1. Comment Received
Only one commenter addressed TTB's request for comments on how to
define a ``reasonable range'' of ingredients used in formulas in Sec.
25.57(a)(1). This commenter, Diageo, recommended that TTB prescribe
specific ranges for various ingredients. For ``major ingredients'' or
those composing more than 3% of a product's total weight or volume,
Diageo recommended that the range should vary by no more than 30% over
or under the actual amount used in production. For ``minor''
ingredients that represent less than 3% of the product's weight or
volume, this comment recommended the reasonable range could vary by up
to 200% of the actual quantity used.
2. TTB Response
TTB is still seeking broad industry input on what constitutes a
``reasonable range'' of ingredients in a formula. Since only one
commenter responded to this question, we do not believe we have enough
information to take final rule action on its meaning. Thus, we are not
defining ``reasonable range'' of ingredients for purposes of Sec.
25.57(a)(1), and have removed the word ``reasonable'' from this
provision.
TTB will continue to permit brewers who submit formulas to indicate
a range of ingredients. A range of ingredients may not be so large as
to change the tax classification of a fermented beverage or to change
the designation of the fermented beverage. For example, a formula for a
``wheat beer'' cannot indicate a range of fermentable ingredients of 5
to 95% wheat malt since a minimum of 25% wheat malt is required for a
beer to have this designation. We will evaluate formulas submitted by
brewers, and make a case-by-case determination whether the range of
ingredients indicated in a formula is appropriate. We note that,
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under Sec. 25.57(e), we will have authority to request additional
information from brewers when we evaluate a formula.
We intend to revisit the question of what constitutes a
``reasonable'' range in the future through rulemaking or other
appropriate procedure.
E. Formula Confidentiality
1. Comments Received
One brewer expressed a strong concern regarding the need for
formula confidentiality. Another commenter stated that formula
protection from public disclosure is a very important issue in the
competitive market. Another brewer commented that the confidentiality
issue for formulas should be resolved in the final rule as a separate
regulation.
2. TTB Response
TTB agrees that formulas filed by brewers, like statements of
process, are confidential and are not generally subject to public
disclosure. To the extent that formulas are filed under the
requirements of part 25, they are classified as ``return information''
subject to the disclosure restrictions of 26 U.S.C. 6103. Furthermore,
formulas filed under either part 7 or part 25 are treated as
confidential business information under the Freedom of Information Act,
5 U.S.C. 552(b)(4), and are thus exempt from that statute's mandatory
disclosure provisions. Finally, TTB has always treated statements of
process and formulas as trade secrets subject to the disclosure
restrictions of 18 U.S.C. 1905.
At this time, TTB is not adopting the suggestion of the commenter
who advocated placement of confidentiality provisions in the formula
regulations in part 25 and part 7. At present, we believe that the
existing TTB and Treasury disclosure regulations adequately address the
protection of this type of data. Furthermore, it would not be an
efficient use of government resources to address this issue for beer
formulas, without addressing the similar issues presented by formulas
for wine and distilled spirits products. Finally, before adopting such
regulations, it would be preferable to specifically air the proposal
for comments from the public and affected industry members. Notice No.
4 did not contain any such proposal.
Accordingly, TTB will consider these comments as suggestions for
future rulemaking actions. In the interim, submitters of formulas
required under parts 7 and 25 should accept our assurances that TTB
will comply with all applicable statutory and regulatory restrictions
on the disclosure of that proprietary information.
F. Standard Form for Formulas
1. Comments Received
Three commenters suggested that TTB should develop a standardized
form for formulas and that industry members should be able to provide
input on the development of the form. One brewer commented that TTB
should develop a formula form for FMBs that is similar to the form used
for flavored wine products. Another brewer requested that TTB develop a
unique formula form that is unlike the formula form for wine.
2. TTB Response
At this time, TTB declines to adopt a standard formula form for
part 25 purposes, but we will consider developing a standardized form
for formulas in the future. We may consider combining a formula form
for beer with the form used for wine in order to achieve
standardization, and we will consider comments or suggestions from
industry members and the public in developing any form for beer
formulas. In the meantime, brewers may continue to prepare their
formulas for fermented products on their own letterhead stationary.
G. Formula Proceedings
1. Comments Received
A brewer commented on the statement in Sec. 25.55 that a formula
remains in effect until surrendered or superseded by a new formula or
until TTB cancels or revokes it. This commenter noted that no formal or
informal procedure is given in the regulation that would apply to the
cancellation or revocation of a formula. This commenter stated that any
attempt to revoke a formula without proper procedures would raise
serious due process issues. The commenter requested inclusion of those
procedural safeguards and that they be at least similar to the
procedural safeguards afforded certificate of label approval
revocations.
2. TTB Response
In 1999, ATF issued regulations setting forth procedures for the
revocation of approved labels in 27 CFR part 13, Labeling Proceedings.
Although we have not prescribed specific procedures for the revocation
of formulas in the regulations, it has been our policy to afford
formula holders due process by giving them advance notice, and an
opportunity to respond, before revoking the formula. An exception, of
course, applies to the extent that the revocation is by operation of
law or regulation. In those cases, it is the new law or regulation that
requires the revocation of the formula, and TTB has no choice but to
comply with the requirements of the law or regulation.
This issue was not specifically aired for comment in Notice No. 4.
Accordingly, we are treating the single comment that we did receive on
the issue as a suggestion for future rulemaking. Pending the issuance
of regulations specifically addressing this issue, we will continue to
provide due process to formula holders by applying procedures similar
to those set forth in part 13 to any cancellation or revocation of an
approved formula.
H. Placement in the CFR
1. Comments Received
One brewer noted that the proposed formula requirements appear in
part 25, which applies to domestic beers, but not in part 7, which
applies to all malt beverages. This brewer stated that the formula
requirement should apply equally to domestic and imported products and
should therefore be placed in part 7.
2. TTB Response
Placement of the formula requirement in part 25 is deliberate. This
action implements TTB's existing statutory authority permitting it to
request certain information from domestic brewers. Many domestic
brewers do not operate in interstate commerce and do not obtain
certificates of label approval for their products because they are not
packaged but rather are sold from tanks at the tavern on brewery
premises. The formula provisions must apply to these brewers as well as
brewers who obtain certificates of label approval since the same
requirements exist regarding the classification of fermented products
and the appropriate use of ingredients. Thus, we must include the
formula requirements in part 25 in order to apply them to all brewers,
regardless of their size or the method of distribution of their
products.
TTB has no statutory authority to require foreign producers to
submit formulas. In the case of imported malt beverages, our authority
to require formula information applies to U.S importers rather than to
foreign brewers. Thus, this final rule document adopts the proposal to
add a new paragraph to Sec. 7.31 to reflect this authority. This
provision recognizes TTB's authority to request formula or sample
information from an importer in conjunction with the filing of a
certificate of label approval for a malt beverage. We believe
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we can obtain adequate information about an imported malt beverage
under this new provision to determine the class and type of an imported
malt beverage and to resolve any ingredient or labeling issues that may
arise during a certificate of label approval submission.
XIII. Other Issues Raised by Commenters
A number of commenters raised issues regarding FMBs that were not
directly addressed in Notice No. 4, and thus are outside the scope of
this rulemaking document. However, TTB wishes to comment on some of
these issues and may consider some of them to be appropriate for future
rulemaking on beer or malt beverages.
A. Information Quality Act
1. Comment Received
A law firm representing a major FMB producer filed a request under
the Information Quality Act (IQA) for correction of TTB's statement in
Notice No. 4 that existing FMB labels may confuse and mislead consumers
as to both the source and amount of alcohol in these beverages, arguing
that Notice No. 4 did not provide any supporting data for these
assertions. In response to this request, TTB stated that it would treat
the letter as a comment to the proposed rule.
2. TTB Response
Section 515 of the Treasury and General Government Appropriations
Act for Fiscal Year 2001, Public Law 106-554, directed the Office of
Management and Budget (OMB) to issue, by September 30, 2001,
government-wide guidelines that ``provide policy and procedural
guidance to Federal agencies for ensuring and maximizing the quality,
objectivity, utility and integrity of information (including
statistical information) disseminated by Federal agencies.'' On
September 28, 2001, OMB issued guidelines; revised final guidelines
were published on February 22, 2002. (See 67 FR 8452.)
The law also requires Federal agencies to issue their own
implementing guidelines, including administrative mechanisms that allow
affected persons to seek and obtain correction of information
maintained and disseminated by the agency, where such information does
not comply with the OMB Guidelines. Finally, the law requires agencies
to report periodically to OMB on the number and nature of complaints
received by the agency, and how such complaints were handled.
In compliance with these requirements, both the Department of the
Treasury and our predecessor agency, ATF, published guidelines on
information quality. (See ``Subdivision of Treasury Information
Technology (IT) Manual,'' Ch. 14: Information Quality (``Treasury
Guidelines''), and ``Process for Requesting Correction of Information
Disseminated by the Bureau of Alcohol, Tobacco and Firearms' (``ATF
Guidelines'').) Both the Treasury and ATF Guidelines stress that the
guidelines are not legally enforceable, and do not affect any otherwise
available judicial review of agency action. Pursuant to the provisions
of the Homeland Security Act of 2002, and Treasury Order No. 120-01
(Revised), published on January 24, 2003, ATF's orders still apply to
TTB until superseded or revised. Accordingly, TTB continues to rely
upon the published procedures of ATF, as well as the published
procedures of the Department of the Treasury, in responding to requests
for correction of information under the IQA.
Section 14.5.3(C) of the Treasury guidelines provides that in most
cases, absent unusual circumstances, requests for correction of
information contained in a notice of proposed rulemaking should be
addressed through the rulemaking process. TTB found that there were no
unusual circumstances in this case, and there was no evidence that the
requester had a reasonable likelihood of suffering actual harm if the
issue was not resolved before the issuance of the final rule on FMBs.
Accordingly, we advised the requester that we would treat the letter as
a comment on the proposed rule, and that the final rule would address
the issues raised in the letter.
The issues raised by this comment are addressed elsewhere in this
preamble. As we stated, TTB remains of the opinion that it is
inherently misleading to label as FMBs products that derive up to 99%
of their alcohol content from the distilled spirits components of added
flavors and other nonbeverage products. As stated earlier in this
preamble, we have determined that both the FAA Act and the IRC provide
us with authority to define the terms ``malt beverage'' and ``beer'' in
order to set limits on the use of alcohol from added flavors and in
order to ensure that the majority of the alcohol is derived from
fermentation at the brewery.
As already pointed out in this preamble, we have also concluded
that we are not required to conduct consumer surveys every time we
define a labeling term applicable to alcohol beverages. In this
rulemaking proceeding, we have considered all the data presented by the
commenters, including the consumer surveys previously conducted on this
issue, as well as a new consumer survey submitted by another FMB
producer. It is our conclusion that the evidence establishes that
current labels may mislead consumers and that they do not provide
adequate information about the identity of these products. As we
specifically stated in this document, we are not concluding that FMB
producers intentionally misled consumers; instead, these producers
appear to have relied on the policies of TTB and its predecessor
agencies in labeling and classifying these products.
However, we have also concluded that the term ``malt beverage'' may
tend to mislead consumers when applied to a product deriving the
majority of its alcohol content from the spirits components of added
flavors and other nonbeverage ingredients. We have also concluded that
such a term does not provide adequate information to consumers about
the identity of such a product. Accordingly, the final rule limits use
of the labeling term ``malt beverage'' to products that derive at least
51% of their alcohol content from fermentation at the brewery. We are
confident that the data in support of the final rule comply with the
requirements of the IQA.
B. ``Alcohol is Alcohol''
1. Comment Received
In its comment, the National Consumer League (NCL) stated,
``alcohol is alcohol, regardless of source.'' The NCL suggested that,
from a consumer standpoint, only the actual alcohol content in a
product matters and not the source of that alcohol. This commenter
stated that most single servings of alcohol beverages contain roughly
an equal amount of alcohol, a fact of which many consumers are unaware.
Further, this commenter cited experts who agree that all types of
alcohol beverages are functionally equivalent on a serving-to-serving
basis and that no differences exist between hard liquor and beer.
Because of the ``alcohol is alcohol'' argument, NCL opposed the
proposed rule because it perpetuates the differences between different
types of alcohol beverages and would continue to accord alcohol
beverages different regulatory status based on their source of alcohol.
This commenter suggested there is no scientific or public policy to
support these distinctions. As previously noted, NCL did state that
there was greater merit to the majority standard, as it ``may reduce
the
[[Page 228]]
potential for consumers to be misled or confused,'' and that compliance
with the majority standard ``will assure that consumers are not
deceived as to product content.''
2. TTB Response
TTB acknowledges that, depending on the alcohol content of the
product, single servings of different types of alcohol beverages may
contain roughly the same amount of ethyl alcohol and that the ethyl
alcohol found in these is chemically the same substance. However,
longstanding Federal and State laws recognize very significant
differences between distilled spirits, wine, and beer or malt beverages
for production, tax, labeling, advertising, and distribution purposes.
Thus, to the extent that the NCL comment suggests that Federal law
should ignore these distinctions, it lies outside the scope of the
proposals made in Notice No. 4 and would require significant statutory
changes.
C. Marketing of FMBs to Underage Drinkers
1. Comments Received
A number of commenters, including many individuals and several
public interest organizations, commented that FMBs should be treated as
distilled spirits. These commenters claimed that FMBs are designed for
the youth market due to their taste and the way in which they are
marketed. Further, these commenters stated that the introduction of
FMBs has substantially increased distilled spirits brand awareness and
loyalty among young people. Some commenters claimed this is a
deliberate strategy on the part of producers.
One commenter suggested that TTB should take action against
producers and collect distilled spirits taxes on products marketed as
malt beverages. CSPI requested that TTB classify FMBs as distilled
spirits in order to reduce youth access to them by limiting the range
of outlets where they can be sold. An individual commenter suggested
that TTB undertake any action that would make FMBs more expensive in
order to reduce their availability to underage youth.
CSPI further commented that its own data found that both teens and
adults think that so-called ``alcopop'' products such as FMBs, which
have the brand names of distilled spirits products, are more like
liquor than beer or wine. Some commenters suggested that these products
are particularly appealing to underage consumers and noted that these
products are marketed on television and are widely available in
convenience and grocery stores. Several commenters argued that
convenience and grocery stores are more conducive to underage sales
than are State-licensed retailers selling distilled spirits, and they
supported classifying FMBs as distilled spirits products so that their
distribution would be more strictly regulated in most States. Other
commenters expressed various concerns about the public health
consequences of alcohol abuse.
On the other hand, some commenters pointed to the recent study
conducted by the Federal Trade Commission (FTC). (See ``Alcohol
Marketing and Advertising: A Report to Congress,'' Sept. 2003.) The
FTC's report noted that it had previously reviewed this issue in
response to a complaint by CSPI, and it had found no evidence of intent
to target minors with the FMB products, packaging, or advertising.
Furthermore, after reviewing the consumer survey evidence submitted by
CSPI in support of the proposition that FMBs were predominantly popular
with minors, the FTC concluded that flaws in the survey's methodology
limited the ability to draw conclusions from the survey data.
The FTC reviewed this issue again in response to a request by
Congress to study the impact on underage consumers of the significant
expansion of ads for flavored malt beverages. The FTC's investigation
again found no evidence of targeting underage consumers in the
marketing of FMBs. However, the report recognized that ad content that
appeals to new legal drinkers, as well as the sweet taste of FMBs, may
be attractive to minors, and the FTC urged the industry to exercise
significant caution when introducing new alcohol beverage products, to
ensure that they are not marketed to an underage audience. (See
``Alcohol Marketing and Advertising: A Report to Congress,'' September
2003, p.22.)
2. TTB Response
As stated in Notice No. 4, we do not believe that the use of
distilled spirits brand names or cocktail names on FMB labels is
inherently misleading. We recognize that many commenters believe that
these names confuse consumers as to the identity of the products.
However, if a product is clearly labeled with a designation such as
``malt beverage with natural flavors,'' we believe that the use of a
distilled spirits brand name on the label does not mislead consumers.
Accordingly, we are not adopting the suggestion that we prohibit the
use of distilled spirits brand names or cocktail names in the labeling
or advertising of FMBs. However, we will continue to consider labels
and advertisements on a case-by-case basis, to determine if the overall
presentation misleads consumers as to the identity of the product.
We note that not a single FMB producer indicated an intention to
produce FMBs that would be classified as distilled spirits products
under either the proposed 0.5% standard or the 51/49 standard we are
adopting. Thus, under either standard, FMBs would continue to be
produced as malt beverages rather than distilled spirits.
We recognize the concerns of many commenters that FMBs may be
particularly attractive to young drinkers. The public health issue
posed by underage consumption of alcohol beverages is significant. In
September of 2003, the National Research Council and Institute of
Medicine of the National Academies released a report to Congress on
underage drinking, in which it found that the societal cost of underage
drinking has been estimated at $53 billion, including $19 billion from
traffic crashes and $29 billion from violent crime. (See ``Reducing
Underage Drinking: A Collective Responsibility.'') The report calls for
a comprehensive prevention strategy to create and sustain a broad
societal commitment to reduce underage drinking.
TTB appreciates the importance of these prevention efforts.
However, many of the issues that are of concern to the commenters in
this regard are beyond the scope of our authority. For example, the FAA
Act does not prohibit the advertisement of distilled spirits products
on television; voluntary industry codes in the broadcasting and
distilled spirits industries govern this matter. Furthermore, it is the
States that decide whether products such as FMBs are sold in liquor
stores or grocery stores. As previously noted, the rulemaking record
indicates that producers of FMBs will reformulate their products so
that they will continue to be classified as malt beverages under
Federal law, regardless of whether we adopt the 0.5% standard or the
51/49 standard. Thus, we do not conclude that adoption of the 0.5%
standard would result in the reclassification, under Federal law, of
FMBs as distilled spirits products.
Our mandate is to ensure the proper classification of FMBs under
the IRC and the FAA Act, and to ensure that these alcohol beverages are
labeled and advertised in a manner that does not mislead consumers. We
do not believe that the concerns of those commenters who wish to reduce
underage alcohol consumption, important as they are, are directly
addressed by this rulemaking.
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D. More Explicit Labeling of FMBs
1. Comments Received
Several commenters requested that TTB implement more specific
labeling for FMBs, including label items such as calories, serving
size, ingredients, alcohol content, and so forth. These commenters
claimed this action would provide essential information to consumers
regarding these products.
2. TTB Response
TTB believes that these comments are outside the scope of the
current rulemaking, as we did not specifically solicit comments on
these issues in Notice No. 4. However, the CSPI, the NCL, and other
public interest groups have recently petitioned TTB to require
additional labeling of all alcohol beverages. TTB will separately study
the petition in order to determine whether to propose such labeling for
alcohol beverages. Therefore, TTB is not considering this request for
additional labeling of flavored malt beverages as part of this
rulemaking.
E. Establishing Another Category of Alcohol Beverages
1. Comments Received
Some commenters suggested that, instead of attempting to classify
FMBs as either beer or distilled spirits, TTB should seek an amendment
to Federal law to define a new class of alcohol beverages. These
commenters suggested that with a new category of alcohol beverages, TTB
could better address taxation, labeling, and other issues that apply to
FMBs. This suggestion would establish a unique category of alcohol
beverages unlike distilled spirits or traditional beer.
2. TTB Response
This comment is beyond the scope of the current rulemaking
procedure, as its implementation would require amendments to Federal
law.
F. Other Comments
One commenter suggested that TTB require identification and
labeling of the source of alcohol in FMBs in order to inform consumers
of their composition.
TTB believes that this comment is outside the scope of the
proposals contained in Notice No. 4. Accordingly, we are not addressing
this subject in the final rule.
XIV. Implementation Dates
TTB received 20 comments expressing opinions about implementation
dates, and related tax issues, for adoption of either the 0.5 percent
standard or the majority standard for flavored malt beverages. Among
these comments, 6 were from brewers, 3 were from Members of Congress, 2
were from State licensing agencies, 3 were from national brewery trade
associations, and the rest were from individuals.
A. Effective Date for Compliance With the New Added Alcohol Standard
1. Comments Received
Comments concerning implementation, or a regulatory effective date,
varied from a minimum of ``as short a period as is reasonable'' to a
maximum of two years after publication of the final rule containing an
added alcohol standard for FMBs.
All brewers that commented on this issue expressed concerns
regarding the time needed for reformulating products, and for the
purchase, installation, and testing of new equipment. Among the reasons
presented for establishing a longer effective date were: the need to
develop the correct taste profile in a reformulated product; the need
to invest and install new equipment to produce reformulated FMBs; the
time needed to gear up for mass production of reformulated products;
the time required to invest in co-packers equipment; and the need to
test new formulations of FMBs. One brewer stated that reformulation of
their products would require them to produce as much as 8 times the
amount of fermented malt base and that they would require significant
time to procure the necessary equipment. Another brewer commented that
they would be able to comply with a 0.5% alcohol standard, as proposed,
within 3 months time, and requested, at most, a 6-month delayed
effective date. Six brewers requested effective dates of 6 months, 6 to
9 months, 1 year (two comments), 18 months, and 2 years.
Three trade associations commented on this issue. One brewery trade
association commented that 3 months was an adequate amount of time to
comply with the new standard. Another commented that 18 months would be
required. The third, a wholesaler association, requested that TTB
establish a reasonable amount of time for brewers to comply with the
new standard.
One State regulatory authority requested swift action to re-
classify FMBs to the 0.5 percent standard, specifying that a TTB delay
will force them to initiate a more restrictive regulation for alcohol
beverages. Another State believed it would not need new State
legislation for the 0.5 percent standard, and urged TTB to adopt this
standard in the minimum period needed to assure industry compliance.
2. TTB Response
TTB is sensitive to the time needs and excise tax concerns of the
FMB industry during this period of transition. We realize that adoption
of any added alcohol standard will impact production methods,
ingredients, suppliers, costs, and other facets of the business.
Moreover, we recognize that considerable time is needed to develop new
products that not only conform to an added alcohol standard, but which
taste the same or are similar to existing non-conforming FMBs.
Based on the submitted comments and the considerations noted above,
we are prescribing a one-year delayed effective date for the regulatory
changes adopted in this final rule document. We believe this will allow
ample time to develop new products and to acquire the necessary
equipment to place them into production. We believe the three-month and
six-month periods requested by two commenters are too short for some
industry members to make the necessary transition to the new rules. We
also believe that industry members will be able to comply with the new
rules in considerably less time than the 2-year period requested by one
commenter, especially since we are adopting the less stringent 51/49
standard for FMB products.
In adopting a one-year delayed effective date, we also note that,
due to the complex nature of this rulemaking, more than one year has
already passed since the publication of the proposed rule. Thus,
brewers have already had a substantial period of time to focus on the
research and development necessary to bring their products into
compliance with a new standard.
Accordingly, we provide a one-year period of time from publication
of this final rule in the Federal Register for brewers and importers to
comply with the 51/49 standard as well as other new regulatory
requirements. As of the effective date of this final rule, products
that do not comply with the new 51/49 standard may not be produced at a
brewery, bottled at a brewery, removed from a brewery with or without
the payment of tax, removed from customs custody for consumption, or
(in the case of products not destined for exportation) transferred to a
second customs bonded warehouse.
[[Page 230]]
B. Effect on Products in the Marketplace
1. Comments Received
Three brewers and two trade associations commented about FMBs that
are in the marketplace at the time of the effective date of a new
standard. These commenters sought reassurance that these FMBs would not
be subject to a floor stocks tax at the higher distilled spirits excise
tax rate, and that these products would not be subject to destruction
or recall from the market since they might be considered distilled
spirits at that time. One brewer requested a six-month delay from the
final rule's effective date so that wholesalers could deplete their
inventories of FMBs not in conformity with new alcohol standards.
2. TTB Response
As noted above, the effective date for implementation of the
alcohol standard impacts only the production and removal from a
brewery, or the importation and removal from customs custody of malt
beverage or beer products. Thus, TTB will continue to treat as beer or
malt beverages those products made according to previously existing
standards and removed from the brewery or from customs custody before
the effective date. TTB will not assess a distilled spirits tax on them
or require their recall or destruction. Wholesalers and retailers
holding these products on or after the effective date may continue to
market them in the same manner as prior to the effective date, until
their supplies in the marketplace are exhausted.
Notwithstanding the above, it is incumbent on wholesalers and
retailers who hold these products to ensure compliance with the
requirements of the States in which the products are held or introduced
for sale. Many States have requested that TTB provide a Federal FMB
definition and added alcohol percent standard that can serve as a guide
for State classification of alcohol beverages. In adopting a 51/49
standard for malt beverages containing no more than 6% alcohol by
volume, and by adding to the regulations a 1.5% standard for malt
beverages with an alcohol content in excess of 6% as explained later in
this preamble, TTB is furnishing guidelines to the various States
concerning the classification of flavored malt beverages. As already
noted in this preamble, while most States look to Federal guidance in
this area and rely on Federal classification of alcohol beverages,
there is certainly no requirement for them to do so. Thus, individual
States may take a different view of the classification and taxable
status of these products, and may reclassify FMBs as distilled spirits
products, perhaps even before the effective date of this final rule.
C. Additional TTB Comment on the Effective Date
We are using a single effective date for the new alcohol percent
standards for FMBs. This date will permit affected industry members to
transition their product lines according to their own needs. Until the
effective date of this final rule, industry members may continue to
produce and remove, at the beer tax rate, FMBs that do not meet the new
alcohol percent standards.
Producers who cannot comply with the new 51/49 standard as of the
effective date of the final rule must stop producing those FMB products
at a brewery. As of the effective date of the final rule, products
deriving more than 49% of their alcohol content from the distilled
spirits components of added flavors may only be produced at distilled
spirits plants. Such products would of course be subject to tax at the
appropriate distilled spirits excise tax rate.
Until the effective date of the final rule, TTB's Advertising,
Labeling and Formulation Division (ALFD) will continue to approve
statements of process and certificates of label approval (COLAs) for
FMBs that may not comply with the new added alcohol standards. During
this interim period, ALFD will qualify these statements of process and
COLA approvals with reference to this final rule's effective date.
However, whether qualified or not, statements of process for FMBs not
in compliance (including those permitting you to make a product not in
compliance with the 51/49 standard) will become obsolete as of the
effective date of this final rule and will be revoked by operation of
the regulation. This means that no individual proceedings are necessary
in order to revoke those formulas. Similarly, whether qualified or not,
COLAs for these products that do not comply with the 51/49 standard as
of the effective date will also be considered revoked by operation of
regulation unless the underlying statement of process is superseded by
a new formula that is in compliance with the 51/49 standard.
Because this final rule incorporates, in large part, the holdings
of ATF Rulings 96-1 and 2002-2, while establishing new standards for
added alcohol from flavors and other nonbeverage products, these
rulings will become obsolete as of the effective date of the final
rule.
XV. Comments on the Proposed Regulatory Text; Regulatory Text Changes
Several commenters suggested changes to the proposed regulatory
text amendments contained in Notice No. 4. These comments are not
directed to the policy behind the proposed regulatory amendments, but
rather to their wording, clarity, or organization. In addition, TTB has
independently reviewed the texts of the proposed amendments and has
made a number of changes as a result of that review. The comments
submitted and the changes made that are not of a minor editorial nature
are discussed below.
A. Reference to Malt Beverage Standards, Sec. Sec. 7.10 and 7.11
1. Comment Received
The FMBC commented that creating a new section to include standards
for malt beverages is unnecessary because persons seeking information
on this topic would look at the definition of a malt beverage in Sec.
7.10. The FMBC suggested incorporating the standards proposed in Sec.
7.11 into the definition of malt beverage appearing in Sec. 7.10.
2. TTB Response
TTB does not agree with the comment and suggested text change. The
statutory definition of a malt beverage is not affected by this final
rule; that definition cannot change without legislative action.
Standards applying to production or composition of a malt beverage are
more technical and may change from time to time. We wish to separate
the relatively simple statutory definition from the more technical
production requirements that we are adopting in this final rule.
Further, we note that Sec. 7.10 would become unnecessarily long and
technical if we were to place malt beverage standards in that section.
Therefore, we have decided to place the standards applying to
production and composition of malt beverages in Sec. 7.11.
We have provided a cross reference in Sec. 7.10 to the standards
for malt beverages appearing in Sec. 7.11 in order to alert readers
that additional conditions may apply to the production or composition
of malt beverages. We also have changed proposed Sec. 7.10 by
including a reference to ``processes'' as well as standards for flavors
in order to alert the reader to the fact that malt beverages may
undergo certain processing specified in Sec. 7.11.
TTB has changed the heading of Sec. 7.11 to read ``Use of
ingredients containing alcohol in malt beverages; processing of malt
beverages.'' We
[[Page 231]]
believe this title more accurately reflects the provisions of this
section, which permit the use of certain processes and authorize the
use of certain ingredients containing alcohol in malt beverages.
B. Comments on Alcohol Flavoring Material Reference, Sec. Sec. 7.11
and 25.15
1. Comments Received
The FMBC commented on the wording in proposed Sec. 7.11,
specifically the phrase ``alcohol flavoring materials and other
ingredients containing alcohol.'' The FMBC supported this wording, and
suggested that this language recognized that brewers may add other
ingredients containing alcohol, such as taxpaid distilled spirits and
wine, to malt beverages. This commenter suggested that the final rule
further clarify this policy by authorizing the use of ``alcohol
flavors, taxpaid wine, taxpaid distilled spirits, or any other
ingredient containing alcohol'' in both Sec. 7.11 and Sec. 25.15.
2. TTB Response
TTB used the wording ``alcohol flavoring materials and other
ingredients containing alcohol'' in proposed Sec. 7.11 to describe the
kinds of materials that might contribute alcohol to a finished malt
beverage. We do not agree with this commenter's suggestion that this
language includes, or should be extended to include, the use of taxpaid
distilled spirits or taxpaid wine.
The provision allowing the addition of flavors and other
ingredients containing alcohol to malt beverages was specifically
designed to permit the addition of alcohol flavors to malt beverages
and to allow the addition of certain other materials such as blenders
containing alcohol to malt beverages. TTB in Notice No. 4 did not
intend to authorize the direct addition of distilled spirits to malt
beverages. TTB reaffirms its long-held position that the IRC does not
explicitly authorize the direct addition of distilled spirits to malt
beverages. Thus, this final rule will not authorize the addition of
distilled spirits to malt beverages.
TTB did include a reference to taxpaid wine in proposed Sec.
25.15(b) and in proposed Sec. 25.55(a)(2). However, this final rule
does not authorize that use of taxpaid wine.
Like distilled spirits, taxpaid wine is a beverage product. Neither
the IRC nor the FAA Act specifically authorizes the use of taxpaid wine
in the production of malt beverages. TTB will not allow taxpaid wine to
make up to 49% of the alcohol content of a malt beverage. Thus, this
final rule does not authorize the use of taxpaid wine in any malt
beverage.
Accordingly, in this final rule we have clarified our intent
regarding the use of ingredients containing alcohol by using the phrase
``flavors and other nonbeverage ingredients containing alcohol'' in
Sec. Sec. 7.11 and 25.15. Use of this modified language makes it very
clear that flavoring materials may contain alcohol and that other
nonbeverage ingredients such as blenders may contain alcohol. It does
not authorize the use of taxpaid distilled spirits or taxpaid wine in
the production of malt beverages.
TTB notes that the FMBC also supported the Notice No. 4 recognition
that various processes and treatments may be used on malt beverages to
remove color, aroma, bitterness or other characteristics derived from
fermentation. This provision remains unchanged in Sec. 7.11.
C. Malt Beverages Above 6.0% Alc/Vol; Status of ATF Ruling 96-1
1. Comments Received
The FMBC commented that ATF Ruling 96-1 limits the contribution of
added alcohol in malt beverages over 6.0% alc/vol to not more than 1.5%
of the total volume. This commenter stated that Notice No. 4 neither
incorporated nor addressed this limitation and requested that TTB
clarify the status of the limit in the ruling on alcohol addition for
malt beverages over 6.0% alc/vol.
Coors commented that the practical effect of the proposed 0.5%
added alcohol limitation is to establish a natural limitation on the
[upper] alcohol content of malt beverages. This commenter noted that
the TTB alternative 51/49 percent proposal would permit a brewer to
produce a 35% alc/vol malt beverage by combining a high alcohol
fermented malt beverage of 18% alc/vol with an additional 17% alc/vol
through alcohol flavor and blender use. Coors stated that ATF Ruling
96-1 clearly presented TTB's intention that alcohol in malt beverages
should be derived from fermentation and not from fortification.
2. TTB Response
Notice No. 4 proposed to limit the addition of alcohol to all malt
beverages from flavors and other materials containing alcohol to less
than 0.5% alc/vol. This proposal would have included malt beverages
with an alcohol content exceeding 6% alcohol by volume. Thus, there was
no need to separately address these malt beverages in the proposed
regulations.
As stated above, we have decided to adopt the more liberal 51/49
standard instead of the proposed 0.5% standard. However, Coors has
accurately pointed out one hazard of extending the 51/49% majority rule
to malt beverages of any alcohol strength including those over 6% alc/
vol. To do so would facilitate the production of extremely high
strength malt beverages at breweries.
Prior to issuing ATF Ruling 96-1, our predecessor agency reviewed
FMBs on the market and determined that, based on approved statements of
process, the only FMBs containing a significant amount of alcohol
derived from flavors were for products that contained 6% or less
alcohol by volume in the finished product. Although ATF had approved
statements of process under Sec. 25.67 for FMBs containing in excess
of 6% alcohol by volume, in no instance had the quantitative amount of
alcoholic flavoring materials used in such products contributed more
than 1.5% alc/vol to the finished product. Accordingly, to preserve the
status quo pending rulemaking on this issue, ATF ruled that FMBs
containing in excess of 6% alcohol by volume may derive no more than
1.5% alcohol by volume from added alcoholic flavoring materials.
Based on the rulemaking record, there is no need to liberalize the
added alcohol standard for FMBs with an alcohol content in excess of
6%. TTB believes that any such liberalization would raise serious
questions as to whether the finished product was appropriately
classified as a malt beverage or as a distilled spirits product.
Accordingly, this final rule incorporates the terms of ATF Ruling
96-1 with respect to malt beverages with an alcohol content of more
than 6% alc/vol, by restricting the addition of alcohol to malt
beverages above 6.0% alc/vol to not more than 1.5% of the volume of the
finished product. We have incorporated this policy in the regulatory
texts by adding a new paragraph (a)(2) to Sec. 7.11 and by modifying
Sec. 25.15(b) to include the same 1.5% added alcohol qualification for
malt beverages and beer over 6% alc/vol.
D. Changes to Sec. 7.31
Although there is no substantive change in the proposed amendment
to Sec. 7.31, we have reversed the order of existing paragraph (d) and
proposed new paragraph (e), so that paragraph (d) contains the new
provision for submitting a formula or sample of a malt beverage to TTB
in conjunction with the filing of an application for a certificate of
label approval. We have also changed the term ``you'' to ``importer''
to clarify
[[Page 232]]
the person required to comply with the regulation.
E. Reference to Standards for Beer, Sec. Sec. 25.11 and 25.15
1. Comment Received
The FMBC commented that creating a new Sec. 25.15 to include
standards for beer production is unnecessary because persons seeking
this information would look at the definition of beer in Sec. 25.11.
The FMBC therefore suggested incorporating the proposed Sec. 25.15
standards into the existing definition of beer in Sec. 25.11.
2. TTB Response
TTB is not adopting this suggestion for the reasons previously set
forth in this comment discussion. We wish to separate the relatively
simple statutory definition of beer from the more technical production
requirements that we are adopting in this final rule. Further, we note
that Sec. 25.11 would become unnecessarily long and technical if we
were to include standards for beer in that section. Therefore, we have
retained the proposed standards applying to the production and
composition of beer in new Sec. 25.15.
We believe that the inclusion of a cross reference at the end of
the Sec. 25.11 beer definition to the standards for beer appearing in
Sec. 25.15 is sufficient to alert readers that additional conditions
may apply to the production and composition of beer.
F. Other Sec. 25.15 Issues
We have changed the title of Sec. 25.15 to read, `` Materials for
the production of beer.'' This change better reflects the content since
this section specifies materials that may be used in producing beer at
a brewery, and does not refer to the tax on beer.
G. Comments on Formula Proposals, Sec. Sec. 25.55-25.58
We have conformed the language throughout Sec. Sec. 25.55-25.58 to
the use of the phrase ``flavors and other nonbeverage ingredients
containing alcohol'' in referring to the materials containing alcohol
that may be used in producing beer. We have also removed the term
``taxpaid wine'' that appeared in proposed Sec. Sec. 25.55(a)(2) and
25.57(a)(3)(ii). As noted earlier in this comment discussion, these
formula regulations do not authorize the use of taxpaid wine or taxpaid
distilled spirits in the production of beer. We also added exception
language regarding hop extract in Sec. 25.55(a)(2) to clarify that the
use of hop extract containing alcohol does not require the filing of a
formula.
It has been TTB's policy to authorize the use of a formula covering
production of a beer base that the brewer does not intend to market,
but will use in the eventual production of a product such as an FMB.
For example, a brewer might choose to file a formula for a beer base
that the brewer has produced and removed character from through a
variety of processes. At a later stage, the brewer could produce
several distinct fermented products by adding different flavors to this
base. We have added a new paragraph (b)(2) to Sec. 25.55 to reflect
this practice.
If a brewer adds flavors to a beer base or otherwise treats it to
produce a fermented beverage that the brewer intends to market, any
approved beer base formula should be referenced in the formula
information specified in Sec. 25.57. We have added a new paragraph (d)
to Sec. 25.57 to clarify this point.
Although we did not receive comments directed to Sec. 25.58, we
have reorganized and revised this section in order to clarify the
distinction between a new formula and a superseding formula. We have
not changed the substantive requirements in proposed Sec. 25.58.
Paragraph (a) sets forth conditions that trigger the filing of a
new formula, and these conditions are the same as those in paragraphs
(a)(1) through (a)(6) of proposed Sec. 25.58. The revised introductory
text of paragraph (a) merely incorporates the terms of proposed
paragraph (c) regarding giving each new formula a new formula number.
Paragraph (b) of Sec. 25.58 combines proposed paragraphs (b) and
(d). The introductory text of revised paragraph (b) clarifies when a
brewer may file a superseding formula in lieu of filing an entirely new
formula. Under this text, a brewer may file a superseding formula when
the brewer makes a change to an existing approved formula that is not
of a type that would require a holder of a certificate of label
approval to file a new application for label approval on TTB Form
5100.31, regardless of whether the formula is for a product covered by
a certificate of label approval. Thus, when a brewer replaces one
ingredient with a similar ingredient, and this replacement is not of a
type that would require a new certificate of label approval for the
product, the brewer may file a superseding formula rather than a new
formula.
Paragraph (b)(1) specifies that superseding formulas must be
approved by TTB before they may be used, and that TTB will cancel the
original formula upon approval of the superseding formula. Under Sec.
25.58(b)(2), a superseding formula retains the original formula number
but it must be annotated to show it is a superseding formula. If an
existing certificate of label approval covers the product, the brewer
may continue to use that certificate.
We have changed the section headings in Sec. Sec. 25.15 and 25.53
through 25.58 by changing the question-style headings to declarative
statement headings. We believe the latter approach is more effective
than question-style headings in helping the reader to find regulatory
information. Additionally, we note that part 25 does not contain other
question-style headings at this time.
XVI. Regulatory Analysis and Notices
A. Executive Order 12866
As noted in the comment discussion in this final rule, several
commenters suggested that the proposed 0.5% standard would impose
significant regulatory burdens and economic costs on the FMB industry.
One comment in particular, from the FMBC, suggested that the costs of
the proposed 0.5% standard, when extrapolated to the entire FMB
industry, would exceed $600 million over the next 4 years. In addition,
this commenter suggested that the proposed 0.5% standard would have a
negative impact on revenue collections by the Federal government due to
reductions in sales of FMBs.
TTB believes that the FMBC comment may have overstated the
regulatory burdens and economic costs that would be imposed by the
proposed rule. However, as already pointed out in this document, we are
persuaded by this and other comments that imposition of a 0.5% standard
for all FMBs would impose greater regulatory burdens and economic costs
than the 51/49 standard.
In response to these comments, TTB evaluated several options to
minimize the regulatory burdens and economic costs imposed by the rule.
In particular, we adopted an option that we believe will meet the
important regulatory goals of this rulemaking project, while reducing
in a meaningful fashion the regulatory burdens and costs imposed by the
rule. In other words, we adopted the more lenient alternative advocated
by the FMBC and others who opposed the 0.5% rule; thus, the final rule
allows products labeled as FMBs to derive up to 49% of their alcohol
content from the distilled spirits components of added flavors and
other nonbeverage products.
In response to concerns raised by the comments, TTB also adopted a
one-year delayed effective date for the final rule,
[[Page 233]]
to allow affected producers adequate time to reformulate their
products, if necessary. We believe that this delayed effective date
also serves to address the concerns of affected industry members.
Accordingly, for the reasons set forth above, we have determined
that the final rule, as modified in response to the comments, is not a
significant regulatory action as defined in E.O. 12866. Therefore, a
regulatory assessment is not required.
B. Regulatory Flexibility Act
The Regulatory Flexibility Act generally requires an agency to
conduct a regulatory flexibility analysis of any rule subject to notice
and comment rulemaking requirements unless the agency certifies that
the rule will not have a significant economic impact on a substantial
number of small entities. Small entities include small businesses,
small not-for-profit enterprises, and small governmental jurisdictions.
We have determined that this final rule will not have a significant
economic impact on a substantial number of small entities. Accordingly,
a regulatory flexibility analysis is not required.
In Notice No. 4, we stated our belief that 10 or fewer qualified
small breweries actually manufacture flavored malt beverages subject to
this rule. We specifically solicited comments on the number of small
breweries that may be affected by this rule and on the impact of this
rule on those breweries. We asked small breweries that believe they
would be significantly affected by this rule to let us know and to tell
us how the rule would affect them.
In response to Notice No. 4, we received only a few comments from
brewers that identified themselves as small brewers that would be
affected by the rule. These comments, as well as other comments
submitted by FMB producers, suggested that the proposed 0.5% standard
would unfairly burden small brewers, and could result in putting these
companies out of business. The comments indicated that the small
brewers would be able to comply with the 51/49 standard without such
significant adverse consequences.
In response to these comments and others, we have modified the
regulatory texts contained in this final rule to reduce the potential
economic impact of the rule on small businesses that produce FMBs. As
indicated earlier in the preamble to this document, we considered
several options to reduce the economic impact on small businesses.
For various reasons, most importantly because the pertinent
statutes would not authorize such an option, we rejected the option of
exempting small businesses from compliance with the requirements of the
final rule. However, for a number of reasons explained in detail
earlier in the preamble to this document, we have adopted the more
liberal 51/49 standard for products labeled as FMBs. We have also
adopted a one-year delayed effective date for the provisions of this
final rule, to allow adequate time for those FMB producers that wish to
reformulate their products or otherwise conform to the requirements of
the final rule regulatory texts. Accordingly, we believe that we have
responded to the concerns raised by small businesses and have
meaningfully reduced the costs and regulatory burdens imposed by the
rule.
It should be noted that several small wholesalers and retailers
commented that the proposed rule would have an adverse impact on them,
because State law might not allow them to sell FMB products that are
reclassified as distilled spirits products. We believe that the
modifications discussed above address their concerns. Furthermore, the
FMB producers that commented on this issue all indicated an intention
to reformulate their products within the requirements of the final
rule, rather than produce beverages that would be classified as
distilled spirits products under Federal law. Finally, we would note
that the Regulatory Flexibility Act does not require us to consider
indirect effects on businesses that are not directly subject to the
requirements of the final rule; instead, the relevant economic impact
is ``the impact of compliance with the proposed rule on regulated small
entities.'' Mid-Tex Electric Cooperative, Inc. v. FERC, 773 F.2d 327,
342 (D.C. Cir. 1985). Wholesalers and retailers of FMBs are not
directly subject to the requirements of the final rule.
Finally, a comment from the FMBC suggested that the alcohol content
labeling requirement would have a significant economic impact on a
substantial number of small entities, including many small brewers that
produce beers and ales that contain only a small quantity of flavors.
The FMBC comment conceded that it did not know how many brewers might
be impacted by this requirement but suggested that many small brewers
would be affected. The FMBC stated that its members already label their
FMB products with alcohol content statements.
TTB did not receive any comments from small brewers who produce
traditional flavored beers and ales suggesting that the requirement for
an alcohol content statement would impose a significant economic
burden. The Brewer's Association of America, a trade association
representing more than 1,400 small brewers, supported the proposed rule
without mentioning the alcohol content statement requirement.
Furthermore, we note that brewers are already required to keep records
of alcohol content under the IRC regulations set forth in 27 CFR
25.293. We have no information indicating that the requirement to
disclose alcohol content on brand labels for malt beverages deriving
alcohol from added flavors or other nonbeverage ingredients would
impose a significant economic burden on a substantial number of small
entities. Accordingly, the record does not support such a finding.
Pursuant to section 7805(f) of the Internal Revenue Code of 1986,
we submitted the notice of proposed rulemaking preceding this final
rule to the Chief Counsel for Advocacy of the Small Business
Administration (SBA) for comment on its impact on small businesses. We
received no comment from the SBA in response to that submission.
C. Paperwork Reduction Act
In Notice No. 4, TTB stated that the provisions of the Paperwork
Reduction Act of 1995, 44 U.S.C. chapter 35, and its implementing
regulations, 5 CFR part 1320, did not apply to the notice of proposed
rulemaking, because we were not proposing any new or revised
recordkeeping requirements. After review of the comments on this issue,
TTB has determined that the final rule includes a new reporting
requirement and a revision of an existing reporting requirement. The
new reporting requirement involves the specific detail that must be
included in the formulas for certain fermented products produced at a
brewery. The revision involves the mandatory alcohol content statement
for malt beverages that derive alcohol from added flavors or other
ingredients. Because the final rule does not take effect for one year
from publication of this document in the Federal Register, there is
time to air these requirements for public comment prior to the
effective date of the rule.
These collections of information have been reviewed and, pending
receipt and evaluation of public comments, approved by the Office of
Management and Budget (OMB) under 44 U.S.C. 3507(j) and assigned
control numbers 1513-0118 and 1513-0087. 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 control number assigned by OMB.
The collection of information in this regulation covered by OMB
control
[[Page 234]]
number 1513-0118 is found in Sec. Sec. 25.55-25.58. This collection is
necessary to ensure that producers of certain beers provide enough
information to TTB to ensure the proper tax classification of the
products. The likely respondents are businesses.
Estimated total annual reporting and/or recordkeeping
burden: 500 hours.
Estimated average annual burden hours per respondent and/
or recordkeeper: 5 hours.
Estimated number of respondents and/or recordkeepers: 100.
Estimated annual frequency of responses: 5.
The collection of information in this regulation covered by OMB
control number 1513-0087 is in Sec. 7.22, which imposes a requirement
for an alcohol content statement on labels of malt beverages deriving
any alcohol from added flavors or other nonbeverage ingredients. This
information is required to ensure that consumers are not misled as to
the alcohol content of malt beverages that derive alcohol from sources
other than fermentation at a brewery. The likely respondents are
businesses. This information constitutes one element of the labeling
information on alcohol beverages required under authority of the
Federal Alcohol Administration Act (FAA Act), and it relates to only
one sector of the alcohol beverage industry. The policy of TTB and its
predecessor agency has been to treat all labeling requirements under
the FAA Act as resulting in one burden hour per respondent.
Accordingly, because the producers of malt beverages already know the
alcohol content of their products and displaying that content on the
label constitutes only a small portion of the existing labeling
requirements, the burden estimate associated with this alcohol content
labeling requirement is minimal.
Comments concerning each collection of information should be
directed to the Office of Management and Budget, Attention: Desk
Officer for the Department of the Treasury, Office of Information and
Regulatory Affairs, Washington, DC 20503. A copy should also be sent to
the Chief, Regulations and Procedures Division, Alcohol and Tobacco Tax
and Trade Bureau, 1310 G Street, NW., Washington, DC 20220. Any such
comments should be submitted not later than March 4, 2005. Comments are
invited on:
Whether the collection of information is necessary for the
proper performance of the functions of the agency, including whether
the information will have practical utility;
The accuracy of the agency's estimate of the information
collection burden;
Ways to enhance the quality, utility, and clarity of the
information to be collected;
Ways to minimize the information collection burden on
respondents, including through the use of automated collection
techniques or other forms of information technology; and
Estimates of capital or start up costs and costs of
operations, maintenance, and purchase of services to provide
information.
XVII. Drafting Information
This principal author of this document is Charles N. Bacon. Other
personnel in the Alcohol and Tobacco Tax and Trade Bureau and in the
Department of the Treasury participated in the drafting of the
document.
List of Subjects
27 CFR Part 7
Advertising, Authority delegations, Beer, Consumer protection,
Customs duties and inspection, Imports, Labeling, Packaging and
containers, Reporting and recordkeeping requirements.
27 CFR Part 25
Beer, Claims, Electronic fund transfers, Excise taxes, Exports,
Labeling, Liquors, Packaging and containers, Reporting and
recordkeeping requirements, Research, Surety bonds.
Amendment to the Regulations
0
For the reasons discussed in the preamble, TTB amends 27 CFR parts 7
and 25 as follows:
PART 7--LABELING AND ADVERTISING OF MALT BEVERAGES
0
1. The authority citation for 27 CFR part 7 continues to read as
follows:
Authority: 27 U.S.C. 205.
0
2. We amend Sec. 7.10 by revising the definition of ``malt beverage''
to read as follows:
Sec. 7.10 Meaning of terms.
* * * * *
Malt beverage. A beverage made by the alcoholic fermentation of an
infusion or decoction, or combination of both, in potable brewing
water, of malted barley with hops, or their parts, or their products,
and with or without other malted cereals, and with or without the
addition of unmalted or prepared cereals, other carbohydrates or
products prepared therefrom, and with or without the addition of carbon
dioxide, and with or without other wholesome products suitable for
human food consumption. Standards applying to the use of processing
methods and flavors in malt beverage production appear in Sec. 7.11.
* * * * *
0
3. We amend subpart B by adding a new Sec. 7.11 to read as follows:
Sec. 7.11 Use of ingredients containing alcohol in malt beverages;
processing of malt beverages.
(a) Use of flavors and other nonbeverage ingredients containing
alcohol--
(1) General. Flavors and other nonbeverage ingredients containing
alcohol may be used in producing a malt beverage. Except as provided in
paragraph (a)(2) of this section, no more than 49% of the overall
alcohol content of the finished product may be derived from the
addition of flavors and other nonbeverage ingredients containing
alcohol. For example, a finished malt beverage that contains 5.0%
alcohol by volume must derive a minimum of 2.55% alcohol by volume from
the fermentation of barley malt and other materials and may derive not
more than 2.45% alcohol by volume from the addition of flavors and
other nonbeverage ingredients containing alcohol.
(2) In the case of malt beverages with an alcohol content of more
than 6% by volume, no more than 1.5% of the volume of the malt beverage
may consist of alcohol derived from added flavors and other nonbeverage
ingredients containing alcohol.
(b) Processing. Malt beverages may be filtered or otherwise
processed in order to remove color, taste, aroma, bitterness, or other
characteristics derived from fermentation.
0
4. We amend Sec. 7.22 by adding a new paragraph (a)(5) to read as
follows:
Sec. 7.22 Mandatory label information.
* * * * *
(a) * * *
(5) Alcohol content in accordance with Sec. 7.71, for malt
beverages that contain any alcohol derived from added flavors or other
added nonbeverage ingredients (other than hops extract) containing
alcohol.
* * * * *
0
5. We amend Sec. 7.29 by revising the introductory text of paragraph
(a) and by adding a new paragraph (a)(7) to read as follows:
Sec. 7.29 Prohibited practices.
(a) Statements on labels. Containers of malt beverages, or any
labels on such
[[Page 235]]
containers, or any carton, case, or individual covering of such
containers, used for sale at retail, or any written, printed, graphic,
or other material accompanying such containers to the consumer, must
not contain:
* * * * *
(7) Any statement, design, device, or representation that tends to
create a false or misleading impression that the malt beverage contains
distilled spirits or is a distilled spirits product. This paragraph
does not prohibit the following on malt beverage labels:
(i) A truthful and accurate statement of alcohol content, in
conformity with Sec. 7.71;
(ii) The use of a brand name of a distilled spirits product as a
malt beverage brand name, provided that the overall label does not
present a misleading impression about the identity of the product; or
(iii) The use of a cocktail name as a brand name or fanciful name
of a malt beverage, provided that the overall label does not present a
misleading impression about the identity of the product.
* * * * *
0
6. We amend Sec. 7.31 by redesignating paragraph (d) as paragraph (e)
and by adding a new paragraph (d) to read as follows:
Sec. 7.31 Label approval and release.
* * * * *
(d) Formula and samples. The appropriate TTB officer may require an
importer to submit a formula for a malt beverage, or a sample of any
malt beverage or ingredients used in producing a malt beverage, prior
to or in conjunction with the filing of a certificate of label approval
on TTB Form 5100.31.
* * * * *
0
7. We amend Sec. 7.54 by revising the introductory text of paragraph
(a) and by adding a new paragraph (a)(8) to read as follows:
Sec. 7.54. Prohibited statements.
(a) General prohibition. An advertisement of malt beverages must
not contain:
* * * * *
(8) Any statement, design, device, or representation that tends to
create a false or misleading impression that the malt beverage contains
distilled spirits or is a distilled spirits product. This paragraph
does not prohibit the following in advertisements for malt beverages:
(i) A truthful and accurate statement of alcohol content, in
conformity with Sec. 7.71;
(ii) The use of a brand name of a distilled spirits product as a
malt beverage brand name, provided that the overall advertisement does
not present a misleading impression about the identity of the product;
or
(iii) The use of a cocktail name as a brand name or fanciful name
of a malt beverage, provided that the overall advertisement does not
present a misleading impression about the identity of the product.
* * * * *
PART 25--BEER
0
8. The authority citation for part 25 continues to read as follows:
Authority: 19 U.S.C. 81c; 26 U.S.C. 5002, 5051-5054, 5056, 5061,
5091, 5111, 5113, 5142, 5143, 5146, 5222, 5401-5403, 5411-5417,
5551, 5552, 5555, 5556, 5671, 5673, 5684, 6011, 6061, 6065, 6091,
6109, 6151, 6301, 6302, 6311, 6313, 6402, 6651, 6656, 6676, 6806,
7011, 7342, 7606, 7805; 31 U.S.C. 9301, 9303-9308.
0
9. We amend Sec. 25.11 by revising the definition of ``beer'' to read
as follows:
Sec. 25.11 Meaning of terms.
* * * * *
Beer. Beer, ale, porter, stout, and other similar fermented
beverages (including sak[eacute] and similar products) of any name or
description containing one-half of one percent or more of alcohol by
volume, brewed or produced from malt, wholly or in part, or from any
substitute for malt. Standards for the production of beer appear in
Sec. 25.15.
* * * * *
0
10. We amend subpart B by adding an undesignated center heading and a
new Sec. 25.15 to read as follows:
Standards for Beer
Sec. 25.15 Materials for the production of beer.
(a) Beer must be brewed from malt or from substitutes for malt.
Only rice, grain of any kind, bran, glucose, sugar, and molasses are
substitutes for malt. In addition, you may also use the following
materials as adjuncts in fermenting beer: honey, fruit, fruit juice,
fruit concentrate, herbs, spices, and other food materials.
(b) You may use flavors and other nonbeverage ingredients
containing alcohol in producing beer. Flavors and other nonbeverage
ingredients containing alcohol may contribute no more than 49% of the
overall alcohol content of the finished beer. For example, a finished
beer that contains 5.0% alcohol by volume must derive a minimum of
2.55% alcohol by volume from the fermentation of ingredients at the
brewery and may derive not more than 2.45% alcohol by volume from the
addition of flavors and other nonbeverage ingredients containing
alcohol. In the case of beer with an alcohol content of more than 6% by
volume, no more than 1.5% of the volume of the beer may consist of
alcohol derived from added flavors and other nonbeverage ingredients
containing alcohol.
0
11. We amend subpart F by adding two undesignated center headings, and
by adding new Sec. Sec. 25.53 and 25.55 through 25.58, to read as
follows:
Samples
Sec. 25.53 Submissions of samples of fermented products.
The appropriate TTB officer may, at any time, require you to submit
samples of:
(a) Cereal beverage, sak[eacute], or any fermented product produced
at the brewery,
(b) Materials used in the production of cereal beverage,
sak[eacute], or any fermented product; and
(c) Cereal beverage, sak[eacute], or any fermented product, in
conjunction with the filing of a formula.
(26 U.S.C. 5415, 5555, 7805(a))
Formulas
Sec. 25.55 Formulas for fermented products.
(a) For what fermented products must a formula be filed? You must
file a formula for approval by TTB if you intend to produce:
(1) Any fermented product that will be treated by any processing,
filtration, or other method of manufacture that is not generally
recognized as a traditional process in the production of a fermented
beverage designated as ``beer,'' ``ale,'' ``porter,'' ``stout,''
``lager,'' or ``malt liquor.'' For purposes of this paragraph:
(i) Removal of any volume of water from beer, filtration of beer to
substantially change the color, flavor, or character, separation of
beer into different components, reverse osmosis, concentration of beer,
and ion exchange treatments are examples of non-traditional processes
for which you must file a formula.
(ii) Pasteurization, filtration prior to bottling, filtration in
lieu of pasteurization, centrifuging for clarity, lagering,
carbonation, and blending are examples of traditional processes for
which you do not need to file a formula.
(iii) If you have questions about whether or not use of a
particular process not listed in this section requires the filing of a
formula, you may request a determination from TTB in
[[Page 236]]
accordance with paragraph (f) of this section.
(2) Any fermented product to which flavors or other nonbeverage
ingredients (other than hop extract) containing alcohol will be added.
(3) Subject to paragraph (f) of this section, any fermented product
to which coloring or natural or artificial flavors will be added.
(4) Subject to paragraph (f) of this section, any fermented product
to which fruit, fruit juice, fruit concentrate, herbs, spices, honey,
maple syrup, or other food materials will be added.
(5) Sak[eacute], including flavored sak[eacute] and sparkling
sak[eacute].
(b) Are separate formulas required for different products?
(1) You must file a separate formula for approval for each
different fermented product for which a formula is required.
(2) You may file a formula for a beer base to be used in the
production of one or more other fermented products. The beer base must
conform to the standards set forth in Sec. 25.15.
(c) When must I file a formula?
(1) Except as provided in paragraph (c)(2) of this section, you may
not produce a fermented product for which a formula is required until
you have filed and received approval of a formula for that product.
(2) You may, for research and development purposes (including
consumer taste testing), produce a fermented product without an
approved formula, but you may not sell or market this product until you
receive approval of the formula for it.
(d) How long is my formula approval valid? Your formula approved
under this section remains in effect until: you supersede it with a new
formula; you voluntarily surrender the formula; TTB cancels or revokes
the formula; or the formula is revoked by operation of law or
regulation.
(e) Are my previously approved statements of process valid? Your
statements of process approved before January 3, 2006 are considered
approved formulas under this section, provided that any finished
product that could be made under the statement of process would be in
compliance with the provisions of this part. You do not need to submit
a formula for approval if a statement of process that remains valid
covers the product.
(f) Determinations by TTB regarding specific processes and
ingredients.
(1) The appropriate TTB officer may determine whether or not use of
a process not listed in paragraph (a)(1) of this section requires you
to file a formula for approval. The appropriate TTB officer may also
exempt the use of a particular coloring, flavoring, or food material
from the formula filing requirement of paragraph (a)(3) or paragraph
(a)(4) of this section upon a finding that the coloring, flavoring, or
food material in question is generally recognized as a traditional
ingredient in the production of a fermented beverage designated as
``beer,'' ``ale,'' ``porter,'' ``stout,'' ``lager,'' or ``malt
liquor.''
(2) You may request a determination from TTB on whether or not the
use of a process not listed in paragraph (a)(1) of this section will
require the filing of a formula or whether the use of a particular
coloring, flavoring or food material may be exempted from the formula
filing requirement of paragraph (a)(3) or paragraph (a)(4) of this
section. You should mail your request to the Assistant Chief,
Advertising, Labeling and Formulation Division, Alcohol and Tobacco Tax
and Trade Bureau, 1310 G Street, NW., Washington, DC 20220.
(i) When requesting a determination as to whether a process is
subject to the formula filing and approval requirement, the request
must include:
(A) A detailed description of the proposed process;
(B) Evidence establishing that the proposed process is generally
recognized as a traditional process in the production of a fermented
beverage designated as ``beer,'' ``ale,'' ``porter,'' ``stout,''
``lager,'' or ``malt liquor''; and
(C) An explanation of the effect of the proposed process on the
production of a fermented product.
(ii) When requesting an exemption from the formula filing
requirement in paragraph (a)(3) or paragraph (a)(4) of this section
regarding coloring, flavoring, or food material ingredients, the
request must include the following information:
(A) A description of the proposed ingredient;
(B) Evidence establishing that the proposed ingredient is generally
recognized as a traditional ingredient in the production of a fermented
beverage designated as ``beer,'' ``ale,'' ``porter,'' ``stout,''
``lager,'' or ``malt liquor''; and
(C) An explanation of the effect of the proposed ingredient in the
production of a fermented product.
Sec. 25.56 Filing of formulas.
(a) What are the general requirements for filing a formula? (1) You
must file your formula in writing. Your formula must identify each
brewery where the formula applies by including each brewery name,
address, and registry number.
(2) You must serially number each formula, commencing with ``1''
and continuing in numerical sequence.
(3) You must date and sign each formula.
(4) You must file two copies of each formula with TTB.
(b) Where do I file a formula? File your formula with the Assistant
Chief, Advertising, Labeling and Formulation Division, Alcohol and
Tobacco Tax and Trade Bureau, 1310 G Street, NW., Washington, DC 20220.
(26 U.S.C. 5401, 7805)
Sec. 25.57 Formula information.
(a) Ingredient information. (1) For each formula you must list each
separate ingredient and the specific quantity used, or a range of
quantities used. You may include optional ingredients in a formula if
they do not impact the labeling or identity of the finished product.
(2) For fermented products containing flavorings you must list for
each formula: The name of the flavor; the product number or TTB
drawback number and approval date of the flavor; the name and location
(city and State) of the flavor manufacturer; the alcohol content of the
flavor; and the point of production at which the flavor was added (that
is, before, during, or after fermentation).
(3) For formulas that include the use of flavors and other
nonbeverage ingredients containing alcohol, you must explicitly
indicate:
(i) The volume and alcohol content of the beer base;
(ii) The maximum volumes of the flavors and other nonbeverage
ingredients containing alcohol to be used;
(iii) The alcoholic strength of the flavors and other nonbeverage
ingredients containing alcohol;
(iv) The overall alcohol contribution to the finished product
provided by the addition of any flavors or other nonbeverage
ingredients containing alcohol. You are not required to list the
alcohol contribution of individual flavors and other nonbeverage
ingredients containing alcohol. You may state the total alcohol
contribution from these ingredients to the finished product; and
(v) The final volume and alcohol content of the finished product.
(b) Process information. For each formula you must describe in
detail each process used to produce a fermented beverage.
(c) Alcohol content. For each formula you must state the alcohol
content of the fermented product after fermentation
[[Page 237]]
and the alcohol content of the finished product.
(d) Beer base formulas. You must refer in your formula to any
approved formula number that covers the production of any beer base
used in producing the formula product. If the beer base was produced by
another brewery of the same ownership, you must also provide the name
and address or name and registry number of that brewery.
(e) Additional information. The appropriate TTB officer may at any
time require you to file additional information concerning a fermented
product, ingredients, or processes, in order to determine whether a
formula should be approved or disapproved or whether the approval of a
formula should be continued.
(26 U.S.C. 5415, 5555, 7805(a))
Sec. 25.58 New and superseding formulas.
(a) New formulas. Except as otherwise provided in paragraph (b) of
this section, you must file a new formula (with a new formula number)
for approval by TTB if you--
(1) Create an entirely new fermented product that requires a
formula;
(2) Add new ingredients to an existing formulation;
(3) Delete ingredients from an existing formulation;
(4) Change the quantity of an ingredient used from the quantity or
range of usage in an approved formula;
(5) Change an approved processing, filtration, or other special
method of manufacture that requires the filing of a formula; or
(6) Change the contribution of alcohol from flavors or ingredients
that contain alcohol.
(b) Superseding formulas. You may file a superseding formula,
instead of a new formula, if you have made any change listed in
paragraphs (a)(2) through (a)(6) of this section and that change is not
of a type that would require a holder of a certificate of label
approval to file a new application for label approval on TTB Form
5100.31.
(1) A superseding formula replaces an existing formula, and you
should file one only if you do not intend to use the existing formula
any more. A superseding formula must be filed with TTB for approval.
When TTB approves a superseding formula, TTB will cancel your previous
formula.
(2) You may use the same formula number for a superseding formula
that you used for the formula the superseding formula replaces, but you
must annotate the formula number to indicate it is a superseding
formula number. (For example, ``Formula 2, superseding.'')
(c) When you file a new or superseding formula with TTB, you must
follow the procedures and other requirements of Sec. Sec. 25.56 and
25.57.
Sec. 25.62 [Amended]
0
12. We amend Sec. 25.62 by removing and reserving paragraph (a)(7).
Sec. 25.67 [Removed and Reserved]
0
13. We amend Subpart G by removing and reserving Sec. 25.67.
Sec. 25.76 [Removed and Reserved]
0
14. We amend Subpart G by removing and reserving Sec. 25.76.
Signed: August 6, 2004.
Arthur J. Libertucci,
Administrator.
Approved: December 22, 2004.
Timothy E. Skud,
Deputy Assistant Secretary (Tax, Trade, and Tariff Policy).
[FR Doc. 04-28460 Filed 12-29-04; 8:45 am]
BILLING CODE 4810-31-P