(a) Whenever an agency is required by section 553 of this title, or any other law, to publish general notice of proposed rulemaking for any proposed rule, or publishes a notice of the proposed rulemaking for an interpretive rule involving the internal revenue laws of the United States, the agency shall prepare and make available for public comment an initial regulatory flexibility analysis. Such analysis shall describe the impact of the proposed rule on small entities. The initial regulatory flexibility analysis or a summary shall be published in the Federal Register at the time of the publication of general notice of proposed rulemaking for the rule. . . .

(b) Each initial regulatory flexibility analysis required under this section shall contain –

(1) a description of the reasons why action by the agency is being considered;

(2) a succinct statement of the objectives of, and legal basis for, the proposed rule;

(3) a description of and, where feasible, an estimate of the number of small entities to which the proposed rule will apply;

(4) a description of the projected reporting, recordkeeping and other compliance matters . . .;

(5) an identification, to the extent practicable, of all relevant Federal Rules which may duplicate, overlap or conflict with the proposed rule.

There is no indication in the Federal Register notice for this proposed rule that a regulatory flexibility analysis was conducted. None of these statutory requirements have been met by the TTB. They have just been summarily dismissed as being irrelevant. Nothing could be farther from the truth. There is no mention of wholesale distributors or retailers, nor any acknowledgement that these proposed changes in the regulations would have any effect on the companies in the distribution chain.

The majority of wholesale distributors of tobacco products are "small entities." The members of the AWMA represent nearly all of the tobacco wholesale distributors in the United States. There are approximately 350 such companies which are AWMA members. Among these companies, the majority are small businesses, employing fewer than 50 people. Under the Small Business Administration’s North American Industry Classification System, a "small entity" in the wholesale trade is one with fewer than 100 employees.

AWMA members submit that there are substantial additional costs which they will suffer if these proposed changes are adopted. The AWMA members anticipate that the proposed change in definitions would result in a number of tobacco products now labeled and sold as "cigars" will be classified as "cigarettes." This has the potential to be a very costly change for the distribution industry which is unique to tobacco products. The possible burden arises from the tax stamping process itself. The industry has developed highly specialized and highly efficient machines, each costing well over $100,000, to uniformly affix revenue stamps to packages of cigarettes, with a very low rate of error. The process is largely automated, using specially designed machines to open ten-pack cartons of cigarettes, affix a stamp on every pack, and close the carton. The efficiency of the machines depends on the uniformity of the product and its packaging.

In the experience of the wholesale distributors, the products and packaging of small cigars are not uniform. If the packs of small cigars vary in any dimension, they cannot go through the stamping machines, or they can be handled only after time-consuming alterations and adjustments to the machines. Any stop in the production line is of course very expensive. Any recalibration, even if possible, will cost thousands of dollars to the industry, an event not considered when the subject regulations were proposed.

Not only does this put an added cost on the stamping of odd-sized products, but it also carries a significant lost opportunity cost to the companies responsible for affixing stamps. When a machine is slowly stamping little cigar packs, it cannot be rapidly stamping cigarette packs. Increased stamping time will be involved. AWMA member companies have advised that, if the current TTB proposal is adopted, they anticipate the need to hire employees for additional shifts or to purchase additional stamping machines. These economic factors were not considered by the TTB when the proposal was issued.

The proposed changes in the definitions of cigarette and cigar will result in a number of products now classified as "cigars" to be treated as "cigarettes" for tax purposes. For instance, the proposed definition of "cigarette" includes any product containing burley tobacco filler. The Cigar Association of America estimates that over 20 percent of large cigars contain burley tobacco filler. These cigars are known as pipe-tobacco cigars. It is unlikely that stamping machines designed for cigarettes could even be reconfigured to stamp such products. The only other alternative would be manual stamping, a cost prohibitive process. The result would be to make a legal product inaccessible to the consuming product.

State revenue agencies partially reimburse tobacco distributors for the stamping costs for affixing the state’s cigarette stamps. In a majority of states, the reimburse is in the range of about 1 to 3 percent of the value of the stamps. Recent analyses by a few of the tobacco distributor members of AWMA have shown that the stamp discount offered by the states does not cover the full cost of the stamping operations. Despite the speed and efficiency of the stamping equipment, the distributors lose money on every pack of cigarettes they stamp. Of course, the wholesale distributor intends to make up that loss in its pricing, but the cost per unit of stamping little cigars is much higher.

Sec. 553(c) of the Administrative Procedure Act requires that the final rule include a "concise general statement of [its] basis and purpose." Although this is not a requirement for the proposed rule, the TTB should be laying the foundation for the concise statement in the notice and comment period. AWMA fails to understand the basis for these proposed changes. What is the purpose or goal of these proposed changes, i.e., the benefit to be gained? TTB suggests there is "confusion" about the definitions of cigarette and little cigars (71 Fed. Reg. at 62515), which may result in "possible revenue losses" (71 Fed. Reg. at 62506), but no evidence is offered that there have been any revenue losses suffered by the Treasury Department or by any state agency, and the possible magnitude of the losses is not touched upon. We do not see that the agency has offered any justification for the change in definitions. Without evidence of a real problem, of significant proportions, the disruptions and dislocations that this change would cause are not justified and should not be pursued.

The preamble to the proposed rule also describes three petitions received from the tobacco industry and state attorneys general. It appears that this proposed rule was motivated primarily by those petitions – TTB decided that the way to respond to the petitions is to publish this proposed rule – rather than by a regulatory need of the federal agency. TTB’s justification for changing the definitions is that these three petitioners assert that there is a problem. But the examples of problems cited by petitioners are related to either the Master Settlement Agreement (MSA) or public health concerns. As TTB correctly states, these are matters that are outside the scope of its authority (71 Fed. Reg. at 62516). Neither MSA fees nor public health responses can be a lawful basis for changing a federal excise tax law.

It is improper for the Government to effectively ban a legal product from the consuming product through an unsubstantiated, "back door" regulatory event such as proposed here through some artificial and heretofore unimaginable regulatory process combining tobacco sugar content with state cigarette taxing authority. It appears that this is another attempt by certain elements of the Federal government to restrict the availability of certain tobacco products through the regulatory process. The effect is that the Government again is effectively attempting to restrict if not outright ban many types of legal little cigars from the consumer. The Government and governmental authorities have no legal basis to effect its anti tobacco policies through the use of a tax which is happening in this instance.

AWMA and its members remain available to assist with any questions.