[Code of Federal Regulations]
[Title 7, Volume 4]
[Revised as of January 1, 2007]
From the U.S. Government Printing Office via GPO Access
[CITE: 7CFR274.12]

[Page 848-866]
 
                          TITLE 7--AGRICULTURE
 
    CHAPTER II--FOOD AND NUTRITION SERVICE, DEPARTMENT OF AGRICULTURE
 
PART 274_ISSUANCE AND USE OF COUPONS--Table of Contents
 
Sec.  274.12  Electronic Benefit Transfer issuance system approval standards.

    (a) General. This section establishes rules for the approval, 
implementation and operation of Electronic Benefit Transfer (EBT) 
systems for the Food Stamp Program as an alternative to issuing food 
stamp coupons. By October 1, 2002, State agencies must have EBT systems 
implemented statewide, unless the Secretary provides a waiver for a 
State agency that faces unusual barriers to implementing an EBT system. 
In general, these rules apply to both on-line and off-line EBT systems, 
unless stated otherwise herein, or unless FNS determines otherwise for 
off-line systems during the system planning and development process.
    (b) Program administration. (1) The State food stamp agency shall 
submit Planning and Implementation Advanced Planning Documents (APDs) 
for FNS approval in accordance with the requirements of Sec.  277.18 of 
this chapter and this section for development and implementation of 
initial and subsequent EBT systems. The State agency shall implement EBT 
systems in a pilot area prior to expansion Statewide or to other project 
areas. The areas of pilot operation and full-scale operation shall be 
identified in the Planning APD when submitted to FNS for approval.
    (2) The State agency shall be responsible for the coordination and 
management of the EBT system. The Secretary may suspend or terminate 
some or all EBT system funding or withdraw approval of the EBT system 
from the State agency upon a finding that the State agency or its 
contracted representative has failed to comply with the requirements of 
this section and/or Sec.  277.18 of this chapter.
    (3) All EBT systems within a State must follow a singular EBT APD 
and system architecture submitted by the State agency. Multiple EBT 
designs will be acceptable only if: such designs can be fully justified 
by the State agency; the system differences are transparent to 
participating households that move within the State; operating costs are 
the same or lower; and the ability of the different systems to readily 
communicate (transaction interchange) with one another.

[[Page 849]]

    (4) The State agency shall indicate how it plans to incorporate 
additional programs into the EBT system if it anticipates the addition 
of other public assistance programs concurrent with or after 
implementation of the Food Stamp Program EBT system. The State agency 
shall also consult with the State agency officials responsible for 
administering the Special Supplemental Nutrition Program for Women, 
Infants and Children (WIC) prior to submitting the Planning APD for FNS 
approval.
    (c) Pilot project approval requirements--(1) EBT planning APD. The 
State agency shall comply with the two-stage approval process for APDs 
in submitting an EBT system proposal to FNS for approval. The Planning 
APD shall contain the requirements specified under Sec.  277.18(d)(1) of 
this chapter, including a brief letter of intent, planning budget, cost 
allocation plan, and schedule of activities and deliverables.
    (i) Pilot project site and expanded site descriptions. At a minimum, 
the proposed pilot project site and expanded site descriptions shall 
include the geographical boundaries, average number and characteristics 
of food stamp program participants and households, the number and type 
of authorized food retailers and authorized retailers bordering the 
pilot and expanded areas, the food stamp redemption patterns of food 
retailers, the status of commercial POS deployment and the estimated 
number of checkout lanes that will require POS equipment; and
    (ii) A description of major contacts. A description of initial 
contacts the State agency has made in the proposed pilot area among food 
retailers, financial institutions and households or their 
representatives that may be affected by implementation of the EBT 
system. Written commitments from the retail grocer community (including 
supermarket chains, independent retailers, and convenience stores) and 
participating financial institutions in the pilot area shall be provided 
along with other documentation that demonstrates the willingness to 
support the proposed EBT system within the pilot area and expanded 
system area. The State agency shall submit evidence of contacts with 
recipient organizations and others.
    (2) EBT Implementation APD. The EBT Implementation APD shall include 
the completed documents required under Sec.  277.18 of this chapter for 
Implementation APDs, where appropriate. In addition, EBT Implementation 
APDs shall include the detailed pilot project site description and 
expanded site description, as described in this paragraph. Also, the 
State agency shall commit to completing and submitting the following 
documents for FNS approval and obtaining such approval prior to issuance 
of benefits to eligible households in the pilot project area:
    (i) Functional demonstration. A functional demonstration of the 
functional requirements prescribed in paragraph (f) of this section in 
combination with the system components described by the approved System 
Design is recommended in order to identify and resolve any problems 
prior to acceptance testing. The Department reserves the right to 
participate in the Functional Demonstration if one is conducted.
    (ii) An acceptance test plan. The Acceptance Test Plan for the pilot 
project shall describe the methodology to be utilized to verify that the 
EBT system complies with Food Stamp Program requirements and System 
Design specifications. At a minimum, the Acceptance Test Plan shall 
address:
    (A) The types of testing to be performed;
    (B) The organization of the test team and associated 
responsibilities, test database generation, test case development, test 
schedule, and the documentation of test results. Acceptance testing 
shall include functional requirements testing, error condition handling 
and destructive testing, security testing, recovery testing, controls 
testing, stress and throughput performance testing, and regression 
testing. FNS may require that any or all of these tests be repeated in 
instances where significant modifications are made to the system after 
these tests are initially completed or if problems that surfaced during 
initial testing warrant a retest;
    (C) A ``what-if'' component shall also be included to permit the 
opportunity for observers and participants to test

[[Page 850]]

possible scenarios in a free-form manner.
    (D) The Department reserves the right to participate and conduct 
independent testing as necessary during the Acceptance testing and 
appropriate events during system design, development, implementation and 
operation.
    (iii) An acceptance test report. The State agency shall provide a 
separate report after the completion of the acceptance test only in 
instances where FNS is not present at the testing or when serious 
problems are uncovered during the testing that remain unresolved by the 
end of the test session. The report shall summarize the activities, 
describe any discrepancies, describe the proposed solutions to 
discrepancies, and the timetable for their retesting and completion. In 
addition, the report shall contain the State agency's recommendations 
regarding implementation of the EBT system in the pilot site.
    (iv) A prototype food retailer agreement. The State agency shall 
enter an agreement with each food retailer that complies with the 
requirements of paragraph (g)(6) of this section.
    (v) A pilot project implementation plan. The pilot project 
implementation plan shall include the following:
    (A) A description of the tools, procedures, detailed schedules, and 
resources needed to implement the pilot project;
    (B) The equipment acquisition and installation requirements, 
ordering schedules, and system and component testing;
    (C) A phase-in strategy which permits a measured and orderly 
transition to EBT. In describing this strategy, the plan shall address 
training schedules that avoid disruption of normal shopping patterns and 
operations of participating households and food retailers. Training of 
food stamp households, State agency personnel and retailers and/or their 
trainers shall be coordinated with the installation of equipment in 
retail stores;
    (D) A description of on-going tasks associated with fine-tuning the 
system and making any corrective actions necessary to meet contractual 
requirements. The description shall also address those tasks associated 
with on-going training, document updates, equipment maintenance, on-site 
support and system adjustments, as needed to meet Food Stamp Program 
requirements; and,
    (E) A plan for orderly phase-out of the pilot project if it is 
demonstrated during the pilot project operations that the system is not 
acceptable.
    (vi) A contingency plan. The State agency shall submit a written 
contingency plan for FNS approval. The contingency plan shall contain 
information regarding the back-up issuance system that will be activated 
in the event of an emergency shut-down which results in short-term or 
extended system inaccessibility, or total discontinuation of EBT system 
operations. The contingency plan shall be incorporated into the State 
system security plan after FNS approval as prescribed at Sec.  277.18(p) 
of this chapter.
    (3) EBT Implementation APD Budget. The Implementation APD budget 
shall be prepared and submitted for FNS approval in accordance with the 
requirements of paragraph (k) of this section and Sec.  277.18(d)(2) of 
this chapter.
    (4) Pilot project reporting. The State agency is required to report 
to FNS all issues that arise during the pilot period. Reports to FNS 
shall be provided as problems occur. In instances where the State agency 
must investigate the issue, FNS must receive the information no later 
than one month after completion of pilot operations.
    (d) Expansion requirements. The pilot and expansion schedule must be 
delineated in the State agency's approved implementation plan. As part 
of the plan, the State agency must indicate a suitable pilot area to 
serve as the basis of the three-month analysis and reporting; however, 
expansion can occur simultaneously with pilot operation. Submission of 
an Advanced Planning Document Update to request FNS approval to 
implement and operate the EBT system in areas beyond the pilot area is 
only required in instances where there are substantial changes to the 
implementation plan. However, if significant problems arise during the 
pilot period or expansion, the Department can require that roll-out be 
suspended until such problems are resolved.

[[Page 851]]

    (e) Functional requirements. The State agency shall ensure that the 
EBT system is capable of performing the following functional 
requirements prior to implementation:
    (1) Authorizing household benefits. (i) Issuing and replacing EBT 
cards to eligible households;
    (ii) Permitting eligible households to select a personal 
identification number (PINs) at least four digits in length;
    (iii) Establishing benefit cards and accounts with the central 
computer database;
    (iv) Maintaining the master household issuance record file data and 
current authorization information;
    (v) Training households and other users in system usage;
    (vi) Authorizing benefit delivery;
    (vii) Posting benefits to each household's account for regular and 
supplemental issuances;
    (viii) Providing households with access to information on benefit 
availability;
    (ix) Ensuring the privacy of household data and providing benefit 
and data security;
    (x) Inventorying and securing accountable documents; and
    (xi) Zeroing out benefit accounts and other account authorization 
activity.
    (2) Providing food benefits to households. (i) Verifying the 
identity of authorized households or authorized household 
representatives at issuance terminals or POS;
    (ii) Verifying the PIN and/or PIN offset, primary account number 
(PAN), terminal identification number and retailer identification 
number;
    (iii) Determining the sufficiency of the household's account balance 
in order to debit or credit household benefit accounts at the point-of-
sale;
    (iv) Sending messages authorizing or rejecting purchases;
    (v) Providing back-up purchase procedures when the system is 
unavailable;
    (vi) Ensuring that benefits are available and carried over from 
month-to-month.
    (vii) Converting EBT benefits to coupons in accordance with 
paragraph (f)(6) of this section; and
    (viii) Responding to issuance problems in a timely manner.
    (3) Crediting retailers and financial institutions for redeemed 
benefits. (i) Verifying electronic transactions flowing to or from 
participating retailers' bank accounts;
    (ii) Creating and maintaining a file containing the individual 
records of EBT transactions;
    (iii) Totalling all credits accumulated by each retailer;
    (iv) Providing balance information to retailers or third party 
processors from individual POS terminals, as needed;
    (v) Providing each retailer information on total deposits in the 
system on a daily basis;
    (vi) Preparing a daily tape in a National Automated Clearinghouse 
format or other process approved by FNS with information on benefits 
redeemed for each retailer and in summary;
    (vii) Transmitting the automated clearinghouse (ACH) tape to a 
financial institution for transmission through the ACH or other method 
approved by FNS;
    (viii) Transferring the information on the ACH tape or other process 
approved by FNS containing daily redemption activity of each retailer to 
the FNS Minneapolis Computer Support Center at least once weekly. 
Transmittal may be by tape, disc, remote job entry or other means 
acceptable to FNS.
    (4) Managing retailer participation. The State agency shall:
    (i) Convey retailer authorization information provided by FNS to the 
system operator using the Retailer Electronic Benefit Transfer (EBT) 
Data Exchange (REDE) system. The State agency must access the REDE files 
to ensure that the FNS retailer files used to authorize valid EBT Food 
Stamp transactions are updated on a daily basis. Follow-up on actions 
taken regarding any disqualification or withdrawal by an authorized food 
retailer from the Food Stamp Program must occur within two business days 
after receipt;
    (ii) Add newly authorized food retail stores or third party 
processors to the EBT system as prescribed under paragraph (g)(1)(ii) of 
this section.
    (iii) Ensure that only currently authorized retailers can access the 
system;

[[Page 852]]

    (iv) Monitor food retailers to ensure that equipment deployment 
complies with paragraph (g)(4) of this section;
    (v) Ensure that equipment and supplies are maintained in working 
order for retail stores equipped by the State agency or its contractor. 
Equipment shall be replaced or repaired within 48 hours;
    (vi) Ensure that retail store employees are trained in system 
operation prior to implementation. Retailer training shall be offered by 
the State agency and include the provision of appropriate written and 
program specific materials. Retailers have the option to waive 
instruction by the State agency if they desire. State agencies shall 
direct retailers to confirm in writing that they are waiving their 
option to training;
    (vii) Provide on-line read-only access to State EBT systems for 
compliance investigations. The State agency is required to provide 
software and telecommunications capability as necessary to FNS 
Compliance Branch Area offices, Regional offices and Field offices so 
that FNS compliance investigators, other appropriate FNS personnel and 
investigators from the Department's Office of Inspector General have 
access to the system in order to conduct investigations of program abuse 
and alleged violations;
    (viii) Ensure that FNS compliance investigators and investigators 
from the Department's Office of Inspector General have access to EBT 
cards and accounts that are updated as necessary to conduct food stamp 
investigations.
    (f) Household participation--(1) Transaction limits. No minimum 
dollar amount per transaction nor maximum limit on the number of 
transactions shall be established. In addition, no transaction fees 
shall be imposed on food stamp households utilizing the EBT system to 
access their benefits.
    (2) Access to balances. Households shall be permitted to determine 
their food stamp account balances without making a purchase or standing 
in a checkout line. The State agency shall ensure that the EBT system is 
capable of providing a transaction history for a period of up two 
calendar months to households upon request.
    (3) Transaction receipts. Households shall be provided printed 
receipts at the time of transaction. At a minimum this information 
shall:
    (i) State the date, merchant's name and location, transaction type, 
transaction amount and remaining balance for the food stamp account;
    (ii) Comply with the requirements of 12 CFR part 205 (Regulation E) 
in addition to the requirements of this section; and
    (iii) Identify the food stamp household member's account number (the 
PAN) using a truncated number or a coded transaction number. The 
household's name shall not appear on the receipt except when a signature 
is required when utilizing a manual transaction voucher.
    (4) Issuance of benefits. State agencies shall establish an 
availability date for household access to their benefits and inform 
households of this date.
    (i) The State agency may make adjustments to benefits posted to 
household accounts after the posting process is complete but prior to 
the availability date for household access in the event benefits are 
erroneously posted.
    (ii) A State agency shall make adjustments to an account to correct 
an auditable, out-of-balance settlement condition that occurs during the 
redemption process as a result of a system error. A system error is 
defined as an error resulting from a malfunction at any point in the 
redemption process: from the system host computer, to the switch, to the 
third party processors, to a store's host computer or point of sale 
(POS) device. These adjustments may occur after the availability date 
and may result in either a debit or credit to the household.
    (A) Client-initiated adjustments. The State agency must act on all 
requests for adjustments made by client households within 90 calendar 
days of the error transaction. The State agency has 10 business days 
from the date the household notifies it of the error to investigate and 
reach a decision on an adjustment and move funds into the client 
account. This timeframe also applies if the State agency or entity other 
than the household discovers a system error that requires a credit 
adjustment to the household. Business

[[Page 853]]

days are defined as calendar days other than Saturdays, Sundays, and 
Federal holidays.
    (B) Retailer-initiated adjustments. The State agency must act upon 
all adjustments to debit a household's account no later than 10 business 
days from the date the error occurred, by placing a hold on the 
adjustment balance in the household's account. If there are insufficient 
benefits to cover the entire adjustment, a hold shall be placed on any 
remaining balance that exists, with the difference being subject to 
availability only in the next future month. The household shall be 
given, at a minimum, adequate notice in accordance with Sec.  273.13 of 
this chapter. The notice must be sent at the time the initial hold is 
attempted on the household's current month's remaining balance, clearly 
state the full adjustment amount, and advise the household that any 
amount still owing is subject to collection from the household's next 
future month's benefits.
    (1) The household shall have 90 days from the date of the notice to 
request a fair hearing.
    (2) Should the household dispute the adjustment and request a 
hearing within 10 days of the notice, a provisional credit must be made 
to the household's account by releasing the hold on the adjustment 
balance within 48 hours of the request by the household, pending 
resolution of the fair hearing. If no request for a hearing is made 
within 10 days of the notice, the hold is released on the adjustment 
balance, and this amount is credited to the retailer's account. If there 
are insufficient funds available in the current month to cover the full 
adjustment amount, the hold may be maintained and settled at one time 
after the next month's benefits become available.
    (iii) The appropriate management controls and procedures for 
accessing benefit accounts after the posting shall be instituted to 
ensure that no unauthorized adjustments are made in accordance with 
paragraph (f)(7)(iii) of this section.
    (5) Issuance and replacement of cards or PINs. (i) The State agency 
shall permit food stamp households to select their Personal 
Identification Number (PIN). PIN assignment procedures shall be 
permitted in accordance with industry standards as long as PIN selection 
is available to clients if they so desire and clients are informed of 
this option.
    (ii) In general, the State agency shall replace EBT cards within two 
business days following notice by the household to the State agency that 
the card has been lost or stolen. In cases where the State agency is 
using centralized card issuance, replacement can be extended to take 
place within up to five calendar days. In all instances, the State 
agency must ensure that clients have in hand an active card and PIN with 
benefits available on the card, within the time frame the State agency 
has identified for card replacement.
    (iii) The State agency shall ensure that a duplicate account is not 
established which would permit households to access more than one 
account in the system.
    (iv) An immediate hold shall be placed on accounts at the time 
notice is received from a household regarding the need for card or PIN 
replacement. The State agency shall implement a reporting system which 
is continually operative. Once a household reports that their EBT card 
has been lost or stolen, the State agency shall assume liability for 
benefits subsequently drawn from the account and replace any lost or 
stolen benefits to the household. The State agency or its agent shall 
maintain a record showing the date and time of all reports by households 
that their card is lost or stolen.
    (v) The State agency may impose a replacement fee by reducing the 
monthly allotment of the household receiving the replacement card; 
however, the fee may not exceed the cost to replace the card. If the 
State agency intends to collect the fee by reducing the monthly 
allotment, it must follow FNS reporting procedures for collecting 
program income. State agencies currently operating EBT systems must 
inform FNS of their proposed collection operations. State agencies in 
the process of developing an EBT system must include the procedure for 
collection of the fee in their system design document. All plans must 
specify how the State agency intends to account for

[[Page 854]]

card replacement fees and include identification of the replacement 
threshold, frequency, and circumstances in which the fee shall be 
applicable. State agencies may establish good cause policies that 
provide exception rules for cases where replacement card fees will not 
be collected.
    (6) Benefit conversion. (i) Households leaving an EBT State must be 
able to use their electronic benefits upon relocation. States must 
provide a means for a client to be able to use their benefits upon 
relocation. A State agency may convert electronic benefits to paper 
coupons if a household is relocating to a State that is not 
interoperable and where electronic benefits are not portable from the 
household's current State of residence, or assist clients in finding an 
authorized retail location where out-of-State electronic benefits can be 
used. At State agency option, a household entering an EBT area may be 
required to spend any remaining food coupons prior to utilizing the EBT 
system to access their benefits. Conversion shall occur within one 
business day following notice to the State agency by the household when 
inventories of food coupons are stored at local agency locations. 
Conversion shall occur within three business days if the State maintains 
coupon inventories in a central location.
    (ii) Requests for conversions to food coupons solely for purposes of 
shopping outside the project area shall be prohibited. However, the 
State agency may allow benefits in an EBT account to be converted to 
coupons for short-term absences from the EBT system area for family 
emergencies or similar isolated occurrences.
    (iii) Splitting food stamp benefits between food coupons and an 
electronic benefit access card at the time of issuance shall not be 
permitted.
    (iv) At State agency option, a limit may be imposed on the number of 
conversions per household that may occur annually for the purposes 
prescribed under paragraph (f)(6)(ii) of this section. A limit on 
conversions to food coupons shall not be imposed on households moving 
from the EBT area.
    (v) The State agency shall develop procedures for conversion 
whenever a household has left a State. These procedures shall not 
conflict with mailing restrictions regarding Authorization to 
Participate documents or other authorizing documents.
    (vi) The State agency shall round EBT benefits remaining in an 
account down to the nearest dollar amount suitable for coupon issuance. 
The State agency shall require the household to spend any remaining 
balance that cannot be converted to food coupons. If a household fails 
to spend the remaining benefits within one week after conversion occurs, 
the State agency shall expunge the benefits from the account and report 
the adjustment to the Department.
    (7) Stale account handling. Stale benefit accounts are those food 
stamp benefit accounts which are not accessed for three months or 
longer.
    (i) If EBT accounts are inactive for three months or longer, the 
State agency may store such benefits off-line.
    (A) Benefits stored off-line shall be made available upon 
reapplication or re-contact by the household;
    (B) The State agency shall attempt to notify the household of this 
action before storage of the benefits off-line and describe the steps 
necessary to bring the benefits back on-line;
    (ii) The State agency shall expunge benefits that have not been 
accessed by the household after a period of one year. Issuance reports 
shall reflect the adjustment to the State agency issuance totals to 
comply with monthly issuance reporting requirements prescribed under 
Sec.  274.4 of this part.
    (iii) Procedures shall be established to permit the appropriate 
managers to adjust benefits that have already been posted to a benefit 
account prior to the household accessing the account; or, after an 
account has become dormant or the household has not used the funds which 
remain after conversion. The procedures shall also be applicable to 
removing stale accounts for off-line storage of benefits or when the 
benefits are expunged. Whenever benefits are expunged or stored off-
line, the State agency shall document the date, amount of the benefits 
and storage location in the household case file.
    (8) Timely benefit availability. The State agency shall ensure that 
the EBT

[[Page 855]]

system complies with the expedited service benefit delivery standard and 
the normal application processing standards prescribed by Sec.  273.2 
and Sec.  274.2 of this chapter.
    (9) Access to retail stores. The EBT system shall provide for 
minimal disruption of access to and service in retail stores by eligible 
households. The EBT system shall not result in a significant increase in 
the cost of food or cost of transportation to authorized food retail 
stores for food stamp households. Checkout lanes equipped with POS 
devices shall be made available to Food Stamp households during all 
retail store hours of operation.
    (10) Household training. The State agency shall provide training to 
each household prior to implementation and as needed during ongoing 
operation of the EBT system. Training functions for an EBT system may be 
incorporated into certification procedures. At a minimum, the household 
training shall include:
    (i) Content which will familiarize each household with the 
provisions of paragraphs (f)(1) through (f)(9) of this section;
    (ii) Hands-on experience in the use of the EBT equipment must be 
available for households that request it or demonstrate a need for that 
kind of training;
    (iii) Notification to the household of the procedures for manual 
transactions and re-presentation;
    (iv) The appropriate utilization and security of the Personal 
Identification Number;
    (v) Each household's responsibilities for reporting loss or damage 
to the EBT card and who to report them to, both during and outside 
business hours. Information on a 24 hour hotline telephone number shall 
be provided to each household during training;
    (vi) Written materials and/or other information, including the 
specific rights to benefits in an EBT system, shall be provided as 
prescribed under 7 CFR 272.4(b) for bilingual households and for 
households with disabilities. Written materials shall be prepared at an 
educational reading level suitable for food stamp households;
    (vii) Information on the signs or other appropriate indicators 
located in checkout lanes that enable the household to identify lanes 
equipped to accept EBT cards.
    (viii) Disclosure information regarding adjustments and a 
household's rights to notice, fair hearings, and provisional credits. 
The disclosure must also state where to call to dispute an adjustment 
and request a fair hearing. State agencies that have already implemented 
EBT shall have one year in which to grandfather adjustment disclosure 
into their training materials.
    (g) Retailer participation. (1) All authorized retailers must be 
afforded the opportunity to participate in the EBT system. An authorized 
food retailer shall not be required to participate in an EBT system.
    (i) Retailers who do not have immediate access to telephones at the 
time of purchase shall be accommodated by an alternative system (e.g., 
manual vouchers with preliminary or delayed telephone verification) for 
redeeming food sales to eligible food stamp customers. These retailers 
include stationary food stores which opt to make home deliveries to food 
stamp households, house-to-house trade routes which operate on standing 
orders from customers, e.g. milk and bread delivery routes, food buying 
cooperatives authorized to participate as well as other food retailers 
authorized under Sec.  278.1 of this chapter. Prior to delivery or upon 
returning to the store, the retailer shall telephone the EBT central 
computer or hotline number to log the transaction and obtain an 
authorization number. If authorization cannot be obtained before or at 
the time of purchase, the retailer assumes the risk for sufficient 
benefits being available in the household's account. Any alternate 
method cannot be burdensome on either the household or the retailer, and 
it must include acceptable privacy and security features. Such systems 
shall only be available to retailers that cannot be equipped with a POS 
terminal at the time of sale.
    (ii) Newly authorized retailers shall have access to the EBT system 
within two weeks after the receipt of the FNS authorization notice. 
However, whenever a retailer chooses to employ a

[[Page 856]]

third party processor to drive its terminals or elects to drive its own 
terminals, access to the system shall be accomplished within a 30 day 
period or a mutually agreed upon time to enable the third party 
interface specifications and any State required functional certification 
to be performed by the State agency and/or its contractor.
    (2) Authorized retailers shall not be required to pay costs 
essential to and directly attributable to EBT system operations as long 
as the equipment or services are provided by the State agency or its 
contractor and are utilized solely for the Food Stamp Program. In 
addition, if Food Stamp Program equipment is deployed under contract to 
the State agency, the State agency may, with USDA approval, share 
appropriate costs with retailers if the equipment is also utilized for 
commercial purposes. The State agency may choose to charge retailers 
reasonable fees in the following circumstances:
    (i) Cost for the replacement of lost, stolen or damaged equipment;
    (ii) The cost of materials and supplies for POS terminals not 
provided by the State agency;
    (iii) Telecommunication costs for all non-EBT use by retailers when 
lines are provided by the State agency. In addition, State agencies may 
remove phone lines from retailers in instances where there is 
significant misuse of the lines.
    (3) The State agency shall ensure that a sufficient number of 
authorized food retailers have agreed to participate throughout the area 
in which the EBT system will operate to ensure that eligible food stamp 
households will not suffer a significant reduction in their choice of 
retail food stores and that a sufficient number of retail food stores 
serving minority language populations are participating.
    (4) The EBT system shall be implemented and operated in a manner 
that maintains equal treatment for food stamp households in accordance 
with Sec.  278.2(b) of this chapter. The following requirements for the 
equal treatment of food stamp households shall directly apply to EBT 
systems:
    (i) Retailers shall not establish special checkout lanes which are 
only for food stamp households or welfare customers. If special lanes 
are designated for the purpose of accepting other electronic debit or 
credit cards and/or other payment methods such as checks, food stamp 
customers with EBT cards may also be assigned to such lanes as long as 
other commercial customers are assigned there as well.
    (ii) POS terminals shall be deployed as follows in EBT systems 
requiring food stamp households to participate:
    (A) For an authorized food retail store with food stamp benefit 
redemption amounting to 15 percent or more of total food sales, all 
checkout lanes shall be equipped;
    (B) For an authorized food retail store with Food Stamp benefit 
redemptions representing less than 15 percent of total food sales, 
supermarkets shall, at a minimum, receive one terminal for every $11,000 
in monthly redemption activity up to the number of lanes per store. All 
other food retailers shall receive one terminal for every $8,000 in 
monthly redemption activity up to the number of lanes per store. 
However, a State agency may utilize an alternative deployment formula 
that permits equipment deployment at higher levels than required by this 
paragraph up to the number of lanes in each store. The State agency 
shall review terminal deployment on a yearly basis and shall be 
authorized to remove excess terminals if actual redemption activity 
warrants a reduction.
    (C) For newly authorized food retailers and authorized food 
retailers bordering the EBT system area, the State agency and food 
retailer shall negotiate a mutually agreed level of terminal deployment 
up to the number of lanes per store. The State agency may consult with 
the appropriate FNS field office in order to determine the previous food 
stamp redemption activity that could be utilized in determining the 
initial number of terminals to deploy in newly authorized retailers or 
border stores. The State agency shall examine household shopping 
patterns in the EBT operating area in order to establish the needs for 
border store equipment. The need to deploy equipment outside the State 
is limited to

[[Page 857]]

neighboring States that are not interoperable due to exemptions for 
technological barriers or temporary waivers. State agencies will also 
need to make accommodations for border stores in interoperable States 
that are deemed necessary for client access. To do so, State agencies 
must ensure that procedures are in place to process manual vouchers in 
instances when the system is down or for those retailers that do not 
have POS equipment. Redemption information shall remain confidential.
    (D) Any food retailer shall be able to submit further evidence that 
it warrants additional terminals after the initial POS terminals are 
deployed. Food stamp households may also submit evidence to the State 
agency that additional POS terminals are needed. State agencies may 
provide retailers with additional terminals above the minimum number 
required by this paragraph at customer service booths or other locations 
if appropriate.
    (5) The State agency shall ensure that the EBT system provides 
credits to the financial institution holding the accounts for retailers 
or third party processors within two business days of the daily cut-over 
period for retailer settlement. The cut-over period is the time of day 
established by the system in which a transaction day is established for 
settlement and reconciliation.
    (6) The State agency shall enter into an agreement with each 
authorized food retailer. The retailer agreement shall describe the 
terms and conditions of participation in the Food Stamp EBT system. At a 
minimum, the agreement shall:
    (i) Describe all terms and conditions with respect to equipment 
ownership, lease arrangements, handling and maintenance for which the 
State agency and merchant are liable;
    (ii) Describe the agreed upon procedures and policies for 
participation and withdrawal from the EBT system;
    (iii) Comply with all Food Stamp Program regulations with respect to 
retailer participation in the program and treatment of Food Stamp 
Program households. This shall include specific requirements with 
respect to the deployment of terminals and the identification of 
checkout lanes for food stamp customers;
    (iv) Delineate the liabilities during system downtime and the 
associated responsibilities of each party with respect to the use of 
off-line and/or manually entered data, paper vouchers, and re-presented 
vouchers.
    (h) Performance and technical standards. The State agency shall 
ensure that EBT systems comply with Point of Sale (POS) technical 
standards established by the American National Standards Institute 
(ANSI) or International Organization for Standardization (ISO) where 
applicable. This includes the draft EBT ISO 8583 Processor Interface 
Technical Specifications contained in the ANSI standards, which 
delineates a standard message format for retailers and third parties. In 
addition, the State agency shall ensure that the EBT system meets 
performance and technical standards in the areas of system processing 
speeds, system availability and reliability, system security, system 
ease-of-use, minimum card and terminal requirements, performance 
bonding, and a minimum transaction set. With prior written approval from 
FNS, the State agency may utilize the prevailing industry performance 
standards in its region in lieu of those identified in this section. The 
standards shall be included in all requests for proposals and contracts.
    (1) System processing speeds. (i) For leased line systems, 98 
percent of EBT transactions shall be processed within 10 seconds or less 
and all EBT transactions shall be processed within 15 seconds. Leased 
line systems rent telecommunications carriers specifically to connect to 
the central authorizing computer. For dial-up systems, 95 percent of the 
EBT transactions shall be processed within 15 seconds or less and all 
EBT transactions shall be processed within 20 seconds or less. Dial-up 
systems utilize existing telecommunications lines to dial up and connect 
to the central computer at the time of the transaction. Processing 
response time shall be measured at the POS terminal from the time the 
`enter' or `send' key is pressed to the receipt and display of 
authorization or disapproval information. Third party processors, as 
defined

[[Page 858]]

in paragraph (h)(5) of this section, shall be required by the State 
agency to comply with the same processing response times required of the 
primary processor.
    (ii) The EBT system shall provide reports, as determined by the 
State agency, that document transaction processing response time and the 
number and type of problematic transactions that could not be processed 
within the standard response time.
    (2) System availability and reliability. (i) The EBT system central 
computer shall be available 99.9 percent of scheduled up-time, 24 hours 
a day, seven days per week. Scheduled up-time shall mean the time the 
database is available for transactions excluding scheduled downtime for 
routine maintenance. The total system, including the system's central 
computer, any network or intermediate processing facilities and 
cardholder authorization processors, shall be available 98 percent of 
scheduled up-time, 24 hours per day, 7 days per week. Scheduled downtime 
for routine maintenance shall occur during non-peak transaction periods. 
State certification procedures shall determine whether intermediate 
processing facilities and cardholder authorization processors are 
capable of complying with system availability standards prescribed 
herein prior to permitting the interface with the central computer 
system.
    (ii) The system central computer shall permit no more than 2 
inaccurate EBT transactions for every 10,000 EBT transactions processed. 
The transactions to be included in measuring system accuracy shall 
include all types of food stamp transactions permitted at POS terminals 
and processed through the host computer, manual transactions entered 
into the system, credits to household accounts, and funds transfers to 
retailer accounts.
    (iii) Reconciliation reports and other information regarding 
problematic transactions shall be made available to the State agency by 
the system operator, individual retailers, households or financial 
institutions as appropriate. Reports on problematic transactions, 
including inaccurate transactions shall be delineated by the source of 
the problem such as card failure, POS terminal failure, interruption of 
telecommunications, or other component failure. Errors shall be resolved 
in a timely manner.
    (3) System security. As an addition to or component of the Security 
Program required of Automated Data Processing systems prescribed under 
Sec.  277.18(p) of this chapter, the State agency shall ensure that the 
following EBT security requirements are established:
    (i) Storage and control measures to control blank unissued EBT cards 
and PINs, and unused or spare POS devices;
    (ii) Measures to ensure communication access control. Communication 
controls shall include the transmission of transaction data and issuance 
information from point-of-sale terminals to work-stations and terminals 
at the data processing center. The following specific security measures 
shall be included, as appropriate, in the system design documentation, 
operating procedures or the State agency Security Program:
    (A) Computer hardware controls that ensure acceptance of data from 
authorized terminals only. These controls shall include the use of 
mechanisms such as retailer identification codes, terminal identifiers 
and user identification codes, and/or other mechanisms and procedures 
recognized by the industry;
    (B) Software controls, placed at either the terminal or central 
computer or both, that establish separate control files containing lists 
of authorized retailers, terminal identifying codes, and user access and 
identification codes. EBT system software controls shall include 
separate checks against the control files in order to validate each 
transaction prior to authorization and limiting the number of 
unsuccessful PIN attempts that can be made utilizing standard industry 
practices before the card is deactivated;
    (C) Communications network security that utilizes the Data 
Encryption Standard algorithm to encrypt the PIN, at a minimum, from the 
point of entry. Other security may include authentication codes and 
check-sum digits, in combination with data encoded on the magnetic 
stripe such as the PIN and/or PIN offset, to ensure data security during 
electronic transmission.

[[Page 859]]

Any of the network security measures may be utilized together or 
separately and may be applied at the terminal or central computer as 
indicated in the approved system design to ensure communications 
control;
    (D) Manual procedures that provide for secure access to the system 
with minimal risk to household or retailer accounts. Manual procedures 
may include the utilization of manager identification codes in obtaining 
telephonic authorization from the central computer system; requirements 
for separate entry with audio response unit verification and 
authorization number; and/or the utilization of 24 hour hotline 
telephone numbers to authorize transactions.
    (iii) Message validation shall include but shall not be limited to:
    (A) Message format checks for completeness of the message, correct 
order of data, existence of control characters, number and size of data 
fields and appropriate format standards as specified in the approved 
system design;
    (B) Range checks for acceptable date fields, number and valid 
account numbers, purchase and refund upper limitations in order to 
prevent and control damage to the system accounts;
    (C) Reversals of messages that are not fully processed and recorded.
    (iv) Administrative and operational procedures shall ensure that:
    (A) Functions affecting an account balance are separated or dually 
controlled during processing and when requesting Federal reimbursement 
through a concentrator bank under the provisions of paragraph (i) of 
this section. These functions may include but are not limited to the set 
up of accounts, transmittal of funds to and from accounts, access to 
files to change account records, and transmittal of retailer deposits to 
the ACH network or other means approved by FNS for crediting retailer 
bank accounts;
    (B) Passwords, identity codes or other security procedures must be 
utilized by State agency or local personnel and at data processing 
centers;
    (C) Software programming changes shall be dual controlled to the 
extent possible;
    (D) System operations functions shall be segregated from 
reconciliation duties;
    (v) A separate EBT security component shall be incorporated into the 
State agency Security Program for Automated Data Processing (ADP) 
systems where appropriate and as prescribed under Sec.  277.18(p) of 
this chapter. The periodic risk analyses required by the Security 
Program shall address the following items specific to an EBT system:
    (A) EBT system vulnerability to theft and unauthorized use;
    (B) Completeness and timeliness of the reconciliation system;
    (C) Vulnerability to tampering with or creating household accounts;
    (D) Erroneous posting of issuances to household accounts;
    (E) Manipulation of retailers' accounts such as creation of false 
transactions or intrusion by unauthorized computer users;
    (F) Capability to monitor systematic abuses at POS terminals such as 
debits for a complete allotment, excessive manual issuances, and 
multiple manual transactions at the same time. Such monitoring may be 
accomplished through the use of exception reporting;
    (G) Tampering with information on the ACH tape or similar 
information utilized in a crediting method approved by FNS; and,
    (H) The availability of a complete audit trail. A complete audit 
trail shall, at a minimum, be able to provide a complete transaction 
history of each individual system activity that affects an account 
balance. The audit trail shall include the tracking of issuances from 
the Master File and Issuance File, network transactions from point-of-
sale terminals to EBT central computer database and system file updates.
    (vi) The State agency shall incorporate the contingency plan 
approved by FNS prior to pilot implementation and subsequently updated 
as part of the Expansion Implementation Plan into the Security Program.
    (4) System ease-of-use. (i) For all system users, the State agency 
shall ensure that the system:
    (A) Minimizes the number of separate steps required to complete a 
transaction;

[[Page 860]]

    (B) Minimizes the number of codes or commands needed to make use of 
the system;
    (C) Makes available clear and comprehensive account balance 
information with a minimum number of actions necessary;
    (D) Provides training and instructions for all system users 
especially those persons with disabilities;
    (E) Makes available prompts on POS terminals or balance only 
terminals, where appropriate;
    (F) Identifies procedures for problem resolution;
    (G) Provides reasonable accommodation for the needs of households 
with disabilities in keeping with the Americans with Disabilities Act of 
1990.
    (ii) In addition to the requirements of paragraph (h)(4)(i) of this 
section, the State agency shall ensure that retailers utilizing the EBT 
system:
    (A) Have available manual backup procedures;
    (B) Can obtain timely information on daily credits to their banks;
    (C) Have available deposit information in a format readily 
comparable to information maintained in the store; and
    (D) Have available instructions on resolving problems with equipment 
and retailer accounts.
    (5) Third party processors. Third party processors are financial 
institutions, cardholder authorization processors other than the party 
with which the State agency has contracted for EBT services, and food 
retailers driving their own terminals that are capable of relaying 
electronic transactions to a central database computer for 
authorization. The State agency shall afford retailers the opportunity 
to use third party processors and shall provide interface specifications 
and certification standards in order for the third party processor to 
participate in the EBT system.
    (i) In order to participate in a Food Stamp Program EBT system, a 
third party processor must be able to meet all third party interface 
specifications and certification standards associated with this section. 
The State agency shall make available to third party processors the 
third party interface specifications prior to implementation of the EBT 
system to enable third party processors to access the database. Third 
party processors shall undergo functional and acceptance tests as 
specified by the State agency;
    (ii) Third party processors shall be liable for transactions until 
the transaction has been electronically accepted by the contracted 
vendor or an intermediate processing facility;
    (iii) The State agency shall ensure that third party processors and 
food retailers driving their own terminals comply with this section and 
all applicable Food Stamp Program regulations.
    (6) Minimum card requirements. (i) The State agency shall ensure 
that the following information is printed on the card:
    (A) The address of the office where a card can be returned if found 
or no longer in use;
    (B) The abbreviated statement of nondiscrimination, which reads as 
follows: ``The USDA is an equal opportunity provider and employer.'' In 
lieu of printing the required information on the EBT card, the State 
agency shall provide each household a card jacket or sleeve containing 
the nondiscrimination statement.
    (ii) FNS reserves the right to require State agencies to place a 
Department logo on the EBT card and/or sleeves or jackets.
    (iii) EBT cards and/or sleeves or jackets shall not contain the name 
of any State or local official. EBT informational materials shall not 
indicate association with any political party or other political 
affiliation.
    (iv) State agencies may require the use of a photograph of one or 
more household members on the card. If the State agency does require the 
EBT cards to contain a photo, it must establish procedures to ensure 
that all appropriate household members or authorized representatives are 
able to access benefits from the account as necessary.
    (7) POS terminals. POS terminals shall meet the following 
requirements:
    (i) Balance information shall not be displayed on the screen of the 
POS terminal except for balance-only inquiry terminals;

[[Page 861]]

    (ii) PINs shall not be displayed at the terminal; and
    (iii) PIN encryption shall occur from the point of entry in a manner 
which prevents the unsecured transmission between any point in the 
system.
    (8) Performance bonding. The State agency may require a performance 
bond in accordance with Sec.  277.8 of this chapter or utilize other 
contractual clauses it deems necessary to enforce the requirements of 
this section.
    (9) Minimum transaction set. At a minimum, the State agency shall 
ensure that the EBT system, including third party processors and 
retailers driving their own terminals, is capable of providing for 
authorizing or rejecting purchases, refunds or customer credits, voids 
or cancellations, key entered transactions, balance inquiries and 
settlement or close-out transactions. The system must be capable of 
completing this transaction set across State borders nationwide in 
accordance with standards specified in paragraph (h)(10) of this 
section.
    (10) Interoperability. State agencies must adopt uniform standards 
to facilitate interoperability and portablilty nationwide. The term 
``interoperability'' means the EBT system must enable a coupon issued in 
the form of an EBT card to be redeemed in any State. The term 
``portablity'' means the EBT system must enable a coupon issued in the 
form of an EBT card to be used in any State by a household to purchase 
food at a retail food store or a wholesale food concern approved under 
the Food Stamp Act of 1977. The standards must include the following:
    (i) EBT system connectivity. State agencies are responsible for 
establishing telecommunications links, transaction switching facilities 
and any other arrangements with other State agencies necessary for the 
routing of interoperable transactions to such other State EBT 
authorization systems. State agencies are also responsible for 
facilitating the settlement of such interoperable transactions and the 
handling of adjustments. These connections need not be direct 
connections between State authorization systems but may be facilitated 
through agreements and linkages with other designated agents or third 
party processors. All State agencies must agree to the timing and 
disposition of disputes, error resolution, and adjustments in accordance 
with Department regulations at Sec.  273.13(a), Sec.  273.15(k) and 
paragraph (f) of this section. State agencies or their designated agents 
must draw funds from State food stamp accounts for food stamp benefits 
transacted by that State's food stamp recipients, regardless of where 
benefits were transacted.
    (ii) Message format. Each authorization system must use the 
International Organization for Standards (ISO) 8583 message format, 
modified for EBT, in a version mutually agreed to between the 
authorization agent and the party connected for all transactions. Each 
authorization system must process each financial transaction as a single 
message financial transaction, except for pre-authorized transactions 
and reversals, processed as paired transactions.
    (iii) Card Primary Account Number (PAN) Requirements. Track 2 on 
each card shall contain the PAN. Each Government entity must obtain an 
Issuer Identification Number (IIN) from the American Banker's 
Association (ABA). The IIN should be included as the first six digits of 
the Primary Account Number. The PAN must comply with International 
Organization for Standards (ISO) 7812, Identification Cards--Numbering 
System and Registration Procedures for Issuer Identifiers. Each State 
agency must be responsible for generating, updating, and distributing 
IIN files of all States to each retailer, processor, or acquirer that is 
directly connected to the State's authorization system. Each terminal 
operator that uses a routing table for routing acquired transactions 
must, within seven calendar days of receiving an IIN routing table 
update, modify its routing tables to reflect the updated routing 
information.
    (iv) Third Party Processor Requirements. Each Third Party Processor 
or terminal operator must have primary responsibility and liability for 
operating the telecommunications and processing system (including 
software and hardware) through which transactions initiated at POS 
terminals it owns, operates, controls or for which it

[[Page 862]]

has signed an agreement to accept EBT transactions, are processed and 
routed, directly or indirectly, to the appropriate State authorization 
system. Each terminal operator must maintain the necessary computer 
hardware and software to interface either directly with a State 
authorization system or with a third party service provider to obtain 
access to one or more State authorization systems. Each terminal 
operator must establish a direct or indirect telecommunications 
connection for the routing of transactions to the State authorization 
system or to a processor directly or indirectly connected to the State 
authorization system.
    (v) REDE File. The State agency must ensure that their EBT system 
verifies FNS retailer numbers for all interstate transactions against 
the National REDE file of all FNS EBT retailers to validate these 
transactions.
    (11) Waivers. The State agency may request a waiver from the 
Department for a temporary exemption from compliance with the 
requirements for interoperability and portability, as found in this 
section, if they can adequately demonstrate that: (1) There are unusual 
technological barriers to the implementation of interoperability; and 
(2) it is in the best interest of the FSP to grant the waiver. All 
waivers must specify a date by which the State agency will achieve 
interoperability and portability.
    (i) Concentrator bank responsibilities. The concentrator bank shall 
be a Federally insured financial institution or other entity acceptable 
to the Federal Reserve which has the capability to take retailer credits 
and/or debits, obtained from the EBT system operator, and transmit them 
to the ACH network operated by the Federal Reserve or through another 
process for crediting retailers approved by FNS. Transmittal shall be by 
tape or on-line in a format suitable for the Automated Clearinghouse 
(ACH) or as approved by FNS.
    (1) The minimum functions of the concentrator bank are:
    (i) Preparing a daily ACH tape or other crediting process approved 
by FNS with information on benefits redeemed and creditable to each 
retailer;
    (ii) Transferring the ACH tape or other crediting process approved 
by FNS to the Federal Reserve or other entity approved by FNS;
    (iii) Initiating and accepting reimbursement from the appropriate 
U.S. Treasury account through the Automated Standard Application for 
Payment (ASAP) system or other payment process approved by FNS. At the 
option of FNS, the State agency may designate another entity as the 
initiator of reimbursement for food stamp redemptions provided the 
entity is acceptable to FNS and U.S. Treasury.
    (iv) Cooperating in the reconciliation of discrepancies and error 
resolution when necessary.
    (2) With the approval of FNS, another procedure, other than the ACH 
system, may be utilized to credit retailer accounts and/or debit FNS' 
account, if it meets the needs of FNS and the EBT system.
    (3) The State agency shall be liable for any errors in the creation 
of the ACH tape or its transmission. The State agency may transfer the 
liability associated with creation of the ACH tape, its transmission or 
another crediting process approved by FNS as appropriate to the EBT 
system operator or the concentrator bank. Appropriate system security 
administrative and operational procedures shall be instituted in 
accordance with paragraph (h)(3) of this section.
    (j) Reconciliation, management reporting, examinations and audits. 
The EBT system shall provide reports and documentation pertaining to the 
following:
    (1) Reconciliation. Reconciliation shall be conducted and records 
kept as follows:
    (i) Reconciliation of benefits posted to household accounts on the 
central computer against benefits on the Issuance Authorization File;
    (ii) Reconciliation of individual household account balances against 
account activities on a daily basis;
    (iii) Reconciliation of each individual retail store's food stamp 
transactions per POS terminal and in total to deposits on a daily basis;
    (iv) Verification of retailer's credits against deposit information 
entered into the ACH network;

[[Page 863]]

    (v) Reconciliation of total funds entered into, exiting from, and 
remaining in the system each day;
    (vi) Maintenance of audit trails that document the full cycle of 
issuance from benefit allotment posting to the State issuance 
authorization file through posting to point-of-sale transactions at 
retailers through settlement of retailer credits.
    (2) Management reports. The State agency shall require the EBT 
system to provide reports that enable the State agency to manage the 
system. The reports shall be available to the State agency or FNS as 
requested on a timely basis and consist of:
    (i) Information on how the system operates relative to its 
performance standards, the incidence, type and cause of system problems, 
and utilization patterns.
    (ii) Retailer transaction data submitted to FNS on a monthly basis. 
This data must be submitted in the specified format in accordance with 
the required schedule.
    (iii) Data detailing by specified category the amount of food stamp 
benefits issued or returned through the EBT system. Data shall be 
provided in a format and mechanism specified by FNS to the FNS Account 
Management Agent as the benefits become available to recipients. This 
data will be used to increase or decrease the food stamp EBT benefit 
funding authorization for the State's ASAP account.
    (3) Pilot project reports. The State agency shall provide quarterly 
reports as described in paragraph (c)(4) of this section during the 
pilot project.
    (4) Program reporting. When benefits are initially issued through an 
EBT system, the State agency shall report as required by FNS in Sec.  
274.4 and in accordance with the FNS instructions specific to EBT 
issuances.
    (5) Examinations and audits. (i) The state agency must obtain an 
examination by an independent auditor of the transaction processing of 
the State EBT service provider regarding the issuance, redemption, and 
settlement of Food Stamp Program benefits. The examination must be done 
at least annually and the report must be completed ninety days after the 
examination period ends. Subsequent examinations must cover the entire 
period since the previous examination. Examinations must follow the 
American Institute of Certified Public Accountants (AICPA) Statement on 
Auditing Standards No. 70, Service Organizations (SAS No. 70), 
requirements for reports on controls placed in operation and tests of 
the operating effectiveness of the controls.
    (ii) The examination report must include a list of all States whose 
systems operate under the same control environment. Auditors conducting 
the examination must follow EBT guidance contained in the Office of 
Management and Budget (OMB) Circular A-133 Compliance Supplement to the 
extent the guidelines refer to FSP benefits. (For availability of OMB 
Circulars referenced in this section, see 5 CFR 1310.3.)
    (iii) The State agency must retain a copy of the SAS No.70 
examination report.
    (iv) The State agency shall respond to written requests from the 
Food and Nutrition Service (FNS), USDA Office of the Inspector General 
(OIG), or the General Accounting Office (GAO) for completed SAS No.70 
examination reports by providing the report within thirty days of 
receipt of the written request.
    (v) The State agency shall respond to written requests from FNS, 
OIG, or GAO to view auditor's workpapers from SAS No. 70 reports by 
arranging to have workpapers made available within thirty days of 
receipt of the written request.
    (vi) FNS and the USDA OIG shall rely on SAS No. 70 reports on EBT 
transaction processing services provided by contractors to the State. 
FNS and USDA OIG reserve the right to conduct other reviews or audits if 
necessary.
    (vii) EBT services provided directly by the State are not subject to 
SAS No. 70 examination requirements of this section but remain subject 
to the single audit requirements at 7 CFR 277.7 and the Office of 
Management and Budget Circular A-133.
    (k) Federal Financial Participation. (1) The cost of administering 
statewide benefit issuance after implementation of the EBT system shall 
be funded at

[[Page 864]]

the regular Federal financial participation rate.
    (2) The State agency shall comply with the provisions set forth 
under 7 CFR 277.18 and appendix A of 7 CFR 277.18 in determining and 
claiming allowable costs for the EBT system.
    (3) Access to system documentation, including cost records of 
contractors or subcontractors shall be made available and incorporated 
into contractual agreements in accordance with Sec.  277.18(k) of this 
chapter.
    (4) State agencies may receive one hundred percent federal funding 
for the costs they incur for switching and settling all food stamp 
interstate transactions. For purposes of this section, the term 
``switching'' means the routing of an interstate transaction that 
consists of transmitting the details of a transaction electronically 
recorded through the use of an EBT card in one State to the issuer of 
the card that is in another State; and the term ``settling'' means 
movement, and reporting such movement, of funds from an EBT card issuer 
located in one to a retail food store, or wholesale food concern, that 
is located in another State, to accomplish an interstate transaction. 
The total amount of one hundred percent funding available annually is 
limited to $500,000 nationwide. Once the $500,000 limitation is 
exceeded, federal financial participation reverts to the standard fifty 
percent program reimbursement rate and procedure. In order to qualify 
for this funding, the State agency must:
    (i) Adhere to the standard of interoperability and portability 
adopted by a majority of State agencies for interoperability costs 
incurred for the period from February 11, 2000 through September 30, 
2002;
    (ii) Meet standards of interoperability and portability under 
paragraphs (e) and (h) of this section for costs incurred after 
September 30, 2002;
    (iii) Sign and submit, in each fiscal year for which the State 
agency requests enhanced funding, an Interoperability Funding Agreement 
to comply with the administrative procedures established by the 
Department. The State agency must submit the signed agreement to the 
Department before the end of the fiscal year in which costs are incurred 
in order to qualify for payment for that fiscal year, and
    (iv) Submit requests for payment on a quarterly basis after the end 
of the quarter in which interoperability costs are incurred, in 
accordance with the Department's administrative procedures. Requests for 
payments shall be due February 15 (for the period October through 
December), May 15 (January through March), August 15 (April through 
June), and November 15 (July through September). Requests for payment 
submitted after the required date for a quarter shall not be considered 
until the following quarter, when such requests for payments are 
scheduled to be processed.
    (l) Re-presentation. The State agency shall ensure that a manual 
purchase system is available for use during times when the EBT system is 
inaccessible.
    (1) Under certain circumstances, when a manual transaction occurs 
due to the inaccessibility of the host computer and the transaction is 
rejected because insufficient funds are available in a household's 
account, the State agency may permit the re-presentation of the 
transaction during subsequent months. At the State agency's option, re-
presentation may be permitted within the EBT system as follows:
    (i) Re-presentation of manual vouchers when there are insufficient 
funds in the EBT account to cover the manual transaction may be 
permitted only under the following circumstances:
    (A) The manual transaction occurred because the host computer was 
down and authorization was obtained by the retailer for the transaction; 
or
    (B) The manual transaction occurred because telephone lines were 
down.
    (ii) Re-presentation of manual vouchers shall not be permitted when 
the EBT card, magnetic stripe, PIN pad, card reader, or POS terminal 
fails and telephone lines are operational. Manual transactions shall not 
be utilized to extend credit to a household via re-presentation when the 
household's account balance is insufficient to cover the planned 
purchase.
    (iii) The State agency may debit the benefit allotment of a 
household following the insufficient funds transaction in either of two 
ways:

[[Page 865]]

    (A) Any amount which equals at least $10 or up to 10% of the 
transaction. This amount will be deducted monthly until the total 
balance owed is paid-in-full. State agencies may opt to re-present at a 
level that is less than the 10% maximum, however, this lesser amount 
must be applied to all households.
    (B) $50 in the first month and the greater of $10 or 10% of the 
allotment in subsequent months until the total balance owed is paid-in-
full. If the monthly allotment is less than $50, the State shall debit 
the account for $10.
    (2) The State agency shall establish procedures for determining the 
validity of each re-presentation and subsequent procedures authorizing a 
debit from a household's monthly benefit allotment. The State agency may 
ask households to voluntarily pay the amount of a re-presented 
transaction or arrange for a faster schedule of payment than identified 
in paragraph (l)(1)(iii) of this section.
    (3) The State agency shall ensure that retailers provide notice to 
households at the time of the manual transaction that re-presentation 
may occur if there are insufficient benefits in the account to cover the 
transaction. The statement shall be printed on the paper voucher or on a 
separate sheet of paper. The State agency shall also provide notice to 
the household prior to the month when a benefit allotment is reduced 
when a re-presentation is necessary. Notice shall be provided to the 
household for each insufficient transaction that is to be re-presented 
in a future month. The notice shall be provided prior to the month it 
occurs and shall state the amount of the reduction in the benefit 
allotment.
    (4) The Department shall not accept liability under any 
circumstances for the overissuance of benefits due to the utilization of 
manual vouchers, including those situations when the host computer is 
inaccessible or telecommunications lines are not functioning. However, 
the State agency, in consultation with authorized retailers and with the 
mutual agreement of the State agency's vendor, if any, may accept 
liability for manual purchases within a specified dollar limit. Costs 
associated with liabilities accepted by the State agency shall not be 
reimbursable.
    (5) The State agency shall be strictly liable for manual 
transactions that result in excess deductions from a household's 
account.
    (m) Store-and-Forward. As an alternative to manual transactions:
    (1) State agencies may opt to allow retailers, at the retailer's own 
choice and liability, to perform store-and-forward transactions when the 
EBT system cannot be accessed for any reason. The retailer would be able 
to forward the transaction to the host one time within 24 hours of when 
the system again becomes available. Should the 24-hour window cross into 
the beginning of a new benefit issuance period, retailers may draw 
against all available benefits in the account.
    (2) State agencies may also opt, in instances where there are 
insufficient funds to authorize an otherwise approvable store-and-
forward transaction, to allow the retailer to collect the balance 
remaining in the client's account, in accordance with the requirements 
detailed in this section. In States that elect not to give retailers 
this option, all store-and-forward transactions with insufficient funds 
will be denied in full.
    (i) State Agencies may elect to allow store and forward to provide 
remaining balances to retailers as follows:
    (A) The EBT processor may provide partial approval of the store-and-
forward transaction, crediting the retailer with the balance remaining 
in the account through a one-step process;
    (B) The transaction should be in accordance with the standard 
message format requirements for store and forward; and
    (C) Re-presentation, as described in paragraph (m) of this section, 
to obtain the uncollected balance from current or future months' 
benefits shall not be allowed for store-and-forward transactions.
    (n) Ownership rights and procurement requirements. (1) The State 
agency shall comply with the software and automated data processing 
equipment ownership rights prescribed under Sec.  277.13 and Sec.  
277.18(l) of this chapter.

[[Page 866]]

    (2) The State agency shall comply with the procurement standards 
prescribed under Sec.  277.18(j) of this chapter. Under service 
agreements, the procurement of equipment and services which will be 
utilized in a Food Stamp EBT system shall be conducted in accordance 
with the provisions set forth under Sec.  277.18(f) of this chapter.

[57 FR 11249, Apr. 1, 1992; 57 FR 44791, Sept. 29, 1992; Amdt. 378, 64 
FR 48938, Sept. 9, 1999; 65 FR 10678, Feb. 29, 2000; Amdt. 385, 65 FR 
33439, May 24, 2000; Amdt. 378, 65 FR 41325, July 5, 2000; Amdt. 384, 65 
FR 49724, Aug. 15, 2000; Amdt. 390, 65 FR 59110, Oct. 4, 2000; Amdt. 
384, 68 FR 37697, June 25, 2003; 70 FR 18270, Apr. 11, 2005; Amdt. 397, 
70 FR 72354, Dec. 5, 2005]