Monday, January 3, 2005

Part III

Department of the Treasury and Tobacco Tax and Trade Bureau

27 CFR Parts 7 and 25 Flavored Beverage and Related Regulatory Amendments (2002R–044P); Final Rule

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DEPARTMENT OF THE TREASURY III. Discussion of Specific Proposals in TTB A. Information Quality Act Notice No. 4 B. ‘‘Alcohol is Alcohol’’ Alcohol and Tobacco Tax and Trade A. Standard for Added Alcohol and C. Marketing of FMBs to Underage Bureau Alcohol from Fermentation Drinkers B. Proposed 0.5% Added Alcohol by D. More Explicit Labeling of FMBs Volume Standard for ‘‘’’ under the E. Establishing Another Category of 27 CFR Parts 7 and 25 IRC Alcohol Beverages [TTB T.D.–21; Re: TTB Notice No. 4] C. Proposed 0.5% Added Alcohol by F. Other Comments Volume Standard for Malt Beverages XIV. Implementation Dates RIN 1513–AA12 under the FAA Act A. Effective Date for Compliance with the D. Alternative 51/49 (Majority) Alcohol New Added Alcohol Standard Flavored Malt Beverage and Related Standard B. Effect on Products in the Marketplace Regulatory Amendments (2002R–044P) E. Proposed Alcohol Content Labeling C. Additional TTB Comment on the Statement for Flavored Malt Beverages Effective Date AGENCY: Alcohol and Tobacco Tax and F. Use of Distilled Spirits Terms in Malt XV. Comments on the Proposed Regulatory Trade Bureau, Treasury. Beverage Labeling and Advertising Text; Regulatory Text Changes G. Filing Formulas for Fermented A. Reference to Malt Beverage Standards, ACTION: Final rule; Treasury decision. Beverages §§ 7.10 and 7.11 H. Samples; Formulas and Samples for B. Comments on Alcohol Flavoring SUMMARY: The Department of the Imported Malt Beverages Material Reference, §§ 7.11 and 25.15 Treasury and its Alcohol and Tobacco I. Other Issues Raised in Notice No. 4 C. Malt Beverages Above 6.0% Alc/Vol; Tax and Trade Bureau adopt as a final IV. Rulemaking History Status of ATF Ruling 96–1 rule certain proposed changes to the V. Comments Received in Response to Notice D. Changes to § 7.31 regulations concerning the production, No. 4 E. Reference to Standards for Beer, §§ 25.11 taxation, composition, labeling, and A. General Discussion of Comments and 25.15 advertising of beer and malt beverages. B. Overview of Comments F. Other § 25.15 Issues This final rule permits the addition of C. Summary of TTB Final Rule Decisions G. Comments on Formula Proposals, and other nonbeverage materials VI. Comments on Whether the Rulemaking Is §§ 25.55–25.58 Necessary and Fair XVI. Regulatory Analysis and Notices containing alcohol to and malt A. Is There a Need to Engage in A. Executive Order 12866 beverages, but, in general, limits the Rulemaking on this Issue? B. Regulatory Flexibility Act alcohol contribution from such flavors B. Fairness and Notice Issues C. Paperwork Reduction Act and other nonbeverage materials to not VII. Regulatory Burden and Cost-Related XVII. Drafting Information more than 49% of the alcohol content of Issues XVIII. List of Subjects the product. However, if a malt beverage A. Costs of Complying with the Proposed XIX. Amendments to the Regulations 0.5% Standard contains more than 6% alcohol by Notes to Readers volume, not more than 1.5% of the B. Effect on Current Products and New volume of the finished product may Product Development A. ATF–TTB Transition C. Effect on Competition consist of alcohol derived from flavors D. Effect on the Retail Licensing System Effective January 24, 2003, section and other nonbeverage ingredients that and Overall Marketplace 1111 of the Homeland Security Act of contain alcohol. This final rule also E. TTB Response 2002 (Public Law 107–296, 116 Stat. amends the regulations relating to the VIII. The 0.5% Standard vs. the 51/49 2135), divided the Bureau of Alcohol, labeling and advertising of malt Standard—Other Issues Tobacco and Firearms (ATF) into two beverages, and adopts a formula A. Comments in Favor of the 0.5% new agencies, the Alcohol and Tobacco requirement for beers. Standard Tax and Trade Bureau (TTB) in the We issue this final rule to clarify the B. Comments in Favor of the 51/49 Department of the Treasury, and the status of flavored malt beverages under Standard C. TTB Response Bureau of Alcohol, Tobacco, Firearms the provisions of the Internal Revenue IX. State Concerns and Explosives in the Department of Code of 1986 and the Federal Alcohol A. Comments by State Regulatory Agencies Justice. The regulation and taxation of Administration Act related to the B. Other Comments in Support of the 0.5% alcohol beverages remains a function of production, composition, taxation, Standard the Department of the Treasury and is labeling, and advertising of alcohol C. Other Comments in Support of the 51/ the responsibility of TTB. References to beverages. This final rule also will 49 Standard the former ATF and the new TTB in this ensure that consumers are adequately D. TTB Response document reflect the time frame, before informed about the identity of flavored X. Mandatory Alcohol Content Labeling for or after January 24, 2003. malt beverages. FMBs A. Comments Supporting the Proposal B. Use of Plain Language DATES: This rule is effective January 3, B. Other Comments 2006. C. TTB Response In this document, ‘‘we,’’ ‘‘our,’’ and ‘‘us’’ refer to the Department of the FOR FURTHER INFORMATION CONTACT: XI. Use of Distilled Spirits Terms on Labels Charles N. Bacon, Alcohol and Tobacco and in Advertisements Treasury and/or the Alcohol and Tax and Trade Bureau, Regulations and A. Comments Received Tobacco Tax and Trade Bureau (TTB). B. TTB Response Procedures Division, P.O. Box 5056, ‘‘You,’’ ‘‘your,’’ and similar words refer XII. New Formula Requirements to members of the alcohol beverage Beverly Farms, MA 01915; telephone A. Fermented Products Requiring Formulas (978) 921–1840. industry and others to whom TTB under § 25.55 regulations apply. SUPPLEMENTARY INFORMATION: B. Standards for Formula Approval C. Alcohol Information in Formulas I. Background Information Table of Contents D. Reasonable Range of Ingredients Notes to Readers E. Formula Confidentiality Flavored malt beverages are A. ATF–TTB Transition F. Standard Form for Formulas products that differ from traditional B. Use of Plain Language G. Formula Proceedings malt beverages such as beer, , , I. Background Information H. Placement in the CFR , , or malt in several II. TTB Notice No. 4 XIII. Other Issues Raised by Commenters respects. Flavored malt beverages

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exhibit little or no traditional beer or set forth guidance on the labeling and most of the flavored malt beverages malt beverage character. Their is advertising of flavored malt beverages studied was derived from alcohol derived primarily from added flavors and again reiterated its intention to flavoring materials and that in some rather than from malt and other engage in rulemaking on the use of cases this figure rose to more than 99%. materials used in fermentation. At the alcohol flavoring materials in the In contrast, the alcohol derived from same time, flavored malt beverages are production of malt beverages. flavors constituted 50% or less of the marketed in traditional beer-type In the interim, State regulatory and overall alcohol in only 4 of the 114 and cans and distributed to the alcohol taxation agencies started to express products studied. beverage market through beer and malt concerns about the status of flavored beverage wholesalers, and their alcohol malt beverages, and these agencies Based on the study’s results, ATF also content is similar to other malt requested that ATF or TTB take action concluded that most flavored malt beverages—in the 4-6% alcohol by to clarify the status of these products as beverages contained very little actual volume range. either malt beverages or distilled spirits. beer base. Only 15 out of the 114 Although flavored malt beverages are In 2002, ATF examined the flavored malt beverages studied produced at , their method of formulation of 114 alcohol beverage contained 51% or more by volume production differs significantly from the products labeled and marketed as fermented beer; the remaining volume production of other malt beverages and flavored malt beverages. ATF undertook of those 15 products consisted of beer. In producing flavored malt this study to find out how these flavors, water, and other ingredients. beverages, brewers brew a fermented products were produced, what Two of the flavored malt beverages base of beer from malt and other ingredients were used, and from where studied contained only 1% fermented materials. Brewers then treat the alcohol in them was derived. This beer by volume. this base using a variety of processes in study did not examine malt beverages order to remove malt beverage character labeled and marketed as flavored beers, II. TTB Notice No. 4 from the base. For example, they remove flavored , and so forth (such as the color, bitterness, and generally ‘‘cherry beer’’ or ‘‘’’) since On March 24, 2003, we proposed a associated with beer, ale, porter, stout, these types of malt beverages typically number of regulatory changes and other malt beverages. This leaves a have the character of malt beverages and concerning beer and malt beverages in base product to which brewers add their alcohol is derived primarily from TTB Notice No. 4 (published in the various flavors, which typically contain fermentation. The major results of the Federal Register at 68 FR 14292; distilled spirits, to achieve the desired study are set forth in the tables below: corrected at 68 FR 15119). Among other taste profile and alcohol level. things, Notice No. 4 solicited comments While the alcohol content of flavored TABLE 1.—ALCOHOL DERIVED FROM on whether certain products marketed malt beverages is similar to that of most ADDED ALCOHOL FLAVORING MATE- as flavored malt beverages should be traditional malt beverages, the alcohol RIALS classified as malt beverages or distilled in many of them is derived primarily spirits products under the Federal from the distilled spirits component of Number of Alcohol Administration Act (FAA Act) the added flavors rather than from Alcohol percentage derived flavored and the Internal Revenue Code of 1986 fermentation. A review of approved from added alcohol favors malt beverages (IRC). We recognized that the answer to formulas showed that more than 99% of this question would affect the rate of tax the alcohol in some flavored malt 0–25% ...... 4 applicable to these products, the beverages was derived from added 26–0% ...... 0 premises on which they may be flavorings containing distilled spirits 51–75% ...... ≤5 instead of from fermentation at the 76–100 ...... 105 produced, and the way that the products brewery. are labeled, advertised and marketed. Flavored malt beverages are sold Maximum alcohol derived from Furthermore, their classification as malt under many proprietary names and added alcohol flavors: beverages or as distilled spirits under 99.98%. Total: 114 include alcohol beverages such as Federal law could affect State oversight alcoholic lemonades, alcoholic colas, and control of these products, since cooler-type products, and other flavored TABLE 2.—VOLUME OF BEER BASE many States follow the Federal alcohol beverages. In recent years, PRESENT IN FLAVORED MALT BEV- classification of alcohol beverages. brewers have partnered with distilled ERAGES Notice No. 4 included a proposal to spirits producers in order to label limit the quantity of alcohol derived flavored malt beverages using Number of from added flavors or other ingredients prominent distilled spirits brand names. Volume of flavored malt bev- flavored erage derived from fermented containing alcohol to less than 0.5% In ATF Ruling 96–1 (ATF Quarterly beer base malt Bulletin 1996–1, p. 49), our predecessor beverages . The notice also agency announced its intention to requested comments on an alternative 0–25% ...... 95 standard requiring that a malt beverage engage in rulemaking on the issue of 26–50% ...... 4 whether it should consider the 51–75% ...... 1 derive a minimum of 51% of its alcohol prohibition, restriction, or limitation of 76–100% ...... 14 content from fermentation at the the use of flavor materials containing brewery, thus allowing no more than alcohol at any stage in the production of ATF concluded that the great majority 49% of the alcohol content to be derived malt beverages. Pending rulemaking, the of the alcohol in most flavored malt from added flavors containing alcohol. ruling held that for malt beverages with beverages was not derived from As discussed below, Notice No. 4 also an alcohol content in excess of 6% fermentation of malt and grain. Instead, included proposed amendments to the alcohol by volume, a maximum of 1.5% most of the alcohol in these products regulations involving the filing of alcohol by volume could be derived was derived from distilled spirits formulas, and the labeling and from alcohol flavoring materials. Six contained in added alcohol flavors. ATF advertising of malt beverages. years later, in ATF Ruling 2002–2, ATF found that over 75% of the alcohol in

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III. Discussion of Specific Proposals in ingredients containing alcohol. As a its predecessor agencies have allowed TTB Notice No. 4 consequence of the proposed new these ingredients in malt beverage section, those products would be taxed A. Standard for Added Alcohol and products. and classified as distilled spirits. This Alcohol From Fermentation TTB and its predecessor agencies proposed section also would allow the have rarely examined the question of In Notice No. 4, we proposed to use of malt, malted grains other what constitutes ‘‘wholesome food delineate how much of the alcohol than barley, unmalted grains, , content of a beer or malt beverage must syrups, molasses, honey, fruit, fruit products’’ under the FAA Act, other be derived from fermentation at the juice, fruit concentrate, herbs, spices than to state that the ingredients added brewery, and how much of the product’s and other food materials in the to malt beverages must be recognized as alcohol content may be derived from production of a beer. It did not provide safe for food use by the Food and Drug alcohol added through the use of flavors any standards for the use of these Administration and must have some and other ingredients containing ingredients. intended purpose in malt beverage alcohol. In Notice No. 4, TTB noted that this production. We and our predecessor Neither the IRC nor the FAA Act 0.5% alcohol standard had long been agencies have considered flavorings provides specific limits on the quantity used to determine whether a beverage is containing distilled spirits to be of flavors that may be added to beer or considered an alcohol beverage. For wholesome food products and have malt beverages; nor does either statute example, many beverages, including allowed their use in producing malt set forth how much of the alcohol juice, soft drinks, and soda, contain a beverages. content of those products must result small amount of alcohol derived from The use of flavors containing distilled from fermentation at the brewery. While the use of flavoring materials containing neither statute expressly sanctions the distilled spirits. As long as the overall spirits can introduce a significant direct addition of distilled spirits or alcohol content of the product is below amount of distilled spirits into a malt other alcohol to beer or malt beverages, 0.5% alcohol by volume, these products beverage. Adding alcohol or distilled TTB and its predecessor agencies, as set are not considered alcohol beverages, spirits in this fashion reduces the need forth in ATF Rulings 96–1 and 2002–2, and are not taxed as such. If the alcohol to use fermented malt in the production have historically allowed flavors, content of the a product reaches 0.5% of a malt beverage in order to attain including flavors containing alcohol, to alcohol by volume, the product would alcohol content. When carried to be added to these products. be subject to the tax imposed on extremes, this practice results in a In Notice No. 4, TTB suggested that distilled spirits products, since it would product in which most of the alcohol the definition of ‘‘beer’’ in the IRC, fall within the statutory definition of a content is derived from added flavors which refers to beer, ale, porter, stout, distilled spirits product. rather than from fermentation at a and ‘‘other similar fermented brewery. beverages,’’ requires that a product C. Proposed 0.5% Added Alcohol by Based on the above considerations, derive a substantial portion of its Volume Standard for Malt Beverages we stated in Notice No. 4 our belief that alcohol from fermentation at a brewery Under the FAA Act since the definition does not In Notice No. 4, TTB proposed adding the definition of a malt beverage in the contemplate a product that derives most to the regulations a new § 7.11 (27 CFR FAA Act supports limiting the amount of its alcohol content from distilled 7.11) that would classify a fermented of alcohol that is not ‘‘made by the spirits. As the ATF study referred to product as a malt beverage only if it alcoholic fermentation * * * of malted above demonstrated, few products contains less than 0.5% alcohol by barley with .’’ Further, we stated marketed as flavored malt beverages volume derived from flavors or other our belief that labeling a beverage that derive a substantial portion, or even a ingredients containing alcohol. This derives most of its alcohol content from bare majority, of their alcohol content proposed section would also have added alcohol flavors as a malt beverage from fermentation. explicitly permitted filtration or other is inherently misleading since We also stated that a similar standard processing to remove color, taste, aroma, consumers expect that malt beverages should apply to the definition of a ‘‘malt bitterness, or other characteristics derive a significant portion of their beverage’’ under the FAA Act. The FAA derived from fermentation. We alcohol content from fermentation of Act defines a malt beverage as a product specifically solicited comments on this barley malt and other ingredients at the made from the fermentation of malted proposed standard and on any other brewery. barley with the addition of hops. While standard that might be consistent with the definition in the FAA Act allows for the FAA Act definition of a malt D. Alternative 51/49 (Majority) Alcohol the addition to malt beverages of ‘‘other beverage. Standard Notice No. 4 noted that the FAA Act’s wholesome food products’’ such as Although Notice No. 4 stated that flavors, we stated that we do not believe definition of ‘‘malt beverage’’ was intended to cover all products made by both the IRC and the FAA Act would that Congress intended for these added support a 0.5% added alcohol standard, materials to represent the dominant brewers at the time of the enactment of it also stated that the IRC would support source of a product’s alcohol content. that Act in 1935. As already noted above, this definition requires that a the issuance of a regulation requiring B. Proposed 0.5% Added Alcohol by malt beverage be made from the that a beer or malt beverage product Volume Standard for ‘‘Beer’’ Under the fermentation of malted barley with must derive a majority of its alcohol IRC hops, with or without the addition of content from fermentation at the In Notice No. 4, TTB proposed adding ‘‘other wholesome food products.’’ For brewery. Accordingly, TTB sought to the regulations a new § 25.15 (27 CFR years, brewers have used many comments on both the 0.5% standard 25.15) that would have the effect of substances, including starches, sugars, and a 51/49 standard, which would treating as a distilled spirits product any honey, fruits, flavors (including those allow up to 49% of the alcohol in a beer fermented product that contains 0.5% or containing alcohol), colors, and or malt beverage to be derived from more alcohol by volume derived from to aid in fermentation, clarification, and flavors or other materials containing flavors, taxpaid wine, or other preservation of malt beverages. TTB and alcohol.

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E. Proposed Alcohol Content Labeling to the type size requirements in 27 CFR Center in Cincinnati, Ohio, as part of the Statement for Flavored Malt Beverages 7.28. Brewer’s Notice for any fermented beverage that the brewer intends to F. Use of Distilled Spirits Terms in Malt In Notice No. 4, TTB suggested that, market under a name other than ‘‘beer,’’ Beverage Labeling and Advertising due to the unique character of these new ‘‘lager,’’ ‘‘ale,’’ ‘‘porter,’’ ‘‘stout,’’ or types of flavored malt beverages, many Notice No. 4 pointed out that some ‘‘.’’ Under 27 CFR 25.76, a consumers have limited experience with newer flavored malt beverages use the brewer must file an amended Brewer’s them. At the same time, due to their names of well-known brands of distilled Notice if there are changes to an label appearance and the use of the spirits as part of their own brand names. approved statement of process. When a brand names of well-known distilled The labels of these flavored malt brewer files a statement of process with spirits products, TTB believed that beverage brands are often designed to the National Revenue Center, a consumers are likely to be confused as resemble the labels of the distilled specialist at TTB’s Advertising, Labeling to the actual alcohol content of the spirits brand used in their names. In and Formulation Division in products. TTB suggested that consumers addition, when first introduced, some of Washington, DC, examines the proposed are likely to assume that some flavored these flavored malt beverages bore label statement of process to ensure that malt beverages are high in alcohol statements referring to the class and authorized materials will be used, to content like the distilled spirits type of distilled spirits used in determine the correct class and type, products whose brand names they bear. producing the nonbeverage-flavoring and to ensure that the fermented Likewise, while other brands of flavored component. For these reasons, a number product may be made at a brewery. malt beverages are not labeled with of State regulatory and taxing Notice No. 4 proposed significant distilled spirits brand names, their authorities questioned the classification changes to the filing requirements labeling or packaging, which often of flavored malt beverages and described above. These changes resembles that of nonalcoholic requested that we take action to clarify included the removal of §§ 25.62(a)(7), beverages such as juices, sodas, bottled their status as either malt beverages or 25.67 and 25.76 and the addition of new water, and energy drinks, is likely to distilled spirits. §§ 25.55 through 25.58 (27 CFR 25.55 confuse consumers as to their identity As previously noted, ATF Ruling through 25.58). These changes would: as alcohol beverages. 2002–2 clarified permissible labeling • Replace the statement of process and advertising practices for flavored To avoid consumer confusion over the requirements found at §§ 25.62(a)(7) and malt beverages, and gave brewers and alcohol content in flavored malt 25.67 with a formula requirement; importers labeling guidelines to prevent • beverages, we proposed the addition of Describe more clearly the fermented the misleading impression that flavored a new paragraph (a)(5) in § 7.22, (27 CFR products for which a formula is malt beverages are distilled spirits or 7.22), setting forth a mandatory necessary; contain distilled spirits. Notice No. 4 • requirement to state on the brand label Require brewers to provide specific proposed to incorporate the holdings of the alcohol content of any malt beverage information about ingredients, the ruling in a new 27 CFR 7.29(a)(7) for that contains any alcohol derived from processes, and alcohol content in labeling purposes and a new 27 CFR added flavors or other ingredients formulas; 7.54(a)(8) for advertising purposes. • containing alcohol. We suggested that Allow brewers to file formulas These proposed provisions would add this requirement would help consumers directly with the Advertising, Labeling to the malt beverage regulations identify these products as alcohol and Formulation Division in language similar to that found in the beverages and would help consumers to Washington, DC; FAA Act wine regulations regarding • Permit brewers to produce certain understand that their alcohol content is distilled spirits statements. The fermented beverages solely for research similar to that of traditional malt proposed language would prohibit and product development purposes beverages. This alcohol content labeling labeling and advertising statements that without having to receive formula would also draw attention to any imply that malt beverages are similar to approval; flavored malt beverages that might lie distilled spirits or that malt beverage • Allow brewers to file formulas to outside the customary 4 to 6% alcohol products are made with, or contain, cover production at multiple breweries; by volume range for malt beverages. For distilled spirits. and example, if a flavored malt beverage The two new provisions in question • Allow brewers to file superseding contained 10% alcohol by volume, would allow the use of a brand name of formulas. alcohol content labeling would inform a distilled spirits product as the brand Proposed § 25.55 would require the consumers about this important fact. name of a malt beverage. However, the filing of a formula with TTB for Since there is no provision in the TTB proposed provisions would have the specified products made at a brewery, regulations that uniquely identifies effect of prohibiting the use of a including ´, flavored sake´, and flavored malt beverages, we proposed distilled spirits brand name in any other sparkling sake´. A formula also would be that the mandatory alcohol content malt beverage labeling or advertising required for products to which any labeling apply to any malt beverage that context. The use of a cocktail name as coloring or natural or artificial flavors contains alcohol from a source other a brand name or fanciful name would be are added, or for any product to which than fermentation at the brewery. For permitted if the malt beverage’s overall fruits, herbs, spices or honey are added. example, if a brewer adds a flavoring formulation, label, or advertisement did This new section also would require the containing alcohol to a malt beverage, not present a misleading impression filing of a formula for any fermented whether it is labeled as a flavored malt about the identity of the product. product that undergoes special beverage, as a flavored beer or ale, or as processing or filtration, or undergoes a specialty malt beverage product, the G. Filing Formulas for Fermented any other process not used in traditional requirement to display alcohol content Beverages brewing. The proposed § 25.55 text on the brand label would apply. We Notice No. 4 noted that the TTB included examples of processes that proposed no changes to the form of the regulations at 27 CFR 25.62 and 25.67 would require the filing of a formula, alcohol content statement, to the require brewers to file a statement of including reverse osmosis, ion exchange tolerances provided in 27 CFR 7.71, or process with TTB’s National Revenue treatments, filtration that changes the

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character of beer or removes material of formulas would be easier and less market could be made under the from beer, concentration or confusing than the present statement of proposed 0.5% added alcohol standard. reconstitution of beer, and freezing or process requirement. Finally, as previously noted, TTB superchilling of beer. However, the H. Samples; Formulas and Samples for requested comments on whether proposed Notice No. 4 text would not Imported Malt Beverages another standard, such as a standard require filing a formula for traditional requiring that a minimum of 51% of the brewing processes such as Notice No. 4 also included a proposed alcohol in a malt beverage be derived pasteurization, filtration prior to new section, § 25.53 (27 CFR 25.53), from fermentation at the brewery (in bottling, filtration in lieu of specifically authorizing a TTB officer at other words, setting a maximum limit of pasteurization, centrifuging (for any time to require the submission of 49% for the alcohol content derived clarification), lagering, carbonation and samples. This section recognized TTB’s from added flavors or other materials), the like. authority to require a brewer to submit would be more appropriate than the Notice No. 4 also proposed more a sample of a beer or a material used in proposed 0.5% added alcohol standard. specific requirements for the producing a beer. For example, we We asked for supporting data, facts, or information required in formulas, occasionally examine samples of beer or studies to back up any suggestions or especially in the realm of flavoring ingredients in connection with our comments for different added alcohol materials and special processes. review of statements of process or standards. Since we recognized that any Proposed § 25.57 spelled out in more formulas and in order to determine the new standard would constitute a detail the information required in proper tax classification of fermented substantial change from existing formulas, and included requirements products. regulations and policy, we also sought Finally, Notice No. 4 also included a found in ATF Rulings 94–3 (which comments on the amount of time proposed amendment to § 7.31 (27 CFR concerned the production of ), needed to comply with any new rule 7.31) to reflect TTB’s statutory authority 96–1, and 2002–2. In keeping with the limiting the amount of alcohol that may current practice of listing ranges of to require an importer to submit a formula for a malt beverage, or a sample be added to products taxed as beer. ingredients in statements of process, Notice No. 4 encouraged comments on proposed § 25.57(a)(1) would permit of a malt beverage or materials used in producing a malt beverage, in the amount of time necessary to develop brewers to indicate a ‘‘reasonable range’’ and implement new formulas for these of ingredients used in formulas. connection with the filing of a certificate of label approval on TTB products and the possible costs However, in order to establish a useful involved. limit, Notice No. 4 requested comments Form 5100.31. This proposal recognized on how to define a ‘‘reasonable range’’ the fact that, occasionally, TTB has had IV. Rulemaking History for the quantity of ingredients used in to examine a statement of process or analyze samples of a malt beverage in Notice No. 4 provided for the making fermented products. Also in submission of comments through June keeping with current policy that permits order to determine the proper 23, 2003. At the request of the E. & J. using special processes in making classification of a product, whether a Gallo Winery, on June 2, 2003, we fermented products, the proposed particular product is a malt beverage, or published Notice No. 10 (68 FR 32698) § 25.57 text specifically permitted such whether a product is correctly labeled to extend the period for the submission special processes, but required brewers under the part 7 regulations. of comments for an additional 120 days, to describe them in detail in their I. Other Issues Raised in Notice No. 4 until October 21, 2003. formulas. As noted in Notice No. 4, § 25.67 In addition to the very specific In Notice No. 4 we stated our requires brewers to file a statement of proposals made by Notice No. 4, TTB intention to place all comments on the process prior to producing any requested comments and information on TTB Web site on the Internet. We stated fermented product at the brewery that is a number of general topics relating to that the names of commenters would be not to be marketed under a traditional the production and labeling of flavored included in the posting of comments on designation. This regulation does not malt beverages. our Web site, but that street addresses, provide any exception permitting TTB requested comments on the telephone numbers, or e-mail addresses research or development of fermented proposed 0.5% added alcohol standard would be deleted on these postings. We products without a statement of process. for beer. Specifically, we solicited did state that this information would With the removal of § 25.67, a brewer information regarding any studies, appear on copies of comments available could produce certain fermented laboratory trials, or other empirical data in the TTB reference library in beverages for research and development that may have existed for added alcohol Washington, DC. purposes under proposed § 25.55(c)(2) in flavored malt beverages. We also Due to the large number of comments, without receiving formula approval; sought comments on how adoption of we were unable to redact street address, however, a brewer could not sell or the proposed standard would affect the telephone number, or e-mail address market such products until receiving taste, shelf life, stability, or other information from the comments we formula approval. characteristics of flavored malt posted on our Web site. Redacting this Proposed § 25.55(e) stated that beverages. In addition, we sought information from the large number of previously approved statements of comments on whether production comments received would have process would remain valid after practices are available to produce prevented us from posting comments on adoption of the new regulation, flavored malt beverages with the desired the Web site in a timely manner. provided that the finished product is in product profile that would comply with Therefore, we issued TTB Notice No. 23 compliance with any new requirements the proposed standard. We also solicited on December 2, 2003 (68 FR 67388). relating to the definition of beer. comments relating to the effect of the This notice advised the public of our The proposed formula regulations did proposed regulation on the viability of inability to redact the information from not specify any Government form to be products currently on the market. comments posted on the Web site and used for their filing. TTB also solicited Notice No. 4 further stated that we were provided an opportunity for comments on whether the proposed particularly interested in comments commenters to request that we redact regulations on the preparation and filing addressing whether products on the this information from their individual

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comments if we received their request to commenters stated that the proposed • Over 4,000 e-mail submissions do so by December 23, 2003. standard is the best way to maintain came from consumers of FMBs. These clear distinctions between beer and comments opposed the proposed rule V. Comments Received in Response to liquor (distilled spirits) and to preserve and suggested that there was no need to Notice No. 4 the flavored malt beverage category. amend the regulations. Many of the A. General Discussion of Comments • Over 2,000 comments were received commenters stated that they like FMBs just the way they are and that the Before the close of the comment from beer distributors across the United proposed changes will be expensive and period, TTB received over 15,000 States. Many of these commenters stated will result in increased costs to comments in response to Notice No. 4. that the proposed rule is consistent with the historical interpretation of what consumers. Of these, over 14,000 consisted of • Over 600 comments came from variations on several form letters, which constitutes beer and other malt beverages. They suggested that beer is a employees of a large producer of FMBs. were submitted by mail, facsimile These commenters opposed the transmission, or e-mail. unique product that has been regulated and taxed differently from other alcohol proposed rule and suggested TTB In addition, we received over 1,000 instead adopt the ‘‘51% compromise.’’ comments after the close of the beverages throughout our Nation’s history. The commenters advocated The commenters suggested that comment period. Due to the large compliance with the proposed standard volume of comments received in adopting the proposed 0.5% standard in order to ensure the integrity of beer and would cost millions of dollars in new response to Notice No. 4, and because equipment purchases, reformulation of of the need to provide expeditious the brewing process. They also stated that the proposed rule would help products, and development of new guidance to State regulatory agencies, processes. They urged TTB to adopt the industry, and consumers on this maintain an orderly marketplace and avoid costly and confusing disruptions regulations that promote fair issue, we determined that it was not competition and provide a level playing practical to consider the late-filed in State licensing, taxation, and distribution policies, any of which field, and they suggested the proposed comments. rule would mark a dramatic change in Most of the comments focused on the would deal a blow to beer wholesalers. • Approximately 900 comments were how these products have been proposed 0.5% standard or the 51/49 produced, marketed, and sold for 30 standard for beer and malt beverages. In received from individuals who identified themselves as employees of years. Finally, the commenters stated particular, the ‘‘form letter’’ comments, that the proposed rule could regulate which made up the vast majority of the another major brewer. These comments supported the proposed rule as a FMBs out of the marketplace, depriving comments, generally commented for or consumers of a drink they enjoy, costing clarification that will ensure that if against the proposed rule, and either millions in tax revenue, and resulting in FMBs were sold as malt beverages, they explicitly or implicitly commented on the loss of thousands of jobs. the standard for added alcohol. The would be made according to traditional • Over 400 small retailers located hundreds of comments received from brewing methods and practices. The across the United States expressed their State legislators also focused primarily commenters suggested that without the opposition to the ‘‘new regulations’’ and on this issue. While Notice No. 4 proposed rule, retailers and wholesalers ‘‘rule changes.’’ Many of these retailers solicited comments on whether there would face a patchwork of individual asked TTB to reach a ‘‘compromise’’ was a different standard that would be State laws and regulations. • that would allow FMBs to remain in appropriate, only a few comments Over 170 submissions came from existence. The commenters suggested addressed this question. beer consumers located primarily in two that the regulatory changes would raise Furthermore, only a small percentage States. Many of these commenters stated the price of FMBs, sabotage this of the total comments focused on issues that the proposed rule would provide a category of products by making it such as alcohol content statements or clear understanding to legislators, State impossible or costly to sell them, and formula requirements. Accordingly, the and Federal regulators, and beer adversely impact small businesses. following breakdown of comments consumers as to what beer is and what • More than 40 comments were focuses on the commenters’ position on beer is not. received from employees of FMB • the proposed 0.5% standard. More than 50 employees of a distributors. These commenters opposed domestic subsidiary of a foreign brewer the 0.5 percent standard and urged TTB B. Overview of Comments expressed their support for the proposed to adopt a ‘‘more reasonable’’ majority In the following comment discussion, rule. They suggested that the proposed standard instead. The commenters the abbreviations ‘‘FMB’’ and FMBs’’ are rule would maintain an orderly focused on the potential impact of the used in place of ‘‘flavored malt marketplace, meet consumer proposed rule on the future of FMB beverage(s).’’ expectations for consistent products, producers and the businesses that rely and help sustain the long-term on the viability of these products. 1. Form Letters development of the product category. Of the over 14,000 form letter These commenters suggested that the 2. Other Comments submissions referred to above, over reformulated products would be FMB Producers. We received 8,000 supported adoption of the consistent with State tax, license, and comments from several major producers proposed 0.5 percent standard and over distribution laws, allowing wholesalers of FMBs. The Beer Institute submitted a 5,000 opposed adoption of that and retailers to continue their comment in support of the proposed standard. The submissions in support of operations. Furthermore, they stated 0.5% standard, on behalf of Anheuser- the proposed rule (or specifically in that without a standard, individual Busch, Miller Brewing Company support of the 0.5 percent standard) States would adopt their own (‘‘Miller’’), and Coors Brewing Company break down as follows: regulations and create a patchwork of (‘‘Coors’’). The Beer Institute stated that • Over 5,000 e-mail comments came different standards. these three senior and sustaining from individuals who identified The submissions in opposition to the members produce or import well over themselves as employees of one major 0.5 percent standard break down as 75% of the beer and other malt U.S. brewer and its subsidiaries. These follows: beverages sold in the United States,

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

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association of companies that create and standards adopted in the final rule. In labeling and advertising statements that manufacture flavors for use in a wide reaching these decisions, we note that are false or tend to mislead consumers. variety of products, including FMBs. Executive Order 12866 provides that, Finally, we have modified the FEMA urged TTB to reconsider the when an agency determines that a language of the formula regulations in proposed 0.5% standard, stating that it regulation is the best available method response to several comments about would significantly restrict the amount of achieving an objective, it shall design whether the proposed requirements of alcohol contributed to the finished its regulation in the most cost-effective were overly burdensome. For example, product from flavors and thus make it manner to achieve that objective. we are no longer requiring formulas to technically impossible for flavor The comments on Notice No. 4 have disclose the alcohol content of the chemists to satisfy the consumer desire persuaded us that implementation of the product at each interim stage of for the distinctive, fresh, fruity malt proposed 0.5% standard might impose production. We have also clarified the beverages currently being sold. economic burdens on a sector of the language of these provisions in response We received a few comments FMB industry and have adverse effects to several technical comments. suggesting revisions to the system of on the viability of small brewers who taxing alcohol beverages as a way to VI. Comments on Whether the produce FMBs, as well as their ability Rulemaking Is Necessary and Fair take care of the classification issue to compete within the malt beverage posed by FMBs. These comments could industry. In this section, we discuss some of the not be adopted without legislative We believe that adoption of the general issues raised by commenters amendments to the IRC. Since the rest alternative ‘‘51/49 standard’’ for beers regarding the need for engaging in of the comments focused primarily on and malt beverages would achieve the rulemaking and the fairness of the the two standards that we aired in important regulatory goals of protecting proposed change in agency policy. Notice No. 4, the 0.5% standard and the the revenue, ensuring that consumers A. Is There a Need To Engage in 51/49 standard, our discussion of the have adequate information about the Rulemaking on This Issue? comments will focus on those two identity of FMB products, and The first issue presented is whether standards. establishing a Federal standard for such A small number of commenters there is a need to engage in rulemaking products, while at the same time focused on the remaining issues raised at all. Many commenters suggested that reducing the compliance costs to the for comment in Notice 4. While we TTB should not amend its regulations in FMB industry. It is noteworthy that, received several comments from States any manner, but should instead allow with the exception of one producer that and consumer groups in support of the the continued production of FMBs remained neutral on this issue, proposed mandatory alcohol content according to current policy. Other comments from the producers of FMBs labeling for FMBs, many comments commenters supported the idea of from industry members suggested that all supported either the more restrictive rulemaking on FMBs. FMBs were being unfairly singled out, 0.5% standard or the more liberal 51/49 1. Comments Opposed to Rulemaking and that any such requirement should standard. Thus, most of the FMB apply to all malt beverages or to none. industry expressed support for creating As indicated above in the comment We also received a few comments in some type of standard for FMBs that overview, TTB received over 4,000 e- opposition to the proposed limitations would set a limit on the alcohol derived mail comments that questioned the need on the use of distilled spirits terms in from added flavors. for rulemaking on FMBs. These malt beverage labeling and advertising. The final rule also adopts the other comments came from consumers who Some of these commenters claimed that proposals aired in Notice 4, with certain stated that they enjoyed drinking FMBs, the proposed restrictions violated the modifications in response to the and that they opposed the proposed First Amendment. comments. We are adopting the regulation, which would mandate Finally, we received a small number proposed mandatory alcohol content changes in the way those products were of comments from brewers and brewery labeling requirements, as we have made. The commenters stated that they trade associations regarding the concluded that this requirement will liked FMBs the way they are, that the proposed new formula filing provide consumers important changes would be expensive, and that requirements. These commenters information about these FMBs. Since we consumers will end up paying more generally favored the new requirements, specifically stated in Notice No. 4 that under the proposed rule. but they expressed concerns regarding we were not proposing mandatory Many of these commenters suggested certain aspects of the proposal and alcohol content labeling for all malt that the Federal Government should not requested that TTB clarify some of the beverage products, comments waste tax dollars on ‘‘trivial’’ issues proposed formula requirements. advocating such a position were such as how FMBs are made, and that considered to be outside the scope of companies should make changes that C. Summary of TTB Final Rule the current rulemaking. We may consumers want, not what the Decisions consider such a proposal in the future. Government demands. Finally, many of After carefully analyzing the We are also adopting the labeling and these comments suggested that the comments, which are discussed in advertising proposals, with Government should focus on bigger greater detail below, we are adopting the modifications to respond to the First issues, such as job creation, improving proposals set forth in Notice No. 4 with Amendment concerns raised by several the economy, and fighting terrorism. certain important modifications. The commenters. As modified, the These comments did not directly final rule adopts the less stringent ‘‘51/ regulation will prohibit the use of address the 51/49 standard. 49 standard’’ (allowing up to 49% of the labeling or advertising statements, A few comments were also received alcohol content to come from flavors designs, devices, or representations that from organizations representing and other nonbeverage ingredients) for tend to create a false or misleading taxpayer and citizen groups, including beers and malt beverages. We are impression that the malt beverage Americans for Tax Reform, the National providing affected industry members contains distilled spirits or is a distilled Taxpayers Union, and Citizens Against one year to reformulate their FMB spirits product. These modifications Government Waste. One of these products or otherwise conform to the clarify that we are only prohibiting commenters stated that the proposed

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rule would limit consumer choice, 3. TTB Response Service issued Revenue Procedure 71– decrease competition, and waste We acknowledge that FMBs are a 26 over 30 years ago. • taxpayer dollars. This commenter popular category of alcohol beverage In 1980, ATF issued Industry suggested that the Government should and that many consumers enjoy Circular 80–3, which advised brewers accommodate legitimate consumer, drinking these products. We recognize that adjunct materials listed in the beer industry, and employment needs before the concerns of many consumers that industry’s Adjunct Report (later referred engaging in rulemaking. Another proposed regulatory changes may to as the Adjunct Reference Manual commenter expressed concerns that the increase the cost of these beverages, and (ARM)), were suitable for use in beer 0.5% standard would force either a we have given serious consideration to and cereal beverages when used in significant tax increase and/or a change cost issues in drafting this final rule. We accordance with the conditions in the production process for FMBs. It have also given serious consideration to described in the report. That Adjunct should be noted that while these the issues of decreased competition and Report, as well as all subsequent comments generally criticized the consumer choice. editions of the ARM, lists ethyl alcohol proposed rule, they expressed a Nonetheless, after reviewing the as a permitted additive for use in preference for either the 51/49 standard thousands of comments received in flavoring beer, without any limitations. or some compromise over the 0.5% response to this notice, we believe more Several commenters stated that they standard. strongly than ever that rulemaking on have relied on these policies to create 2. Comments Supporting Rulemaking this issue is necessary. The beverages that consumers enjoy and that overwhelming majority of the State they have invested millions of dollars TTB also received approximately regulatory agencies that commented on promoting those brands. 11,000 comments urging that TTB set a FMBs urged TTB to adopt a Federal Some commenters argued that the limit on the quantity of alcohol derived standard for these products in order to industry had ample warning that TTB’s from added flavors in malt beverages. avoid a patchwork of inconsistent State predecessor agency was contemplating a While these comments were divided requirements. In addition, comments limitation on the use of flavors over whether the limit should be set at from the beer industry overwhelmingly containing alcohol in the production of the 51/49 standard or the proposed favored the adoption of a Federal beer and malt beverages. These 0.5% standard, these commenters standard, including many commenters commenters noted that in 1996 ATF believed that it was important that TTB who pointed to the importance of notified the industry, through ATF set a standard and clarify the maintaining a distinction between malt Ruling 96–1, that rulemaking limiting classification of these products as malt beverages, in which alcohol is derived the alcohol contribution from flavors in beverages or distilled spirits. It should from fermentation, and distilled spirits, FMBs under 6% alc/vol was be noted that we received comments in in which alcohol is derived from forthcoming. This ruling clearly stated support of setting a standard from the . that TTB would initiate future beer industry, producers of flavored Treasury and TTB believe it is rulemaking to consider the prohibition, malt beverages, consumers, members of important, in order to protect both the restriction, or limitation on alcohol Congress and other elected officials, and revenue and the consumer, to set a limit derived from the distilled spirits State regulatory agencies. on the use in FMBs of alcohol not components of added flavors, a These commenters supported the derived from fermentation at the statement that was reiterated in ATF setting of a uniform Federal standard for brewery and prevent the unlimited use Ruling 2002–2. a variety of reasons. Some commenters of alcohol derived from distilled spirits However, commenters who opposed expressed concern that current labels in FMB production. Thus, we do not the proposed 0.5% standard suggested mislead consumers. Many consumers adopt the views of those commenters that ATF’s actions after 1996 sent mixed and brewers suggested that the Federal who urged that TTB take no action on signals to the industry. For example, a government has the responsibility to this matter. U.S. Senator stated that although the maintain a distinction between Bureau in 1996 suggested that B. Fairness and Notice Issues traditional beer products and distilled rulemaking ‘‘in the near future’’ might spirits, and that the line between these 1. Comments Received limit the use of flavors in such products, two well-established categories should Many commenters argued that it is it abandoned that rulemaking project not be blurred by allowing the unfair for TTB to change a policy upon and did not even mention it in the production of malt beverages that derive which brewers and importers have unified regulatory agenda that every most of their alcohol content from the relied for several decades. These Federal agency must publish on a semi- distilled spirits components of added commenters made the following annual basis. Another U.S. Senator flavors. arguments: noted that although the 1996 ruling Many commenters expressed concern • Since the 1950s, TTB and its mentioned rulemaking, no such that, in the absence of a Federal predecessor agencies have required the rulemaking proposal appeared until standard, the States would each set their review and approval of a statement of 2003. The Senator suggested that: own standards, leaving members of the process (SOP) for any beer produced In the intervening 7-year time period, beer industry facing a confusing with flavors. By reviewing and manufacturers have relied on the existing law patchwork of regulatory standards. approving SOPs for the various FMBs and the Bureau’s formula approvals to invest Finally, of the FMB producers who on the market today, TTB has accepted hundreds of millions of dollars in the commented on this issue, almost all them as beer and malt beverages, and formulation and marketing of new products. supported action to set a standard to has endorsed the use of nonbeverage These investments have created hundreds of limit the quantity of alcohol derived jobs and a vibrant fast-growing U.S. market flavors up to the quantities indicated in sector in which tens of millions of cases of from added flavors. While one major the SOPs. • FMBs have already been sold. Without a FMB producer expressed neutrality on Our predecessor agencies have reasonable public health or safety rationale, the issue, the rest favored either the officially recognized the use of flavoring it does not seem prudent or fair to revise proposed 0.5% standard or the 51/49 materials in the production of malt these rules dramatically at this stage of the standard. beverages since the Internal Revenue game.

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Accordingly, the Senator urged TTB to Ruling 96–1 that require explicit 444 F.2d 841, 852 (1970) (footnote adopt the 51/49 standard, as it would ingredient listing and alcohol content omitted), cert. denied, 403 U.S. 923 ‘‘accomplish the same goals and have a information in statements of process, (1971).) lesser impact on these products and the but instead delayed enforcement of New manufacturing processes and industry that produces them.’’ these provisions until the issuance of marketing trends created a need for TTB Other members of Congress made ATF Ruling 2002–2 in 2002. and our predecessor agency to similar comments. A letter signed by 26 reevaluate longstanding policies on the members of the House of 2. TTB Response use of flavors containing alcohol in the Representatives supported the TTB agrees with the commenters who production of beer and malt beverages. ‘‘majority’’ standard, stating that over note that for many years ATF and its As the above-cited cases demonstrate, the past 5 years, ‘‘hundreds of millions predecessors allowed brewers to use an agency may make changes in policy, of dollars have been invested in the alcohol-flavoring ingredients, without as long as the interpretation of the development of the FMB category. limitation, when producing malt applicable statutes and the rest of the These investments, and the thousands beverages. Our predecessor agencies administrative record reflects reasoned of jobs created, were all made on the approved statements of process and deliberation. reliance of long-standing federal policy certificates of label approval for these Finally, even if the agency in the two and rules.’’ The letter suggested that products and, before 1996, never rulings referred to by the commenter Notice No. 4 intends to ‘‘change the suggested that there was any limit on had not given notice of its intention to established rules mid-stream on those the use of flavoring materials in FMBs. engage in rulemaking on this issue, and who have successfully created the Accordingly, we acknowledge that the even if the agency sent mixed signals on category. This is especially troubling in FMB industry relied on existing policies this issue prior to 2002, an agency is not that it threatens to stifle the only growth in formulating these products. precluded from engaging in rulemaking sector in the brewing industry over the It is important to note, however, that simply because it would change even a last several years.’’ we know of no evidence that would longstanding policy. By publishing a Diageo stated that, in the summer of suggest that producers of FMBs in the notice of proposed rulemaking and 2000, company officials met with ATF 1970s or 1980s were using nonbeverage soliciting comments on this issue, we representatives and revealed Diageo’s flavors in their products at the high have clearly met the notice and plans to enter the FMB market in the levels disclosed in the 2002 ATF study. comment requirements of the near future in reliance on existing To the best of our knowledge, the Administrative Procedure Act (APA). policy. Diageo stated that company production of FMBs that derived the Notice No. 4 provided specific notice of officials advised ATF that it would majority (and in some cases, up to 99%) the proposed changes to the industry reconsider these plans if ATF planned of their alcohol content from added and the public, and we provided the to place new limits on the use of flavors flavors is a trend that began in the industry and the public almost 7 in FMBs containing not more than 6% 1990s. As the trend accelerated, ATF months to submit comments on those alc/vol. Diageo also stated that, after the concluded that it was necessary to proposed changes. meeting, ATF officials indicated that the reevaluate the prior policy and consider As reflected in this discussion of agency did not plan to change existing the need for placing limits on the comments, we have carefully policy towards FMB formulation. quantity of alcohol derived from added considered the comments from all Diageo claims that, in reliance on those flavors. Furthermore, many State interested parties, and we have given assurances, Diageo introduced regulatory agencies began requesting full consideration to options that would Ice in December 2000. that ATF create a Federal standard for minimize any adverse economic impact The FMBC also stated that a number the production of FMBs because of the flowing from the rule and that would of its members had received assurances confusion caused by the marketing and afford industry members an adequate from ATF, in the summer of 2000, that labeling of these products. period of time to reformulate their ATF planned no change in policy Agencies may change policies, as long products, if necessary. In crafting a towards the addition of alcohol to FMBs as the agency follows the appropriate standard on the use of flavors containing 6% alcohol by volume or procedures under the Administrative containing alcohol in the production of less. The FMBC stated that it sought Procedure Act. The Supreme Court has FMBs, we have also taken into these assurances after an ATF official recognized that ‘‘[r]egulatory agencies consideration past and current agency sent a letter indicating that the Bureau do not establish rules of conduct to last policy. Accordingly, we have taken was considering rulemaking, which forever.’’ (See American Trucking fairness and equity into consideration in might limit the alcohol from added Assns., Inc. v. Atchison, T. & S. F. R. drafting the final rule. flavors to no more than 25% of the total Co., 387 U.S. 397, 416 (1967).) The alcohol content of the product. Court has also stated that agencies must VII. Regulatory Burden and Cost- A commenter pointed out that be given ample latitude to ‘‘adapt their Related Issues although ATF Ruling 96–1 stated that rules and policies to the demands of One of the most important issues ATF would undertake rulemaking to changing circumstances.’’ (See Permian raised in the comments is the difference limit alcohol from flavors in beer and Basin Area Rate Cases, 390 U.S. 747, in regulatory burdens and costs malt beverages, ATF labeling and 784 (1968).) Furthermore, the Court has associated with the proposed 0.5% formula specialists never qualified recognized that ‘‘[a]n agency’s view of standard and the 51/49 standard. approvals of statements of process or what is in the public interest may Opponents of the proposed 0.5% labels by stating that the approval was change, either with or without a change standard gave more weight to this issue conditioned on future rulemaking. in circumstances. But an agency than did supporters of that standard. Instead, these commenters claimed that changing its course must supply a However, many commenters who would ATF continued to approve statements of reasoned analysis * * *.’’ (See Motor be directly impacted by the proposed process and labels without qualification. Vehicle Mfrs. Ass’n v. State Farm Mut. 0.5% standard urged TTB to adopt the Another commenter stated that ATF Auto. Ins. Co., 463 U.S. 29, 57 (1983), 51/49 standard instead because it would personnel did not immediately quoting Greater Boston Television Corp. be less costly and because it would not implement the provisions in ATF v. FCC, 143 U. S. App. D. C. 383, 394, distort competition in the FMB market.

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The major issues raised by commenters spirits. Such reclassification would Loss of Sales Due To Reformulation. on both sides of this question are negatively affect wholesalers and Several FMB producers commented that summarized below. retailers because in certain States they even if they can reformulate their would no longer be able to sell these products to comply with the 0.5 percent A. Costs of Complying With the products. standard, they believe they may not be Proposed 0.5% Standard able to achieve the same taste profile as 2. Comments Opposed to the 0.5% 1. Comments in Support of the 0.5% their existing products. They indicate Standard Standard that this would cause them to lose Many industry members who Opponents of the proposed 0.5% customers, thereby reducing their sales commented in support of the 0.5% standard submitted a great deal of data and revenue. standard downplayed the importance of about the estimated economic impact of ECS Study. The FMBC contracted economic issues. For example, the Beer the proposed rule. The FMBC submitted with Economic Consulting Services, Institute stated that the economic well an economic study indicating that LLC (ECS) to conduct an economic being of certain sectors of the economy adoption of the proposed rule would assessment of the impact that both the should not be a consideration in have an adverse impact on the FMB 0.5 percent standard and the majority straightforward application of properly industry amounting to over $600 standard would have on the domestic enacted Federal statutes. It also million over the next 4 years. Other industry. The ECS assessment relied on suggested that some of the comments commenters argued that the proposed information available to the public as were based on erroneous information 0.5% standard would have negative cost well as information it obtained by that was provided to retailers, notably implications for the industry, the surveying the FMBC’s members. Sales the false threat that FMBs will disappear public, and the Federal Government, as by the members of the FMBC comprise from the marketplace if the proposed set forth below. approximately 56 percent of the FMB TTB standard is finally adopted. Consumer Prices. Many commenters market. Instead, the Beer Institute suggested that expressed concerns that the cost of FMB The ECS found that, for various these products would continue either as products would rise if the proposed rule reasons, the FMBC’s members distilled spirits products or as were adopted. As previously noted, unanimously responded that they reformulated FMBs. several thousand consumers commented would choose to reformulate their Some individual FMB producers also against the proposed rule on various products to comply with either standard suggested that the economic issues were grounds, including the concern rather than sell them as distilled spirits not significant. Anheuser-Busch expressed by many that the 0.5% specialty products. They expected acknowledged that, as with any new standard would result in higher prices substantial costs associated with process, there may be associated for consumers. reformulating current products to transition costs, and it stated that even Disruption to Existing Businesses. The comply with either standard. ECS the 51/49 standard would require FMBC commented that the proposed estimated losses based on expected loss process changes and associated 0.5% standard would profoundly in volume, expected upfront capital transition costs for most producers. threaten the FMB business of its costs, expected upfront research and Anheuser-Busch commented that it members. It stated that these companies development and test marketing costs, expected the total cost impact across the had relied on longstanding Federal expected losses in operating income, company’s system to be minimal, policies to create beverages that and expected capital losses. ECS then ranging between a small investment in consumers enjoy and had invested extrapolated the data they obtained from capital and a net cost savings due to millions of dollars in promoting these FMBC members to the entire FMB process and material changes. In either brands. The FMBC suggested that any industry based on market share data. case, the brewer did not anticipate that change would disrupt and possibly Specifically, the ECS estimated the the slight change in cost would impact damage the business of its members; cost to comply over the next four years FMB prices for its wholesalers, retailers however, they were willing to adjust to to be: or consumers. a majority standard. The FMBC argued Miller commented that there are costs that the proposed 0.5% standard COSTS TO COMPLY (IN MILLIONS) that have been, and will be, incurred as presented a much more dire threat to OVER 4 YEARS a result of the proposed new standard; the business investment of its members, however, it accepted those costs as a without a sound policy justification Majority 0.5% Costs to standard Standard part of doing business in a regulated behind it. industry. Neither brewer submitted an Research and Development Costs. FMBC Members ...... 186.2 340.5 estimate of the costs they expected to Many commenters suggested that Entire FMB Industry .. 332.5 608.1 incur; nor did they explain precisely compliance with a new standard would Federal Taxes Fore- how they would reformulate their force brewers to incur extensive upfront gone ...... 139.1 291.8 products to minimize the cost of manufacturing costs for research and compliance. development to create new formulations ECS indicated that the 0.5 percent Some supporters of the 0.5 percent for existing products. According to these standard imposes significantly higher standard commented that the standard commenters, the 0.5 percent standard costs because it ‘‘would drive several of would not adversely affect wholesalers would require most manufacturers to the products off retailer shelves or retailers, and that in fact, the reformulate their existing products. completely, denying the producers, standard will bring clarity to the They stated that reformulation would be distributors and retailers a source of marketplace and preserve the FMB quite costly in that it would require business and profits and denying category for wholesalers and retailers. large amounts of capital to purchase customers a product they have come to Without a clear standard, these new equipment, investment in enjoy.’’ commenters believe that the States expensive technologies and treatment Indirect Costs. Several commenters would take action and may ultimately processes, and to advertise the newly focused on the indirect costs associated classify these products as distilled reformulated products. with the proposed rule. For example,

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some commenters suggested that Wisconsin, which employs 350 people. would affect taste, shelf life, stability, or Federal Government’s revenue The brewery was closed in 1999, but other characteristics of these products. collections would suffer because the resumed operations in 2000 capitalized We also sought comments on whether 0.5% standard would cause sales of with funds contributed by employees production practices are available to FMB products to decline. Several FMB and local investors. It adopted a produce FMBs with the desired product wholesale distributors and other contract-brewing business strategy profile and still comply with the commenters expressed concern that the because the beer brands formerly proposed standard. Finally, we sought 0.5 percent standard would cause produced by the brewery were comments as to whether another existing FMBs to be reclassified as purchased and are now controlled by a standard, such as the 51/49 standard, distilled spirits, with the result that major brewery. City Brewing Company would be more appropriate for these wholesale distributors would no longer stated that the consolidation of U.S. products. be permitted to distribute them in breweries had virtually eliminated all certain States. These commenters also excess brewing capacity for beer 1. Comments Supporting the 0.5% noted that this reclassification would marketers other than the largest U.S. Standard affect retailers because, in many States, brewers. The brewery stated that it has Anheuser-Busch commented that it is only State stores can sell distilled been profitable since resuming capable of producing FMBs under the spirits. operation, but it expressed concerns that 0.5% standard and is preparing to do so. Effect on Small Businesses. Many the proposed rule might result in a loss The brewer stated that its brew masters commenters suggested that the proposed of business for FMB producers, which have already developed reformulated 0.5% standard would have adverse would have a significant negative products that will be indistinguishable effects on small businesses. Some of impact on the brewery. from the current FMB products they these commenters suggested that the A small brewery in North Carolina, produce and sell. Anheuser-Busch costs of complying with any new Carolina Beer & Beverage Company, indicated that these reformulated standard would hurt small companies stated that adoption of the 0.5% products would have the same clarity, the most since larger companies possess standard would have a ‘‘profound aroma, and taste profile of their current economy of scale advantages. adverse impact’’ on both this brewery products. Anheuser-Busch further stated TTB received a few comments from and similar small brewers. The brewery that reformulation could be done and companies that identified themselves as urged adoption of the majority standard that no FMB producer should lead TTB small brewers that would be adversely instead. Carolina Beer & Beverage stated to believe otherwise. impacted by the proposed rule. It that 70% of its revenues are derived Miller also commented that its should be noted that, pursuant to the from FMBs, and it noted that it had products could be produced under the regulations issued by the Small invested significant amounts of capital proposed standard without Business Administration, a small brewer and resources in order to produce FMBs compromising their taste or their high is one that has no more than 500 that comply with longstanding Federal quality standards. Furthermore, the employees. (See 13 CFR 121.201). These policies. This brewery suggested that if brewer indicated that it has successfully commenters urged TTB to adopt the 51/ TTB adopted the 0.5% standard, it was produced prototype products that 49 standard. They suggested that the unlikely that it could to maintain its comply with the 0.5% standard and has proposed rule would have a competitiveness in the FMB industry tested the acceptability of these disproportionately large impact on and that such a standard could even products with expert tasters and others. small businesses because they are less threaten the company’s ability to stay in These tests confirm that the able to adapt to the new technology business. reformulated product satisfies the taste necessary to comply with the proposed In addition, many distributors profile of the original product. 0.5% standard. commented on the adverse impact of the Miller further stated that shelf life and Mark Anthony Brands (MAB), a 0.5% standard. For example, United product stability are not expected to be member of the FMBC, is the national States Beverage, a small distributor barriers to complying with the new distributor and marketer of several located in Connecticut, commented that standards. Miller stated that: popular FMB products. MAB and its it employs 85 people and that FMB production affiliate, Mark Anthony products support over 70% of its Shelf life will be reduced to that of a traditional beer, i.e., approximately four Brewing, Inc., contract with four U.S. revenues. This commenter stated that months which is a significant reduction from co-packing facilities to produce its FMB the proposed 0.5% standard would have the six to 12 month shelf life currently products. [In this document, references ‘‘devastating’’ effects on the industry. applicable to Flavored Malt Beverages to ‘‘co-packing’’ cover situations where United States Beverage also suggested produced today. Because it will be consistent one brewer produces and bottles for that while reformulation might be only with traditional beers, however, we do not another brewer pursuant to a contract or an inconvenience to the largest brewers, anticipate shelf life or product stability to be where a brewer uses another brewer’s it would be an ‘‘operational an insurmountable problem with the premises under an alternating proprietor impossibility’’ for a smaller brewer. reformulated products. arrangement.] MAB suggested that TTB Other commenters stated that since should abandon the 0.5% proposal in B. Effect on Current Products and New certain brewers have already favor of the majority standard because Product Development demonstrated their ability to produce the latter did not threaten the In Notice No. 4, TTB sought FMBs in accordance with the 0.5% competitive viability of small comments relating to the effect of the standard, they believe that these companies like MAB and its co-packers. proposed regulations on the viability of products will be available to MAB suggested that the 0.5% standard products currently on the market. We wholesalers and retailers in all States would threaten the viability of the few stated we were particularly interested in with no interruption and no discernable regional breweries that currently co- comments addressing whether products taste differences. pack FMB products for MAB and others. on the market could be made under the Coors commented that the 0.5% City Brewing Company stated that it proposed standard. Additionally, we standard ‘‘is also fair because it does not owns and operates a 5-million barrel sought comments on how the adoption prohibit any current product. Just capacity brewery in La Crosse, of the 0.5% added alcohol standard because many of the current ‘flavored

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malt beverages’ may need to be the consumer desire for the distinctive less acceptable beverage. The change in reclassified as distilled spirits does not FMBs currently sold. flavor will be caused by a combination mean that the TTB proposed regulation FEMA noted that flavors contain ethyl of increased malt base percentages and will ‘kill the category,’ as some might alcohol because it is a safe, economical, off-flavor contributed by the malt. claim.’’ Coors suggested that under the and effective extraction medium for FEMA stated that limiting either the proposed rule, products containing fruits, nuts, and botanicals, as well as a ingredients that may be used in flavors 0.5% or more alcohol from the distilled diluent for polar and non-polar flavor or the alcohol contributions from flavors spirits components of added flavors chemicals. FEMA also stated that fruit would make it impossible for could continue to be produced, but essences and distillates, which are used manufacturers to continue producing would be regulated as distilled spirits extensively in the creation of natural many of the malt beverages being sold products. fruit flavors, contain an appreciable today and would severely limit the amount (up to 20–25%) of naturally 2. Comments Supporting the 51/49 flavor industry’s opportunity for new occurring ethyl alcohol. product development. Standard FEMA stated that, because of their While the major brewers claimed that composition, alcohol beverages require 3. Neutral Comment product reformulation under the 0.5% higher flavor loads to deliver pleasing Finally, Gallo stated that it had standard would not be a problem, as characterizing flavors. It stated that conducted a study involving the aging previously noted in this preamble, other while many non-alcoholic beverages use of reformulated products under normal FMB producers suggested that this emulsions to deliver flavor systems, this conditions to determine the impact of would have a significant impact on their is not possible in alcohol beverages the proposed changes to the alcohol businesses, resulting in higher costs for because the destabilizing effect of the source standards on FMBs. Gallo research and development, new ethyl alcohol will produce precipitation studied two of its 13 FMB products, equipment, and marketing, and the and oil separation in the final beverage. comparing their current formulation possibility of reduced sales due to According to FEMA, this means that the with both standards aired in Notice No. consumer rejection of reformulated higher flavor level and the dependence 4. Due to the limited time available, products. on ethyl alcohol as the only reliable Gallo noted that it was only able to Furthermore, several members of solvent makes it necessary to exceed the evaluate these products as they would Congress expressed concerns about the 0.5% limitation to manufacture age under normal shipping and storage costs of reformulation and the possible acceptable and stable products. conditions 31⁄2 months after production. risks posed by such reformulations to FEMA noted that the ATF study After evaluating the results, Gallo the FMB industry. For example, one referenced in Notice No. 4 found that determined that the study was U.S. Senator stated: most FMBs formulated their products in inconclusive. According to Gallo, it If the new formulation standards increase accordance with ATF Ruling 96–1. appeared that the change in malt the costs of producing FMBs, and alter their FEMA stated this has resulted in the percentage impacted each product taste such that consumers are reluctant to evolution of beverages that deliver to differently. Gallo concluded that ‘‘[t]he purchase them, the FMB market will decline. the consumer a clean, pleasant flavor indication is that all of our products This decline in profitability will surely drive and that have a reasonable shelf life. must be studied individually to some FMB manufacturers out of the market, FEMA further stated that producers and reduce competition in the marketplace. understand the full impact of the have used various treatments to reduce proposed change. There was no time to This Senator urged adoption of the the inherent bitterness and off-flavor explore this issue in time for these 51/49 standard. Another Senator characteristics associated with comments.’’ Gallo stated that, in light of suggested that the proposed standard fermented malt beverages. FEMA the inconclusive results from the study, ‘‘would likely change the taste and suggested that if TTB limits the it took no position on the proposed character of FMBs—products which contribution of alcohol from flavors to definitions for beer and malt beverages. have attained broad consumer loyalty. less than 0.5%, that restriction would Gallo did indicate that it plans to There is no doubt that this outcome negatively impact the taste of FMBs and continue to produce and market FMBs would provide FMB’s rivals with a limit the shelf life of these products. under either of the standards aired for distinct competitive advantage.’’ FEMA noted that malt-based comment in Notice No. 4. However, it Numerous State lawmakers opposed beverages require a higher percentage of pointed out that either new standard to the 0.5% standard commented that if flavor addition than other alcohol would require Gallo to invest in new TTB establishes the 0.5% standard, it beverages due to the more pronounced equipment to produce additional would force FMB brewers to make organoleptic properties of the malt base volumes of malt base. Either standard costly changes to their current itself. Malt-based products have an would also force Gallo to develop new production processes. They indicated aftertaste that is difficult to overcome. malt fermentation techniques and that TTB’s adoption of the 0.5% The aftertaste and malty off-characters production techniques to provide a malt standard would force FMB brewers to tend to accentuate with increased base that results in products with a increase the amount of malted barley exposure to heat. Limiting the amount flavor and taste profile that meets and other traditional ingredients used in of alcohol derived from flavor severely current consumer expectations. This, an FMB, probably resulting in very limits the opportunity to use vanilla, Gallo noted, might require development differently tasting products. cocoa, coffee, and other botanical of new technology and different As indicated earlier in this comment extracts that often require usage levels equipment. discussion, the Flavor and Extract of 3% or higher in the finished Manufacturers Association of the United products. C. Effect on Competition States (FEMA) urged TTB to reconsider In conclusion, FEMA stated that the proposed 0.5% standard because it limiting the contribution of alcohol 1. Comments in Support of the 0.5% would significantly restrict the amount content by flavors to less than 0.5% Standard of alcohol contributed to the finished would change the overall taste profile of Many small craft brewers expressed product from flavors, thus making it these products, and the consumer will support for the 0.5% standard based on impossible for flavor chemists to satisfy ultimately receive a different tasting, their view that the arrival of FMBs in

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the marketplace has had a negative technologies and capabilities similar to with the high failure rate of new effect on sales of traditional malt those apparently possessed today by the products, production capacity presents beverage products. Some commenters largest brewers. The FMBC added that a formidable barrier to entry to the U.S. suggested that TTB should adopt the the marketplace, not the Government, beer market. 0.5% standard for added alcohol should determine the industry’s Accordingly, MAB stated that the because this action would benefit small winners and losers. The FMBC urged ‘‘few remaining ‘old regional’ brewers brewers who generally do not produce TTB to avoid crafting a rule that hands today represent the only realistic way to FMBs. a competitive advantage to some FMB quickly access significant production Many small brewers and their producers at the expense of others. capacity in the U.S.’’ MAB argued that employees expressed their concern that Mark Anthony Brands (MAB) stated the demise of America’s ‘‘second-tier’’ the arrival of FMBs during the past that: brewers over the past 10 years has taken years has weakened the brewing [F]ederal policies favoring competition vast amounts of brewing capacity off- industry. They explained that over the demand that TTB consider anticipated anti- line, and that a few old regional past 25 years there has been a major competitive effects in choosing between breweries, which currently co-pack revitalization of the brewing industry, policy alternatives and seek to adopt that FMB products for MAB and others, own with smaller brewers and brewpubs alternative which promotes competitive the remaining excess U.S. brewing now found in every State and outcomes. The 0.5% standard would favor capacity. MAB concluded that a decline metropolitan area and in many small larger companies, particularly America’s (and in FMB sales would ‘‘likely’’ cause these towns. They indicated that the number the world’s) largest brewers, and would brewers to close their doors altogether therefore decrease competition in the FMB of microbreweries closing since the and that this resulting loss of arrival of the newer FMBs has exceeded market segment. MAB accordingly urges TTB to reject the proposed 0.5% standard in favor production capacity in the United States the number of microbreweries of one that allows FMB producers to compete would add costs and drive jobs opening—reversing the trend and on a level playing field and supports future overseas. weakening the industry. competition. MAB also suggested that the 0.5% One small brewer stated that he MAB suggested that Federal policy standard represented a ‘‘win-win’’ expects to compete with other quality scenario for the largest brewers if they small brewers in the region, but would strongly favors marketplace competition and discourages the unhealthy indeed possess the technology to not like to see huge corporations with produce FMBs under that standard that unlimited legal and marketing funds concentration of market power in the hands of a few dominant players. MAB achieve the same taste profile as existing compete against him with products that products. MAB stated that this are not real beer. Another small brewer also argued that ensuring competition in the alcohol beverage industry played an technology would allow them to commented that if he can make a dominate the FMB category with their wonderful tasting product with this important role in motivating Congress to enact the FAA Act, and it cited a products. On the other hand, if standard, then the larger competitors consumers reject FMBs produced under could do it also. A third brewer provision of the legislative history of the FAA Act, which indicated that its the 0.5% standard, MAB stated that ‘‘the indicated that the manner of FMB largest brewers will benefit because the production explained in Notice No. 4 promoters wanted to ‘‘enable small units to get into the liquor industry.’’ elimination of the FMB category will avoids many of the costs associated with protect their extensive investments in the volume demands of beer production MAB also noted that the burdens of regulation fall disproportionately on the production and distribution of and storage. He indicated that he traditional beer and malt beverage believes this results in an unfair small companies, citing a provision of the legislative history of the Regulatory products.’’ competitive advantage over traditional Several members of Congress and craft brewers. Flexibility Act which recognized that even if actual regulatory costs are equal indicated that the 0.5% standard seems 2. Comments in Support of the 51/49 between competing large and small designed to distort the existing market Standard firms, small firms have fewer units of by providing an artificial competitive Many opponents of the 0.5% standard output over which to spread such costs advantage for companies that currently suggested that adoption of the standard and are thus unable to take advantage of dominate the domestic beer industry but would have an anti-competitive effect. the economies of scale. that have introduced under-performing For example, the FMBC suggested that As noted earlier in this comment and less popular FMB products. support for the 0.5% standard appeared discussion, MAB argued that TTB We also received a comment from the to come from the many industry should abandon the 0.5% proposal in British Embassy suggesting that the members who, for competitive reasons, favor of the majority standard. MAB proposed rule would place an unfair would benefit from the complete demise stated that the past two decades have competitive disadvantage on companies of the FMB category or would derive a seen the concentration of brewing based in the United Kingdom (U.K.), competitive advantage from a 0.5% rule. capacity in the United States into a very including the U.S. market leader, The FMBC stated that the 0.5% small number of hands and that while threatening jobs in the U.K. and the standard, if adopted, would give a America is home to over 1,400 United States, as well as thousands of competitive advantage to some FMB breweries, the three largest brewers own dollars in investment. producers at the expense of others. In the facilities responsible for producing D. Effect on the Retail Licensing System support of this claim, the FMBC pointed over 90% of domestic beer and malt and Overall Marketplace out that America’s largest brewer beverages. Noting that most other claimed that it could already produce brewers are small ‘‘micro’’ and ‘‘regional 1. Comments in Support of the 0.5% FMBs meeting the 0.5% standard specialty’’ operations that produce their Standard without compromising product taste or own products, the commenter argued Many commenters stated that the availability. The FMBC stated that this that these small brewers would not have 0.5% standard would ensure product illustrates that, if adopted, the standard the capacity to produce a successful integrity, preserve long standing would adversely affect competition by new brand. MAB suggested that because distinctions imposed on beer, wine, and forcing competitors to acquire of the costs of a new brewery, combined spirits, and provide a uniform and

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consistent classification system on production of FMBs and contract comments from brewers that identified which States, wholesalers, retailers, and production has occurred at five non- themselves as small businesses consumers can rely. They stated that, if Diageo facilities during the past three producing FMBs that would be adopted, the standard would help to years. adversely impacted by the proposed maintain an orderly marketplace, meet A U.S. Senator commented that FMB 0.5% standard. consumer expectations for consistent bottling facilities provide jobs and Nor do we believe that the proposed products, and help sustain the long-term millions in dollars to local economies rule would have been a significant development of the FMB category. through wages, taxes, services regulatory action within the meaning of According to several commenters, purchased, and other means. He stated Executive Order 12866, notwithstanding implementation of the 0.5% standard that any regulation that threatens the the suggestion to the contrary in the ECS would avoid costly and confusing market position of these products puts Study. The primary data for the analysis disruptions in State licensing, taxation, those jobs at risk. Other U.S. Senators in that study comes from FMBC and distribution policies. Several commented that this proposal could members. Because much of the retailers and wholesalers feared that any have a profound and devastating impact economic data submitted by FMBC other standard could have significant on employees in their States and across members is proprietary and consequences for the industry and for the nation. Two U.S. Senators indicated confidential, TTB cannot verify the thousands of alcohol beverage licensees, that FMBs constitute a booming accuracy of the figures. most of which are small businesses. industry that has brought a direct Furthermore, we are concerned that Without a clear standard, some benefit to their State, and they do not certain parameter assumptions and commenters believed that the States wish to see its growth and associated calculations in the ECS study are would take action and may ultimately jobs curtailed in such an unnecessary questionable and could lead to an classify these products as distilled fashion. overstatement of loss. For example, spirits. Such reclassification would A wholesaler expressed concern over since the study separately included negatively affect beer wholesalers and some small brewers’ claims that the estimates of declines in Federal retailers because in certain States they 0.5% standard will not harm America’s corporate tax revenue, it should have would no longer be able to sell these small brewers. This commenter asserted presented its estimates of declines in products. that these small brewers have never profits net of taxes. Under the 0.5% produced an FMB product and have no standard, ECS calculated that Federal 2. Comments in Support of the 51/49 corporate tax revenue would decline by Standard intention of competing in the FMB category in the future. Since these small $94 million in present value due to In opposition to the 0.5% standard, brewers have no stake in the outcome of reduced profits for FMBC firms over the several FMB wholesalers expressed this proposed rulemaking, their claims period 2004–2007. Accordingly, the concern that the standard would cause should not be considered as expected after-tax decline in profits for TTB to reclassify existing FMBs as authoritative. Other commenters FMBC firms would be $247 million distilled spirits. Some commenters pointed out that it is not the job of TTB rather than the $341 million decline in expressed a fear that if TTB reclassifies to favor one industry over another. profits listed in the study. The study’s these products, certain States will no use of discount rates of 20 and 30 longer permit beer wholesalers to E. TTB Response percent to account for the increased distribute them. Some commenters 1. Regulatory Burdens and Costs uncertainty of future income appears to pointed out that this reclassification Imposed by the Proposed Rule assume a large risk-premium. The would also affect retailers because in treatment of capital expenditures is many States only State-operated stores When we issued Notice No. 4, we unclear, and the measurement of capital can sell distilled spirits. certified that the proposed rule would stock and capital losses is questionable. Many commenters, chiefly not have a significant impact on a Furthermore, there is a wholesalers and their employees, as substantial number of entities. We methodological flaw in deriving private well as employees of FMB producers, stated our belief that 10 or fewer and public loss totals because the ECS expressed the fear that they will lose qualified small breweries manufacture study looked at FMB operations in their jobs if TTB approves the 0.5% FMBs subject to the rule. We asked any isolation, without accounting for the standard. One industry association small brewery that believed it would be potential for increased sales of other cautioned that approval of this standard significantly affected by this rule to let types of alcohol beverages. For example, would cost jobs in production facilities us know and tell us how it would affect we do not agree that either the proposed all across the country. Another them. We also certified that the 0.5% standard or the 51/49 standard commenter pointed out that thousands proposed rule was not a significant would result in significant losses of of businesses rely on sales of FMBs for regulatory action, as defined by Federal tax revenues as a result of revenue, from the product itself and Executive Order 12866, because it lowered sales of FMBs. Even if the from secondary sales. The commenter would not have an annual effect of $100 reformulation of popular FMB products indicated that, if implemented, Notice million or more on the United States results in lowered sales for these No. 4 would threaten sales and put economy. products, it does not necessarily follow further pressure on small businesses After reviewing the comments, we that the Federal Government would lose already pushed to the brink. have not changed our position on these tax revenues as a result. Because of Diageo explained that its products matters. We do not believe that the changes in consumer preference and have generated numerous jobs proposed rule would have had a other factors, the relative market share throughout the country. Diageo noted significant economic impact on small of specific products often fluctuates. that it not only employs numerous businesses, within the meaning of the However, it is logical to assume that production and sales employees, but Regulatory Flexibility Act. While we most of the FMB consumers who might also generates work for numerous received many comments suggesting abandon their favorite products as a suppliers in areas such as glassware and that there would be numerous indirect result of changes in taste profile would packaging materials. Diageo stated that effects on wholesalers and retailers of substitute other alcohol beverages for two of its facilities are involved in the FMBs, we received only a few them.

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Thus, it is unlikely that any changes complying with a 51/49 standard would intention in this rulemaking action to in the relative market share of FMB be significantly lower. Those FMB favor any one segment of the FMB or products would result in a significant producers that commented in favor of beer industry over another, to remove net loss of the Federal excise taxes the 0.5% standard did not specifically competition in the marketplace, or to collected on alcohol beverages. address the relative costs of the two destroy a particular category of malt Furthermore, because many FMB standards, although one brewer noted beverages simply because it is preferred producers also manufacture other types that either standard would impose some by many consumers over more of alcohol beverages, losses in sales of costs. traditional brewery products. Our FMB products may be offset by In addition to the costs associated statutory mission under the FAA Act is increased sales of other types of alcohol with producing new FMBs that met the to promote fair competition within the beverages. new standards, many FMB producers malt beverage industry, not to favor one Finally, we do not believe that the expressed concerns that they would not segment of the industry over another. economic impact on FMBC members be able to achieve the same taste profile Accordingly, the purpose of the final can necessarily be extrapolated to the under the proposed 0.5% standard, and rule is to treat all segments of the beer rest of the FMB industry based simply that the 51/49 standard would afford and FMB industries in a fair and even on market share. In fact, the FMBC, as them more flexibility in meeting the fashion. well as other commenters opposed to expectations of consumers in this area. the proposed 0.5% standard, have These producers are concerned that if 2. Options To Reduce Regulatory argued in this rulemaking proceeding they attempt to reformulate their Burdens and Costs that the 0.5% standard would benefit products in accordance with the 0.5% Even if a rule is not a significant America’s largest brewers at the expense standard, consumers will not accept the regulatory action, Executive Order of their competitors. The comments reformulated products and product sales 12866 requires us to design the show that the expected costs of will go down, possibly resulting in the regulation in the most cost-effective compliance vary from producer to disappearance of some current FMB manner to achieve the regulatory producer. For example, as previously products from the marketplace. objective. noted, Anheuser-Busch commented that A comment from FEMA supported We have considered several options to it expected the total cost impact to be this concern, noting that the 0.5% reduce the regulatory burdens and minimal and did not anticipate the standard would make it impossible for economic costs imposed by the ‘‘slight change in cost’’ to impact FMB manufacturers to continue producing proposed rule. One of those options is prices for wholesalers, retailers, or many of the malt beverages being sold to exempt small businesses from the consumers. Opponents of the 0.5% today and would severely limit the requirements of the rule. However, this standard cannot argue with any flavor industry’s opportunity for new option is not viable for several reasons. consistency that the standard would product development. We also find First, one of the primary purposes of the unfairly benefit their competitors, while persuasive the comment from Gallo, rule is to enhance consumer protection; still maintaining that those competitors which did not take a position on the this purpose would be defeated by an would suffer the same costs and losses 0.5% or 51/49 standard, but which exemption for small businesses. as they would. noted the difficulty of predicting the Furthermore, some small brewers who Nonetheless, after carefully impact of either standard on the taste produce FMBs do so under contract considering all of the comments on this profile and shelf life of FMB products. with larger companies, and allowing an issue, TTB is persuaded that Although the number of small exemption for these companies would implementation of the proposed 0.5% brewers affected by this rule is not large, raise significant fairness issues. Finally, standard might impose economic we note that several commenters and most important, since the IRC does burdens on a sector of the FMB industry indicated that there are fewer regional not authorize such a difference in tax and adversely affect the viability of brewers with excess production treatment for small producers of FMBs, some small brewers who produce FMBs, capacity in the United States today than we do not believe we have statutory as well as their ability to compete in the past. Many commenters indicated authority to implement such an within the beer industry. that the proposed 0.5% standard could exemption by regulation. The comments indicated that while have a significant impact on those A second option we considered was some brewers would be able to regional brewers that co-pack FMBs for the delay of the effective date of the reformulate without incurring other companies. In particular, we are final rule in order to provide adequate significant costs, many producers of concerned that the economic impact of time for the industry to make the FMBs believe that reformulation of their the proposed rule may be necessary changes to product products to comply with a 0.5% disproportionately borne by those small formulation. As discussed in more standard would result in significant brewers who lack the economies of scale detail later in this document, we have costs. The FMB producers that possessed by their larger competitors, delayed the implementation of the final commented on this issue indicated that and who would be less able to absorb rule for one year. We believe this one- they would reformulate their products the costs associated with reformulation year delayed effective date will provide as FMBs rather than produce them as of products in accordance with the more ample time for the FMB industry to distilled spirits products. Accordingly, stringent 0.5% standard. conform to the requirements of the final the costs associated with the 0.5% As a related matter, TTB is concerned rule. standard are not connected with the that the proposed 0.5% rule might affect The final option we considered was higher Federal excise tax imposed on the ability of some small brewers to adoption of the 51/49 standard instead distilled spirits products. Instead, these compete within the brewing industry. It of the 0.5% standard. Based on the costs are brought about by the need to should be noted that we do not agree information in the rulemaking record, conduct research and development, and with those comments that suggested that we have concluded that compliance to invest in new equipment and one of the purposes of the proposed rule with the 51/49 standard will be technology necessary to produce FMBs was to protect either large or small significantly less burdensome and costly that meet the 0.5% standard. Many FMB brewers from competition with than compliance with the 0.5% producers indicated that the costs of producers of FMBs. It is not TTB’s standard. Furthermore, based on the

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comments, it appears that adoption of a common sense approach to the comments suggesting that the proposed the 51/49 standard would not adversely regulation of alcohol beverages 0.5% standard was the best way to affect the ability of small brewers to considering that small amounts of maintain ‘‘clear distinctions between compete in the FMB marketplace and alcohol are present in many other beer and liquor.’’ would reduce the impact of the changes beverage products such as juice, soft Many commenters agreed that TTB needed to reformulate existing products drinks, soda, and non-alcoholic beers has a responsibility to protect to comply with the final rule. made by brewers.’’ consumers through accurate labeling, to As we considered the comments and Several commenters noted that the ensure that products labeled as weighed the relative merits of the 0.5% IRC and FAA Act definitions of ‘‘beer’’ ‘‘flavored malt beverages’’ are truly standard and the 51/49 standard, we and ‘‘malt beverage,’’ respectively, products that have alcohol obtained by also considered the issues of costs and contemplate that the alcohol content in the fermentation of malt. Others other regulatory burdens. As shown in those products must be derived from believed the proposed rule would the remainder of this document, we fermentation, not from added distilled promote consistency in consumer have tried to address these issues at spirits. Coors argued that while some expectations, clarify Federal public each step, so that our final rule will may argue that there is a difference policy, and end any confusion that may achieve the goals of this rulemaking between combining distilled spirits linger from the past or that may arise process—protecting the revenue, ‘‘directly’’ with a malt base and doing so from alternative proposals. ensuring that FMB labels provide the ‘‘indirectly’’ through the addition of Several commenters suggested that, in consumer with adequate information flavors, it believed that ‘‘this is a the absence of a national standard, about the identity of the product and do distinction without a difference. States would enact differing standards not mislead consumers, and setting a Congress clearly intended to classify under which the same product may be Federal standard for the use of added any alcoholic beverage that contains a sold as a ‘‘beer’’ in one State and as a alcohol flavors in malt beverage mixture or dilution of distilled spirits as ‘‘distilled spirits’’ product in another products—while minimizing ‘distilled spirits.’’’ State. The commenters suggested that unnecessary costs and other regulatory Several brewers commented that these inconsistent standards would burdens on the affected industry. neither law nor good policy supported confuse consumers. For these and other reasons set forth the 51/49 standard. Coors suggested that Many commenters focused on later in this document, we have while the proposed 0.5% standard industry and consumer understanding concluded that we should adopt the 51/ allowed the addition of a de minimis of the terms ‘‘beer’’ and ‘‘malt 49 standard for beers under the IRC and amount of flavors, a 51/49 rule went beverage.’’ For example, the Brewers’ for malt beverages under the FAA Act. beyond the allowance of a de minimis Association of America (BAA), a 62- TTB believes that by allowing FMBs to quantity of flavors. Anheuser-Busch year-old trade association representing comply with the less stringent 51/49 stated that neither the FAA Act nor the the interests of more than 1,400 small standard rather than the proposed 0.5% IRC provided a basis for TTB to adopt American breweries, submitted a standard, we meet the goals of this the 51/49 standard, arguing that ‘‘[t]he comment in support of the 0.5% rulemaking proceeding and, at the same difference of only a couple of drops standard. The BAA stated: time, lessen the potential economic between a product that is ‘mostly’ a beer costs and other regulatory burdens versus ‘mostly’ a distilled spirit would The perception of the general public is that beer is a beverage with malt flavor and hop imposed on members of the FMB make a mockery of the law, public bitterness, flavor and aroma. Many small industry. The other reasons for adopting policy and the many years of distinction brewers currently produce flavored malt the 51/49 standard are set forth between malt beverages and distilled beverages that have these characteristics. The elsewhere in this preamble. spirits.’’ products currently classified as FMBs and recently analyzed by TTB display none of VIII. The 0.5% Standard vs. the 51/49 2. Consumer Deception or Confusion these characteristics, and should not be Standard—Other Issues Many commenters supported the considered or taxed as beer. A. Comments in Favor of the 0.5% proposed 0.5% standard based on the Many commenters stated that many Standard premise that it would reduce consumer FMBs do not meet the traditional confusion. These commenters included definition of beer or ale and thus blur 1. Consistency With the IRC and the consumers, State senators and the line between spirits-based beverages FAA Act representatives, beer distributors, and traditional beers and ales. Others Many commenters found support for merchandisers, Members of Congress, argued that the consumer does not the proposed 0.5% standard in the IRC State governors, State ABC expect beer to contain added distilled provisions establishing 0.5% as a commissions, breweries, national alcohol from outside sources. Some dividing point between products subject associations, State licensing and taxing suggested that it was deceptive to to tax under the IRC and those that are authorities, State coalitions, and characterize FMBs as malt beverages not subject to tax. For example, the Beer industry members. since many FMBs do not resemble or Institute noted that the IRC ‘‘clearly As indicated in the comment taste like beer. provides the Secretary with broad overview, several thousand commenters authority to issue and enforce stated that the establishment of a 0.5 3. Preserving the Integrity of Beer regulations, to classify products for tax percent standard would eliminate Many commenters stated that beer purposes, and to establish a workable consumer confusion, preserve the and malt beverages are unique beverages administrative system to collect taxes.’’ integrity of the beer category, or provide with a unique history. We received The Beer Institute stated that classifying beer consumers with a clear thousands of comments from the beer intoxicating based on the 0.5% understanding of the product. Many industry urging TTB to maintain this cutoff has a long history, dating back to commenters suggested that it was distinction by adopting the 0.5% 1902 and continuing through important to define the difference standard. These commenters noted that Prohibition. Miller commented that the between beer and other alcohol Federal and State governments have ‘‘use of what could be characterized as beverages, such as distilled spirits. For historically regulated and taxed beer a de minimis threshold such as 0.5% is example, we received thousands of and malt beverages differently from

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distilled spirits. These commenters alcohol to be derived from fermentation. Some commenters stated that the suggested that the 0.5% standard was The FMBC suggested that the IRC places proposed 0.5% standard would the only way to maintain the integrity a practical limit on the use of flavors arbitrarily impose a more rigorous of beer and the brewing process. because of the unpleasant taste of standard on FMBs and beer than TTB Many commenters were of the nonbeverage flavors. The FMBC and imposes on other alcohol beverages. The opinion that the 0.5 percent standard Diageo both argued that IRC section commenters allege, as examples of this will ensure that FMBs are produced as 5001(a)(2) does not apply to products disparity in treatment: traditional malt beverages using containing nonbeverage drawback • There is no regulatory restriction on traditional brewing methods and flavors, and that it instead only applies the amount of alcohol flavorings used in processes. A large number of to products containing distilled spirits wine specialty products; commenters stated that the on which tax has not been paid or • has less stringent classification of FMBs as beer threatens determined. standards for the addition of distilled beer culture in the United States. In this Authority Under the FAA Act. Many spirits to the wine base than the regard, they pointed out that beer has proposed 0.5% standard; commenters also noted that the FAA • unique attributes as a beverage— Act does not place limits on the use of Distilled spirits products may including malt-flavor, hop-bitterness, flavors in a malt beverage but instead contain up to 50% wine on a proof and aroma. Many of these commenters explicitly authorizes the use of gallon basis; • Certain wines may be labeled with argued that the integrity of beer and the ‘‘wholesome food products’’ in malt a varietal designation if 51% of the brewing process must be preserved. beverage production (see 27 U.S.C. grapes are of the labeled grape variety; Some commenters suggested that beer 211(a)(7)). Furthermore, the comments and and FMBs are produced differently and suggested that since the Volstead Act • should be categorized separately in the A TTB regulation, 27 CFR 5.22(b), explicitly restricted the use of requires to be alcohol beverage market. Many nonbeverage flavors to make a beverage, commenters pointed to the history of produced from a fermented mash of not the silence of the FAA Act indicates a less than 51 percent corn. The other 49 alcohol beverages in the United States deliberate choice by Congress to allow as evidence of the longstanding percent may come from any other grain. the unlimited use of flavoring materials Additionally, a number of distinction between malt beverages and in malt beverage production. distilled spirits. They stated that these commenters argued that TTB’s general differences are well defined by the 2. Standard Best Supported by Law policy on beer ingredients, allowing as taxation structures at the State and little as 25% of the fermentable Many commenters suggested that if ingredients to be from malted barley, is Federal levels and these differences TTB has statutory authority to impose a should be maintained. significantly more lenient than the limit under the IRC or the FAA Act, the proposed 0.5% standard. Some B. Comments in Favor of the 51/49 0.5% standard has no basis in Federal commenters further noted that to label Standard law; rather, the 51/49 standard is the a product ‘‘beer,’’ 50 percent of the proper standard. These commenters fermentable base must be a grain. 1. TTB’s Statutory Authority Under the pointed out that in Notice No. 4, TTB IRC and the FAA Act Accordingly, these commenters argued indicated that IRC section 5052 also that the 51/49 standard was more Several FMB producers suggested that would support the issuance of a consistent with TTB’s regulatory TTB lacks statutory authority to impose regulation requiring that a beer or malt policies than the 0.5% standard. a 0.5% limit on the use of alcohol beverage must directly derive a majority derived from flavoring materials in the of its alcohol content from fermentation. 4. Burden of Establishing Consumer production of FMBs. It should be noted The commenters argued that since both Deception that while these commenters also the FAA Act and the IRC would support In support of their position against the believe TTB lacks authority to impose such a standard, TTB did not provide proposed 0.5% standard, FMBC, as well any limits on the use of alcohol derived sufficient reasons why it proposed the as several FMB producers, argued that from flavoring materials in the much stricter 0.5% standard. TTB failed to meet its burden of production of malt beverages, they 3. IRC Regulatory Policy establishing that consumer deception or nonetheless supported the 51/49 option confusion results from use of the term as a matter of policy. Many commenters suggested that the ‘‘malt beverage’’ on the label of a Authority Under the IRC. Several 51/49 standard would actually protect product that derives most of its alcohol commenters stated that the current the revenue by placing a meaningful from added flavors. These commenters definition of the term ‘‘beer’’ in the IRC, limit on the addition of alcohol suggested that TTB must first produce at 26 U.S.C. 5052, gives brewers flavorings to FMBs in a manner evidence to back up its assertion that substantial discretion in formulating consistent with TTB’s regulatory policy. use of the term ‘‘malt beverage’’ on a their products and places no limits on For example, one commenter argued label leads consumers to believe that a the use of nonbeverage flavors in that the 0.5% standard is punitive and significant portion of the product’s products taxed as beer. They noted that has no basis in recent TTB policy. This alcohol derives from fermentation of prior IRC provisions included commenter suggested that ATF Ruling barley malt and other ingredients at the restrictions on producing a beverage 96–1 actually weakened the case for the brewery, and must secondly from nonbeverage articles such as 0.5% standard since the ruling permits demonstrate that the consumer flavors, and they suggested that the the addition of up to 1.5% alc/vol confusion it asserts is material in that it current IRC’s silence on the issue derived from flavors in beer and malt actually affects consumers’ purchasing represents a deliberate choice by beverages over 6.0% alc/vol. The decisions. Congress not to restrict flavor use in the commenter stated that in view of this FMBC suggested that TTB had not production of beer. Furthermore, the ruling, TTB has failed to present met either of those burdens in Notice comments noted that the statutory evidence why a far stricter standard, No. 4. This commenter argued that the definitions of beer and malt beverages 0.5%, should be used for the definitions notice contained no evidence of do not specify any minimum amount of of beer and malt beverages. consumer confusion, cited to no

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consumer survey, and did not point to about the source of alcohol in FMBs why someone would choose an FMB, a single consumer complaint about the were likely to influence the purchasing providing as one of the reasons whether alcohol source in FMBs. FMBC decisions of consumers. the alcohol comes from the fermentation suggested that a final rule could not To determine if the term ‘‘malt or distillation process. The respondents cure this deficiency as the APA requires beverage’’ confused consumers, the were asked to choose their top three TTB to provide the public an research group provided respondents reasons. The results were as follows: opportunity to comment on the basis of with a bottle of the FMB ‘‘Mike’s Hard [In percent] new regulations. FMBC also stated that Lemonade.’’ The term ‘‘malt beverage’’ Federal courts today virtually require appeared prominently on the front label. The Taste ...... 81 survey evidence to back up a claim of The survey asked the respondents to Alcohol Strength ...... 47 consumer confusion; mere assertions of look at the bottle and to state if they Convenience ...... 42 administrative expertise, without more, believed the alcohol came from a Cost ...... 32 would not carry TTB’s evidentiary distillation or fermentation process, or if What My Friends/Family/Co-Workers burden. they had no belief about the product’s are Drinking ...... 32 Finally, FMBC suggested that TTB alcohol source. The results were as Advertising and Marketing ...... 21 The Design of the Packaging and bears an even heavier evidentiary follows: Bottle ...... 9 burden since Notice No. 4’s assertion of [In percent] The Image I Want to Portray to Peo- confusion directly contradicts its ple ...... 8 predecessor’s pronouncements on the No belief about the source of alcohol .. 80 Whether the Alcohol Comes from a same subject. FMBC pointed out that Alcohol comes from a distillation proc- Fermentation or Distillation Process 0.2 when TTB’s predecessor agency, ATF, ess ...... 11 decided not to pursue further Alcohol comes from a fermentation MAB suggested that the Luntz survey rulemaking on the use of cocktail names process ...... 9 demonstrates that alcohol source is on labels of malt beverage coolers, it totally immaterial to the purchasing concluded, in a letter dated November As noted in the table, the Luntz decisions of FMB consumers. When 17, 1997, as follows: survey found that four out of five FMB asked for their top two reasons for consumers had no belief about the choosing an FMB, not a single Evidence introduced indicates that alcohol source in an FMB product after respondent gave alcohol source as a flavored malt beverages are viewed by examining a bottle of a well-known consumers as coolers or low alcohol reason. Indeed, taste-related responses refreshers, and not as a distilled spirits FMB product prominently labeled as a topped consumers’ criteria for selection, product. Evidence introduced also indicates ‘‘malt beverage.’’ Consumers who had a followed by the FMB’s difference from that the presence of distilled spirits or any belief about the alcohol source roughly beer and its convenience. Even when similarity of these products to a distilled split into those who believed that it presented with a list of 9 reasons for spirits drink is not a criteria in their selection contained alcohol from fermentation selecting an FMB that included alcohol by consumers. and those who believed that it source, just one respondent chose Accordingly, FMBC, like many other contained alcohol from distillation. Of alcohol source as a reason for selecting commenters, suggested that TTB’s the 9% of the respondents (54 out of an FMB. MAB suggested that this statement in the preamble to Notice No. 600) who believed the product derived evidence conclusively demonstrates that 4 was inconsistent with the conclusion its alcohol from fermentation, alcohol source is not material to of its predecessor agency, reached just 6 approximately 2% (14 out of 600) based consumers’ purchasing decisions, and years before, that consumers did not this belief on the product’s labeling as that to label an FMB as a ‘‘malt care about the alcohol source of malt a malt beverage. MAB asserted that the beverage’’ is not misleading as a matter beverage products. The commenters case law requires a level of confusion far of law. noted that ATF had reached this greater than 2% in order to find the 6. Standard That Best Prevents conclusion after soliciting public existence of consumer confusion in the Consumer Deception comments on the use of cocktail names marketplace. in the labeling of malt beverages, and To determine whether the source of Some commenters suggested that that its conclusion was consistent with alcohol in FMBs affected purchasing adoption of the 51/49 standard would consumer surveys submitted by malt decisions, the survey asked respondents better prevent consumer deception than beverage producers in that rulemaking to name the top two most important implementation of the proposed 0.5% proceeding. reasons why they drink FMBs. The standard. The FMBC suggested that if results were as follows: TTB was concerned about consumer 5. Consumer Survey Conducted by the [In percent] confusion, it had failed to bear its Luntz Research Companies burden of establishing why the 0.5% MAB retained the Luntz Research Taste/Flavor ...... 52 standard prevents consumer deception Companies (‘‘Luntz’’) to survey New/Different/Not Beer ...... 28 better than a majority or 51/49% consumer beliefs about the alcohol Convenience/Availability ...... 13 standard. As noted earlier in the source in FMBs, and to ascertain Refreshing/Thirst Quenching ...... 12 comment overview, the National whether any of these beliefs were Easy to Drink/No Alcohol Taste ...... 12 Consumers League (NCL) made a similar Females Like Them ...... 9 material to FMB purchasing decisions. Effect of Alcohol ...... 6 comment, noting that requiring that the Luntz conducted 600 face-to-face Friends/Family Drink It ...... 7 product derive a majority of its alcohol interviews of FMB consumers in 3 Given to Me/Bought For Me ...... 5 content from malt fermentation would metropolitan areas—Baltimore, Chicago, assure that an FMB actually contains a and San Diego. The purpose of the The survey noted that not one of the significant concentration of malt. The survey was to determine if the term 600 respondents stated that the source NCL also questioned whether source of ‘‘malt beverage’’ led consumers to of alcohol was an important reason for alcohol was in any way material to believe erroneously that the alcohol in choosing an FMB. consumer choice, and urged more an FMB comes from a fermentation The survey then provided the complete labeling information on process and whether consumer beliefs respondents with a list of nine reasons alcohol beverage containers.

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As noted earlier in this comment contrary, we have concluded that we TTB does not agree with this discussion, several commenters pointed have authority, under both the IRC and interpretation of the IRC. Section out that TTB and its predecessor agency the FAA Act, to issue regulations that 5001(a)(2) provides as follows: had adopted ‘‘majority’’ or establish those limits. (2) Products containing distilled spirits. All ‘‘predominance’’ standards for other Statutory Definitions. Fermentation is products of distillation, by whatever name products. These commenters noted that the process by which yeast converts known, which contain distilled spirits, on wine can constitute up to 50% of a into alcohol and carbon dioxide. which the tax imposed by law has not been distilled spirits product; thus, Both the definition of ‘‘beer’’ under IRC paid, and any alcoholic ingredient added to nonbeverage flavors should be able to section 5052 and the definition of ‘‘malt such products, shall be considered and taxed as distilled spirits. contribute up to half (or 49%) of the beverage’’ under the FAA Act focus on alcohol content of a malt beverage fermentation as the source of the alcohol The commenter misreads this section product. in these products. by suggesting that the critical issue is whether the distilled spirits contained 7. Preserving the Integrity of Beer The study conducted by ATF in 2002 established that for many FMB in the product have been taxpaid. The FMBC noted that several products, the major source of alcohol Instead, the statute clearly imposes a tax supporters of the 0.5% standard cast was distilled alcohol rather than on all products of distillation that themselves as defenders of ‘‘traditional’’ fermented alcohol. The results of this contain distilled spirits, as long as the and ‘‘age-old’’ production techniques, study raised the question: Should a tax imposed by law on the finished but suggested that the brewing industry product that derives the majority (in product has not been paid. ‘‘long ago departed from the brewing some cases up to 99%) of its alcohol This provision of the IRC must be methods employed at the time current from the distilled spirits components of read in conjunction with other IRC federal and state alcohol control laws added flavors qualify as a ‘‘beer’’ under requirements. Subject to certain were enacted.’’ The FMBC suggested the IRC, and as a ‘‘malt beverage’’ under exceptions not relevant here, a person that several techniques currently used the FAA Act? TTB concluded that who manufactures, mixes, or otherwise by brewers are not specifically Congress never intended to allow such processes distilled spirits is a processor within the meaning of IRC section authorized by law such as the use of products to qualify as beers or malt 5002(a)(5). The definition of a high-tech to enhance beverages. At the same time, neither ‘‘processor’’ does not revolve around fermentation, the use of ‘‘high-gravity’’ statutory definition explicitly excludes whether the distilled spirits in question brewing to produce a high-alcohol beverages that contain alcohol in are taxpaid or not, and neither does the product to which water is added just addition to that produced during their imposition of tax under section before packaging to make beer, new fermentation. Accordingly, we proposed 5001(a)(2). The critical issue is not fermentation techniques that have a regulation that would allow only less whether the original distilled spirits pushed the upper strength limit of beer than 0.5% alcohol by volume derived used in the product were taxpaid; to 25% alcohol by volume, and the from flavors, and we also sought thousands of adjuncts authorized by the instead, the issue is whether the final comments on an alternative proposal product has been taxpaid as a distilled ARM. that would require that at least 51% of The FMBC argued that ‘‘tradition’’ spirits product. the alcohol in a beer or malt beverage Furthermore, IRC section 5002(a)(8) arguments play upon the real must be derived from fermentation at differences in taste and appearance defines the term ‘‘distilled spirits’’ to the brewery. mean ‘‘that substance known as ethyl between conventional beers and FMBs. After carefully considering the However, the FMBC asserted that alcohol, ethanol, or spirits of wine in comments on this issue, as well as the any form (including all dilutions and Federal policy long ago abandoned any statutes that provide us with authority taste, aroma, or color criterion for mixtures thereof from whatever source to issue regulations on standards for or by whatever process produced).’’ The products classified as beer or and malt beverages, we have beverages. Finally, the FMBC noted that application of this definition does not concluded that we have statutory depend upon whether the spirits are supporters of the 0.5% standard claim authority to limit the alcohol that may taxpaid or not. that brewers can produce, under the be added to ‘‘beers’’ under the IRC, and TTB also believes that those 0.5% standard, FMBs that look and taste to ‘‘malt beverages’’ under the FAA Act, commenters who questioned TTB’s exactly like FMBs on the market today. and to ensure that they derive most of authority under the IRC are overlooking Thus, claimed the FMBC, ‘‘in a their alcohol from fermentation at a our broad authority over the production wonderfully ironic twist, supporters of brewery rather than from the distilled of flavoring materials under the the 0.5% standards wrap themselves in spirits components of added flavors. nonbeverage drawback provisions of the the banner of brewing tradition while Authority Under the IRC. TTB does IRC. This authority includes the ability championing a rule that will accelerate not agree with those commenters who to ensure that nonbeverage flavors are the development and deployment of suggested that malt beverages may not being misused as the primary source high-technology processes necessary to contain unlimited quantities of distilled of alcohol in beverage products such as produce an FMB under the Notice 4 alcohol from added flavors without malt beverages. standard.’’ falling under the statutory definition of Pursuant to section 5132 of the IRC C. TTB Response a distilled spirit. One commenter argued (26 U.S.C. 5132), the Secretary has that the provisions of IRC section authority to issue ‘‘rules and regulations 1. Statutory Authority 5001(a)(2) apply only to products * * * to secure the Treasury against In the preamble to Notice No. 4, TTB containing distilled spirits on which the frauds.’’ This authority is not new, and set forth, in great detail, its authority to tax has not been paid. Because the it has been used in the past to issue engage in rulemaking to place limits on distilled spirits used in nonbeverage regulations placing a 21⁄2 percent limit the use of alcohol derived from drawback products are tax determined on the quantity of nonbeverage flavoring materials in the production of or taxpaid, the commenter argued that drawback flavors used in the production malt beverages. After carefully this section does not apply to products of distilled spirits products. (See T.D. considering the comments to the containing flavors. 5573.) Congress recognized this

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regulatory limit when it enacted section the use of non-beverage flavors in the adopt a limit on the use of added flavors 5010 of the IRC in 1980, limiting the production of beer, wine, and distilled containing alcohol, it is very possible quantity of flavors eligible for a tax spirits. The IRC does not require us to that producers will find new ways to credit in distilled spirits products to 21⁄2 adopt a 0.5% standard. Accordingly, take advantage of this policy, by percent. Our broad authority to limit the companies that have invested millions producing at breweries more and more use of drawback flavors in the of dollars in reliance on the existing products that used to be produced at production of alcoholic beverages also policy argued that if TTB has discretion distilled spirits plants. Accordingly, we allows us to place limits on the use of to implement either standard, the believe that, at a minimum, the alcohol such flavors in the production of beer. Bureau should choose the standard that derived from added flavors and other Authority Under the FAA Act. The imposes the least burden on FMB nonbeverage ingredients must be FAA Act also gives the Secretary of the producers. restricted to less than half the alcohol Treasury authority to issue regulations After carefully considering the content of the finished FMB product. to prevent deception in the labeling and comments, we agree with those We are persuaded by the comments advertising of malt beverages and to commenters who stated that TTB has that suggested that the proposed 0.5% ensure that labels provide consumers some discretion in this area. Beers limit was not the appropriate standard, with adequate information about the subject to taxation under the IRC are not notwithstanding its historical use to identity and quality of malt beverages. nonalcoholic beverages like soft drinks; distinguish alcohol beverages from non- (See 27 U.S.C. 205(e).) One of the thus, the 0.5% limit on added alcohol alcoholic beverage products, because we questions raised by this rulemaking in nonalcoholic products does not apply are dealing here with a taxable process is whether the term ‘‘malt to beers, which are already being taxed commodity—beer—not a nonalcoholic beverage’’ is an accurate description of under the IRC. However, our authority beverage such as a soda or juice. In a product that derives up to 99% of its under the IRC includes the authority to other words, when we use the 0.5% alcohol from the distilled spirits set standards for the production of beer limitation to limit the use of alcohol components of added flavors. Our and for the use of nonbeverage flavors from flavorings in nonalcoholic authority under the FAA Act requires us in beer production, to ensure that the beverages, we are drawing a line to issue regulations setting forth revenue is adequately protected. between products that are subject to tax standards for terms such as ‘‘malt 3. Which Interpretation Is Consistent under Chapter 51 of the IRC and those beverage’’ to ensure that use of this With Our Regulatory Policy and that are not. However, FMBs are clearly designation on alcohol beverage labels Practice? subject to tax under Chapter 51; the only does not mislead consumers but instead question is whether they are provides consumers with adequate After careful consideration of the comments, we have concluded that it is appropriately taxed as beers or distilled information about the identity and spirits. quality of the product. necessary, for purposes of implementing Accordingly, TTB has concluded that the relevant statutes, to adopt a limit on While either the proposed 0.5% it has authority, under both the IRC and the use of alcohol derived from standard or the 51/49 standard would be the FAA Act, to set limits on the flavoring materials in the production of consistent with the statutory language, quantity of non-fermented alcohol, beer. As explained below, we believe we have concluded that the 51/49 limit derived from added flavors, that is used that the 51/49 standard interprets the is more consistent with TTB regulatory in the production of flavored malt statutes as issue in a way most policy and practice. As previously beverages. consistent with our regulatory policy on noted, the revenue issue posed is how revenue classification issues. to ensure that we maintain a meaningful 2. Which Standard Is Better Supported The unlimited use of flavors distinction between beer and distilled Under the IRC? containing alcohol in the production of spirits under the IRC. Because the In Notice No. 4, we stated that we FMBs poses a threat to the revenue. statute does not provide us with specific believed that the IRC would support Once FMBs start deriving 51%, or 75%, guidance on this issue, we are guided by either the proposed 0.5% standard or or even 99% of their alcohol content our regulatory policy on similar the alternate 51/49 standard. After from the distilled spirits components of classification issues. carefully examining the comments, we added flavors, it can be argued that With regard to those commenters who have concluded that valid arguments these products are properly classified as argued that the proposed limits on the may be made in favor of both standards. distilled spirits rather than as beers. As use of alcoholic flavorings in the The primary argument in favor of the previously noted, the IRC definitions of production of beer are inconsistent with 0.5% standard is that it establishes a de these terms make it clear that beers are our treatment of wines under the IRC, minimis standard for the addition to products of fermentation, and distilled and who suggested that the regulations beer of flavors containing alcohol. spirits are generally products of do not place limits on the use of flavors Essentially, the use of this a standard distillation. The tax rate on beer is containing alcohol in the production of treats beers in the same way that soft significantly lower than the tax rate on wine, we believe that these statements drinks and other non-alcoholic products distilled spirits. Accordingly, allowing are not entirely accurate. In the first are treated; they may contain less than such products to be produced at a place, it should be noted that the 0.5% added alcohol from flavors. brewery and taxpaid as beers rather than statutes and regulations governing the The arguments against the 0.5% distilled spirits renders meaningless the production of wine under the IRC differ standard are both practical and distinction between distilled spirits significantly from the statutes and statutory. We are not starting from a products and beers. regulations governing the production of blank slate; instead, we are facing a Clearly, a standard must be beer under the IRC. While the IRC does marketplace in which many of the most established in order to avoid the current not specifically authorize the direct popular FMB products derive the vast situation whereby a product deriving as addition of distilled spirits to beer, it majority of their alcohol content from much as 99% of its alcohol content from does specifically authorize the addition added flavors. The policies of TTB and the distilled alcohol component in of wine spirits to wines. (See 26 U.S.C. its predecessor agencies have allowed added flavors is classified, and taxpaid, 5373.) Thus, many wines contain this practice for years. We have allowed as a beer. Furthermore, if we do not distilled alcohol from wine spirits.

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Secondly, the IRC regulations Brewers will pay the same tax rate on beverage, provided that the overall label governing the production of wine do beer regardless of whether the beer does not present a misleading place limits on the use of essences derives 10% or 49% of its alcohol impression about the identity of the containing spirits. In particular, the content from added flavors. Because product. regulations provide that where an beer is taxed on a volume basis, a Consumer Survey Conducted by the essence contains spirits, use of the brewer derives no tax advantage by Luntz Companies. We have carefully essence may not increase the volume of increasing the flavors content of the reviewed the results of the consumer the wine more than 10 percent nor its product to the maximum allowed by the study conducted by Luntz. The alcohol content more than four percent regulations. Thus, the 51/49 standard commenter that submitted this study by volume. (See 27 CFR 24.85.) Thus, will accord maximum flexibility to the argues that it establishes two essential the regulations do place limitations on industry in formulating their products points: alcohol source is immaterial to the use of essences containing spirits in according to the taste preferences of consumers, and consumers are not the production of wine. As previously their consumers, without jeopardizing confused about the source of alcohol in noted, there is a 21⁄2% limit on the use the revenue. an FMB product. We disagree. of drawback flavors eligible for credit in Accordingly, TTB is amending the First, we will address the materiality the production of distilled spirits proposed regulation in 27 CFR 25.15 to issue. Other commenters have raised products under 26 U.S.C. 5010. provide that flavors and other this issue as well, noting that in 1997 TTB believes that because of the nonbeverage ingredients containing our predecessor agency concluded that different statutory provisions, our alcohol may contribute no more than there was evidence indicating that treatment of the use of flavors in wines 49% of the overall alcohol content of similarity to distilled spirits products and distilled spirits does not provide the finished beer. was not a major factor in consumers’ clear guidance as to how to limit the use purchasing decisions with regard to 5. FAA Act, Consumer Deception of alcohol derived from flavors in beer FMB products. A major producer of production. However, we believe that a After carefully considering all the FMB products has submitted new more analogous regulatory provision comments on this issue, TTB has consumer evidence, the Luntz survey, concerns the use of wine in distilled concluded that current FMB labels do which purports to establish that the spirits products. Regulations issued not provide consumers with adequate source of alcohol in an FMB is not a under both the FAA Act and the IRC information about the product. For this material factor in a consumer’s decision define the term ‘‘distilled spirits’’ to reason, we have decided to set new to purchase the product. Accordingly, exclude mixtures of distilled spirits and standards for use of the designation several commenters have argued that wine, bottled at 48 degrees proof or less, ‘‘malt beverage’’ on labels. TTB can justify action based on if the mixture contains more than 50 TTB concludes that the term ‘‘malt consumer deception only if consumers percent wine on a proof gallon basis. beverage’’ does not accurately describe are being misled in a material fashion. (See 27 CFR 5.11 and 19.11.) This a product that derives up to 99% of its TTB does not agree that the Luntz longstanding distinction signifies the alcohol content from the distilled spirits survey conclusively establishes that intent to distinguish between two components of nonbeverage flavoring consumers do not care whether the categories of taxable alcohol beverages, materials. However, it is important to product is a result of fermentation or wine and distilled spirits, based on a stress that this in no way means that distillation. Furthermore, we do not predominance standard. producers of FMBs currently on the agree that we are required to conduct market have intentionally misled consumer surveys to find out if alcohol 4. Reasons for Adoption of the 51/49 consumers by using this term on labels. source is a material issue to consumers Standard Under the IRC Regulations Instead, these producers have relied on before setting standards that distinguish After carefully considering the record, the policies of TTB and our predecessor malt beverages from distilled spirits TTB has concluded that the 51/49 agency. Accordingly, the focus of TTB is products. standard is most consistent with our on which standard for FMBs will best Since the enactment of the FAA Act regulatory policy on revenue achieve our statutory mandate of in 1935, we and our predecessor classification issues. Accordingly, we ensuring that malt beverage labels agencies have issued regulations setting are adopting the 51/49 standard in the adequately inform consumers about the class and type designations or standards regulations setting forth the standards, identity of the product. of identity for wines, distilled spirits, under the IRC, for addition of flavoring Consistency With 1997 Decision on and malt beverages. These standards of materials that contain alcohol to beer. Cocktail Names. We do not believe that identity are largely based on industry As noted previously, TTB has our predecessor agency’s 1997 decision and consumer understanding of the determined that the adoption of the not to pursue further rulemaking on the meaning of certain terms. The FAA Act 0.5% standard for all beers under the use of cocktail names in the labeling or provides us with authority to issue IRC would impose additional economic advertising of malt beverages precludes labeling regulations that will prevent costs and regulatory burdens on the beer us from making this decision. In the first consumer deception and provide the industry. Since we have concluded, place, we recognize that we are consumers with adequate information after careful analysis of the record, that changing longstanding policy with about the identity and quality of the either interpretation is allowed under regard to the labeling of FMB products; product. (See 27 U.S.C. 205(e).) the relevant statutes, we are adopting that is why we engaged in notice and The FAA Act provides for three broad the alternative that is less costly to the comment rulemaking before categories of alcohol beverages: distilled industry, and imposes fewer regulatory implementing this change. Secondly, spirits, wines, and malt beverages. The burdens. the proposed and final rules are classification of a product within one of It should be emphasized that adoption consistent in many respects with ATF’s these categories is the most fundamental of this standard reflects a decision on a 1997 decision about cocktail names. As decision that must be made before the tax classification issue, and will in no set forth later in this document, the product can be properly labeled or way reduce the tax liability of brewers regulations in this final rule continue to advertised under the Act. To say that that utilize the maximum amount of allow the use of a cocktail name as a consumers do not care whether the flavors in the FMBs that they produce. brand name or fanciful name of a malt alcohol in a product comes from

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fermentation or distillation is equivalent was not confined to a requirement of As previously noted, TTB does not to saying that consumers do not care truthful and informative labeling.’’ (See agree that it needs to conduct a whether the product is a distilled spirits 318 U.S. at 230.) The Court held that consumer survey to establish standards product or a malt beverage. Yet, our ‘‘provisions for standards of identity for the use of labeling terms based on most basic responsibility under the FAA thus reflect a recognition by Congress of consumer and industry understanding Act labeling provisions is to provide the the inability of consumers in some cases of the terms. As the U.S. Court of consumer with adequate information to determine, solely on the basis of Appeals for the D.C. Circuit has about the identity of the product. There informative labeling, the relative merits recognized, ‘‘while consumer surveys can be no question that the starting of a variety of products superficially conducted by independent experts may point of this responsibility is informing resembling each other.’’ (See 318 U.S. at arguably constitute the best way to the consumer whether the beverage is a 230–231.) In the same way, regardless of establish consumer understanding and wine, malt beverage, or distilled spirits whether we have consumer surveys preference * * * such surveys are not product. establishing that consumers care the exclusive form of probative evidence In Federal Security Administrator v. whether a product derives its alcohol of public perception.’’ (See FTC v. Quaker Oats Co., 318 U.S. 218 (1943), from distilled spirits or beer, it is our Brown & Williamson Tobacco Corp., 778 the Supreme Court upheld revised responsibility to ensure that the label F.2d 35, 41 (D.C. Cir. 1985).) Our standards of identity for ‘‘farina’’ and truthfully and adequately describes the conclusion in this matter is bolstered by ‘‘enriched farina’’ under the Federal contents of the product. In order to do comments from beer and malt beverage Food, Drug and Cosmetic Act. A this, we must establish basic standards industry members urging us to preserve manufacturer had challenged these for use of the terms ‘‘distilled spirits’’ the integrity of the beer and malt standards, alleging that under the and ‘‘malt beverage’’ on alcohol beverage classifications by establishing revised standards, its product, beverage labels. limits on the use of flavors containing previously marketed as farina enriched The second issue addressed by the alcohol. with Vitamin D, would qualify as Luntz survey is whether current labels Based on the above analysis, TTB neither farina nor enriched farina. The mislead consumers, and whether they concludes that current FMB labels may Court of Appeals found that the provide adequate information about the mislead or confuse consumers by Administrator’s findings as to probable identity of the product. MAB argues that labeling as ‘‘malt beverages’’ products consumer confusion in the absence of consumers are not confused about the that derive up to 99% of their alcohol prescribed standards of identity were source of alcohol based on the fact that content from added flavors rather than speculative and conjectural, in the of the 20 percent of consumers that had from fermentation at the brewery. We absence of evidence that the a belief about the source of alcohol, less believe that our statutory mandate to respondent’s product had in fact than half believed that the alcohol came prevent consumer deception, and to confused or misled anyone. The from fermentation, and slightly more ensure that alcohol beverage labels Supreme Court overturned this than half believed that it came from decision, stressing the deferential nature distillation. TTB draws very different provide consumers with adequate of its review of the Administrator’s conclusions from this survey. information about the identity of the decision. The Supreme Court rejected The survey was conducted for a ‘‘hard product, support an amendment to the the argument that the Administrator lemonade’’ product labeled as a regulations that would limit the relied on speculative and conjectural ‘‘flavored malt beverage.’’ Yet 80% of quantity of alcohol derived from flavors testimony as to whether the marketing the respondents, after reading the label, in a malt beverage product. of products that do not conform to had no belief whatsoever as to whether 6. Reasons for Adopting the 51/49 standards of identity would tend to the product was derived from fermented Standard for FMBs confuse and mislead consumers, finding alcohol or distilled alcohol. This would that: seem to indicate that the vast majority After careful consideration of the of the respondents were very confused record, we have decided to adopt the The exercise of the administrative rule- 51/49 standard for malt beverages under making power necessarily looks to the future. as to the classification of this FMB The statute requires the Administrator to product. the FAA Act. We agree with those adopt standards of identity [which], in his Because the vast majority—80%—of commenters who suggested that the 51/ judgment, ‘‘will’’ promote honesty and fair the respondents had no belief on this 49 standard is consistent with certain dealing in the interest of consumers. Acting issue whatsoever, and the remaining other limits in our FAA Act labeling within his statutory authority he is required respondents were almost evenly divided regulations. See, for example, 27 CFR to establish standards which will guard on the question, the survey clearly does 5.11 (the definition of the term against the probable future effects of present not establish that current FMB labels ‘‘distilled spirits’’ excludes mixtures trends. (See 318 U.S. at 228.) provide consumers with adequate containing wine, bottled at 48° proof or Similarly, our authority under the FAA information about the identity of the less, if the mixture contains more than Act requires us to prescribe labeling product. Indeed, the only thing that is 50 percent wine on a proof gallon basis) regulations that will ensure that clear from the results of the survey is and 27 CFR 5.22(b)(1)(i) (the standard of consumers are adequately informed as that, of the 600 FMB consumers that identity for ‘‘bourbon ’’ provides, to the identity and quality of alcohol participated in the survey, only a very among other things, that it must be beverages. small percentage (11%) recognized that produced from a mash of not less than Although the Quaker Oats case deals the alcohol in the product might come 51 percent corn). We believe the 51/49 with the Federal Food, Drug and from distillation rather than standard will adequately inform Cosmetic Act (FD&C Act), rather than fermentation. Thus, to the extent that consumers about the identity of the the FAA Act, many of the Court’s the survey’s results establish anything at product. Furthermore, as noted observations about the FD&C Act are all, they would appear to resoundingly previously, adoption of the 51/49 equally applicable to the FAA Act. For support the conclusion that there is standard for FMBs will minimize example, the Court noted that ‘‘the text significant confusion among FMB economic costs and regulatory burdens and the legislative history of the present consumers about the identity of these placed on members of the FMB statute plainly show that its purpose products. industry.

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IX. State Concerns standard for these beverages is Department of Alcoholic Beverage As noted in the preamble to Notice established, state legislatures and Control indicated that California had No. 4, one of our concerns in this administrators can make an informed ‘‘always deferred to your agency’s rulemaking process has been to provide decision as to whether it is in the state’s professional expertise concerning the a Federal standard for the guidance of interest to comply with or deviate from classification of alcoholic beverages into State regulatory agencies. Several State the national standard.’’ The Washington one of three primary categories: beer, regulatory and taxation agencies State Liquor Control Board commented wine, or distilled spirits’’ and it expressed concerns to TTB about FMBs that ‘‘[a]ddressing these issues at the intended to continue deferring to TTB’s and requested that TTB take action to federal level will ensure consistency classification of FMBs. A comment from clarify their status as either malt and preclude the various states from the Comptroller of Maryland and its beverages or distilled spirits. Many having to create separate regulations.’’ Alcohol and Tobacco Tax Division supported the proposed 0.5% standard States have urged us to define FMBs and 2. Need for Expeditious Action establish regulatory limits on the but stated that Maryland ‘‘adopts federal Many States urged TTB to resolve the addition of alcohol to beer and malt standards with respect to labeling and issue expeditiously. For example, the beverages through the use of flavors. In content of alcoholic beverages’’ and thus Superintendent of the Idaho Liquor the absence of such a Federal definition was ‘‘prepared to apply whatever Dispensary did not express support for and regulation, several States have said standards your agency ultimately either the 0.5% standard or the 51/49 that they will develop their own determines to be most appropriate.’’ standard, but urged TTB ‘‘to take action definitions for FMBs. to reach a decision on a standard.’’ The 5. Possibility of Unilateral State Actions TTB received more than 650 To Classify FMBs comments addressing the creation of a Director of Minnesota’s Alcohol and Several State agencies commented Federal standard for beer or malt Gambling Enforcement Division also did that without prompt action by TTB, it beverages or addressing Federal-State not express a preference for either would be necessary for them to relationship issues. Thirty-one State standard but noted that the introduction undertake this regulatory activity on liquor control boards, revenue of FMBs into the marketplace ‘‘has been their own. For example, Maine’s departments, or other State agencies a complicated and confusing situation Department of Public Safety Liquor having jurisdiction over alcohol for regulators as well as the consuming Licensing Division commented that if beverages, as well as one county liquor public’’ and stated that the Federal TTB delays or fails to adopt the commission, submitted comments. efforts to establish a uniform national proposed 0.5% standard, many States Twenty-four of these comments standard were of great importance to the State. The Director of Oklahoma’s ‘‘will find the need to act under their supported the proposed rule. Of the independent authority to determine the remaining 8 comments, 6 supported the Alcoholic Beverage Laws Enforcement Commission expressed his appreciation alcohol beverage category, label concept of a uniform standard for disclosures, tax, necessary wholesale flavored malt beverages and 2 provided of Federal efforts to clarify issues concerning FMBs. and retail license requirements in order information about State laws without to continue the selling of these products expressing an opinion on the TTB 3. Importance of Consistent Federal in their state.’’ proposals. Standard Some States have already begun We also received comments in Many States noted the importance of regulatory proceedings on this issue. support of the proposed rule from three a consistent Federal standard. For The Nebraska Liquor Control Governors, one Lieutenant Governor, example, the Director of the Montana Commission commented that it has and many State legislators. A smaller Department of Revenue supported the already determined that FMBs number of State legislators commented proposed 0.5% standard, noting that containing more than 0.5% alcohol in favor of the 51/49 standard. Montana, ‘‘like many other states, derived from distillation should be A. Comments by State Regulatory believe[s] it could be detrimental to both classified as distilled spirits, and has set Agencies regulatory agencies and the industry if a deadline for industry compliance with there are inconsistent classifications of this standard. The Tennessee Alcoholic 1. Federal Leadership Role these products in different states.’’ Beverage Commission commented that Several State regulatory agencies it had already conducted administrative commented that it was only in the last 4. States That Follow the Federal proceedings on the classification issue year that they became aware of the Standard and that it believed that TTB’s proposed actual composition of flavored malt Many commenters stated that State 0.5% standard would be consistent with beverages and that is up to TTB to governments have traditionally followed the position taken at its hearing. The establish a national standard. Some Federal policy in the taxation, licensing, issuance of an order in this matter is stated that a Federal definition for beer and distribution of alcohol beverages. awaiting the TTB final rule. and malt beverages would ease the For example, the Kentucky Alcoholic Other States commented that they burden on State regulators by providing Beverage Control Board stated that the would defer action pending completion a uniform definition. ‘‘Board has long felt that this standard of the TTB rulemaking proceedings. A Several of these agencies also should be set by the Federal Regulatory comment from the Virginia Department commented that individual State Authorities, not the individual states. of Alcoholic Beverage Control noted governments do not have the time or Such Policy consistency is important that while Virginia had accepted resources necessary to establish because while states enjoy regulatory Federal classification of products in the definitions of beer or malt beverages, or power over alcohol, most follow federal past, under State law a product to properly identify new alcohol regulatory guidelines.’’ containing alcohol from spirits and beer beverages. They suggested that the Some comments from States indicated is classified as a distilled spirits Federal Government has these that they would follow the Federal product, even if the majority of the resources. For example, the Delaware standard regardless of what decision is alcohol is contributed by beer. The Alcoholic Beverage Control reached by TTB. For example, a commenter suggested that TTB’s recent Commissioner noted that ‘‘[i]f a national comment from the California study revealed that most FMBs were

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incorrectly classified in Virginia, and Customers, along with regulators, have ‘‘beer’’ in one State and as ‘‘hard liquor’’ stated that the Department was delaying been unsure what this hybrid product in another. These comments suggested action pending the outcome of the TTB really is.’’ that this was already happening in rulemaking. Nebraska and will almost certainly 8. State Law Issues A comment from the Massachusetts happen in other States as well. Other Alcoholic Beverages Control In Notice No. 4, TTB solicited commenters pointed out that such Commission expressed support for the comments on whether States would different standards could result in proposed 0.5% standard, stating that the have to enact new legislation if TTB subjecting a product to two entirely Commission ‘‘in the past has amended its regulations to establish different sets of laws and regulations substantially deferred to federal either the 0.5% standard or the 51/49 regarding production, distribution, standards concerning the identity of a standard. Some States advised that the place of sales, labeling, and advertising. specific product, but the information proposed 0.5% standard would not Many commenters stated that this that has come to light recently during require amendments to State law, but discrepancy would jeopardize the review and discussion of FMB is they did not address the issue of nationwide marketing and distribution troubling to the Commission.’’ This whether a different standard would be efforts by industry members. commenter indicated that inconsistent with State law. For A State lawmaker commented that Massachusetts is deferring taking any example, the Oklahoma Alcoholic clear definitions of alcohol beverages action pending completion of the TTB Beverage Laws Enforcement are important for the State legislative rulemaking process. Commission advised that under process. Without definitions, the State Oklahoma’s constitution, alcohol 6. Tax Issues legislatures cannot study and act on beverages were taxed and regulated beverage alcohol issues in an educated Some State agencies focused on the based on whether the alcohol content of and professional manner. taxation aspects of the proposed 0.5% the product exceeds 3.2%, regardless of Several members of the beer industry standard, suggesting that taxing FMBs as whether the alcohol content is derived supported the 0.5% standard as being distilled spirits would have positive from brewing or distilling. most likely to resolve the concerns of revenue effects. For example, a A comment from the Georgia State administrators. For example, the comment from the Maryland Department of Revenue advised that the Beer Institute commented that the 0.5% Comptroller and Alcohol and Tobacco proposed 0.5% standard would most standard is the best option to maintain Tax Division suggested that it seemed likely cause the State to enact new consistency among existing Federal and ‘‘inherently unfair to tax a product as a legislation, because Georgia’s alcoholic State statutes and regulations. While ‘malt beverage’ when the majority of the beverage code did not anticipate such noting that State officials must utilize alcohol by volume contained in the products. However, this comment noted their respective definitions of alcohol product is from distilled spirits that, regardless of the standard, it might beverages, the Beer Institute suggested (flavoring or otherwise).’’ Delaware’s be necessary for the State to enact that almost all of the States that have Office of Alcoholic Beverage Control legislation in order to bring clarity to the reviewed the issue can reconcile their Commissioner commented in support of issues of taxation and distribution. statutes and regulations with the TTB the proposed regulation and stated that Only a few States indicated that proposal, but that this is not true of its concerns were not with distribution, adoption of a standard other than the alternative standards. but with ‘‘the tax issue and the 0.5% standard would be inconsistent The Beer Institute suggested that substantial reduction in the rate paid for with State law. A comment from the implementation of an alternative beer * * * versus the rate paid for ‘low Virginia Department of Alcoholic standard would: spirits’ * * *. Obviously, the amount of Beverage Control stated that while money in controversy is large for the adoption of the proposed 0.5% standard unravel the consensus and relative stability State, the industry, and the consumers.’’ would be consistent with State law, any that have been achieved to date with respect to state statutes and regulations. The standard allowing a higher percentage of 7. Consumer Deception alternative discussed in Notice No. 4, a alcohol from a source other than the standard permitting a 51–49% blend of malt Several State agencies focused on the brewing process would create a beverage and distilled alcohol would require issue of consumer confusion or potential conflict with current State law, many changes in existing state tax and deception. For example, a comment which classifies products containing regulatory systems or even worse, a return to from ’s Division of Alcoholic mixtures of beer and distilled spirits as state-federal conflicts and inconsistent Beverages and Tobacco supported the distilled spirits products, regardless of regulation. 0.5% standard as a ‘‘positive step whether the majority of the alcohol is Anheuser-Busch predicted that: toward providing consumer information contributed by the beer. The Arkansas and avoiding confusion.’’ A comment there will be complete disorder in the Alcoholic Beverage Control Division nationwide marketplace if FMBs are from Kentucky’s Alcoholic Beverage indicated that if TTB allowed the use of permitted to contain 49 percent distilled Control Board stated that the proposed distilled spirits products as a flavoring spirits alcohol under federal law, yet most 0.5% standard ‘‘maintains the clear agent, legislative changes would be states would only permit 0.5% spirit alcohol. distinction between malt beverages and required in Arkansas if this product was A patchwork of states regulating identical distilled spirits that were becoming to be sold by beer-only permittees. products as distilled spirits in most states, blurred in the minds of many regulators, and as beer in others, would cause havoc and including Kentucky.’’ The Oregon B. Other Comments in Support of the tremendous consumer confusion. Liquor Control Commission stated that 0.5% Standard As one example of the confusion that while FMBs were made in breweries, Hundreds of brewery employees could be caused by differing State distributed through beer distribution submitted comments stating that classifications of the same product, the channels, and taxed as beer, they without the proposed 0.5% standard, brewer noted that television discovered that ‘‘their alcohol is mainly brewers, wholesalers and retailers may advertisements regularly cross State or completely from distilled spirits face a patchwork of individual State lines. sources, and their appearance and taste laws and regulations, where the same Anheuser-Busch also suggested that usually do not resemble beer. product may ultimately be sold as while the 51/49 standard is nowhere to

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be found in State laws, many State laws elevate the opinions of a few State guidance in classifying FMBs. However, incorporate a 0.5% alcohol by volume regulators above other considerations it we have concluded that the 51/49 threshold in their definitions of malt must weigh. standard would achieve the same goal, beverages and distilled spirits; The FMBC further stated that all with less cost to the industry, as accordingly, adoption of the alternative States today classify FMBs as ‘‘beer,’’ discussed earlier in this document. We 51/49 standard by TTB would be ‘‘malt beverages,’’ or an equivalent agree with those commenters who disruptive to the system of State laws. statutory term. The FMBC suggested suggested that the 51/49 standard will The brewer suggested there is no basis that while definitions vary from State to achieve our regulatory goal of to support the alternative standard in State, many resemble in material establishing a uniform standard that existing State laws, and that such action respects one of the two Federal provides a meaningful distinction would create a conflict between Federal definitions. Like these Federal statutes, between FMBs and distilled spirits and State law. Additionally, Anheuser- State statutes are silent on the issue of products. Busch stated that such Federal action how much alcohol nonbeverage flavors It is noteworthy that, while most of would trigger disruptive State action can contribute to a malt beverage or the comments from State regulatory since many States would no longer beer. Accordingly, the FMBC argued agencies supported the proposed rule, follow TTB guidance, but would instead that even assuming that this silence only a few of these comments have to develop and/or enforce their could support the imposition of limits specifically opposed the majority own 0.5% standard, ‘‘effectively ending on the use of flavors, it would allow standard. Several State regulatory federal leadership on the most State regulators to adopt either a agencies did not specifically support important alcohol regulation issues.’’ majority standard, a 0.5% standard, or either standard, but simply supported Coors commented that the 0.5% some other standard. TTB’s action in trying to resolve this proposal is consistent with TTB’s role The FMBC also challenged the difficult issue by setting a uniform under the 21st Amendment and noted characterization by other commenters of standard. State laws on this issue. The FMBC that it is the only approach or proposal Furthermore, while a few States noted that some supporters of the 0.5% consistent with the vast majority of the suggested that any standard other than standard suggest that the presence of a different State laws. Accordingly, Coors 0.5% would be inconsistent with their 0.5% alcohol by volume threshold in suggested that the 0.5% proposal ‘‘thus State laws or regulations, none of these many State statutes requires those states fulfills TTB’s role as a leader of the comments pointed to laws that to limit the alcohol contribution of states’ regulatory and tax collecting specifically restricted the use of alcohol organizations.’’ Coors acknowledged flavors to that de minimis amount. derived from nonbeverage flavors in that ‘‘[e]xamples of differences in the However, the FMBC pointed out that FMB production. Like Federal law, regulation of malt beverages at the state these thresholds do not address the many State laws use 0.5% alcohol by level do exist,’’ but suggested that ‘‘only formulation of products but instead volume as the dividing point between the TTB proposed regulation provides constitute a threshold that divides products subject to tax and other comity to the states and a marketplace taxable alcohol beverages from products regulations, and those that are not. free from disruption * * *.’’ Miller containing alcohol that are not subject Similarly, some State laws classify suggested that, given the support of the to taxation. The FMBC stated that it was mixtures of beer and distilled spirits as States for the proposed 0.5% standard aware of no State statute that sets distilled spirits products. However, we and the reality of the FAA Act’s 0.5%—or any other figure—as the penultimate provision, ‘‘considering mandatory limit on the amount of are not aware of any current State other standards would be detrimental to alcohol that flavors or other alcohol statutes that specifically regulate flavor the creation of a uniform standard.’’ sources can contribute to a malt use in FMB production, although at beverage. The FMBC also noted that if least two States have apparently C. Other Comments in Support of the such an interpretation prevailed, many initiated administrative procedures to 51/49 Standard States would have to reclassify wines establish such a policy. Supporters of the 51/49 standard that derive alcohol from flavors or Several States have indicated that challenged those comments that spirits. they will not follow TTB’s lead if we suggested that only the proposed 0.5% The FMBC argued that while some adopt an alternative to the 0.5% standard would meet the needs of the States have expressed support for Notice standard. Other States have indicated States and result in a uniform Federal No. 4, none to date had indicated that that they will follow the Federal standard. These commenters argued that they could not accept a majority standard, regardless of what it is. TTB’s while a national standard would be standard. Finally, the FMBC stated that role is to provide Federal leadership on beneficial, TTB has provided no in 2002, the Joint Committee of the this issue. However, it is up to the States evidence in Notice No. 4 as to why the States (a body that represents the to decide whether they want to follow proposed 0.5% standard is the only way interest of alcohol regulators from both Federal standards or not. to accomplish this goal. Several the ‘‘control’’ and ‘‘open’’ States) voted Clearly, many brewers are concerned commenters stated there is no reason to to recommend that States support a over facing a multitude of different State assume the proposed 0.5% standard for position that more than 50% of the laws and regulations. Pursuant to the added alcohol is the only standard volume of a finished FMB come from 21st Amendment, States have supported by the various State the product’s beer/malt beverage base. significant authority to regulate the sale authorities. The FMBC suggested that such a and distribution of alcohol beverages The FMBC noted that Federal law standard would be more lenient than within their borders. Under the remains independent of State law and the majority standard that FMBC can penultimate clause of the FAA Act, that the views of State officials are not accept. Federal labeling and advertising binding on TTB. The FMBC stated that regulations apply to malt beverages only while it commended TTB for seeking to D. TTB Response to the extent that the State has adopted craft a national standard to respond to We agree with those commenters who similar requirements for malt beverages State concerns, TTB should not regulate suggested that the originally proposed sold within the State. Accordingly, to the ‘‘least common denominator’’ and 0.5% standard would give States brewers, wholesalers and retailers must

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follow State laws on these issues, consumer confusion over the alcohol companies place that labeling on their regardless of what standard TTB adopts. content of FMBs. FMBs. This trade association noted that We recognize that our adoption of the Two State liquor authorities although nearly all FMBs fall within a 51/49 standard may mean that some supported the Notice No. 4 proposal to 5.0 to 5.5 percent alcohol by volume States will adopt a standard that differs require alcohol content labeling on range, so-called traditional malt from the Federal standard. However, as FMBs and other malt beverages that beverages contain between 4% and 25% many commenters noted, State derive alcohol content from sources alcohol by volume, a much wider range, requirements on alcohol beverage other than the brewing process. They making alcohol content labeling more classification issues already vary from agreed that this alcohol content labeling meaningful for so-called traditional malt State to State. We do not believe that the is necessary because of the similarity of beverages than for FMBs. Since most adoption of a different standard by some some FMB labels to distilled spirits malt beverage labels do not contain States will cause major problems to the labels and because of the need to alcohol content information, the FMBC beer industry; in any case, it is beyond distinguish FMBs from non-alcohol claims that consumers are less informed TTB’s authority to control what the products. Both States cited the and more confused about the alcohol States choose to do on this issue. We importance to consumers of having content of other malt beverages. The would note, however, that although TTB alcohol content information available on FMBC therefore urged TTB to require is adopting the 51/49 standard for malt beverage labels. alcohol content labeling on all malt FMBs, brewers are free to adopt the B. Other Comments beverages. stricter 0.5% standard for their own CSPI similarly urged TTB to adopt FMB products, thus ensuring Several commenters opined that the alcohol content labeling for all malt compliance with those State laws and proposed alcohol labeling requirement beverages, stating that there is no reason regulations that are amended to should not be restricted to FMBs and to require such labeling only for FMBs incorporate this standard. Finally, by other products containing added alcohol and other malternative-type products, adopting a one-year effective date but should apply to all malt beverages. but not for all malt beverages. Another provision for this final rule, we hope to These commenters generally stated that consumer organization, the NCL, also provide States with an adequate period there was no reason to single out FMBs supported mandatory alcohol labeling of time in which to decide whether they for mandatory alcohol content labeling. for all malt beverages. The NCL stated, wish to follow the Federal rule or not, Diageo commented that Notice No. 4 ‘‘Mandatory labeling will provide and to make any corresponding changes provides no basis for requiring alcohol consumers with the information they in their own laws or policies. content statements only on the labels of need to make better, more informed malt beverages that derive alcohol from choices about alcoholic beverage X. Mandatory Alcohol Content Labeling added flavors or other ingredients. consumption.’’ for FMBs Diageo stated that the intended alcohol Anheuser-Busch opposed the TTB received 31 comments content labeling bears no relationship to proposal to require alcohol content expressing opinions about the proposed its cited justification in Notice No. 4, labeling on FMBs and other malt mandatory alcohol content labeling for where TTB stated that consumers may beverages containing alcohol from flavored malt beverages. Five believe either that spirits-branded malt added ingredients. Anheuser-Busch commenters were brewers, six were beverages contain the same high alcohol stated that consumers do not assume from State licensing or regulatory content as distilled spirits or that other malt beverages with distilled spirits agencies, seven were from interest FMBs may contain no alcohol due to brand names are higher in alcohol groups, six were from individuals, and their unconventional appearance. As an content, noting also that most FMBs smaller numbers were from other example of the contradictory policy this already have alcohol content labeling. sources. Although we received requirement would cause, Diageo Anheuser-Busch further stated that any thousands of form letters supporting the asserted that the regulations would not alcohol content labeling should be at the Notice No. 4 proposals, none of these require alcohol content labeling on a discretion of the brewer and should not letters specifically addressed alcohol product with a distilled spirits brand be applied to only one kind of malt content labeling. name such as ‘‘Jack Daniels ’’ but beverage. would require alcohol content labeling A. Comments Supporting the Proposal C. TTB Response on a traditional malt beverage product Miller supported the proposed made with alcohol flavoring materials The intent of TTB’s proposal for alcohol content labeling requirement for like ‘‘Strawberry Blonde Ale.’’ Diageo alcohol content labeling was to provide FMBs and other malt beverages that further stated that they have placed this important information to consumers derive any alcohol from added alcohol content on labels of their FMBs who may not be familiar with FMBs, or ingredients. Miller’s comment stated since 2000. who may be misled by distilled spirits that it would oppose a requirement to Brown-Forman also commented that brand labels into believing that their label all malt beverages with an alcohol TTB has no basis for treating FMBs alcohol content is higher than of other content statement. Miller also differently from other malt beverages. malt beverages. For the reasons outlined commented that the regulations should Brown-Forman argued that alcohol in the preamble to Notice No. 4, TTB is provide flexibility by allowing the content labeling is important consumer adopting the amendment to § 7.22(a) to alcohol statement on any label rather information that should be required for require alcohol content labeling on the than on the brand label (front label) as all malt beverages. Gallo also supported brand labels of malt beverages that proposed. Miller commented that extending alcohol content labeling to all derive any amount of alcohol from allowing the alcohol content statement malt beverages but requested that it be flavors or other ingredients containing on any label is consistent with other optional because of labeling alcohol. TTB believes this requirement mandatory labeling requirements such prohibitions in Oklahoma and New will provide consumers with better as the Government warning label, and York State. information about these malt beverage that the proposed placement on the The FMBC commented that alcohol products and will help prevent brand label is unnecessary since there is content is important consumer consumer confusion over their identity. no empirical evidence concerning information and that all of their member Moreover, this requirement applies to

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the addition of flavors or other We recognize that brewers may be the color of dark rum’’ as a truthful nonbeverage materials containing required to print different labels for malt statement that describes the color of an alcohol at any step in the production beverages intended for sale in those FMB product but which would be process. At the same time, we are States in which alcohol content prohibited. Another commenter cited modifying the new § 7.22(a)(5) text to statements on malt beverage labels are the example of ‘‘Beer aged in Bourbon exclude from this requirement the use of prohibited. However, TTB does not Barrels’’ as a truthful, informative hop extract that contains alcohol since believe this is a sufficient reason not to statement that would similarly be hops are an essential ingredient in the adopt mandatory alcohol content prohibited by the proposed regulations. production of malt beverages. It should labeling statements for malt beverages B. TTB Response be noted, however, that TTB will count that derive alcohol from flavors or other any alcohol contained in added hop ingredients. Brewers have always been We are incorporating the general extract toward the 49% limitation under required to conform labels to State holdings of ATF Ruling 2002–2 into the 51/49 standard. requirements when those requirements §§ 7.29 and 7.54. However, in response TTB notes that the final rule text, like conflict with part 7 requirements under to the comments received on this issue, the proposed rule text, does not separate the FAA Act. we are modifying the language of the FMBs that derive a substantial portion With regard to the requirement that regulation to clarify that the regulation (up to 49%) of their alcohol content the alcohol content statement appear on prohibits only those labeling and from added flavors from those the brand label, we have concluded that advertising representations that tend to traditional malt beverages that contain consumers are more likely to notice the create a false or misleading impression small amounts of added alcohol from statement if it appears on the brand that the malt beverage contains distilled flavors. Thus, this alcohol content label. Furthermore, this requirement is spirits or is a distilled spirits product. labeling requirement applies to flavored consistent with the regulations In addition, we are keeping ‘‘safe beers, flavored ales, and so forth that are applicable to the mandatory alcohol harbor’’ provisions in §§ 7.29 and 7.54 produced using alcohol flavorings. content statements for wine (see 27 CFR that incorporate the specific practices While many comments supported 4.32(a)(3) and distilled spirits (see 27 that we do not consider misleading. alcohol content labeling for all malt CFR 5.32(a)(3)). The proposed language in §§ 7.29 and beverages, TTB is unable to issue such 7.54 was patterned after the existing a broad regulation at this time. In Notice XI. Use of Distilled Spirits Terms on language in 27 CFR part 4, Labeling and No. 4, we specifically stated that we Labels and in Advertisements Advertising of Wine. In response to the were not proposing to require alcohol A. Comments Received issues raised by the commenters, we are content statements on all malt beverage revising these sections to clarify that we containers at that time. Thus, we have TTB received 10 comments not aired this issue for comment. We addressing the proposed limitations on are not banning truthful and non- also believe that such a requirement the use of distilled spirits terms in malt misleading speech about malt beverage represents a significant departure from beverage labeling and advertising. Three products. Instead, we are incorporating past labeling requirements that, until of these comments came from brewers, the holdings of ATF Ruling 2002–2, the addition of § 7.71 in 1993, actually two were from State licensing and which were intended to ensure that prohibited the placement of alcohol regulatory agencies, and the rest were labeling and advertising statements content statements on malt beverage from other sources. The majority of the comparing FMBs to distilled spirits labels (unless required by State law), comments favored limiting the use of products do not mislead consumers. due to the prohibition within the FAA distilled spirits terms on FMBs. ATF Ruling 2002–2 noted the Act (this prohibition was found to be Several brewers requested assurances existence of a recent trend in the unconstitutional in Rubin v. Coors that the policy in ATF Ruling 2002–2, marketing of FMBs. Brewers and Brewing Co., 514 U.S. 476 (1995)). Thus, allowing the use of distilled spirits importers had begun to associate FMBs while we are not unsympathetic to the brand names on FMBs, will continue. with well-known brands of distilled comments suggesting mandatory alcohol They commented that industry members spirits, by using distilled spirits brand content labeling for all malt beverages, have made large investments in the names as the brand names for FMB we are not in a position to implement labeling and advertising of these products; by using labeling and such a rule without notice and public distilled spirits brand names based on packaging that resemble the labeling comment. We also note that we have existing government policies. and packaging of well-known distilled received several petitions from various Several commenters believed the spirits brands; and by the use of specific consumer and public interest groups for proposed language of §§ 7.29 and 7.54 is distilled spirits terms in describing additional labeling information on vague, and they requested clearer flavorings added to malt beverages. The alcohol beverage containers, including language that directly addresses TTB’s ruling noted that these products were alcohol content labeling. TTB intends to stated purpose. The Washington Legal drawing media attention, in part pursue these labeling issues in future Foundation, a nonprofit public interest because of the impression given that rulemaking. law and policy center, submitted a these FMBs are made with distilled TTB acknowledges Gallo’s comment comment in opposition to the proposed spirits or contain distilled spirits. regarding two States’ prohibition of language, asserting that the regulation Certain FMBs were using labels that alcohol content statements on malt would not accommodate the First used distilled spirits brand names or beverage labels. Pursuant to the Amendment rights of malt beverage distilled spirits class and type penultimate paragraph of the FAA Act, industry members to make truthful designations to describe a flavor the labeling requirements of the FAA statements about their products. element as part of the statement of Act apply only to the extent that State One commenter pointed out that the composition on the label. For example, law imposes similar requirements on use of certain non-misleading these labels used a distilled spirits malt beverages sold within the State. statements would be prohibited by the brand name, and then stated ‘‘Flavored Thus, brewers have to comply with the proposed limitations on the use of malt beverage made with natural flavors labeling laws of the State in which the distilled spirits terms on FMBs. This containing ’’ or ‘‘Flavored malt malt beverages are being sold. commenter cites a statement of ‘‘having beverage with natural flavors containing

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genuine [Distilled Spirits Brand infringe upon the First Amendment beverage is not in itself misleading. The Name].’’ rights of producers and importers of ruling further held that the use of a The ruling held that such statements FMBs. Information on alcohol beverage cocktail term as the brand name or were misleading. The labels create the labels is considered commercial speech. fanciful name of a malt beverage is not misleading impression that the product (See Rubin v. Coors Brewing Co., 514 misleading if there is no misleading is made with, or contains, distilled U.S. 476, 481 (1995).) The First impression about the identity of the spirits. In fact, however, distilled spirits Amendment protects commercial product, based on the overall labeling used to manufacture flavors lose their speech only if that speech concerns and advertising of the product. class and type when blended with other lawful activity and is not false or Consistent with the proposed rule, ingredients to make a flavor extract. misleading. (See Central Hudson Gas & and in response to the comments that Thus, it is misleading to represent that Electric Corp. v. Public Serv. Comm’n, specifically request affirmation that the the malt beverage contains a particular 447 U.S. 557, 563–564 (1980).) use of distilled spirits brand names will class or type of distilled spirits, such as Similarly, our statutory authority under be permitted, we are incorporating these vodka, rum or . Furthermore, this the FAA Act is to ensure that labels ‘‘safe harbor’’ provisions from the ruling kind of labeling created the misleading provide consumers with adequate into §§ 7.29 and 7.54. We are impression that the product contained information as to the quality and reconfiguring the text as three distilled spirits, or in fact was a distilled identity of malt beverages, and to ensure subparagraphs in § 7.29(a)(7) and spirits product. that labels and advertisements for such § 7.54(a)(8). Subparagraph (i) permits Accordingly, the purpose of the ruling products do not tend to mislead the truthful statement of alcohol content was to set forth specific labeling and consumers. (See 27 U.S.C. 205(e) and in labeling and advertising in advertising statements that would be (f).) It is not TTB’s intention to prohibit conformity with existing requirements considered misleading. The ruling held any labeling or advertising statements in § 7.71. Subparagraph (ii) in each case that the use of a brand name of a that are truthful and non-misleading. permits the use of a distilled spirits distilled spirits product as the brand The final rule regulatory texts brand name as the brand name of a malt name of a malt beverage was not in itself incorporate the proposal to prohibit the beverage provided the overall label or misleading. However, the use of a types of references to distilled spirits advertisement does not present a distilled spirits term found in the brand names and class and type misleading impression about the standards of identity in 27 CFR part 5 designations in FMB statements of identity of the product. Similarly, (such as whisky, rum, vodka, , compositions that were addressed in subparagraph (iii) permits the use of a , and so forth) as the brand name for ATF Ruling 2002–2. However, those cocktail name as the brand name or a malt beverage or as part of the texts will allow truthful non-misleading fanciful name of a malt beverage, with statement of composition or as the statements that may draw similarities the same proviso. fanciful name of a malt beverage, is between the taste or character of a malt XII. New Formula Requirements misleading. The use of a cocktail term beverage and the taste or character of a as the fanciful name of a malt beverage distilled spirits product, but that do not TTB received a small number of would not be considered misleading if imply in a false or misleading fashion comments from brewers and brewery the overall labeling and advertising does that the product contains distilled trade associations on the proposed new not create a misleading impression spirits or is a distilled spirits product. formula filing requirements that would about the identity of the product. Moreover, this general prohibition will replace the existing statement of TTB still takes the view that the use not prohibit truthful and non- process. These commenters generally of a distilled spirits brand name as the misleading statements such as ‘‘beer favored the new formula filing brand name of an FMB is not inherently aged in whiskey barrels’’, provided that requirements, but they expressed misleading. Furthermore, we do not such a statement is not in the context of concerns regarding certain aspects of the believe that the use of a cocktail name implying that the FMB contains whisky proposal and requested that TTB clarify as part of a fanciful name of an FMB is as the result of the aging process. some of the proposed formula Finally, this standard will not prohibit always misleading, as long as the requirements. the use of cocktail terms as a brand remaining labeling and advertising of name or fanciful name on malt beverage A. Fermented Products Requiring the product do not create a misleading labels or in advertising provided the use Formulas Under § 25.55 impression as to the identity of the of those terms does not draw a product. We are not changing our 1. Comments Received misleading comparison between the two position with respect to these issues. types of alcohol beverages. To the extent Several brewers and brewing industry In response to the concerns voiced by that labeling or advertising comparisons trade associations commented on the the commenters, we are changing the between malt beverages and distilled proposed requirements that would wording of the amendments to §§ 7.29 spirits are false or misleading in a trigger the filing of a formula by a and 7.54 contained in the proposed rule. manner that is not covered by these new brewer. These commenters requested Instead of the specific prohibitions regulations, they would fall under the that we more clearly communicate proposed in those sections, we are general prohibition on the use of false which fermented products require filing adding the following to the prohibited or misleading statements in the labeling formulas. statements with respect to labeling and or advertising of malt beverages. (See 27 One brewer stated that because of the advertising of malt beverages: CFR 7.29(a)(1) and 7.54(a)(1).) wording of the proposal, it appears that Any statement, design, device, or ATF Ruling 2002–2 held that certain most fermented products would require representation that tends to create a false or labeling and advertising practices by a formula. A brewery trade association misleading impression that the malt beverage themselves are not misleading if their argued that the requirement to file contains distilled spirits or is a distilled use does not give a misleading formulas showing special processing is spirits product. impression about the malt beverage. The so broad that the proposal would Because this language prohibits only ruling specifically held that the use of require brewers to file formulas for most labeling and advertising statements that a brand name of a distilled spirits products. This association noted that are false and misleading, it does not product as the brand name of a malt many traditional malt beverages contain

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fruits, herbs, spices, or honey and that products require the filing of a formula. does not require a formula. the proposed requirement to file a Thus, in this final rule document, we Subparagraph, (a)(1)(ii) of § 25.55 lists formula for fermented products have changed § 25.55 in order to state examples of these processes. These containing any of these ingredients more clearly when a brewer must file processes were listed in the preamble to would greatly increase the number of and receive approval of a formula in Notice No. 4 as examples of traditional products for which a formula is order to produce a fermented product. processes not requiring a formula. Other required. The association further alleged We have added a provision to this processes exist that are considered that products containing some of these section that allows a brewer to request traditional and will not require filing a types of ingredients are considered information on whether a formula is formula. traditional malt beverages or beer and required in specific instances. Subparagraph (a)(1)(iii) of § 25.55 that, therefore, filing formulas for them Additionally we have amended this provides that brewers may request a would simply increase the number of section to make it clear that TTB determination from us as to whether a formulas filed without assisting TTB in approval of a formula is required prior particular process used in producing classifying them for tax purposes. One to using it to produce a fermented beer will require a formula. Procedures brewer and one trade association product. for requesting this determination are suggested adding a paragraph to the Paragraph (a) of § 25.55 lists contained in new paragraph (f) of formula requirements in § 25.55 to state processes, materials, or specific types of § 25.55. that a formula is not required when fermented products that will require a Paragraphs 25.55(a)(2) through (a)(5) processes or ingredients are used in the brewer to file a formula. Paragraph (a)(1) list the other instances when a formula production of traditional beers. contains the general rule to file a is required to produce a fermented One brewer commented that proposed formula for a fermented product that is product. These correspond to those § 25.55 requires a formula when honey produced using certain processes. Based formula requirements in proposed is used but does not specifically require on the comments to Notice No. 4, which § 25.55(a). a formula when maple syrup is added indicated that the term ‘‘special Paragraph (a)(3) requires brewers to to beer. Further, this brewer commented processing’’ is so broad that formulas file formulas when they use coloring or that TTB should rewrite § 25.55 in the would be required for most fermented natural or artificial flavors in producing final rule to require formulas only for products, we have changed the criteria a fermented product. Paragraph (a)(4) beer made with the use of processes or in § 25.55(a)(1) that trigger filing a requires brewers to file a formula for ingredients that the TTB Administrator formula. Section 25.55(a)(1) now any fermented product to which fruit, has not declared as standard brewing requires filing a formula for the use of fruit juice, fruit concentrate, herbs, processes or ingredients. TTB would any process, filtration, or other method spices, honey, maple syrup, or other then implement this regulation by of manufacture that is not generally food materials are added. In response to periodically publishing a list of recognized as a traditional process in the above comments regarding the processes or ingredients declared to be the production of a fermented beverage production of traditional brewery traditional and therefore not requiring designated as ‘‘beer,’’ ‘‘ale,’’ ‘‘porter,’’ products to which certain flavors or the filing of a formula for their use in ‘‘stout,’’ ‘‘lager,’’ or ‘‘malt liquor.’’ We other material are added without filing beer production. have also removed the language from a statement of process, we have added this proposed section that would have a reference to § 25.55(f). This section 2. TTB Response used a change in the character of beer permits brewers to request a The formula requirement proposed in or the removal of material from beer as determination from us as to whether a § 25.55 would replace the statement of a criterion for the filing of a formula particular ingredient used in producing process now required by § 25.67. The since it is impossible to quantify these beer will require a formula. existing section currently requires standards. Thus, under § 25.55(a)(1), the 3. New Procedural Requirements brewers to file a statement of process sole criterion for filing a formula for a whenever they propose to produce a process depends on whether or not the New paragraph (f)(1) of § 25.55 fermented product not marketed as process is traditionally used in authorizes TTB to determine whether ‘‘beer,’’ ‘‘ale,’’ ‘‘porter,’’ ‘‘stout,’’ ‘‘lager,’’ producing fermented products the use of a particular process or a or ‘‘malt liquor.’’ As several commenters designated as beer, ale, and so forth. particular ingredient will require the noted, some traditional malt beverage Non-traditional processes such as ion filing of a formula. Under § 25.55(f)(2), products are made with added flavors exchange treatment, reverse osmosis, a brewer may request a determination but are marketed under those traditional concentration of beer, separation of beer on whether the use of a proposed designations and not as flavored or into different components, and filtration process or a proposed ingredient will specialty products. Because of the to substantially change the color, flavor, require the filing of a formula. present wording in § 25.67, which uses or character of beer are processes that Paragraph (f)(2)(i) sets forth the the marketing designation as the filing require the filing of a formula. These information that a brewer must submit criterion, some brewers may not file a processes are those specifically to TTB in order to request a statement of process for some fermented included in proposed § 25.55(a)(1) as determination as to whether a formula products that contain flavors or other requiring filing a formula. We note that is required when using a particular materials. While these fermented these are only examples, and the process. For use of a proposed process, products do not require a statement of exclusion of a process from this listing the brewer must submit a full process under § 25.67, the proposed does not mean that its use in making a description of the process, evidence of regulation would require a formula and fermented product would not require whether the process is generally perhaps additional labeling for these the filing of a formula. recognized as a traditional process in traditional fermented products. Conversely, processes such as the production of fermented beverages The intent of this proposal was not to pasteurization, filtration prior to designated as beer, ale, and so forth, and require a statement of process or bottling, filtration in lieu of an explanation of the intended effect of formula for additional kinds of pasteurization, centrifuging for clarity, the process. fermented products. Rather, it was lagering, carbonation, blending, and so Similarly, a brewer may request an intended to clarify which fermented forth are clearly traditional and their use exemption from the formula filing

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requirement under § 25.55(a)(3) and process is appropriate for the and criteria that TTB will use in (a)(4) when certain flavors or other production of a fermented beverage that evaluating beer produced by special ingredients are used in a fermented is to be sold under a traditional processes. product. Under § 25.55(f)(2)(ii), a brewer designation such as ‘‘beer’’ or ‘‘ale’’. 2. TTB Response must submit information about the We will maintain on the TTB Web site proposed ingredient, including a a list of new processes and ingredients TTB has not incorporated in this final description of the ingredient, evidence determined by TTB under § 25.55(f) to rule its informal administrative policy establishing that the proposed require, or not to require, the filing of regarding the percentage of fermentable ingredient is generally recognized as a a formula. materials in a beer that must be grain- traditional ingredient in the production based because we did not air this issue B. Standards for Formula Approval of a fermented beverage designated as for comment in Notice No. 4. However, beer, ale, and so forth, and what effect 1. Comments Received we agree with the FMBC that the proposed regulatory text did not the use of the proposed ingredient has The FMBC and one FMB producer on the fermented product. However, adequately distinguish between commented that proposed § 25.15(a) fermentable materials and fermentable there is no exemption from the formula gives brewers a wide variety of requirement in § 25.55(a)(2) with respect adjuncts. The term ‘‘beer’’ is defined in ingredients for producing beer. The section 5052(a) of the IRC as: to the use of flavors and other FMBC agreed that the statutory ingredients containing alcohol, because definition of beer permits the use of a beer, ale, porter, stout, and other similar ´ this information is essential for wide range of fermentable materials at fermented beverages (including sake or similar products) of any name or description purposes of administering the 51/49 the brewery and that this listing of standard. containing one-half of 1 percent or more of ingredients reflects existing TTB policy. As suggested by the comments, there alcohol by volume, brewed or produced from However, both commenters stated that may be many fermented beverages malt, wholly or in part, or from any produced and marketed under the the proposed formula regulations substitute therefor. traditional designations of ‘‘beer,’’ ‘‘ale,’’ provide no standard for using these In 1889, the Commissioner of Internal and so forth that contain flavors or other materials in producing beer. The FMBC Revenue stated that the term ‘‘substitute ingredients and which are produced commented that proposed § 25.15(a) for malt’’ included rice, grain of any without statements of process. The appears to blur the distinction between kind other than malt, sugar, bran, information submitted by brewers under beer and wine since TTB taxes as wine , and molasses. paragraph (f) will allow us to evaluate products made primarily from honey, The comment from the FMBC rightly whether or not these fermented fruit, fruit juice, and fruit concentrate, pointed out that the proposed language products made with flavors or other which are all materials listed in of new § 25.15(a) seemed to authorize ingredients should be subject to the proposed § 25.15(a). These commenters unlimited use of materials such as formula approval and possible requested that TTB provide to the honey and fruit as substitutes for malt. additional labeling provisions. TTB will industry regulatory standards to as to This was not our intention. give consideration to the past usage of when the use of honey, fruit, and other Accordingly, we have revised the those flavors or other ingredients and to materials would result in classification language in paragraph (a) of proposed whether the fermented products are of a product as a wine. As an example § 25.15. The first and second sentences considered to be traditional products of a suggested standard, these of paragraph (a) address the basic that are entitled to be marketed as commenters cited TTB’s unofficial brewing materials, and we have revised ‘‘beer,’’ ‘‘ale,’’ and so forth without policy that half of the fermentable this list to conform the substitutes for formula approval and without material in a beer must be derived from malt to those specifically listed in the additional labeling information. As part barley malt and other fermentable Internal Revenue Commissioner’s letter of our evaluation, we will take into grains. These commenters suggested in 1889. Accordingly, § 25.15(a) lists the consideration the class and type that incorporating this policy of following materials as the only regulations in § 7.24(a) that require that ingredient use in the regulations would permissible substitutes for malt: rice, statements of class and type conform to provide brewers with necessary grain of any kind, bran, glucose, sugar, the designation of the product as known guidance in determining what and molasses. We note the term ‘‘grain to the trade. Additionally, § 7.24(e) fermented products qualify as a beer, of any kind’’ includes both malted and requires products designated as ‘‘ale,’’ especially when other fermentable unmalted grains. ‘‘porter’’’ or ‘‘stout’’ to be produced ingredients such as honey or fruit are The third sentence of paragraph (a) without the use of coloring or flavoring used. lists other materials that may be used in materials (other than those recognized The FMBC further commented that brewing but that are not considered in standard brewing practices). We will although Notice No. 4 stated that one basic brewing ingredients as consider these criteria when evaluating use of the formula submission is for contemplated by the IRC. Extensive use a request for a determination on the use TTB to evaluate whether a certain of those other materials in fermentation of flavors or other materials in process constitutes distillation, the could yield a fermented product that producing fermented products without actual proposed formula regulations do might be considered wine rather than obtaining a formula approval. not contain any standards that could be beer; thus, the revised text distinguishes With respect to the use of processes, used for this purpose. The FMBC stated between those materials that we we recognize that the listings in that without such regulatory guidelines, categorize as ‘‘adjuncts’’ and the basic § 25.55(a)(1)(i) are not complete and that producers would be uncertain whether brewing materials covered by the first brewers may propose to use new a proposed process constitutes two sentences of § 25.15(a). processes in the production of distillation and, further, that this lack of In the absence of a regulatory fermented beverages. Thus, a request to a standard will lead to arbitrary and standard, TTB will continue to rely on TTB under paragraph (f) of § 25.55 will uneven decision-making. The FMBC its current administrative guideline, permit us to determine, for example, therefore requested that TTB seek which requires at least 50% of the whether a process may constitute comments on proposed regulations fermentable material in an IRC ‘‘beer’’ to distillation, and whether a proposed containing both criteria for distillation be one or more of the following: barley

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malt, other malted grains, unmalted will not exceed the overall limit will make it clear that the use of grains, rice, bran, sugars, or molasses. established by § 25.15. alternative ingredients is permitted and Brewers may use the other materials This brewer also commented that the that it is not necessary to list the alcohol listed in the third sentence of § 25.15(a) requirement to state the alcohol content contribution of each individual as fermentable adjuncts in the of the fermented product at each step in ingredient in the formula. production of a beer at a brewery. We production is overly restrictive. This We also have removed the proposed will consider the comments requirement, according to the requirement in § 25.57(c) for listing in a summarized above as suggestions for commenter, would eliminate formula the alcohol content of a future amendments of the part 25 streamlining of operations, forcing fermented beverage at every step in regulations, and we may address this production by batches rather than in- production. We agree with the issue in the near future in connection line blending and other methods. The commenter that this requirement is with the planned revision of the part 25 commenter therefore suggested burdensome and not useful in brewery regulations. requiring a single statement for alcohol evaluating a formula. This paragraph content at the final stage of production. With regard to the FMBC comment now requires listing only the alcohol requesting regulatory standards for 2. TTB Response content of the fermented product after distillation and for the evaluation of fermentation and the alcohol content of TTB will continue to require the finished product. other processes in producing beer, TTB information about individual flavors notes that Notice No. 4 did not propose and other ingredients in fermented D. Reasonable Range of Ingredients to adopt either of those standards. beverages, not only for tax classification 1. Comment Received Moreover, determinations of whether purposes under the IRC, but also for distillation has occurred are highly labeling purposes under the FAA Act. Only one commenter addressed TTB’s technical matters. The determination Thus, we are retaining the requirement request for comments on how to define often depends on laboratory in § 25.57 to provide information about a ‘‘reasonable range’’ of ingredients used examination of the process and the separate flavors and other ingredients. in formulas in § 25.57(a)(1). This materials produced. Therefore, we Additionally, we need to know at what commenter, Diageo, recommended that believe that it is preferable to continue stage in production flavorings are added TTB prescribe specific ranges for to examine processes on a case-by-case since this information impacts the various ingredients. For ‘‘major basis. However, we will consider these classification and labeling of the ingredients’’ or those composing more comments as suggestions for future fermented product. Thus, we have than 3% of a product’s total weight or regulatory amendments. amended § 25.57(a)(2) to require volume, Diageo recommended that the C. Alcohol Information in Formulas brewers to state the point of range should vary by no more than 30% production’during, before, or after over or under the actual amount used in 1. Comment Received fermentation’that flavors are added. production. For ‘‘minor’’ ingredients We do agree that brewers need that represent less than 3% of the One brewer commented that since flexibility to use alternate ingredients in product’s weight or volume, this Notice No. 4 proposed limits on the producing fermented beverages and that comment recommended the reasonable amount of alcohol that can be added to brewers should not be required to file range could vary by up to 200% of the fermented beverages through the use of new or amended formulas every time actual quantity used. flavors and other ingredients containing they make slight changes in the use of 2. TTB Response alcohol, it was unnecessary to require flavors or in the ratio of certain flavors detailed information about those used in a product. Nevertheless, we TTB is still seeking broad industry ingredients in formula submissions. again emphasize that the proposed input on what constitutes a ‘‘reasonable This commenter stated that since the formula requirements are intended to range’’ of ingredients in a formula. Since proposal would limit the amount of clarify existing statement of process only one commenter responded to this added alcohol, the detailed information requirements and are not intended to question, we do not believe we have in proposed § 25.57 is not needed and impose new requirements on brewers. enough information to take final rule should not be required. It is our intention to permit the use of action on its meaning. Thus, we are not Another brewer expressed its concern alternate or optional flavors in defining ‘‘reasonable range’’ of about the requirement to state maximum producing fermented products, and, to ingredients for purposes of § 25.57(a)(1), volumes of flavoring materials in this end, we have added the following and have removed the word formulas. This brewer commented that sentence at the end of proposed ‘‘reasonable’’ from this provision. they need significant flexibility in the § 25.57(a)(1): ‘‘You may include TTB will continue to permit brewers amounts and types of flavorings to optional ingredients in a formula if they who submit formulas to indicate a range accommodate price changes or do not impact the labeling or identity of of ingredients. A range of ingredients acceptability of ingredients in foreign the finished product.’’ We have also may not be so large as to change the tax countries. Furthermore, they may use clarified our position on alcohol content classification of a fermented beverage or two or more flavors alternatively in a contributed by alternative flavors and to change the designation of the formulation. Although, on examination, other nonbeverage ingredients fermented beverage. For example, a the use of the maximum amounts of containing alcohol in a formula by formula for a ‘‘’’ cannot each flavor listed would appear to adding the following sentences at the indicate a range of fermentable exceed overall added alcohol end of § 25.57(a)(3)(iv): ‘‘You are not ingredients of 5 to 95% wheat malt limitations, this brewer stated this is not required to list the alcohol contribution since a minimum of 25% wheat malt is the intention of using or listing of individual flavors and other required for a beer to have this alternative flavors in a formula. Thus, nonbeverage ingredients containing designation. We will evaluate formulas this brewer requested that TTB add a alcohol. You may state the total alcohol submitted by brewers, and make a case- provision in § 25.57 specifying that the contribution from these ingredients to by-case determination whether the amount of alcohol contributed by all of the finished product.’’ We believe the range of ingredients indicated in a the flavoring material in a formulation addition of these sentences to § 25.57 formula is appropriate. We note that,

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under § 25.57(e), we will have authority restrictions on the disclosure of that revocation is by operation of law or to request additional information from proprietary information. regulation. In those cases, it is the new brewers when we evaluate a formula. law or regulation that requires the F. Standard Form for Formulas We intend to revisit the question of revocation of the formula, and TTB has what constitutes a ‘‘reasonable’’ range in 1. Comments Received no choice but to comply with the the future through rulemaking or other Three commenters suggested that TTB requirements of the law or regulation. appropriate procedure. should develop a standardized form for This issue was not specifically aired for comment in Notice No. 4. E. Formula Confidentiality formulas and that industry members should be able to provide input on the Accordingly, we are treating the single 1. Comments Received development of the form. One brewer comment that we did receive on the One brewer expressed a strong commented that TTB should develop a issue as a suggestion for future concern regarding the need for formula formula form for FMBs that is similar to rulemaking. Pending the issuance of confidentiality. Another commenter the form used for flavored wine regulations specifically addressing this stated that formula protection from products. Another brewer requested that issue, we will continue to provide due public disclosure is a very important TTB develop a unique formula form that process to formula holders by applying issue in the competitive market. is unlike the formula form for wine. procedures similar to those set forth in part 13 to any cancellation or revocation Another brewer commented that the 2. TTB Response confidentiality issue for formulas of an approved formula. should be resolved in the final rule as At this time, TTB declines to adopt a H. Placement in the CFR a separate regulation. standard formula form for part 25 purposes, but we will consider 1. Comments Received 2. TTB Response developing a standardized form for One brewer noted that the proposed TTB agrees that formulas filed by formulas in the future. We may consider formula requirements appear in part 25, brewers, like statements of process, are combining a formula form for beer with which applies to domestic beers, but not confidential and are not generally the form used for wine in order to in part 7, which applies to all malt subject to public disclosure. To the achieve standardization, and we will beverages. This brewer stated that the extent that formulas are filed under the consider comments or suggestions from formula requirement should apply requirements of part 25, they are industry members and the public in equally to domestic and imported classified as ‘‘return information’’ developing any form for beer formulas. products and should therefore be placed subject to the disclosure restrictions of In the meantime, brewers may continue in part 7. 26 U.S.C. 6103. Furthermore, formulas to prepare their formulas for fermented filed under either part 7 or part 25 are products on their own letterhead 2. TTB Response treated as confidential business stationary. Placement of the formula requirement information under the Freedom of G. Formula Proceedings in part 25 is deliberate. This action Information Act, 5 U.S.C. 552(b)(4), and implements TTB’s existing statutory are thus exempt from that statute’s 1. Comments Received authority permitting it to request certain mandatory disclosure provisions. A brewer commented on the information from domestic brewers. Finally, TTB has always treated statement in § 25.55 that a formula Many domestic brewers do not operate statements of process and formulas as remains in effect until surrendered or in interstate commerce and do not trade secrets subject to the disclosure superseded by a new formula or until obtain certificates of label approval for restrictions of 18 U.S.C. 1905. TTB cancels or revokes it. This their products because they are not At this time, TTB is not adopting the commenter noted that no formal or packaged but rather are sold from tanks suggestion of the commenter who informal procedure is given in the at the tavern on brewery premises. The advocated placement of confidentiality regulation that would apply to the formula provisions must apply to these provisions in the formula regulations in cancellation or revocation of a formula. brewers as well as brewers who obtain part 25 and part 7. At present, we This commenter stated that any attempt certificates of label approval since the believe that the existing TTB and to revoke a formula without proper same requirements exist regarding the Treasury disclosure regulations procedures would raise serious due classification of fermented products and adequately address the protection of this process issues. The commenter the appropriate use of ingredients. Thus, type of data. Furthermore, it would not requested inclusion of those procedural we must include the formula be an efficient use of government safeguards and that they be at least requirements in part 25 in order to resources to address this issue for beer similar to the procedural safeguards apply them to all brewers, regardless of formulas, without addressing the similar afforded certificate of label approval their size or the method of distribution issues presented by formulas for wine revocations. of their products. and distilled spirits products. Finally, TTB has no statutory authority to before adopting such regulations, it 2. TTB Response require foreign producers to submit would be preferable to specifically air In 1999, ATF issued regulations formulas. In the case of imported malt the proposal for comments from the setting forth procedures for the beverages, our authority to require public and affected industry members. revocation of approved labels in 27 CFR formula information applies to U.S Notice No. 4 did not contain any such part 13, Labeling Proceedings. Although importers rather than to foreign brewers. proposal. we have not prescribed specific Thus, this final rule document adopts Accordingly, TTB will consider these procedures for the revocation of the proposal to add a new paragraph to comments as suggestions for future formulas in the regulations, it has been § 7.31 to reflect this authority. This rulemaking actions. In the interim, our policy to afford formula holders due provision recognizes TTB’s authority to submitters of formulas required under process by giving them advance notice, request formula or sample information parts 7 and 25 should accept our and an opportunity to respond, before from an importer in conjunction with assurances that TTB will comply with revoking the formula. An exception, of the filing of a certificate of label all applicable statutory and regulatory course, applies to the extent that the approval for a malt beverage. We believe

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we can obtain adequate information In compliance with these proceeding, we have considered all the about an imported malt beverage under requirements, both the Department of data presented by the commenters, this new provision to determine the the Treasury and our predecessor including the consumer surveys class and type of an imported malt agency, ATF, published guidelines on previously conducted on this issue, as beverage and to resolve any ingredient information quality. (See ‘‘Subdivision well as a new consumer survey or labeling issues that may arise during of Treasury Information Technology (IT) submitted by another FMB producer. It a certificate of label approval Manual,’’ Ch. 14: Information Quality is our conclusion that the evidence submission. (‘‘Treasury Guidelines’’), and ‘‘Process establishes that current labels may for Requesting Correction of Information mislead consumers and that they do not XIII. Other Issues Raised by Disseminated by the Bureau of Alcohol, provide adequate information about the Commenters Tobacco and Firearms’ (‘‘ATF identity of these products. As we A number of commenters raised Guidelines’’).) Both the Treasury and specifically stated in this document, we issues regarding FMBs that were not ATF Guidelines stress that the are not concluding that FMB producers directly addressed in Notice No. 4, and guidelines are not legally enforceable, intentionally misled consumers; thus are outside the scope of this and do not affect any otherwise instead, these producers appear to have rulemaking document. However, TTB available judicial review of agency relied on the policies of TTB and its wishes to comment on some of these action. Pursuant to the provisions of the predecessor agencies in labeling and issues and may consider some of them Homeland Security Act of 2002, and classifying these products. to be appropriate for future rulemaking Treasury Order No. 120–01 (Revised), However, we have also concluded on beer or malt beverages. published on January 24, 2003, ATF’s that the term ‘‘malt beverage’’ may tend orders still apply to TTB until to mislead consumers when applied to A. Information Quality Act superseded or revised. Accordingly, a product deriving the majority of its 1. Comment Received TTB continues to rely upon the alcohol content from the spirits published procedures of ATF, as well as A law firm representing a major FMB components of added flavors and other the published procedures of the producer filed a request under the nonbeverage ingredients. We have also Department of the Treasury, in concluded that such a term does not Information Quality Act (IQA) for responding to requests for correction of correction of TTB’s statement in Notice provide adequate information to information under the IQA. consumers about the identity of such a No. 4 that existing FMB labels may Section 14.5.3(C) of the Treasury confuse and mislead consumers as to product. Accordingly, the final rule guidelines provides that in most cases, limits use of the labeling term ‘‘malt both the source and amount of alcohol absent unusual circumstances, requests in these beverages, arguing that Notice beverage’’ to products that derive at for correction of information contained least 51% of their alcohol content from No. 4 did not provide any supporting in a notice of proposed rulemaking data for these assertions. In response to fermentation at the brewery. We are should be addressed through the confident that the data in support of the this request, TTB stated that it would rulemaking process. TTB found that treat the letter as a comment to the final rule comply with the requirements there were no unusual circumstances in of the IQA. proposed rule. this case, and there was no evidence 2. TTB Response that the requester had a reasonable B. ‘‘Alcohol is Alcohol’’ likelihood of suffering actual harm if the 1. Comment Received Section 515 of the Treasury and issue was not resolved before the General Government Appropriations issuance of the final rule on FMBs. In its comment, the National Act for Fiscal Year 2001, Public Law Accordingly, we advised the requester Consumer League (NCL) stated, ‘‘alcohol 106–554, directed the Office of that we would treat the letter as a is alcohol, regardless of source.’’ The Management and Budget (OMB) to comment on the proposed rule, and that NCL suggested that, from a consumer issue, by September 30, 2001, the final rule would address the issues standpoint, only the actual alcohol government-wide guidelines that raised in the letter. content in a product matters and not the ‘‘provide policy and procedural The issues raised by this comment are source of that alcohol. This commenter guidance to Federal agencies for addressed elsewhere in this preamble. stated that most single servings of ensuring and maximizing the quality, As we stated, TTB remains of the alcohol beverages contain roughly an objectivity, utility and integrity of opinion that it is inherently misleading equal amount of alcohol, a fact of which information (including statistical to label as FMBs products that derive up many consumers are unaware. Further, information) disseminated by Federal to 99% of their alcohol content from the this commenter cited experts who agree agencies.’’ On September 28, 2001, OMB distilled spirits components of added that all types of alcohol beverages are issued guidelines; revised final flavors and other nonbeverage products. functionally equivalent on a serving-to- guidelines were published on February As stated earlier in this preamble, we serving basis and that no differences 22, 2002. (See 67 FR 8452.) have determined that both the FAA Act exist between hard liquor and beer. The law also requires Federal and the IRC provide us with authority Because of the ‘‘alcohol is alcohol’’ agencies to issue their own to define the terms ‘‘malt beverage’’ and argument, NCL opposed the proposed implementing guidelines, including ‘‘beer’’ in order to set limits on the use rule because it perpetuates the administrative mechanisms that allow of alcohol from added flavors and in differences between different types of affected persons to seek and obtain order to ensure that the majority of the alcohol beverages and would continue correction of information maintained alcohol is derived from fermentation at to accord alcohol beverages different and disseminated by the agency, where the brewery. regulatory status based on their source such information does not comply with As already pointed out in this of alcohol. This commenter suggested the OMB Guidelines. Finally, the law preamble, we have also concluded that there is no scientific or public policy to requires agencies to report periodically we are not required to conduct support these distinctions. As to OMB on the number and nature of consumer surveys every time we define previously noted, NCL did state that complaints received by the agency, and a labeling term applicable to alcohol there was greater merit to the majority how such complaints were handled. beverages. In this rulemaking standard, as it ‘‘may reduce the

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potential for consumers to be misled or convenience and grocery stores. Several will continue to consider labels and confused,’’ and that compliance with commenters argued that convenience advertisements on a case-by-case basis, the majority standard ‘‘will assure that and grocery stores are more conducive to determine if the overall presentation consumers are not deceived as to to underage sales than are State-licensed misleads consumers as to the identity of product content.’’ retailers selling distilled spirits, and the product. they supported classifying FMBs as We note that not a single FMB 2. TTB Response distilled spirits products so that their producer indicated an intention to TTB acknowledges that, depending on distribution would be more strictly produce FMBs that would be classified the alcohol content of the product, regulated in most States. Other as distilled spirits products under either single servings of different types of commenters expressed various concerns the proposed 0.5% standard or the 51/ alcohol beverages may contain roughly about the public health consequences of 49 standard we are adopting. Thus, the same amount of ethyl alcohol and alcohol abuse. under either standard, FMBs would that the ethyl alcohol found in these is On the other hand, some commenters continue to be produced as malt chemically the same substance. pointed to the recent study conducted beverages rather than distilled spirits. However, longstanding Federal and by the Federal Trade Commission (FTC). We recognize the concerns of many State laws recognize very significant (See ‘‘Alcohol Marketing and commenters that FMBs may be differences between distilled spirits, Advertising: A Report to Congress,’’ particularly attractive to young drinkers. wine, and beer or malt beverages for Sept. 2003.) The FTC’s report noted that The public health issue posed by production, tax, labeling, advertising, it had previously reviewed this issue in underage consumption of alcohol and distribution purposes. Thus, to the response to a complaint by CSPI, and it beverages is significant. In September of extent that the NCL comment suggests had found no evidence of intent to 2003, the National Research Council that Federal law should ignore these target minors with the FMB products, and Institute of Medicine of the distinctions, it lies outside the scope of packaging, or advertising. Furthermore, National Academies released a report to the proposals made in Notice No. 4 and after reviewing the consumer survey Congress on underage drinking, in would require significant statutory evidence submitted by CSPI in support which it found that the societal cost of changes. of the proposition that FMBs were underage drinking has been estimated at predominantly popular with minors, the $53 billion, including $19 billion from C. Marketing of FMBs to Underage FTC concluded that flaws in the traffic crashes and $29 billion from Drinkers survey’s methodology limited the ability violent crime. (See ‘‘Reducing Underage 1. Comments Received to draw conclusions from the survey Drinking: A Collective Responsibility.’’) data. The report calls for a comprehensive A number of commenters, including The FTC reviewed this issue again in prevention strategy to create and sustain many individuals and several public response to a request by Congress to a broad societal commitment to reduce interest organizations, commented that study the impact on underage underage drinking. FMBs should be treated as distilled consumers of the significant expansion TTB appreciates the importance of spirits. These commenters claimed that of ads for flavored malt beverages. The these prevention efforts. However, many FMBs are designed for the youth market FTC’s investigation again found no of the issues that are of concern to the due to their taste and the way in which evidence of targeting underage commenters in this regard are beyond they are marketed. Further, these consumers in the marketing of FMBs. the scope of our authority. For example, commenters stated that the introduction However, the report recognized that ad the FAA Act does not prohibit the of FMBs has substantially increased content that appeals to new legal advertisement of distilled spirits distilled spirits brand awareness and drinkers, as well as the sweet taste of products on television; voluntary loyalty among young people. Some FMBs, may be attractive to minors, and industry codes in the broadcasting and commenters claimed this is a deliberate the FTC urged the industry to exercise distilled spirits industries govern this strategy on the part of producers. significant caution when introducing matter. Furthermore, it is the States that One commenter suggested that TTB new alcohol beverage products, to decide whether products such as FMBs should take action against producers ensure that they are not marketed to an are sold in liquor stores or grocery and collect distilled spirits taxes on underage audience. (See ‘‘Alcohol stores. As previously noted, the products marketed as malt beverages. Marketing and Advertising: A Report to rulemaking record indicates that CSPI requested that TTB classify FMBs Congress,’’ September 2003, p.22.) producers of FMBs will reformulate as distilled spirits in order to reduce their products so that they will continue youth access to them by limiting the 2. TTB Response to be classified as malt beverages under range of outlets where they can be sold. As stated in Notice No. 4, we do not Federal law, regardless of whether we An individual commenter suggested believe that the use of distilled spirits adopt the 0.5% standard or the 51/49 that TTB undertake any action that brand names or cocktail names on FMB standard. Thus, we do not conclude that would make FMBs more expensive in labels is inherently misleading. We adoption of the 0.5% standard would order to reduce their availability to recognize that many commenters result in the reclassification, under underage youth. believe that these names confuse Federal law, of FMBs as distilled spirits CSPI further commented that its own consumers as to the identity of the products. data found that both teens and adults products. However, if a product is Our mandate is to ensure the proper think that so-called ‘‘alcopop’’ products clearly labeled with a designation such classification of FMBs under the IRC such as FMBs, which have the brand as ‘‘malt beverage with natural flavors,’’ and the FAA Act, and to ensure that names of distilled spirits products, are we believe that the use of a distilled these alcohol beverages are labeled and more like liquor than beer or wine. spirits brand name on the label does not advertised in a manner that does not Some commenters suggested that these mislead consumers. Accordingly, we are mislead consumers. We do not believe products are particularly appealing to not adopting the suggestion that we that the concerns of those commenters underage consumers and noted that prohibit the use of distilled spirits brand who wish to reduce underage alcohol these products are marketed on names or cocktail names in the labeling consumption, important as they are, are television and are widely available in or advertising of FMBs. However, we directly addressed by this rulemaking.

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D. More Explicit Labeling of FMBs standard for flavored malt beverages. adopt this standard in the minimum Among these comments, 6 were from 1. Comments Received period needed to assure industry brewers, 3 were from Members of compliance. Several commenters requested that Congress, 2 were from State licensing TTB implement more specific labeling agencies, 3 were from national brewery 2. TTB Response for FMBs, including label items such as trade associations, and the rest were TTB is sensitive to the time needs and calories, serving size, ingredients, from individuals. alcohol content, and so forth. These excise tax concerns of the FMB industry commenters claimed this action would A. Effective Date for Compliance With during this period of transition. We provide essential information to the New Added Alcohol Standard realize that adoption of any added alcohol standard will impact production consumers regarding these products. 1. Comments Received methods, ingredients, suppliers, costs, 2. TTB Response Comments concerning and other facets of the business. TTB believes that these comments are implementation, or a regulatory Moreover, we recognize that outside the scope of the current effective date, varied from a minimum considerable time is needed to develop rulemaking, as we did not specifically of ‘‘as short a period as is reasonable’’ new products that not only conform to solicit comments on these issues in to a maximum of two years after an added alcohol standard, but which publication of the final rule containing Notice No. 4. However, the CSPI, the taste the same or are similar to existing an added alcohol standard for FMBs. NCL, and other public interest groups non-conforming FMBs. have recently petitioned TTB to require All brewers that commented on this additional labeling of all alcohol issue expressed concerns regarding the Based on the submitted comments beverages. TTB will separately study the time needed for reformulating products, and the considerations noted above, we petition in order to determine whether and for the purchase, installation, and are prescribing a one-year delayed to propose such labeling for alcohol testing of new equipment. Among the effective date for the regulatory changes beverages. Therefore, TTB is not reasons presented for establishing a adopted in this final rule document. We considering this request for additional longer effective date were: the need to believe this will allow ample time to labeling of flavored malt beverages as develop the correct taste profile in a develop new products and to acquire part of this rulemaking. reformulated product; the need to invest the necessary equipment to place them and install new equipment to produce into production. We believe the three- E. Establishing Another Category of reformulated FMBs; the time needed to month and six-month periods requested Alcohol Beverages gear up for mass production of by two commenters are too short for 1. Comments Received reformulated products; the time some industry members to make the required to invest in co-packers necessary transition to the new rules. Some commenters suggested that, equipment; and the need to test new instead of attempting to classify FMBs We also believe that industry members formulations of FMBs. One brewer will be able to comply with the new as either beer or distilled spirits, TTB stated that reformulation of their rules in considerably less time than the should seek an amendment to Federal products would require them to produce 2-year period requested by one law to define a new class of alcohol as much as 8 times the amount of beverages. These commenters suggested fermented malt base and that they commenter, especially since we are that with a new category of alcohol would require significant time to adopting the less stringent 51/49 beverages, TTB could better address procure the necessary equipment. standard for FMB products. taxation, labeling, and other issues that Another brewer commented that they In adopting a one-year delayed apply to FMBs. This suggestion would would be able to comply with a 0.5% effective date, we also note that, due to establish a unique category of alcohol alcohol standard, as proposed, within 3 the complex nature of this rulemaking, beverages unlike distilled spirits or months time, and requested, at most, a more than one year has already passed traditional beer. 6-month delayed effective date. Six since the publication of the proposed 2. TTB Response brewers requested effective dates of 6 rule. Thus, brewers have already had a This comment is beyond the scope of months, 6 to 9 months, 1 year (two substantial period of time to focus on the current rulemaking procedure, as its comments), 18 months, and 2 years. the research and development necessary implementation would require Three trade associations commented to bring their products into compliance amendments to Federal law. on this issue. One brewery trade with a new standard. association commented that 3 months F. Other Comments was an adequate amount of time to Accordingly, we provide a one-year period of time from publication of this One commenter suggested that TTB comply with the new standard. Another final rule in the Federal Register for require identification and labeling of the commented that 18 months would be source of alcohol in FMBs in order to required. The third, a wholesaler brewers and importers to comply with inform consumers of their composition. association, requested that TTB the 51/49 standard as well as other new TTB believes that this comment is establish a reasonable amount of time regulatory requirements. As of the outside the scope of the proposals for brewers to comply with the new effective date of this final rule, products contained in Notice No. 4. Accordingly, standard. that do not comply with the new 51/49 we are not addressing this subject in the One State regulatory authority standard may not be produced at a final rule. requested swift action to re-classify brewery, bottled at a brewery, removed FMBs to the 0.5 percent standard, from a brewery with or without the XIV. Implementation Dates specifying that a TTB delay will force payment of tax, removed from customs TTB received 20 comments them to initiate a more restrictive custody for consumption, or (in the case expressing opinions about regulation for alcohol beverages. of products not destined for exportation) implementation dates, and related tax Another State believed it would not transferred to a second customs bonded issues, for adoption of either the 0.5 need new State legislation for the 0.5 warehouse. percent standard or the majority percent standard, and urged TTB to

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B. Effect on Products in the Marketplace status of these products, and may XV. Comments on the Proposed reclassify FMBs as distilled spirits Regulatory Text; Regulatory Text 1. Comments Received products, perhaps even before the Changes Three brewers and two trade effective date of this final rule. Several commenters suggested associations commented about FMBs changes to the proposed regulatory text that are in the marketplace at the time C. Additional TTB Comment on the amendments contained in Notice No. 4. of the effective date of a new standard. Effective Date These comments are not directed to the These commenters sought reassurance We are using a single effective date for policy behind the proposed regulatory that these FMBs would not be subject to the new alcohol percent standards for amendments, but rather to their a floor stocks tax at the higher distilled FMBs. This date will permit affected wording, clarity, or organization. In spirits excise tax rate, and that these industry members to transition their addition, TTB has independently products would not be subject to product lines according to their own destruction or recall from the market reviewed the texts of the proposed needs. Until the effective date of this amendments and has made a number of since they might be considered distilled final rule, industry members may spirits at that time. One brewer changes as a result of that review. The continue to produce and remove, at the comments submitted and the changes requested a six-month delay from the beer tax rate, FMBs that do not meet the final rule’s effective date so that made that are not of a minor editorial new alcohol percent standards. nature are discussed below. wholesalers could deplete their Producers who cannot comply with inventories of FMBs not in conformity the new 51/49 standard as of the A. Reference to Malt Beverage with new alcohol standards. effective date of the final rule must stop Standards, §§ 7.10 and 7.11 2. TTB Response producing those FMB products at a 1. Comment Received brewery. As of the effective date of the As noted above, the effective date for The FMBC commented that creating a final rule, products deriving more than implementation of the alcohol standard new section to include standards for 49% of their alcohol content from the impacts only the production and malt beverages is unnecessary because distilled spirits components of added removal from a brewery, or the persons seeking information on this flavors may only be produced at importation and removal from customs topic would look at the definition of a distilled spirits plants. Such products custody of malt beverage or beer malt beverage in § 7.10. The FMBC would of course be subject to tax at the products. Thus, TTB will continue to suggested incorporating the standards appropriate distilled spirits excise tax treat as beer or malt beverages those proposed in § 7.11 into the definition of rate. products made according to previously malt beverage appearing in § 7.10. existing standards and removed from Until the effective date of the final the brewery or from customs custody rule, TTB’s Advertising, Labeling and 2. TTB Response before the effective date. TTB will not Formulation Division (ALFD) will TTB does not agree with the comment assess a distilled spirits tax on them or continue to approve statements of and suggested text change. The statutory require their recall or destruction. process and certificates of label definition of a malt beverage is not Wholesalers and retailers holding these approval (COLAs) for FMBs that may affected by this final rule; that definition products on or after the effective date not comply with the new added alcohol cannot change without legislative may continue to market them in the standards. During this interim period, action. Standards applying to same manner as prior to the effective ALFD will qualify these statements of production or composition of a malt date, until their supplies in the process and COLA approvals with beverage are more technical and may marketplace are exhausted. reference to this final rule’s effective change from time to time. We wish to Notwithstanding the above, it is date. However, whether qualified or not, separate the relatively simple statutory incumbent on wholesalers and retailers statements of process for FMBs not in definition from the more technical who hold these products to ensure compliance (including those permitting production requirements that we are compliance with the requirements of the you to make a product not in adopting in this final rule. Further, we States in which the products are held or compliance with the 51/49 standard) note that § 7.10 would become introduced for sale. Many States have will become obsolete as of the effective unnecessarily long and technical if we requested that TTB provide a Federal date of this final rule and will be were to place malt beverage standards in FMB definition and added alcohol revoked by operation of the regulation. that section. Therefore, we have decided percent standard that can serve as a This means that no individual to place the standards applying to guide for State classification of alcohol proceedings are necessary in order to production and composition of malt beverages. In adopting a 51/49 standard revoke those formulas. Similarly, beverages in § 7.11. for malt beverages containing no more whether qualified or not, COLAs for We have provided a cross reference in than 6% alcohol by volume, and by these products that do not comply with § 7.10 to the standards for malt adding to the regulations a 1.5% the 51/49 standard as of the effective beverages appearing in § 7.11 in order to standard for malt beverages with an date will also be considered revoked by alert readers that additional conditions alcohol content in excess of 6% as operation of regulation unless the may apply to the production or explained later in this preamble, TTB is underlying statement of process is composition of malt beverages. We also furnishing guidelines to the various superseded by a new formula that is in have changed proposed § 7.10 by States concerning the classification of compliance with the 51/49 standard. including a reference to ‘‘processes’’ as flavored malt beverages. As already Because this final rule incorporates, well as standards for flavors in order to noted in this preamble, while most in large part, the holdings of ATF alert the reader to the fact that malt States look to Federal guidance in this Rulings 96–1 and 2002–2, while beverages may undergo certain area and rely on Federal classification of establishing new standards for added processing specified in § 7.11. alcohol beverages, there is certainly no alcohol from flavors and other TTB has changed the heading of requirement for them to do so. Thus, nonbeverage products, these rulings will § 7.11 to read ‘‘Use of ingredients individual States may take a different become obsolete as of the effective date containing alcohol in malt beverages; view of the classification and taxable of the final rule. processing of malt beverages.’’ We

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believe this title more accurately reflects the use of taxpaid wine in any malt As stated above, we have decided to the provisions of this section, which beverage. adopt the more liberal 51/49 standard permit the use of certain processes and Accordingly, in this final rule we instead of the proposed 0.5% standard. authorize the use of certain ingredients have clarified our intent regarding the However, Coors has accurately pointed containing alcohol in malt beverages. use of ingredients containing alcohol by out one hazard of extending the 51/49% using the phrase ‘‘flavors and other majority rule to malt beverages of any B. Comments on Alcohol Flavoring nonbeverage ingredients containing alcohol strength including those over Material Reference, §§ 7.11 and 25.15 alcohol’’ in §§ 7.11 and 25.15. Use of 6% alc/vol. To do so would facilitate 1. Comments Received this modified language makes it very the production of extremely high clear that flavoring materials may strength malt beverages at breweries. The FMBC commented on the contain alcohol and that other Prior to issuing ATF Ruling 96–1, our wording in proposed § 7.11, specifically nonbeverage ingredients such as predecessor agency reviewed FMBs on the phrase ‘‘alcohol flavoring materials blenders may contain alcohol. It does the market and determined that, based and other ingredients containing not authorize the use of taxpaid distilled on approved statements of process, the alcohol.’’ The FMBC supported this spirits or taxpaid wine in the only FMBs containing a significant wording, and suggested that this production of malt beverages. amount of alcohol derived from flavors language recognized that brewers may TTB notes that the FMBC also were for products that contained 6% or add other ingredients containing supported the Notice No. 4 recognition less alcohol by volume in the finished alcohol, such as taxpaid distilled spirits that various processes and treatments product. Although ATF had approved and wine, to malt beverages. This may be used on malt beverages to statements of process under § 25.67 for commenter suggested that the final rule remove color, aroma, bitterness or other FMBs containing in excess of 6% further clarify this policy by authorizing characteristics derived from alcohol by volume, in no instance had the use of ‘‘alcohol flavors, taxpaid fermentation. This provision remains the quantitative amount of alcoholic wine, taxpaid distilled spirits, or any unchanged in § 7.11. flavoring materials used in such other ingredient containing alcohol’’ in products contributed more than 1.5% both § 7.11 and § 25.15. C. Malt Beverages Above 6.0% Alc/Vol; alc/vol to the finished product. Status of ATF Ruling 96–1 2. TTB Response Accordingly, to preserve the status quo 1. Comments Received pending rulemaking on this issue, ATF TTB used the wording ‘‘alcohol ruled that FMBs containing in excess of flavoring materials and other The FMBC commented that ATF 6% alcohol by volume may derive no ingredients containing alcohol’’ in Ruling 96–1 limits the contribution of more than 1.5% alcohol by volume from proposed § 7.11 to describe the kinds of added alcohol in malt beverages over added alcoholic flavoring materials. materials that might contribute alcohol 6.0% alc/vol to not more than 1.5% of Based on the rulemaking record, there to a finished malt beverage. We do not the total volume. This commenter stated is no need to liberalize the added agree with this commenter’s suggestion that Notice No. 4 neither incorporated alcohol standard for FMBs with an that this language includes, or should be nor addressed this limitation and alcohol content in excess of 6%. TTB extended to include, the use of taxpaid requested that TTB clarify the status of believes that any such liberalization distilled spirits or taxpaid wine. the limit in the ruling on alcohol would raise serious questions as to addition for malt beverages over 6.0% The provision allowing the addition whether the finished product was alc/vol. of flavors and other ingredients appropriately classified as a malt Coors commented that the practical containing alcohol to malt beverages beverage or as a distilled spirits product. effect of the proposed 0.5% added was specifically designed to permit the Accordingly, this final rule alcohol limitation is to establish a addition of alcohol flavors to malt incorporates the terms of ATF Ruling natural limitation on the [upper] alcohol beverages and to allow the addition of 96–1 with respect to malt beverages content of malt beverages. This certain other materials such as blenders with an alcohol content of more than commenter noted that the TTB containing alcohol to malt beverages. 6% alc/vol, by restricting the addition of alternative 51/49 percent proposal TTB in Notice No. 4 did not intend to alcohol to malt beverages above 6.0% would permit a brewer to produce a authorize the direct addition of distilled alc/vol to not more than 1.5% of the 35% alc/vol malt beverage by spirits to malt beverages. TTB reaffirms volume of the finished product. We combining a high alcohol fermented its long-held position that the IRC does have incorporated this policy in the malt beverage of 18% alc/vol with an not explicitly authorize the direct regulatory texts by adding a new additional 17% alc/vol through alcohol addition of distilled spirits to malt paragraph (a)(2) to § 7.11 and by flavor and blender use. Coors stated that beverages. Thus, this final rule will not modifying § 25.15(b) to include the ATF Ruling 96–1 clearly presented authorize the addition of distilled spirits same 1.5% added alcohol qualification TTB’s intention that alcohol in malt to malt beverages. for malt beverages and beer over 6% alc/ beverages should be derived from vol. TTB did include a reference to fermentation and not from fortification. taxpaid wine in proposed § 25.15(b) and D. Changes to § 7.31 in proposed § 25.55(a)(2). However, this 2. TTB Response Although there is no substantive final rule does not authorize that use of Notice No. 4 proposed to limit the change in the proposed amendment to taxpaid wine. addition of alcohol to all malt beverages § 7.31, we have reversed the order of Like distilled spirits, taxpaid wine is from flavors and other materials existing paragraph (d) and proposed a beverage product. Neither the IRC nor containing alcohol to less than 0.5% new paragraph (e), so that paragraph (d) the FAA Act specifically authorizes the alc/vol. This proposal would have contains the new provision for use of taxpaid wine in the production of included malt beverages with an alcohol submitting a formula or sample of a malt malt beverages. TTB will not allow content exceeding 6% alcohol by beverage to TTB in conjunction with the taxpaid wine to make up to 49% of the volume. Thus, there was no need to filing of an application for a certificate alcohol content of a malt beverage. separately address these malt beverages of label approval. We have also changed Thus, this final rule does not authorize in the proposed regulations. the term ‘‘you’’ to ‘‘importer’’ to clarify

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the person required to comply with the It has been TTB’s policy to authorize superseding formula. Under regulation. the use of a formula covering § 25.58(b)(2), a superseding formula production of a beer base that the retains the original formula number but E. Reference to Standards for Beer, brewer does not intend to market, but it must be annotated to show it is a §§ 25.11 and 25.15 will use in the eventual production of superseding formula. If an existing 1. Comment Received a product such as an FMB. For example, certificate of label approval covers the The FMBC commented that creating a a brewer might choose to file a formula product, the brewer may continue to use new § 25.15 to include standards for for a beer base that the brewer has that certificate. beer production is unnecessary because produced and removed character from We have changed the section persons seeking this information would through a variety of processes. At a later headings in §§ 25.15 and 25.53 through look at the definition of beer in § 25.11. stage, the brewer could produce several 25.58 by changing the question-style The FMBC therefore suggested distinct fermented products by adding headings to declarative statement incorporating the proposed § 25.15 different flavors to this base. We have headings. We believe the latter approach standards into the existing definition of added a new paragraph (b)(2) to § 25.55 is more effective than question-style beer in § 25.11. to reflect this practice. headings in helping the reader to find If a brewer adds flavors to a beer base regulatory information. Additionally, 2. TTB Response or otherwise treats it to produce a we note that part 25 does not contain TTB is not adopting this suggestion fermented beverage that the brewer other question-style headings at this for the reasons previously set forth in intends to market, any approved beer time. this comment discussion. We wish to base formula should be referenced in XVI. Regulatory Analysis and Notices separate the relatively simple statutory the formula information specified in definition of beer from the more § 25.57. We have added a new A. Executive Order 12866 paragraph (d) to § 25.57 to clarify this technical production requirements that As noted in the comment discussion we are adopting in this final rule. point. Although we did not receive in this final rule, several commenters Further, we note that § 25.11 would suggested that the proposed 0.5% become unnecessarily long and comments directed to § 25.58, we have reorganized and revised this section in standard would impose significant technical if we were to include regulatory burdens and economic costs standards for beer in that section. order to clarify the distinction between a new formula and a superseding on the FMB industry. One comment in Therefore, we have retained the particular, from the FMBC, suggested proposed standards applying to the formula. We have not changed the that the costs of the proposed 0.5% production and composition of beer in substantive requirements in proposed standard, when extrapolated to the new § 25.15. § 25.58. We believe that the inclusion of a Paragraph (a) sets forth conditions entire FMB industry, would exceed cross reference at the end of the § 25.11 that trigger the filing of a new formula, $600 million over the next 4 years. In beer definition to the standards for beer and these conditions are the same as addition, this commenter suggested that appearing in § 25.15 is sufficient to alert those in paragraphs (a)(1) through (a)(6) the proposed 0.5% standard would have readers that additional conditions may of proposed § 25.58. The revised a negative impact on revenue apply to the production and introductory text of paragraph (a) collections by the Federal government composition of beer. merely incorporates the terms of due to reductions in sales of FMBs. proposed paragraph (c) regarding giving TTB believes that the FMBC comment F. Other § 25.15 Issues each new formula a new formula may have overstated the regulatory We have changed the title of § 25.15 number. burdens and economic costs that would to read, ‘‘Materials for the production Paragraph (b) of § 25.58 combines be imposed by the proposed rule. of beer.’’ This change better reflects the proposed paragraphs (b) and (d). The However, as already pointed out in this content since this section specifies introductory text of revised paragraph document, we are persuaded by this and materials that may be used in producing (b) clarifies when a brewer may file a other comments that imposition of a beer at a brewery, and does not refer to superseding formula in lieu of filing an 0.5% standard for all FMBs would the tax on beer. entirely new formula. Under this text, a impose greater regulatory burdens and brewer may file a superseding formula economic costs than the 51/49 standard. G. Comments on Formula Proposals, when the brewer makes a change to an In response to these comments, TTB §§ 25.55–25.58 existing approved formula that is not of evaluated several options to minimize We have conformed the language a type that would require a holder of a the regulatory burdens and economic throughout §§ 25.55–25.58 to the use of certificate of label approval to file a new costs imposed by the rule. In particular, the phrase ‘‘flavors and other application for label approval on TTB we adopted an option that we believe nonbeverage ingredients containing Form 5100.31, regardless of whether the will meet the important regulatory goals alcohol’’ in referring to the materials formula is for a product covered by a of this rulemaking project, while containing alcohol that may be used in certificate of label approval. Thus, when reducing in a meaningful fashion the producing beer. We have also removed a brewer replaces one ingredient with a regulatory burdens and costs imposed the term ‘‘taxpaid wine’’ that appeared similar ingredient, and this replacement by the rule. In other words, we adopted in proposed §§ 25.55(a)(2) and is not of a type that would require a new the more lenient alternative advocated 25.57(a)(3)(ii). As noted earlier in this certificate of label approval for the by the FMBC and others who opposed comment discussion, these formula product, the brewer may file a the 0.5% rule; thus, the final rule allows regulations do not authorize the use of superseding formula rather than a new products labeled as FMBs to derive up taxpaid wine or taxpaid distilled spirits formula. to 49% of their alcohol content from the in the production of beer. We also Paragraph (b)(1) specifies that distilled spirits components of added added exception language regarding hop superseding formulas must be approved flavors and other nonbeverage products. extract in § 25.55(a)(2) to clarify that the by TTB before they may be used, and In response to concerns raised by the use of hop extract containing alcohol that TTB will cancel the original comments, TTB also adopted a one-year does not require the filing of a formula. formula upon approval of the delayed effective date for the final rule,

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to allow affected producers adequate the option of exempting small association representing more than time to reformulate their products, if businesses from compliance with the 1,400 small brewers, supported the necessary. We believe that this delayed requirements of the final rule. However, proposed rule without mentioning the effective date also serves to address the for a number of reasons explained in alcohol content statement requirement. concerns of affected industry members. detail earlier in the preamble to this Furthermore, we note that brewers are Accordingly, for the reasons set forth document, we have adopted the more already required to keep records of above, we have determined that the liberal 51/49 standard for products alcohol content under the IRC final rule, as modified in response to the labeled as FMBs. We have also adopted regulations set forth in 27 CFR 25.293. comments, is not a significant regulatory a one-year delayed effective date for the We have no information indicating that action as defined in E.O. 12866. provisions of this final rule, to allow the requirement to disclose alcohol Therefore, a regulatory assessment is not adequate time for those FMB producers content on brand labels for malt required. that wish to reformulate their products beverages deriving alcohol from added B. Regulatory Flexibility Act or otherwise conform to the flavors or other nonbeverage ingredients requirements of the final rule regulatory would impose a significant economic The Regulatory Flexibility Act texts. Accordingly, we believe that we burden on a substantial number of small generally requires an agency to conduct have responded to the concerns raised entities. Accordingly, the record does a regulatory flexibility analysis of any by small businesses and have not support such a finding. rule subject to notice and comment meaningfully reduced the costs and Pursuant to section 7805(f) of the rulemaking requirements unless the regulatory burdens imposed by the rule. Internal Revenue Code of 1986, we agency certifies that the rule will not It should be noted that several small submitted the notice of proposed have a significant economic impact on wholesalers and retailers commented rulemaking preceding this final rule to a substantial number of small entities. that the proposed rule would have an the Chief Counsel for Advocacy of the Small entities include small businesses, adverse impact on them, because State Small Business Administration (SBA) small not-for-profit enterprises, and law might not allow them to sell FMB for comment on its impact on small small governmental jurisdictions. products that are reclassified as distilled businesses. We received no comment We have determined that this final spirits products. We believe that the from the SBA in response to that rule will not have a significant modifications discussed above address submission. economic impact on a substantial their concerns. Furthermore, the FMB C. Paperwork Reduction Act number of small entities. Accordingly, a producers that commented on this issue regulatory flexibility analysis is not all indicated an intention to reformulate In Notice No. 4, TTB stated that the required. their products within the requirements provisions of the Paperwork Reduction In Notice No. 4, we stated our belief of the final rule, rather than produce Act of 1995, 44 U.S.C. chapter 35, and that 10 or fewer qualified small beverages that would be classified as its implementing regulations, 5 CFR part breweries actually manufacture flavored distilled spirits products under Federal 1320, did not apply to the notice of malt beverages subject to this rule. We law. Finally, we would note that the proposed rulemaking, because we were specifically solicited comments on the Regulatory Flexibility Act does not not proposing any new or revised number of small breweries that may be require us to consider indirect effects on recordkeeping requirements. After affected by this rule and on the impact businesses that are not directly subject review of the comments on this issue, of this rule on those breweries. We to the requirements of the final rule; TTB has determined that the final rule asked small breweries that believe they instead, the relevant economic impact is includes a new reporting requirement would be significantly affected by this ‘‘the impact of compliance with the and a revision of an existing reporting rule to let us know and to tell us how proposed rule on regulated small requirement. The new reporting the rule would affect them. entities.’’ Mid-Tex Electric Cooperative, requirement involves the specific detail In response to Notice No. 4, we Inc. v. FERC, 773 F.2d 327, 342 (D.C. that must be included in the formulas received only a few comments from Cir. 1985). Wholesalers and retailers of for certain fermented products produced brewers that identified themselves as FMBs are not directly subject to the at a brewery. The revision involves the small brewers that would be affected by requirements of the final rule. mandatory alcohol content statement for the rule. These comments, as well as Finally, a comment from the FMBC malt beverages that derive alcohol from other comments submitted by FMB suggested that the alcohol content added flavors or other ingredients. producers, suggested that the proposed labeling requirement would have a Because the final rule does not take 0.5% standard would unfairly burden significant economic impact on a effect for one year from publication of small brewers, and could result in substantial number of small entities, this document in the Federal Register, putting these companies out of business. including many small brewers that there is time to air these requirements The comments indicated that the small produce beers and ales that contain only for public comment prior to the effective brewers would be able to comply with a small quantity of flavors. The FMBC date of the rule. the 51/49 standard without such comment conceded that it did not know These collections of information have significant adverse consequences. how many brewers might be impacted been reviewed and, pending receipt and In response to these comments and by this requirement but suggested that evaluation of public comments, others, we have modified the regulatory many small brewers would be affected. approved by the Office of Management texts contained in this final rule to The FMBC stated that its members and Budget (OMB) under 44 U.S.C. reduce the potential economic impact of already label their FMB products with 3507(j) and assigned control numbers the rule on small businesses that alcohol content statements. 1513–0118 and 1513–0087. An agency produce FMBs. As indicated earlier in TTB did not receive any comments may not conduct or sponsor, and a the preamble to this document, we from small brewers who produce person is not required to respond to, a considered several options to reduce the traditional flavored beers and ales collection of information unless it economic impact on small businesses. suggesting that the requirement for an displays a valid control number For various reasons, most importantly alcohol content statement would impose assigned by OMB. because the pertinent statutes would not a significant economic burden. The The collection of information in this authorize such an option, we rejected Brewer’s Association of America, a trade regulation covered by OMB control

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number 1513–0118 is found in • The accuracy of the agency’s dioxide, and with or without other §§ 25.55–25.58. This collection is estimate of the information collection wholesome products suitable for human necessary to ensure that producers of burden; food consumption. Standards applying certain beers provide enough • Ways to enhance the quality, utility, to the use of processing methods and information to TTB to ensure the proper and clarity of the information to be flavors in malt beverage production tax classification of the products. The collected; appear in § 7.11. • likely respondents are businesses. Ways to minimize the information * * * * * • Estimated total annual reporting collection burden on respondents, I 3. We amend subpart B by adding a and/or recordkeeping burden: 500 including through the use of automated new § 7.11 to read as follows: hours. collection techniques or other forms of • Estimated average annual burden information technology; and § 7.11 Use of ingredients containing hours per respondent and/or • Estimates of capital or start up costs alcohol in malt beverages; processing of recordkeeper: 5 hours. and costs of operations, maintenance, malt beverages. • Estimated number of respondents and purchase of services to provide (a) Use of flavors and other and/or recordkeepers: 100. information. nonbeverage ingredients containing • Estimated annual frequency of XVII. Drafting Information alcohol— responses: 5. (1) General. Flavors and other The collection of information in this This principal author of this nonbeverage ingredients containing regulation covered by OMB control document is Charles N. Bacon. Other alcohol may be used in producing a number 1513–0087 is in § 7.22, which personnel in the Alcohol and Tobacco malt beverage. Except as provided in imposes a requirement for an alcohol Tax and Trade Bureau and in the paragraph (a)(2) of this section, no more content statement on labels of malt Department of the Treasury participated than 49% of the overall alcohol content beverages deriving any alcohol from in the drafting of the document. of the finished product may be derived added flavors or other nonbeverage List of Subjects from the addition of flavors and other ingredients. This information is nonbeverage ingredients containing required to ensure that consumers are 27 CFR Part 7 alcohol. For example, a finished malt not misled as to the alcohol content of Advertising, Authority delegations, beverage that contains 5.0% alcohol by malt beverages that derive alcohol from Beer, Consumer protection, Customs volume must derive a minimum of sources other than fermentation at a duties and inspection, Imports, 2.55% alcohol by volume from the brewery. The likely respondents are Labeling, Packaging and containers, fermentation of barley malt and other businesses. This information constitutes Reporting and recordkeeping materials and may derive not more than one element of the labeling information requirements. 2.45% alcohol by volume from the on alcohol beverages required under addition of flavors and other 27 CFR Part 25 authority of the Federal Alcohol nonbeverage ingredients containing Administration Act (FAA Act), and it Beer, Claims, Electronic fund alcohol. relates to only one sector of the alcohol transfers, Excise taxes, Exports, (2) In the case of malt beverages with beverage industry. The policy of TTB Labeling, Liquors, Packaging and an alcohol content of more than 6% by and its predecessor agency has been to containers, Reporting and recordkeeping volume, no more than 1.5% of the treat all labeling requirements under the requirements, Research, Surety bonds. volume of the malt beverage may consist of alcohol derived from added flavors FAA Act as resulting in one burden Amendment to the Regulations hour per respondent. Accordingly, and other nonbeverage ingredients because the producers of malt beverages I For the reasons discussed in the containing alcohol. already know the alcohol content of preamble, TTB amends 27 CFR parts 7 (b) Processing. Malt beverages may be their products and displaying that and 25 as follows: filtered or otherwise processed in order content on the label constitutes only a to remove color, taste, aroma, bitterness, small portion of the existing labeling PART 7—LABELING AND or other characteristics derived from requirements, the burden estimate ADVERTISING OF MALT BEVERAGES fermentation. I associated with this alcohol content I 1. The authority citation for 27 CFR 4. We amend § 7.22 by adding a new labeling requirement is minimal. part 7 continues to read as follows: paragraph (a)(5) to read as follows: Comments concerning each collection of information should be directed to the Authority: 27 U.S.C. 205. § 7.22 Mandatory label information. Office of Management and Budget, I 2. We amend § 7.10 by revising the * * * * * Attention: Desk Officer for the definition of ‘‘malt beverage’’ to read as (a) * * * Department of the Treasury, Office of follows: (5) Alcohol content in accordance Information and Regulatory Affairs, with § 7.71, for malt beverages that Washington, DC 20503. A copy should § 7.10 Meaning of terms. contain any alcohol derived from added also be sent to the Chief, Regulations * * * * * flavors or other added nonbeverage and Procedures Division, Alcohol and Malt beverage. A beverage made by ingredients (other than hops extract) Tobacco Tax and Trade Bureau, 1310 G the alcoholic fermentation of an containing alcohol. Street, NW., Washington, DC 20220. infusion or decoction, or combination of * * * * * Any such comments should be both, in potable brewing water, of I 5. We amend § 7.29 by revising the submitted not later than March 4, 2005. malted barley with hops, or their parts, introductory text of paragraph (a) and by Comments are invited on: or their products, and with or without adding a new paragraph (a)(7) to read as • Whether the collection of other malted cereals, and with or follows: information is necessary for the proper without the addition of unmalted or performance of the functions of the prepared cereals, other carbohydrates or § 7.29 Prohibited practices. agency, including whether the products prepared therefrom, and with (a) Statements on labels. Containers of information will have practical utility; or without the addition of carbon malt beverages, or any labels on such

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containers, or any carton, case, or (ii) The use of a brand name of a the brewery and may derive not more individual covering of such containers, distilled spirits product as a malt than 2.45% alcohol by volume from the used for sale at retail, or any written, beverage brand name, provided that the addition of flavors and other printed, graphic, or other material overall advertisement does not present a nonbeverage ingredients containing accompanying such containers to the misleading impression about the alcohol. In the case of beer with an consumer, must not contain: identity of the product; or alcohol content of more than 6% by * * * * * (iii) The use of a cocktail name as a volume, no more than 1.5% of the (7) Any statement, design, device, or brand name or fanciful name of a malt volume of the beer may consist of representation that tends to create a beverage, provided that the overall alcohol derived from added flavors and false or misleading impression that the advertisement does not present a other nonbeverage ingredients malt beverage contains distilled spirits misleading impression about the containing alcohol. or is a distilled spirits product. This identity of the product. I 11. We amend subpart F by adding two paragraph does not prohibit the * * * * * undesignated center headings, and by following on malt beverage labels: adding new §§ 25.53 and 25.55 through (i) A truthful and accurate statement PART 25—BEER 25.58, to read as follows: of alcohol content, in conformity with I § 7.71; 8. The authority citation for part 25 Samples continues to read as follows: (ii) The use of a brand name of a § 25.53 Submissions of samples of distilled spirits product as a malt Authority: 19 U.S.C. 81c; 26 U.S.C. 5002, fermented products. beverage brand name, provided that the 5051–5054, 5056, 5061, 5091, 5111, 5113, 5142, 5143, 5146, 5222, 5401–5403, 5411– The appropriate TTB officer may, at overall label does not present a any time, require you to submit samples misleading impression about the 5417, 5551, 5552, 5555, 5556, 5671, 5673, 5684, 6011, 6061, 6065, 6091, 6109, 6151, of: identity of the product; or (a) Cereal beverage, sake´, or any (iii) The use of a cocktail name as a 6301, 6302, 6311, 6313, 6402, 6651, 6656, 6676, 6806, 7011, 7342, 7606, 7805; 31 U.S.C. fermented product produced at the brand name or fanciful name of a malt 9301, 9303–9308. brewery, beverage, provided that the overall label (b) Materials used in the production does not present a misleading I 9. We amend § 25.11 by revising the of cereal beverage, sake´, or any impression about the identity of the definition of ‘‘beer’’ to read as follows: fermented product; and product. § 25.11 Meaning of terms. (c) Cereal beverage, sake´, or any * * * * * * * * * * fermented product, in conjunction with I 6. We amend § 7.31 by redesignating Beer. Beer, ale, porter, stout, and other the filing of a formula. paragraph (d) as paragraph (e) and by similar fermented beverages (including (26 U.S.C. 5415, 5555, 7805(a)) adding a new paragraph (d) to read as sake´ and similar products) of any name follows: or description containing one-half of Formulas § 7.31 Label approval and release. one percent or more of alcohol by § 25.55 Formulas for fermented products. volume, brewed or produced from malt, * * * * * (a) For what fermented products must wholly or in part, or from any substitute (d) Formula and samples. The a formula be filed? You must file a for malt. Standards for the production of appropriate TTB officer may require an formula for approval by TTB if you beer appear in § 25.15. importer to submit a formula for a malt intend to produce: beverage, or a sample of any malt * * * * * (1) Any fermented product that will beverage or ingredients used in I 10. We amend subpart B by adding an be treated by any processing, filtration, producing a malt beverage, prior to or in undesignated center heading and a new or other method of manufacture that is conjunction with the filing of a § 25.15 to read as follows: not generally recognized as a traditional certificate of label approval on TTB Standards for Beer process in the production of a fermented Form 5100.31. beverage designated as ‘‘beer,’’ ‘‘ale,’’ * * * * * § 25.15 Materials for the production of ‘‘porter,’’ ‘‘stout,’’ ‘‘lager,’’ or ‘‘malt I 7. We amend § 7.54 by revising the beer. liquor.’’ For purposes of this paragraph: introductory text of paragraph (a) and by (a) Beer must be brewed from malt or (i) Removal of any volume of water adding a new paragraph (a)(8) to read as from substitutes for malt. Only rice, from beer, filtration of beer to follows: grain of any kind, bran, glucose, sugar, substantially change the color, flavor, or and molasses are substitutes for malt. In character, separation of beer into § 7.54. Prohibited statements. addition, you may also use the different components, reverse osmosis, (a) General prohibition. An following materials as adjuncts in concentration of beer, and ion exchange advertisement of malt beverages must fermenting beer: honey, fruit, fruit juice, treatments are examples of non- not contain: fruit concentrate, herbs, spices, and traditional processes for which you * * * * * other food materials. must file a formula. (8) Any statement, design, device, or (b) You may use flavors and other (ii) Pasteurization, filtration prior to representation that tends to create a nonbeverage ingredients containing bottling, filtration in lieu of false or misleading impression that the alcohol in producing beer. Flavors and pasteurization, centrifuging for clarity, malt beverage contains distilled spirits other nonbeverage ingredients lagering, carbonation, and blending are or is a distilled spirits product. This containing alcohol may contribute no examples of traditional processes for paragraph does not prohibit the more than 49% of the overall alcohol which you do not need to file a formula. following in advertisements for malt content of the finished beer. For (iii) If you have questions about beverages: example, a finished beer that contains whether or not use of a particular (i) A truthful and accurate statement 5.0% alcohol by volume must derive a process not listed in this section of alcohol content, in conformity with minimum of 2.55% alcohol by volume requires the filing of a formula, you may § 7.71; from the fermentation of ingredients at request a determination from TTB in

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accordance with paragraph (f) of this TTB officer may also exempt the use of (2) You must serially number each section. a particular coloring, flavoring, or food formula, commencing with ‘‘1’’ and (2) Any fermented product to which material from the formula filing continuing in numerical sequence. flavors or other nonbeverage ingredients requirement of paragraph (a)(3) or (3) You must date and sign each (other than hop extract) containing paragraph (a)(4) of this section upon a formula. alcohol will be added. finding that the coloring, flavoring, or (4) You must file two copies of each (3) Subject to paragraph (f) of this food material in question is generally formula with TTB. section, any fermented product to which recognized as a traditional ingredient in (b) Where do I file a formula? File coloring or natural or artificial flavors the production of a fermented beverage your formula with the Assistant Chief, will be added. designated as ‘‘beer,’’ ‘‘ale,’’ ‘‘porter,’’ Advertising, Labeling and Formulation (4) Subject to paragraph (f) of this ‘‘stout,’’ ‘‘lager,’’ or ‘‘malt liquor.’’ Division, Alcohol and Tobacco Tax and section, any fermented product to which (2) You may request a determination Trade Bureau, 1310 G Street, NW., fruit, fruit juice, fruit concentrate, herbs, from TTB on whether or not the use of Washington, DC 20220. spices, honey, maple syrup, or other a process not listed in paragraph (a)(1) (26 U.S.C. 5401, 7805) food materials will be added. of this section will require the filing of (5) Sake´, including flavored sake´ and a formula or whether the use of a § 25.57 Formula information. ´ sparkling sake. particular coloring, flavoring or food (a) Ingredient information. (1) For (b) Are separate formulas required for material may be exempted from the each formula you must list each different products? formula filing requirement of paragraph (1) You must file a separate formula separate ingredient and the specific (a)(3) or paragraph (a)(4) of this section. for approval for each different quantity used, or a range of quantities You should mail your request to the fermented product for which a formula used. You may include optional Assistant Chief, Advertising, Labeling is required. ingredients in a formula if they do not (2) You may file a formula for a beer and Formulation Division, Alcohol and impact the labeling or identity of the base to be used in the production of one Tobacco Tax and Trade Bureau, 1310 G finished product. or more other fermented products. The Street, NW., Washington, DC 20220. (2) For fermented products containing beer base must conform to the standards (i) When requesting a determination flavorings you must list for each set forth in § 25.15. as to whether a process is subject to the formula: The name of the flavor; the (c) When must I file a formula? formula filing and approval product number or TTB drawback (1) Except as provided in paragraph requirement, the request must include: number and approval date of the flavor; (c)(2) of this section, you may not (A) A detailed description of the the name and location (city and State) produce a fermented product for which proposed process; of the flavor manufacturer; the alcohol a formula is required until you have (B) Evidence establishing that the content of the flavor; and the point of filed and received approval of a formula proposed process is generally production at which the flavor was for that product. recognized as a traditional process in added (that is, before, during, or after (2) You may, for research and the production of a fermented beverage fermentation). development purposes (including designated as ‘‘beer,’’ ‘‘ale,’’ ‘‘porter,’’ (3) For formulas that include the use consumer taste testing), produce a ‘‘stout,’’ ‘‘lager,’’ or ‘‘malt liquor’’; and of flavors and other nonbeverage ingredients containing alcohol, you fermented product without an approved (C) An explanation of the effect of the must explicitly indicate: formula, but you may not sell or market proposed process on the production of (i) The volume and alcohol content of this product until you receive approval a fermented product. the beer base; of the formula for it. (ii) When requesting an exemption (d) How long is my formula approval (ii) The maximum volumes of the from the formula filing requirement in valid? Your formula approved under flavors and other nonbeverage paragraph (a)(3) or paragraph (a)(4) of this section remains in effect until: you ingredients containing alcohol to be this section regarding coloring, supersede it with a new formula; you used; flavoring, or food material ingredients, voluntarily surrender the formula; TTB (iii) The alcoholic strength of the the request must include the following cancels or revokes the formula; or the flavors and other nonbeverage information: formula is revoked by operation of law ingredients containing alcohol; or regulation. (A) A description of the proposed (iv) The overall alcohol contribution (e) Are my previously approved ingredient; to the finished product provided by the statements of process valid? Your (B) Evidence establishing that the addition of any flavors or other statements of process approved before proposed ingredient is generally nonbeverage ingredients containing January 3, 2006 are considered recognized as a traditional ingredient in alcohol. You are not required to list the approved formulas under this section, the production of a fermented beverage alcohol contribution of individual provided that any finished product that designated as ‘‘beer,’’ ‘‘ale,’’ ‘‘porter,’’ flavors and other nonbeverage could be made under the statement of ‘‘stout,’’ ‘‘lager,’’ or ‘‘malt liquor’’; and ingredients containing alcohol. You may process would be in compliance with (C) An explanation of the effect of the state the total alcohol contribution from the provisions of this part. You do not proposed ingredient in the production these ingredients to the finished need to submit a formula for approval of a fermented product. product; and if a statement of process that remains (v) The final volume and alcohol § 25.56 Filing of formulas. valid covers the product. content of the finished product. (f) Determinations by TTB regarding (a) What are the general requirements (b) Process information. For each specific processes and ingredients. for filing a formula? (1) You must file formula you must describe in detail (1) The appropriate TTB officer may your formula in writing. Your formula each process used to produce a determine whether or not use of a must identify each brewery where the fermented beverage. process not listed in paragraph (a)(1) of formula applies by including each (c) Alcohol content. For each formula this section requires you to file a brewery name, address, and registry you must state the alcohol content of the formula for approval. The appropriate number. fermented product after fermentation

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and the alcohol content of the finished (3) Delete ingredients from an existing superseding formula replaces, but you product. formulation; must annotate the formula number to (d) Beer base formulas. You must refer (4) Change the quantity of an indicate it is a superseding formula in your formula to any approved ingredient used from the quantity or number. (For example, ‘‘Formula 2, formula number that covers the range of usage in an approved formula; superseding.’’) production of any beer base used in (5) Change an approved processing, (c) When you file a new or producing the formula product. If the filtration, or other special method of superseding formula with TTB, you beer base was produced by another manufacture that requires the filing of a must follow the procedures and other brewery of the same ownership, you formula; or requirements of §§ 25.56 and 25.57. must also provide the name and address (6) Change the contribution of alcohol or name and registry number of that from flavors or ingredients that contain § 25.62 [Amended] brewery. alcohol. I 12. We amend § 25.62 by removing and (e) Additional information. The (b) Superseding formulas. You may reserving paragraph (a)(7). appropriate TTB officer may at any time file a superseding formula, instead of a require you to file additional new formula, if you have made any § 25.67 [Removed and Reserved] information concerning a fermented change listed in paragraphs (a)(2) product, ingredients, or processes, in through (a)(6) of this section and that I 13. We amend Subpart G by removing order to determine whether a formula change is not of a type that would and reserving § 25.67. should be approved or disapproved or require a holder of a certificate of label § 25.76 [Removed and Reserved] whether the approval of a formula approval to file a new application for should be continued. label approval on TTB Form 5100.31. I (26 U.S.C. 5415, 5555, 7805(a)) 14. We amend Subpart G by removing (1) A superseding formula replaces an and reserving § 25.76. § 25.58 New and superseding formulas. existing formula, and you should file Signed: August 6, 2004. one only if you do not intend to use the (a) New formulas. Except as otherwise Arthur J. Libertucci, provided in paragraph (b) of this existing formula any more. A Administrator. section, you must file a new formula superseding formula must be filed with (with a new formula number) for TTB for approval. When TTB approves Approved: December 22, 2004. approval by TTB if you— a superseding formula, TTB will cancel Timothy E. Skud, (1) Create an entirely new fermented your previous formula. Deputy Assistant Secretary (Tax, Trade, and product that requires a formula; (2) You may use the same formula Tariff Policy). (2) Add new ingredients to an existing number for a superseding formula that [FR Doc. 04–28460 Filed 12–29–04; 8:45 am] formulation; you used for the formula the BILLING CODE 4810–31–P

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