Rule2026-09160
Implementing PATRIOT Act Improvements: Contraband Cigarettes and Smokeless Tobacco
Primary source
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Published
May 8, 2026
Effective
June 8, 2026
Issuing agencies
Justice DepartmentAlcohol, Tobacco, Firearms, and Explosives Bureau
Abstract
The Bureau of Alcohol, Tobacco, Firearms, and Explosives ("ATF") is amending Department of Justice ("Department") regulations to implement certain provisions of the USA PATRIOT Improvement and Reauthorization Act of 2005 ("PATRIOT Improvement Act") relating to trafficking in contraband cigarettes or smokeless tobacco. This act amended the Contraband Cigarette Trafficking Act ("CCTA") by, among other things, reducing the threshold amount of cigarettes necessary to trigger jurisdiction under the CCTA from a quantity in excess of 60,000 to a quantity in excess of 10,000; extending the provisions of the CCTA to cover contraband smokeless tobacco; expanding record-keeping requirements; and imposing reporting requirements.
Full Text
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<title>Federal Register, Volume 91 Issue 89 (Friday, May 8, 2026)</title>
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[Federal Register Volume 91, Number 89 (Friday, May 8, 2026)]
[Rules and Regulations]
[Pages 25118-25133]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2026-09160]
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DEPARTMENT OF JUSTICE
Bureau of Alcohol, Tobacco, Firearms, and Explosives
27 CFR Part 646
[ATF No. 2006R-1F]
RIN 1140-AA31
Implementing PATRIOT Act Improvements: Contraband Cigarettes and
Smokeless Tobacco
AGENCY: Bureau of Alcohol, Tobacco, Firearms, and Explosives,
Department of Justice.
ACTION: Final rule.
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SUMMARY: The Bureau of Alcohol, Tobacco, Firearms, and Explosives
(``ATF'') is amending Department of Justice (``Department'')
regulations to implement certain provisions of the USA PATRIOT
Improvement and Reauthorization Act of 2005 (``PATRIOT Improvement
Act'') relating to trafficking in contraband cigarettes or smokeless
tobacco. This act amended the Contraband Cigarette Trafficking Act
(``CCTA'') by, among other things, reducing the threshold amount of
cigarettes necessary to trigger jurisdiction under the CCTA from a
quantity in excess of 60,000 to a quantity in excess of 10,000;
extending the provisions of the CCTA to cover contraband smokeless
tobacco; expanding record-keeping requirements; and imposing reporting
requirements.
DATES: This final rule is effective June 8, 2026.
FOR FURTHER INFORMATION CONTACT: Office of Regulatory Affairs, by email
at <a href="/cdn-cgi/l/email-protection#0d425f4c4d6c796b236a627b"><span class="__cf_email__" data-cfemail="8cc3decdccedf8eaa2ebe3fa">[email protected]</span></a>, by mail at Office of Regulatory Affairs; Enforcement
Programs and Services; Bureau of Alcohol, Tobacco, Firearms, and
Explosives; 99 New York Avenue NE; Washington, DC 20226, or by
telephone at 202-648-7070 (this is not a toll-free number); ATTN: RIN
1140-AA31.
SUPPLEMENTARY INFORMATION:
I. Background
In 1978, the Contraband Cigarette Trafficking Act (``CCTA''), 18
U.S.C. 2341 et seq., was enacted to deter cigarette smuggling between
states that had diverse tax rates. The Attorney General has delegated
primary responsibility to enforce and administer the CCTA to the
Director of ATF (``Director''). See 28 CFR 0.130. Accordingly, the
Department and ATF have promulgated regulations \1\ that implement
provisions of the CCTA in 27 CFR part 646.
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\1\ In Attorney General Order Number 6353-2025, the Attorney
General delegated authority to the Director to issue regulations
pertaining to matters within ATF's jurisdiction, including under the
National Firearms Act, Gun Control Act, and Title XI of the
Organized Crime Control Act. ATF's jurisdiction also includes the
Arms Export Control Act and the CCTA.
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Since the CCTA was enacted, cigarette smuggling and trafficking has
grown in complexity and become a global problem that costs governments
throughout the world billions of dollars in lost tax revenue. Criminals
smuggle and traffic cigarettes between low-tax and high-tax states and
across international borders. ATF's investigations, Congress, and other
sources have established that organized crime and terrorist groups
divert legal tobacco products into illegal markets.\2\ Organized crime
and terrorist groups use profits derived from cigarette trafficking to
finance additional criminal enterprises.
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\2\ The legislative history of the PATRIOT Improvement Act,
Public Law 109-177, 120 Stat. 192, 221-24 (2006), indicates that the
CCTA was amended, and the threshold was lowered from 60,000 to
10,000 cigarettes, in order to prevent criminal organizations and
terrorists from funding their activities by purchasing cigarettes in
a low-excise tax state and reselling them in a high-excise tax
state. 151 Cong. Rec. H6284 (July 21, 2005) (statement of Rep.
Coble); see also United States v. Hammoud, No. 300-CR-00147-GCM-DSC,
2022 WL 17326071, at *1 (W.D.N.C. Nov. 29, 2022) (explaining how a
Hezbollah cell orchestrated a cigarette-trafficking scheme from
North Carolina, a low-tax state, to Michigan, a high-tax state, to
finance Hezbollah activities); United States v. Hammoud, 381 F.3d
316, 325-26 (4th Cir. 2004) (same); Kate Willson, Alain Lallemand &
Aamir Latif, Terrorism and tobacco: Extremists and insurgents turn
to tobacco smuggling, Int'l Consortium of Investigative Journalists
(June 29, 2009), <a href="https://www.icij.org/investigations/tobacco-underground/terrorism-and-tobacco/">https://www.icij.org/investigations/tobacco-underground/terrorism-and-tobacco/</a> [<a href="https://perma.cc/LU79-JSGU">https://perma.cc/LU79-JSGU</a>].
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Further, trafficking in contraband tobacco products poses a serious
health risk because selling trafficked tobacco products avoids taxes in
the jurisdiction in which the tobacco product is resold. This decreases
the cost of those tobacco products and promotes distribution of cheap
tobacco, which, in turn, increases tobacco use.\3\ The impact of this
illicit
[[Page 25119]]
trade on health and other public interests is discussed in the National
Cancer Institute's Monograph 21, ``The Economics of Tobacco and Tobacco
Control.'' \4\ That report concludes that ``tax avoidance and tax
evasion, especially large-scale smuggling of tobacco products,
undermine the effectiveness of tobacco control policies and reduce the
health and economic benefits that result from these policies.'' \5\
Finally, the sale of contraband products poses a serious financial
threat to legitimate manufacturers, wholesalers, and retailers.
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\3\ The Centers for Disease Control and Prevention (``CDC'') has
stated that increasing the price of tobacco products is an effective
way to reduce demand and that cigarette smoking in 2018 cost the
United States more than $600 billion, including more than $240
billion in health care spending. See CDC, Economic Trends in Tobacco
(Sep. 17, 2024), <a href="https://www.cdc.gov/tobacco/php/data-statistics/economic-trends/index.html">https://www.cdc.gov/tobacco/php/data-statistics/economic-trends/index.html</a> [<a href="https://perma.cc/QS8G-MU73">https://perma.cc/QS8G-MU73</a>].
\4\ U.S. National Cancer Institute and World Health
Organization. (2016). The economics of tobacco and tobacco control.
NCI Tobacco Control Monograph 21, NIH Publication No. 16-CA-8029A.
<a href="https://cancercontrol.cancer.gov/brp/tcrb/monographs/monograph-21">https://cancercontrol.cancer.gov/brp/tcrb/monographs/monograph-21</a>
[<a href="https://perma.cc/TK5B-XEF2">https://perma.cc/TK5B-XEF2</a>].
\5\ Id. at 17.
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II. USA PATRIOT Improvement and Reauthorization Act of 2005
Section 121 of the PATRIOT Improvement Act \6\ made several
amendments to the CCTA, 18 U.S.C. 2341 et seq., as discussed below.
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\6\ Public Law 109-177, 120 Stat. at 221-24.
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A. Section 121(a)--Threshold Quantity for Treatment as Contraband
Cigarettes
Prior to its amendment, 18 U.S.C. 2342 made it unlawful for any
person knowingly to ship, transport, receive, possess, sell,
distribute, or purchase contraband cigarettes, defined as any quantity
in excess of 60,000 cigarettes bearing no evidence that applicable
state cigarette taxes had been paid in the state where such cigarettes
were found. Section 121(a) of the PATRIOT Improvement Act amended this
portion of the CCTA by reducing the number of cigarettes that trigger
application of the CCTA to a quantity in excess of 10,000 cigarettes
bearing no evidence that applicable state or local taxes had been paid
in the state or locality where such cigarettes are found. 120 Stat. at
221.
B. Section 121(b)--Contraband Smokeless Tobacco
Section 121(b) of the PATRIOT Improvement Act amended the CCTA by
extending the CCTA's provisions to include contraband smokeless
tobacco. It defined ``smokeless tobacco'' as ``any finely cut, ground,
powdered, or leaf tobacco that is intended to be placed in the oral or
nasal cavity or otherwise consumed without being combusted.'' 120 Stat.
at 221. This amendment also defined ``contraband smokeless tobacco'' as
a quantity in excess of 500 single-unit consumer-sized cans or packages
of smokeless tobacco, or their equivalent, possessed by any person
other than (1) a person holding a permit issued pursuant to chapter 52
of the Internal Revenue Code of 1986 (``IRC'') as a manufacturer of
tobacco products or as an export warehouse proprietor, a person
operating a customs bonded warehouse pursuant to sections 311 or 555 of
the Tariff Act of 1930 (19 U.S.C. 1311, 1555), or an agent of such
person; (2) a common carrier transporting such smokeless tobacco under
a proper bill of lading or freight bill that states the quantity,
source, and designation of such smokeless tobacco; (3) a person who is
licensed or otherwise authorized by the state where such smokeless
tobacco is found to engage in the business of selling or distributing
tobacco products, and has complied with the accounting, tax, and
payment requirements relating to such license or authorization with
respect to such smokeless tobacco; or (4) an officer, employee, or
agent of the United States or a state, or any department, agency, or
instrumentality of the United States or a state (including any
political subdivision of a state), having possession of such smokeless
tobacco in connection with the performance of official duties. Id. at
221-22.
C. Section 121(c)--Record-keeping, Reporting, and Inspection
Prior to amendment, the CCTA authorized the Secretary of the
Treasury to prescribe limited regulations concerning record-keeping and
inspection requirements for any person who distributed any quantity of
cigarettes in excess of 60,000 cigarettes in a single transaction.
Section 121(c) of the PATRIOT Improvement Act amended these provisions
of the CCTA by authorizing the Attorney General, rather than the
Secretary of the Treasury, to prescribe regulations concerning record-
keeping requirements, including requirements for retaining such
information as the Attorney General considers appropriate for the
purposes of CCTA enforcement against persons who ship, sell, or
distribute \7\ any quantity in excess of 10,000 cigarettes or 500
single-unit consumer-sized cans or packages of smokeless tobacco in a
single transaction. 120 Stat. at 222.
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\7\ The definition of ``distribute'' in the regulations at Sec.
646.143 includes shipping and selling as forms of distributing. As a
result, ATF is removing the terms ``ship'' and ``sell'' (and
variants thereof) in the provisions in this rule to eliminate
confusion about which terms apply in which sections.
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The act also authorized regulations requiring persons, except for
tribal governments, who engage in a delivery sale, and who ship, sell,
or distribute any quantity in excess of 10,000 cigarettes or 500
single-unit consumer-sized cans or packages of smokeless tobacco within
a single month, to submit to the Attorney General, pursuant to
regulations prescribed by the Attorney General, a report setting forth
(1) the person's beginning and ending inventories of cigarettes and
cans or packages of smokeless tobacco (in total) for such month; (2)
the total quantity of cigarettes and cans or packages of smokeless
tobacco that the person received within such month from each other
person (itemized by name and address); and (3) the total quantity of
cigarettes and cans or packages of smokeless tobacco that the person
distributed within such month to each person (itemized by name and
address) other than a retail purchaser. Id. at 222-23.
Finally, the act added the term ``delivery sale,'' which means any
sale of cigarettes or smokeless tobacco in interstate commerce to a
consumer if (a) the consumer submits the order for such sale by means
of a telephone or other method of voice transmission, mail, or the
internet or other online service, or by any other means where the
consumer is not in the same physical location as the seller when the
purchase or offer of sale is made; or (b) the cigarettes or smokeless
tobacco are delivered by use of mails, common carrier, private delivery
service, or any other means where the consumer is not in the same
physical location as the seller when the consumer obtains physical
possession of the cigarettes or smokeless tobacco. Id. at 223.
D. Section 121(d)--Disposal or Use of Forfeited Cigarettes and
Smokeless Tobacco
Section 121(d) of the PATRIOT Improvement Act amended the CCTA to
state that the provisions of 18 U.S.C. 981 through 987 relating to
civil forfeiture extend to any seizure or civil forfeiture of
contraband cigarettes or contraband smokeless tobacco involved in any
violation of the CCTA. 120 Stat. at 223. Section 121(d) further
provided that any cigarettes or smokeless tobacco so seized will either
(1) be destroyed and not resold, or (2) be used for undercover
investigative operations for the detection and prosecution of crimes,
and then destroyed and not resold. Id.
[[Page 25120]]
E. Section 121(e)--Effect on State and Local Law
Section 121(e) of the PATRIOT Improvement Act clarified that the
CCTA is not intended to affect the concurrent jurisdiction of a state
or local government to enact and enforce its own cigarette tax laws; to
confiscate cigarettes, smokeless tobacco, or other property seized for
violation of such laws; or to provide for penalties for the violation
of such laws. 120 Stat. at 223. This section also clarified that the
CCTA is not intended to inhibit coordinated law-enforcement efforts by
state or local governments. Id. The existing regulations do not address
these subjects, and ATF did not propose any regulatory amendments in
relation to these statutory changes.
F. Section 121(f)--Enforcement
Section 121(f) of the PATRIOT Improvement Act created a new civil
cause of action allowing state and local governments and federal
tobacco permittees under the IRC to bring actions in federal district
court to prevent or restrain CCTA violations. 120 Stat. at 223-24. In
addition, it authorized state and local governments to seek civil
penalties, monetary damages, and injunctive or other equitable relief.
Id. at 224. The existing regulations do not address these subjects, and
ATF did not propose any regulatory amendments in relation to these
statutory changes.
G. Section 121(g)--Conforming and Clerical Amendments
Section 121(g) of the PATRIOT Improvement Act made several
conforming and clerical amendments to the CCTA, such as changing the
title of chapter 114 to read ``Trafficking in Contraband Cigarettes and
Smokeless Tobacco'' and changing the section headings of 18 U.S.C. 2343
and 2345. 120 Stat. at 224.
III. Proposed Rule
On July 28, 2010, the Department, on behalf of ATF, published in
the Federal Register a notice of proposed rulemaking (``NPRM''), titled
``Implementing the USA PATRIOT Improvement and Reauthorization Act of
2005 Regarding Trafficking in Contraband Cigarettes or Smokeless
Tobacco (2006R-1P),'' 75 FR 44173, which proposed to implement the
provisions of section 121 of the PATRIOT Improvement Act relating to
trafficking in contraband cigarettes or smokeless tobacco. (RIN 1140-
AA31.) The NPRM proposed to amend ATF regulations to comport with
section 121 of the PATRIOT Improvement Act through a number of changes.
First, ATF proposed reducing the amount of cigarettes necessary to
trigger jurisdiction under the CCTA from a quantity in excess of 60,000
to a quantity in excess of 10,000, per section 121(a) of the PATRIOT
Improvement Act. ATF proposed amendments to carry out this change in 27
CFR 646.141 (revising the stated scope of part 646 to reflect the new
threshold amount), Sec. 646.143 (revising the definitions of
``contraband cigarettes,'' ``distributor,'' and ``exempted person'' to
reflect the new threshold amount), Sec. 646.146 (revising paragraphs
(a) and (b)(1) to reflect the new threshold amount), and Sec. 646.147
(revising paragraphs (1) and (2) to reflect the new threshold amount).
75 FR 44177-78. ATF also proposed to amend Sec. 646.143 by adding a
definition for the term ``cigarette.'' 75 FR 44177. The proposed
definition reflected the meaning of the term set forth in the CCTA, as
amended.
Second, the PATRIOT Improvement Act extended the CCTA to contraband
smokeless tobacco, and ATF proposed to account for this by adding the
statutory definitions of the terms ``smokeless tobacco'' and
``contraband smokeless tobacco,'' per section 121(b) of the PATRIOT
Improvement Act. ATF proposed adding the CCTA's definitions for both
terms to 27 CFR 646.143 to match the statutory definitions. 75 FR
44177. It also proposed amending Sec. Sec. 646.146 and 147 to add
``smokeless tobacco'' and ``cans or packages of smokeless tobacco'' to
the list of distributed items covered by the CCTA; and it proposed to
amend Sec. 646.154(a) by adding ``or contraband smokeless tobacco''
after ``contraband cigarettes.'' 75 FR 44177-78.
Third, to account for the reporting requirements imposed in section
121(c) of the PATRIOT Improvement Act, ATF proposed to add new CCTA
requirements regarding contraband smokeless tobacco to 27 CFR 646.143
(amending the definitions of ``business premises'' and ``distributor''
and adding definitions of ``delivery sale'' and ``interstate
commerce'') and to Sec. 646.146 (revising the section heading to read
``Records and Reports'' and incorporating the new reporting and record-
keeping CCTA requirements). 75 FR 44177-78. The proposed regulatory
language was identical to the statutory language regarding such
reporting requirements.
Fourth, to implement the requirement of section 121(d) of the
PATRIOT Improvement Act that cigarettes and smokeless tobacco be seized
and forfeited under the CCTA and be either used in law-enforcement
operations or destroyed, ATF proposed regulatory language in 27 CFR
646.155 that was identical to the statutory language. 75 FR 44178-79.
In addition, the NPRM stated that ATF was considering an amendment
of the regulations in Sec. 646.150 concerning distributors' retention
of required records. In general, existing Sec. 646.150 provides that
each distributor of cigarettes shall retain the records required by
Sec. Sec. 646.146 and 646.147 for three years following the close of
the year in which the records are made and shall keep the required
records on the distributor's business premises. 75 FR 44175. ATF stated
it was considering extending the record retention requirement to five
years, thus harmonizing the regulations with the applicable statute of
limitations for CCTA violations, which is five years. See id. The NPRM
solicited comments on this issue.
The comment period for the NPRM closed on October 26, 2010. ATF
received ten comments, which were submitted from consumers, industry
members, public interest organizations and associations, and a local
government agency.
IV. Comment Analysis
A. General Comment Received in Opposition and ATF Response
Comment Received
One commenter generally opposed the NPRM, stating that reducing the
threshold amount of cigarettes necessary to trigger jurisdiction under
the CCTA from quantities in excess of 60,000 to quantities in excess of
10,000 ``does not address the problem of the extraordinarily high
taxation of cigarettes.'' The commenter stated that the purpose of the
CCTA is to permit prosecution when organized crime becomes involved in
the illegal transportation and sale of cigarettes and asserted that
decreasing the threshold to 10,000 would lead to prosecuting
individuals crossing state borders to buy cigarettes for themselves and
their friends.
ATF Response
ATF is reducing the threshold amount of cigarettes necessary to
trigger jurisdiction under the CCTA to quantities in excess of 10,000
because it is implementing the change made by the PATRIOT Improvement
Act. Any further change in the threshold amount would require
legislative action. ATF does not have the authority to reinstate the
60,000-cigarette threshold. ATF also does not have authority to address
[[Page 25121]]
levels of cigarette taxation imposed by other taxing authorities.
B. Issue-Specific Comments and ATF Responses
Nine comments expressed concerns regarding the proposed regulatory
changes or the issue of trafficking in contraband tobacco products.
These concerns are addressed below.
1. Scope of 27 CFR 646.141
Comments Received
One commenter, a legal association, stated that the proposed
revision to the scope of Sec. 646.141--focusing on a single
transaction--is not consistent with 18 U.S.C. 2343(b) and that ``[i]t
should be expanded to cover persons who ship, sell or distribute
cumulatively in excess of 10,000 cigarettes (or their smokeless
equivalent) within a single month, where such persons have also made
any delivery sales.''
ATF Response
ATF concurs with this recommendation, and this final rule revises
Sec. 646.141 concerning the scope of part 646, consistent with the
statutory language, to provide that the regulations also apply to
persons who have made one or more delivery sales of smokeless tobacco
and cigarettes, and who ship, sell, or distribute, either in a single
transaction or cumulatively, more than 10,000 cigarettes or 500 single-
unit consumer-sized cans or packages of smokeless tobacco within a
single calendar month. The final rule also includes a technical
amendment substituting the word ``part'' for the word ``subpart'' in
the regulatory text.
2. Definition of ``Cigarette''
The NPRM proposed amending Sec. 646.143 by adding a definition of
``cigarette'' to reflect the meaning of the term set forth in 18 U.S.C.
2341(1), as amended by the PATRIOT Improvement Act. This definition
includes any roll of tobacco ``wrapped in paper or in any substance not
containing tobacco'' and any roll of tobacco wrapped in any substance
containing tobacco that, ``because of its appearance, the type of
tobacco used in the filler, or its packaging and labeling, is likely to
be offered to, or purchased by, consumers as a cigarette.'' 18 U.S.C.
2341(1)(B).
Comment Received
One commenter stated that the final rule should clarify that ATF
will define ``cigarette'' to include tobacco products labeled as
``little cigars'' or ``filtered cigars.'' According to the commenter,
ATF needs to regularly inform the tobacco industry and others that ATF
broadly applies its definition of ``cigarette'' to reach products
labeled as ``little cigars'' or ``filtered cigars'' and not as
``cigarettes.''
ATF Response
The definitions of ``cigarette'' and ``smokeless tobacco'' are set
by the CCTA, as amended by the PATRIOT Improvement Act, and ATF lacks
the authority to alter the statutory definitions. The definition of
``cigarette'' may reach some tobacco products labeled as ``little
cigars'' or ``filtered cigars'' if, for example, such products are
rolls of tobacco ``wrapped in any substance containing tobacco'' that,
``because of [their] appearance, the type of tobacco used in the
filler, or [the] packaging and labeling,'' are ``likely to be offered
to, or purchased by, consumers as a cigarette.'' 18 U.S.C. 2341(1)(B).
The classification of tobacco products labeled as ``little cigars'' or
``filtered cigars'' is a complex issue because of the wide range of
products that use these labels. ATF, therefore, declines to determine
on a categorical basis that any product labeled as a ``little cigar,''
or ``filtered cigar'' is a ``cigarette'' under this rule. ATF will
apply the statutory definition of ``cigarette'' on a case-by-case basis
to determine whether the product at issue falls within that definition.
Accordingly, ATF is not adopting the commenter's suggestion.
3. Definition of ``Exempted Person''
The regulations at 27 CFR 646.143 exempt from the definition of
contraband cigarettes those cigarettes possessed by specific persons
such as manufacturers and export warehouse proprietors holding permits
under chapter 52 of the IRC; persons operating customs bonded
warehouses; persons operating within foreign-trade zones (``FTZs'')
when the cigarettes have been entered under zone-restricted access or,
in respect to foreign cigarettes, have been admitted into the zone but
not entered into the United States; common or contract carriers;
persons licensed or otherwise authorized by a state to pay tobacco
taxes; and federal, state, and local authorities when operating in
connection with the performance of official duties.
The NPRM proposed to revise Sec. 646.143 to conform to the PATRIOT
Improvement Act amendments by changing the number of cigarettes sold
from 60,000 to 10,000 and expanding the scope of part 646 to cover
smokeless tobacco. In connection with expanding the regulations to
cover smokeless tobacco, ATF proposed adding a new paragraph (b) under
the definition of ``exempted persons'' to include persons handling
smokeless tobacco--not just cigarettes. 75 FR 44177-78. ATF intended
for the classes of exempted persons in paragraph (b) to mirror the
existing list of exemptions for persons distributing cigarettes.
However, ATF inadvertently did not include in paragraph (b) the
foreign-trade-zone exemption from the current definition of ``exempted
person.'' As a result, ATF is adding that exemption in this final rule
to fully align the two provisions. Doing so will ensure that the
regulations treat cigarettes and smokeless tobacco in a similar manner,
just as the CCTA--as amended by the PATRIOT Improvement Act--treats
cigarettes and smokeless tobacco in a similar manner. Compare 18 U.S.C.
2341(2)(A)-(D) (setting out exemptions from the definition of
``contraband cigarettes''), with 18 U.S.C. 2341(7)(A)-(D) (setting out
the same exemptions from the definition of ``contraband smokeless
tobacco'').
Comments Received
One commenter stated that ATF's current regulations are
inconsistent with the CCTA and that ATF should bring its regulations
into line with the act. This commenter was referring to the fact that
the exemptions in 18 U.S.C. 2341(2) and 2341(7)--in contrast to ATF's
current and proposed definitions of ``exempted person''--do not
explicitly exempt from the definitions of ``contraband cigarette'' and
``contraband smokeless tobacco'' certain quantities of cigarettes and
smokeless tobacco held by persons operating in FTZs. The commenter
argued that ATF should eliminate the FTZ exemption and stated that
disallowing the FTZ exemption is particularly important in light of
mounting evidence that FTZs play integral roles in the importation and
domestic distribution of contraband cigarettes. The commenter said that
an exemption for persons operating in FTZs may threaten the goal of
reducing or eliminating contraband trafficking. The commenter provided
background information on FTZs, such as zones in Buffalo and Las Vegas,
being used as central hubs in schemes to smuggle contraband cigarettes
into and throughout the United States. The commenter indicated that
large quantities of imported cigarettes--all of them untaxed and
unstamped--had been flowing through these FTZs and then into states
around the country, where they were then sold in black market
transactions. Given this existing abuse of FTZs, the commenter urged
ATF to use the proposed rule as an opportunity to eliminate that
exemption. Accordingly, the commenter
[[Page 25122]]
recommended that the definition of ``exempted person'' in Sec. 646.143
be amended by deleting the exemption for persons operating within an
FTZ.
A different commenter raised a separate issue with respect to the
definition of ``exempted person.'' This commenter encouraged ATF to
clarify that simply having a federal permit under the IRC as a
manufacturer of tobacco products, or as an export warehouse proprietor,
or being an agent of such a permitted entity, does not mean that any
and all cigarettes or smokeless tobacco in the permittee's possession
are ineligible to be classified as contraband tobacco products. The
commenter stated that the definition of ``exempted person'' in Sec.
646.143 should include a manufacturer or export warehouse proprietor
that possesses cigarettes and smokeless tobacco that might otherwise
qualify as contraband only if the permittee is operating within the
legal scope of its permit. Conversely, the commenter continued, the
definition of ``exempted person'' should exclude a federally permitted
manufacturer or export warehouse proprietor if it operates beyond the
scope of its legal activities as a permittee. According to the
commenter, the proposed rule, taken literally, inaccurately suggested a
form of blanket immunity for those manufacturers or export warehouse
proprietors that have federal permits.
ATF Response
The existing regulations provide ``exempted person'' status to any
person operating within an FTZ when the cigarettes involved have been
entered into the zone under zone-restricted status or, with respect to
foreign cigarettes, have been admitted into the zone but have not been
entered into the United States. Nothing in the PATRIOT Improvement Act
amendments to the CCTA indicated an intention to narrow the scope of
the existing FTZ exemption or any other exemption. The legislative
history similarly does not reflect any concern with continuing to allow
this almost 50-year-old existing exemption in the regulations, nor does
it indicate that the list of exemptions in the CCTA and PATRIOT
Improvement Act was meant to be exhaustive. The existing FTZ exemption
has been in the regulations for decades, so Congress was aware of it
and could have acted through the PATRIOT Improvement Act amendments to
eliminate it; however, Congress did not choose to do so. ``It is well
established that when Congress revisits a statute giving rise to a
longstanding administrative interpretation without pertinent change,
the congressional failure to revise or repeal the agency's
interpretation is persuasive evidence that the interpretation is the
one intended by Congress.'' Commodity Futures Trading Comm'n v. Schor,
478 U.S. 833, 846 (1986) (quotation marks omitted). Here, because
Congress ``revisit[ed]'' the CCTA in the PATRIOT Improvement Act but
did not ``revise or repeal'' ATF's longstanding exemptions implementing
the CCTA, ATF's existing regulatory exemptions--including the FTZ
exemption--accurately reflect congressional intent.
In addition, the NPRM for this rule did not raise for public notice
and comment the issue of eliminating the FTZ exemption. Because the FTZ
exemption has been in effect for almost 50 years, industry business
practices for importing and exporting products have been established
with this exemption as part of their operations. Removing the exemption
could, depending on any final regulatory language that ATF adopts,
cause any unstamped cigarettes and smokeless tobacco within covered FTZ
areas to become automatically contraband, which could have significant
consequences. In addition, eliminating the exemption would cause
tobacco products in customs bonded warehouses (``CBWs'') and FTZs to be
treated differently, even though the two effectively serve the same
function. That inconsistency could also have significant consequences.
Moreover, this inconsistent treatment could undermine the efficacy of
the commenter's proposal to eliminate the FTZ exemption, as any
smuggling activity that would have occurred in an FTZ would simply
shift to CBWs. Because of these issues and concerns, ATF believes--at
the current time--that the question of removing the FTZ exemption would
benefit from a greater opportunity for public comment. Therefore, ATF
declines to revise this rule to remove the exemption for FTZs. ATF
will, however, continue to vigorously carry out its law enforcement
responsibilities and address FTZ abuses.
Next, regarding the concerns raised by a different commenter, the
PATRIOT Improvement Act amendments to the CCTA did not amend the
statutory definitions of ``manufacturer'' or ``export warehouse
proprietor.'' The CCTA merely references those terms as they are
presently defined in the IRC, 26 U.S.C. 5702. As such, ATF does not
believe that rulemaking pursuant to the CCTA amendments is an
appropriate vehicle to define the scope of potential criminal
activities by manufacturers, export warehouse proprietors, or other
exempted parties. ATF does agree with the commenter that the exemptions
in the rule do not grant manufacturers the authority to operate beyond
what their federal permits allow; however, ATF emphasizes that whether
an exempted party under the CCTA is engaged in activities that are
beyond the scope of its licensed activities and would therefore
constitute illegal activity, aiding and abetting criminal activity, or
a conspiracy to engage in criminal activity, is an issue that federal
personnel would have to evaluate and prosecute on a case-by-case basis.
Such evaluations and investigations are not appropriate subjects for
this rulemaking.
Separately, ATF notes the need for a technical amendment to the
definition of ``Exempted person''; the definition should reference the
1986 version of the IRC, not the 1954 version.
4. Definition of ``Contraband Smokeless Tobacco''
The NPRM proposed to define the term ``contraband smokeless
tobacco'' as ``any quantity of smokeless tobacco in excess of 500
single-unit consumer-sized cans or packages, or their equivalent, that
are in the possession of any person other than an exempted person.'' 75
FR 44177.
Comment Received
A member of the tobacco industry commented, ``[w]hile this
regulation tracks the statutory language, its failure to define what
constitutes a single-unit consumer-sized can or package may lead to
confusion.'' The commenter explained that it sells moist snuff in 1.2-
ounce cans and 12-ounce tubs that hold as much moist snuff as ten
individual cans. The commenter believed that the term ``contraband
smokeless tobacco'' could be clarified by, for example, stating that
``single-unit'' cans include only 1.2-ounce cans or that a total weight
requirement, such as 600 ounces of smokeless tobacco, would subject a
person to the requirements of part 646.
ATF Response
ATF understands that different types of smokeless tobacco are
marketed to consumers in packages of varying sizes. While the commenter
referred to a typical ``consumer-sized can'' of moist snuff, a
``consumer-sized can[ ] or package[ ]'' of another variety of smokeless
tobacco could be larger or smaller, and ATF has encountered such
variations in its enforcement experiences. A ``consumer-sized can''
invariably includes a small amount of the product, but ATF does not
believe that it is necessary to set a specific size for purposes of
implementing the PATRIOT Improvement Act. ATF has not encountered
confusion about what constitutes a single-unit consumer-sized
[[Page 25123]]
can or package of smokeless tobacco in the 20 years since the PATRIOT
Improvement Act was passed, and the commenter referred only to the
potential for confusion, not actual incidents of confusion. Therefore,
ATF believes that the statutory definition reflected in the proposed
rule is preferable because it allows enforcement flexibility. Indeed,
setting a specific size, such as 1.2 ounces, could allow for
gamesmanship in which parties begin selling 1.1- or 1.3-ounce
containers that--despite being intended for single-unit consumer
sales--would fall outside the scope of the regulations.
5. Impact of the Prevent All Cigarette Trafficking Act of 2009 (``PACT
Act'')
The PACT Act, Public Law 111-154, 124 Stat. 1087, was enacted on
March 31, 2010. Section 4 of the PACT Act, which amended the CCTA at 18
U.S.C. 2343(c), expanded ATF's inspection authority. This provision
added to ATF's already-existing inspection authority by authorizing ATF
to enter the business premises of delivery sellers to inspect records
and tobacco products stored there, authorized federal district courts
to compel such inspections, and imposed a civil penalty not to exceed
$10,000 for denying access for an inspection or failing to comply with
a federal district court order compelling such an inspection. 124 Stat.
at 1109. The regulation that implements 18 U.S.C. 2343(c) is 27 CFR
646.153.
Comments Received
Two industry commenters requested that 27 CFR 646.153 be amended to
reflect the changes to the CCTA made by section 4 of the PACT Act.
ATF Response
ATF concurs. The provisions of section 4 of the PACT Act that
expand ATF's inspection authority are self-executing because section
6(b) of the PACT Act provided that section 4 of that act became
effective on the date it was enacted. See 124 Stat. at 1110-11.
However, ATF believes there is value in having the regulatory language
concerning its inspection authority track the corresponding statutory
language. Doing so makes the two authorities consistent, thereby
reducing confusion, and provides more effective notice to regulated
parties. Accordingly, the final rule includes the inspection provision
from section 4 of the PACT Act.
6. Reporting Requirements Under 27 CFR 646.146(b)(1)
The NPRM proposed to implement 18 U.S.C. 2343(b) by amending 27 CFR
646.146(b)(1) to provide that, except for a tribal government, each
distributor who engages in a delivery sale, and who ships, sells, or
distributes any quantity in excess of 10,000 cigarettes, or smokeless
tobacco in excess of 500 single-unit consumer-sized cans or packages or
their equivalent, within a single month, must prepare and submit to the
Director of ATF the ATF Form 5200.25, Tobacco Inventory and Direct
Sales Report. However, ATF has since determined that it would be more
efficient for persons to submit reports without using a form because of
the varying length of lists that could be submitted and because of
developments in digital formats. This final rule accordingly removes
references to the form itself but retains the report title and
reporting requirements from the NPRM, as discussed in section IV.B.7 of
this preamble, below. Paragraphs (i) through (iii) in 27 CFR
646.146(b)(1) continue to specify the information that must be included
in the report.
Comments Received
Two commenters noted that the NPRM proposed to apply the reporting
requirement to ``each distributor'' who engages in a delivery sale,
while the PATRIOT Improvement Act applies the requirement to ``each
person.'' Both commenters contended that the proposed reporting
requirement in the rule was narrower in scope than that specified in
the statute.
One of the two commenters stated that because the proposed
definition of ``Distributor'' in Sec. 646.143 included persons who
distributed more than 10,000 cigarettes, or smokeless tobacco in excess
of 500 single-unit consumer-sized cans or packages, in a single
transaction, the reporting requirement was more limited than Congress
intended. The commenter stated that the definition would exclude
persons who ship, sell, or distribute in excess of 10,000 cigarettes in
a month, but who do not make any single shipment, sale, or distribution
over 10,000 cigarettes. The commenter argued that this was not the
intent of the statute, and that Congress instead intended to capture
persons making delivery sales for which the total monthly volume of all
such person's monthly sales exceeded a certain threshold--i.e., 10,000
cigarettes (or their smokeless equivalent).
According to the two commenters, the term ``distributor'' should be
replaced with ``person'' wherever it appears in Sec. 646.146(b)(1). In
addition, one of the commenters indicated that the final rule should
specify that, in determining whether the person meets the threshold of
10,000 cigarettes (or their smokeless equivalent) in one month, the
person must add together all shipments, sales, and distributions,
regardless of the volume of any single sale, and must count all
cigarettes sold by all locations under the person's common control or
ownership.
ATF Response
ATF concurs with the comments. Hence, ATF has replaced the term
``distributor'' with ``person'' wherever it appears in Sec.
646.146(b)(1), which covers the reporting requirement, as suggested by
the commenters. ATF also concurs with the suggestion to include all
locations under common control in the definition of ``person.'' In
light of the fact that many distributors operate from multiple
locations, ATF has also revised the definition of ``person'' in Sec.
646.143 to include all locations under a person's common control.
Therefore, in determining whether the person meets the threshold for
the reporting requirements of 10,000 cigarettes (or their smokeless
equivalent) in one month, the person must add together all shipments,
sales, and distributions,\8\ regardless of volume of any single
distribution, and must count all cigarettes and smokeless tobacco sold
at all locations under common control of the person.
---------------------------------------------------------------------------
\8\ As noted in the background section, because the existing
definition of ``distribute'' already includes ``ship'' and ``sell''
as distribution types, ATF is modifying the phrases with all three
terms in this rule to use solely the term ``distributions'' (and
variants thereof, such as ``distribute'').
---------------------------------------------------------------------------
ATF notes that the definition of ``distributor'' as included in the
NPRM is not affected by this change to substitute ``person'' for
``distributor'' in the reporting requirement provisions. ATF is
retaining the definition of ``distributor'' because it remains valid
with respect to the record-keeping requirements already in ATF
regulations.
7. Implementing 27 CFR 646.146(b)(1)(i)-(iii)
As mentioned above, the NPRM proposed to revise paragraphs (i)
through (iii) in Sec. 646.146(b)(1) to specify the information persons
are required to include under the new reporting requirement, for which
ATF was proposing to develop a new form, ATF Form 5200.25. As noted
above, ATF has now decided not to develop a form for this purpose, but
these paragraphs of the rule will still set out the same information
proposed in the NPRM.
Comments Received
The legal association commenter noted that the proposed regulations
``merely quote the statute and do not
[[Page 25124]]
provide any further guidance on the form or timing of the reports.''
The commenter stated that the statute itself omits many details and
offered the following comments:
a. The proposed regulations do not specify the required timeframe
for making the reports. The commenter suggested that the final
regulations specify that the reports be made no later than the 10th
calendar day of the following month, which is consistent with the
existing requirement in the Jenkins Act, 15 U.S.C. 376.
b. The proposed regulation in 27 CFR 646.146(b)(1)(i) does not
specify exactly what must be reported as part of an ``inventory.'' The
commenter suggested that a meaningful inventory must include, at a
minimum, the manufacturer and brand family of each product, along with
the number of cigarettes or ounces (e.g., Philip Morris, Marlboro,
20,000 cigarettes).
c. The report of cigarettes or smokeless tobacco received should
include the manufacturer, brand, and quantity, together with the
vendor's name and address.
d. The report of cigarettes or smokeless tobacco distributed should
include the manufacturer, brand, and quantity, together with the name
and address of each person to whom the cigarettes or smokeless tobacco
were distributed. The commenter noted this requirement would be
consistent with the Jenkins Act, which requires a memorandum or invoice
including the name, address, brand, and quantity. See 15 U.S.C.
376(a)(2).
e. The reports of cigarettes or smokeless tobacco distributed
should include all distributions of cigarettes or smokeless tobacco
(except for face-to-face retail sales), not just delivery sales (i.e.,
all shipments from one distributor to another should be included in the
reports, even where such distributions do not cross state lines).
f. The CCTA at 18 U.S.C. 2343(b) uses the term ``ships, sells, or
distributes,'' while 18 U.S.C. 2343(b)(3) uses the term ``distributed''
only. The commenter stated that this difference in terminology should
not be interpreted to limit the reporting requirements in section
2343(b), since that section was clearly intended to capture delivery
sales to consumers, and that 27 CFR 646.146(b)(1)(iii) should make this
clear in the final rule.
A second commenter concurred with several of the comments described
above.
ATF Response
ATF agrees with the commenters' suggestions that the timeframe for
filing reports should be no later than the 10th calendar day of the
following month; that Sec. 646.146(b)(1)(i) should specify what
persons must report as part of a cigarette or smokeless tobacco
inventory; that Sec. 646.146(b)(1)(i) should also require that the
brand name be identified, as well as the number of cigarettes or
consumer-sized cans or packages of smokeless tobacco, in conformance
with the Jenkins Act (which was previously amended by the PACT Act);
that reports of cigarettes or smokeless tobacco under Sec. Sec.
646.146(b)(1)(ii) and (iii) should identify brands and quantities,
together with the name and address of the party from whom the
cigarettes were obtained; that, apart from distributions to retail
purchasers, the distribution reports prepared by delivery sellers
should include all distributions, not just delivery sale distributions;
and that the distribution reports required in section 2343(b)(3) should
include all dispositions of cigarettes and smokeless tobacco made by a
covered person during a given calendar month. However, the existing
definition of the term ``distribute'' is ``to sell, ship, issue, give,
transfer, or otherwise dispose of,'' and the existing definition of
``disposition'' is ``movement of cigarettes [modified in this proposed
rule to add smokeless tobacco] from a person's business premises,
wherever situated, by shipment or other means of distribution.'' In
other words, in the context of these reporting requirements, all
dispositions of cigarettes and smokeless tobacco made by a covered
person would also all be distributions, and using either term results
in the same effect. The final rule has been amended to make these
changes.
Section 2343(b) refers to ``[a]ny person, except for a tribal
government, who engages in a delivery sale,'' and section 2343(b)(3)
includes a requirement that such a person prepare reports relevant ``to
each person (itemized by name and address) other than a retail
purchaser.'' A person engaged in a delivery sale who ``ships, sells, or
distributes'' pursuant to section 2343(b) must prepare reports in
compliance with section 2343(b)(3). As such, all cigarettes and cans or
packages of smokeless tobacco that the person distributes (not just
those distributed through delivery sales) to persons other than retail
purchasers (as now defined in 27 CFR 646.143), must be reported. In
other words, engaging in a ``delivery sale'' as defined in 18 U.S.C.
2343(e) triggers the potential application of the reporting
requirements in 18 U.S.C. 2343(b). And those reporting requirements
encompass all distributions in which the person engaged--not just those
sales that specifically qualify as ``delivery sales.''
Concerning the reporting exception for distributions to retail
purchasers, ATF notes that the definition of ``retail purchaser'' it
has chosen to adopt--as described below in section IV.B.8 of this
preamble--specifies that the term applies as to a specific sale. Hence,
a person required to prepare reports under 18 U.S.C. 2343(b) must
include the information identified in 27 CFR 646.146(b)(1)(iii) for all
non-retail distributions, which include all delivery sales, to a given
consumer, even if the same consumer also made in-person purchases
during the calendar month and was thereby a retail purchaser as to
those specific sales.
8. Terms ``Retail Purchaser'' and ``Tribal Government''
Section 2343(b) of the CCTA, as amended by the PATRIOT Improvement
Act, provides that any person, except for a tribal government, who
engages in a delivery sale, and who ships, sells, or distributes any
quantity in excess of 10,000 cigarettes, or any quantity in excess of
500 single-unit consumer-sized cans or packages of smokeless tobacco,
or their equivalent, within a single month, must submit to the Attorney
General a report that sets forth specified information, including the
total quantity of cigarettes and cans or packages of smokeless tobacco
that the person distributed within such month to each person (itemized
by name and address) other than a retail purchaser. The proposed
regulation that implements section 2343(b) is 27 CFR 646.146(b)(1).
Comments Received
Two commenters noted that the proposed regulations do not include a
definition of ``retail purchaser.'' One of these commenters suggested
the following definition:
Retail purchaser--A consumer who purchases cigarettes or smokeless
tobacco in a face-to-face transaction whereby the consumer is
physically present at the business premises of the person making the
sale; makes the order directly to the seller without using a telephone,
mail, the internet, or other means of remote communication; and takes
possession of the cigarettes or smokeless tobacco directly from the
seller rather than having the cigarettes or smokeless tobacco shipped
to the consumer by means of mail, common carrier, or private delivery
service.
This commenter also noted that the proposed regulations do not
include a
[[Page 25125]]
definition of ``tribal government.'' The commenter suggested that the
term should be defined in the final rule and be limited to entities
that are governments of federally recognized tribes published in the
Federal Register in accordance with 25 U.S.C. 479(a)(1),\9\ and not
individual tribal members, persons licensed by the tribe, or other
persons selling cigarettes manufactured by tribes or tribal members.
---------------------------------------------------------------------------
\9\ Although the commenter referenced 25 U.S.C. 479(a)(1), that
section is now codified in 25 U.S.C. 5129. As a result, ATF treats
this comment as referring to the latter section.
---------------------------------------------------------------------------
ATF Response
ATF concurs with the commenters regarding the definition of
``retail purchaser,'' and it adopts the definition proposed by the
commenter because this definition harmonizes with the definition of
``delivery sale'' in 18 U.S.C. 2343(e). However, ATF does not agree
that the term ``tribal government'' should be defined in the final
rule. This is a complex issue that is outside the scope of ATF's
expertise and is best handled on a case-by-case basis in consultation
with the relevant federal agencies, such as the Department of the
Interior. (As discussed in section V of this preamble, below (regarding
consultations with tribal governments), ATF similarly declines to
define ``tribal business'' as a term in the regulations).
9. Extension of the Record Retention Period
In general, the current regulations at 27 CFR 646.150 provide that
each distributor of cigarettes must retain the records required by
Sec. Sec. 646.146 and 646.147 for three years following the close of
the year in which the records are made. The distributor must keep the
required records on the distributor's business premises. In the
proposed rule, ATF advised that it was considering extending the record
retention requirement to five years. The proposed amendment would
harmonize the regulations with the applicable statute of limitations
for CCTA violations, which is five years. Accordingly, ATF solicited
and received comments on this issue.
Comments Received
One commenter supported an extension of the record retention
requirement to five years, stating that ``[s]uch an extension should
help to maintain records useful for both discovering and prosecuting
contraband trafficking'' and that ``having to keep the records for just
two more years, especially in this era of electronic record-keeping,
would not unduly burden the tobacco industry businesses.''
Another commenter argued that an extension of the record-keeping
period would increase the burden on the industry. However, the
commenter stated that the additional burden could be substantially
mitigated if the required records could be maintained in electronic
form. The commenter recommended that in the final rule ATF clarify that
any required records may be maintained in electronic form, without the
need for regulated companies to retain hard copies of the same records.
ATF Response
ATF concurs that the records-retention requirement in the
regulation should be extended to five years to comport with the statute
of limitations on CCTA prosecutions. ATF also concurs that the required
records may be kept in electronic form, and the final regulations have
been amended accordingly. As discussed below in section VI.F of this
preamble, ATF has also amended the final regulation to account for
storage in cloud-based databases. The final rule allows persons to
store their records remotely using a server located within the United
States or its territories, or, if using a host facility, using one that
has a business premises within the United States or its territories and
that is subject to U.S. legal process.
10. ATF Interaction With the U.S. Food and Drug Administration
(``FDA'')
Comment Received
One commenter stated that menthol cigarettes are preferred by over
18 million people, or one third of adult cigarette smokers, and that
banning such cigarettes would create an enormous demand for contraband
menthol cigarettes. According to the commenter, ATF is the agency with
the greatest understanding of the dynamics of the contraband market and
of the dangers to Americans from illicit cigarette trafficking, and it
is incumbent on ATF to provide FDA with information and recommendations
regarding the contraband cigarette issue. The commenter said extensive
new trafficking opportunities resulting from a menthol ban would
adversely affect ATF's ability to enforce the CCTA.
ATF Response
ATF does not believe that the statutory changes to the CCTA under
the PATRIOT Improvement Act relate to this issue. The CCTA does not
affect ATF's authority relating to this specific issue, nor does the
CCTA affect FDA's authority under the Family Smoking Prevention and
Tobacco Control Act.\10\ ATF and FDA routinely collaborate, share, and
exchange investigative information to ensure compliance with federal
laws and regulations. For questions regarding the Family Smoking
Prevention and Tobacco Control Act, interested parties should contact
the FDA's Center for Tobacco Products by phone at 1-877-287-1373 or
online at <a href="https://www.fda.gov/tobacco-products/about-center-tobacco-products-ctp/contact-ctp">https://www.fda.gov/tobacco-products/about-center-tobacco-products-ctp/contact-ctp</a>.
---------------------------------------------------------------------------
\10\ Public Law 111-31, div. A, 123 Stat. 1776 (2009).
---------------------------------------------------------------------------
11. Traceable Tax Stamps
The reporting requirements in 18 U.S.C. 2343(b) (for persons who
engage in a delivery sale and who ship, sell, or distribute any
quantity of 10,000 cigarettes, or any quantity in excess of 500 single-
unit consumer-sized cans or packages of smokeless tobacco, or their
equivalent, in a single month) do not apply to tribal governments.
Comment Received
One city agency commenter stated that if, because of the statutory
exemption, the reporting requirements cannot be imposed on tribal
governments, there are other measures that could help combat illegal
sales of tobacco products. For example, the commenter stated that the
federal government should require that all tobacco products contain one
of two traceable stamps: either a tax stamp or a restricted-sale notice
stamp that indicates that the product will be sold at a tax-free
location such as an Indian reservation, military base, or duty-free
shop. Furthermore, any manufacturer or distributor involved in the sale
of tax-free tobacco products should be required to track all such tax-
free sales and report them to the federal government, which should
disclose these sales to the state and local governments in the states
and localities in which the sales occur.
ATF Response
ATF declines to adopt this suggestion in this rulemaking. The
commenter did not identify a basis in the statutory changes to the CCTA
effectuated by the PATRIOT Improvement Act that would authorize issuing
regulations that require traceable tax stamps. Accordingly, any such
change would be outside the scope of this rulemaking.
12. Regulating Other Tobacco Products
Comment Received
According to a city agency commenter, governments have
[[Page 25126]]
increased taxes on ``other tobacco products'' (``OTPs''), meaning
products other than cigarettes, such as cigarillos or cigars. The
commenter suggested that these increased taxes could lead to increased
trafficking, as buyers and sellers attempt to avoid the higher taxes.
Therefore, the commenter requested that ATF ``consider including
language which would designate trafficking rules for OTPs such as small
and large cigars, cigarillos, and pipe tobacco.''
ATF Response
As discussed above in section IV.B.2 of this preamble, the
statutory changes to the CCTA effected by the PATRIOT Improvement Act
do not expand the coverage of the CCTA to products other than
cigarettes or smokeless tobacco, such as small or large cigars,
cigarillos, or pipe tobacco. Therefore, making a regulatory change to
do so is outside the scope of this rule.
V. Consultation With Tribal Governments in Compliance With Executive
Order 13175
Section 3(c) of Executive Order 13175 (Consultation and
Coordination With Indian Tribal Governments) requires that ``[w]hen
undertaking to formulate and implement policies that have tribal
implications, agencies shall . . . consult with tribal officials as to
the need for federal standards and any alternatives that would limit
the scope of federal standards or otherwise preserve the prerogatives
and authority of Indian tribes.'' Per Department policy,\11\
``[c]onsultation is the formal process through which the Department of
Justice seeks tribal input regarding the development of new or amended
policies, regulations, and legislative actions initiated by the
Department.''
---------------------------------------------------------------------------
\11\ DOJ, Policy Statement 0300.01: Tribal Consultation 4 (Nov.
30, 2022), <a href="https://www.justice.gov/d9/2022-12/doj-memorandum-tribal-consultation.pdf">https://www.justice.gov/d9/2022-12/doj-memorandum-tribal-consultation.pdf</a> (updating a 2013 policy statement on the
implementation of Executive Order 13175) [<a href="https://perma.cc/PUD8-DQD4">https://perma.cc/PUD8-DQD4</a>.
---------------------------------------------------------------------------
Accordingly, on February 24 and 25, 2015, the Department invited
the leaders of federally recognized tribes to consult on the proposed
rule. The consultation process provided the Department useful feedback
from tribes and tribal organizations, including the Winnebago Tribe of
Nebraska, the Onondaga Tribe of New York, the Shoshone-Bannock Tribes
of Idaho, and the Big Sandy Rancheria (Tribes) of California.
The Winnebago Tribe and the Shoshone-Bannock Tribe consultants
noted that section 121(c) of the PATRIOT Improvement Act, amending 18
U.S.C 2343(b), requires that all distributors who engage in delivery
sales and who sell in excess of 10,000 cigarettes or 500 single-unit
consumer-sized cans or packages of smokeless tobacco within a single
month, except tribal governments, must submit reports to the Attorney
General. During the tribal consultation, ATF indicated that, in its
view, a business that was wholly owned and operated by a tribal
government would fall within this reporting exemption. Both tribes
asked for the regulations to define the term ``tribal business.''
The amended CCTA does not use the term ``tribal business.'' ATF
does not believe that it is necessary to create and define the term
``tribal business'' in these regulations or that it is helpful to do so
at this time. If any issues arise concerning whether a particular
business with a connection to a tribal government has reporting
obligations, ATF believes it would be optimal to analyze specific
factual situations to ascertain if the specific business is wholly
owned and operated by a tribal government and is therefore exempt from
the reporting requirements.
The Winnebago Tribe and the Shoshone-Bannock Tribe recommended that
section 121(e) of the PATRIOT Improvement Act, amending 18 U.S.C. 2345,
be amended to include tribal governments and tribal jurisdiction. These
statutory provisions relate to the CCTA's effect on state and local
laws. Expanding the scope of the statute is beyond ATF's regulatory
authority; the changes recommended by the tribes would require
congressional action.
The Winnebago Tribe, Shoshone-Bannock Tribe, and Onondaga Tribe
recommended that ATF amend section 121(f) to preclude the creation of
new civil enforcement actions against tribal governments or wholly
owned tribal companies. The statutory language of the CCTA provides
that a state, local government, or person who holds an IRC permit to
manufacture or import tobacco cannot bring a civil action against ``an
Indian tribe or an Indian in Indian country (as defined in 18 U.S.C.
1151).'' 18 U.S.C. 2346(b)(1). The final rule in no way alters the
operation of this provision of the statute. States, local governments,
and IRC permit holders will still be barred from bringing new civil
enforcement actions against ``Indian tribes'' and ``Indians in Indian
country (as defined in 18 U.S.C. 1151)'' under the amended CCTA. ATF
cannot amend a statute, and thus the requested change is outside the
scope of this or other rulemaking.
Big Sandy Rancheria commented that ATF's proposed rule should make
clear that business-to-business transactions will not be included in
determining the cumulative monthly total that triggers reporting
requirements under 18 U.S.C. 2343(b). ATF does not adopt this
recommendation. The statute states that any person who engages in a
delivery sale and who ships, sells, or distributes ``any quantity in
excess of 10,000 cigarettes, or any quantity in excess of 500 single-
unit consumer-sized cans or packages of smokeless tobacco, or their
equivalent, within a single month'' is subject to the reporting
requirement. The statute does not contain an exemption for business-to-
business sales. ATF cannot change a statute. Accordingly, the requested
change is outside the scope of this rulemaking. ATF notes that all
persons, regardless of whether they are subject to the reporting
requirements of 18 U.S.C. 2343(b), must keep detailed records under
section 2343(a) and this final rule's Sec. Sec. 646.146 and 646.147,
subject to inspection by ATF, of all sales or shipments in excess of
10,000 cigarettes or 500 single-unit consumer-sized cans or packages of
smokeless tobacco in a single transaction pursuant to 18 U.S.C.
2343(a).
The Onondaga Tribe objected to Congress lowering the CCTA threshold
from 60,000 to 10,000 cigarettes. ATF notes that only Congress can
amend statutory language lowering the threshold amount that triggers
reporting requirements under the CCTA; ATF cannot do so through
rulemaking.
Lastly, tribal governments noted that the PATRIOT Improvement Act
amendments to the CCTA and the enactment of the PACT Act of 2009 were
roughly contemporaneous and addressed similar subjects; they
accordingly argued that the term ``consumer'' should be defined in
these CCTA regulations using the PACT Act definition. However, Congress
did not include a definition of ``consumer'' in the CCTA amendments in
the PATRIOT Improvement Act. Instead, Congress used the term only to
define the term ``delivery sales,'' which it used in turn only to
discuss particular reporting obligations from which it specifically
exempted tribal governments. ATF does not see any need to define the
term ``consumer'' under the PATRIOT Improvement Act amendments to the
CCTA at this time.
VI. Final Rule
This final rule implements, with modifications, amendments to the
regulations at 27 CFR part 646 that were specified in the NPRM
published in the Federal Register on July 28, 2010, 75 FR 44173. In
addition, the final rule is making minor technical amendments to
[[Page 25127]]
change the word ``shall'' to ``must'' and other similar plain writing
edits, in accordance with current regulatory conventions. The
modifications to the NPRM are each discussed in detail below.
A. Headings
Because smokeless tobacco has been added to the scope of the CCTA
by the PATRIOT Improvement Act, this final rule amends the heading of
part 646, changing it from ``Contraband Cigarettes'' to ``Contraband
Cigarettes and Smokeless Tobacco,'' in line with similar changes made
in the statute. Likewise, the rule also amends the undesignated heading
``Other Provisions Relating to the Distribution of Cigarettes (Sec.
646.153)'' to read ``Other Provisions Relating to the Distribution of
Cigarettes and Smokeless Tobacco (Sec. 646.153).'' Finally, this rule
amends the undesignated center heading ``Records'' by adding ``and
Reports'' to reflect the reporting requirements of the PATRIOT
Improvement Act.
B. Section 646.141
For consistency with 18 U.S.C. 2343(b), this final rule amends the
NPRM's proposed 27 CFR 646.141 to include delivery sales of smokeless
tobacco and cigarettes; and shipping, selling, or distributing, either
in a single transaction or cumulatively, more than 10,000 cigarettes or
500 single-unit consumer-sized cans or packages of smokeless tobacco
within a single calendar month. In addition, it incorporates a
technical amendment changing the word ``subpart'' to the word ``part''
in the text that describes the scope of these rules.
C. Sections 646.143, 646.146(a), 646.146(b), and 646.150
The final rule revises the NPRM's proposed definition of ``exempted
person'' in Sec. 646.143(b), by including certain persons operating in
FTZs within the list of exempted persons for contraband smokeless
tobacco. The exemption for operating within an FTZ when the smokeless
tobacco involved has been entered into the zone under zone-restricted
status or, in respect to foreign smokeless tobacco, has been admitted
into the zone but has not been entered into the United States, is the
same as the existing exemption for cigarettes and was inadvertently not
included in the proposed rule. ATF adds this exemption to the final
rule to align the smokeless tobacco exemptions fully with the FTZ
exemption for cigarettes that already exists in the regulations
implementing the CCTA.
The final rule removes the NPRM's proposed definition of
``interstate commerce'' in Sec. 646.143 because including the
definition for the entire CCTA goes beyond the scope of this rule and
is not necessary. For purposes of the amendments made by the PATRIOT
Improvement Act, the term ``interstate commerce'' has the definition
supplied by the act itself at 18 U.S.C. 2343(f).
The final rule revises the definition of ``person'' in Sec.
646.143 to include all locations under common control of a person.
Therefore, in determining whether the person meets the threshold of
10,000 cigarettes (or the smokeless equivalent) in a single month for
reporting purposes, the person must add together all shipments, sales,
and distributions, regardless of volume of any single sale, shipment,
or distribution, and must count all cigarettes and smokeless tobacco
sold by all locations under the person's common control.
The final rule also adds to the NPRM's proposed Sec. 646.143 a
definition for ``retail purchaser'' that harmonizes with the definition
of ``delivery sale'' in 18 U.S.C. 2343(e), makes technical amendments
to the definition of ``exempted person'' to track the language in 18
U.S.C. 2341(2)(D), and references the correct 1986 version of the IRC.
In addition, the final rule amends Sec. 646.146(a) and Sec.
646.150 to add that each person who ships, sells, or distributes (which
would become only each person who distributes) cigarettes or smokeless
tobacco must keep copies of the required documents, which tracks the
language in 18 U.S.C. 2343(a). Section 646.146 adds in-line headers to
subsections (a) and (b) to identify their topics.
Consistent with two commenters who noted that the NPRM proposed to
apply the reporting requirement to ``each distributor'' who engages in
a delivery sale, whereas the statute applies the requirement to ``each
person,'' the final rule replaces the NPRM's proposed use of the term
``distributor'' with ``person'' wherever it appears in Sec.
646.146(b)(1).
D. Section 646.146(b)(1)(i)-(iii)
The proposed regulation did not provide guidance on the timing for
submission of the information required by the reporting requirements.
Therefore, the final rule specifies that the report must be prepared
and submitted by the 10th day of the calendar month following the month
that is the subject of the report. The final rule also specifies what
is to be reported, including the brand name of the cigarettes or
smokeless tobacco. In addition, the final rule removes a reference to a
new ATF form for the purpose of submitting reports. ATF has determined
that it would be more efficient to allow persons to submit reports
without being required to use a form, especially due to the highly
variable length of lists that persons may need to submit.
E. Section 646.147
This final rule makes a technical amendment to the phrase ``more
than 10,000 cigarettes or 500 single-unit consumer-sized cans or
packages of smokeless tobacco'' in the NPRM's proposed Sec. 646.147;
this change ensures consistency with Sec. 646.141.
F. Section 646.150 Retention Period
The final rule extends the record retention requirement in the
NPRM's proposed Sec. 646.150 from three years to five years following
the close of the year in which the records are made. This amendment
harmonizes the regulations with the applicable statute of limitations
for CCTA violations, which is five years. In addition, the final rule
clarifies that these records may be maintained in electronic form on
the person's business premises. Further, the final rule permits persons
to use domestic remote data storage facilities or a host facility
(i.e., cloud-based storage) for the required records, if the entities
that control the storage facilities are subject to service of U.S.
legal process and have a business premises within the United States or
its territories. In addition, persons required to maintain these
records who choose to do so electronically must ensure that they are
accessible by ATF on the business premises and are available on
request, whether they are in cloud storage or an electronic device
physically located at the premises.
This final rule does not apply to Electronic Nicotine Delivery
Systems.
VII. Statutory and Executive Order Review
A. Executive Orders 12866 and 13563
Executive Order 12866 (Regulatory Planning and Review) directs
agencies to assess the costs and benefits of available regulatory
alternatives and, if regulation is necessary, to select regulatory
approaches that maximize net benefits.
Executive Order 13563 (Improving Regulation and Regulatory Review)
emphasizes the importance of agencies quantifying both costs and
benefits, reducing costs, harmonizing rules, and promoting public
flexibility.
The Office of Management and Budget (``OMB'') determined that the
proposed
[[Page 25128]]
rule was a ``significant regulatory action'' under section 3(f)(1) of
Executive Order 12866 because of facts that applied at the time the
proposed rule was published in 2010. Although the factual circumstances
have changed, as described below, OMB has reviewed this final rule
because of OMB's determination that the prior NPRM was a ``significant
regulatory action.''
Most of the provisions in this rule simply incorporate statutory
changes to the CCTA effected by the PATRIOT Improvement Act, primarily
by modifying record-keeping requirements in the existing regulations to
decrease the triggering threshold from 60,000 to 10,000 cigarettes and
to include smokeless tobacco. In addition, the rule also implements
reporting requirements that ATF originally projected in the NPRM would
affect a substantial portion of the tobacco industry. The projected
impact of this reporting requirement was the basis for OMB considering
the NPRM to be ``significant'' under section 3(f) of Executive Order
12866. However, this rule will no longer have that originally projected
impact because of intervening changes.
Five years after the PATRIOT Improvement Act was passed, Congress
enacted the PACT Act in 2010, which effectively, as a practical matter,
eliminated the ability to make lawful ``delivery sales'' of the sort
that would trigger the reporting requirements imposed by the PATRIOT
Improvement Act. The PACT Act bans mailing cigarettes and smokeless
tobacco; provides that distributing cigarettes and smokeless tobacco
must accord with state and local stamping, taxing, and other
requirements; and provides that distributors must register with states,
follow labeling, age verification, and packaging requirements, and
more. In light of the PACT Act's comprehensive statutory requirements
and prohibitions, distributors long ago ceased engaging in delivery
sales covered by the PATRIOT Improvement Act's reporting requirement.
ATF has thus determined that the CCTA reporting requirements
incorporated into ATF's regulations via this final rule will have no
cost to industry. It is vaguely possible that, at some distant date,
one or more distributors might decide to start engaging in delivery
sales covered by this requirement despite the PACT Act's disincentives,
but ATF's experience over the 15 years since the PACT Act has been in
effect indicates that this possibility is too speculative for assessing
a projected possible economic impact from this final rule's reporting
requirements.
Next, although most portions of this final rule simply incorporate
statutory changes to the CCTA effected by the PATRIOT Improvement Act,
it is possible this rule could result in a small number of additional
distributors being subject to the record-keeping requirements in 27 CFR
part 646 because of the decrease in the triggering threshold from
60,000 to 10,000 cigarettes and because the regulations also impose
record-keeping requirements for certain shipments, sales, and
distributions of smokeless tobacco. ATF has determined this potential
increase will likely have a de minimis impact because distributors
already generate such records in the regular course of business and
likely will not have to make additional records or entries to comply
with the rule.
Furthermore, this de minimis potential increase would be more than
offset by the savings resulting from the rule's provisions allowing
persons to use electronic records and to use commercial business
records they generate in the course of regular business to meet the
requirements.
1. Need Statement
Since the CCTA was enacted in 1978, cigarette smuggling and
trafficking has grown in complexity and become a global problem that
costs governments throughout the world billions of dollars in lost tax
revenue. ATF's investigations, Congress, and other sources have
established that organized crime and terrorist groups divert legal
tobacco products into illegal markets. Organized crime and terrorist
groups use profits derived from cigarette trafficking, and the more
recent market of smokeless tobacco trafficking, to finance additional
criminal enterprises. As a result, section 121 of the PATRIOT
Improvement Act made several amendments to the CCTA, 18 U.S.C. 2341 et
seq., to strengthen the ability to investigate and track cigarette and
smokeless tobacco trafficking.
This rulemaking updates ATF's regulations to be consistent with the
amendments made by the PATRIOT Improvement Act to the CCTA relating to
trafficking in contraband cigarettes and smokeless tobacco and to
facilitate enforcing the CCTA.
2. Costs
In this final rule, ATF has largely retained the substance of the
regulations proposed by the NPRM, but has made certain modifications,
including a modification that allows regulated entities to store
records electronically. ATF has adjusted its analysis of the costs
imposed by this rule to account for changes in the number of regulated
entities since the publication of the NPRM and in response to public
comments. In the NPRM, ATF estimated that 3,000 entities would be
subject to monthly reporting requirements; in this final rule, ATF
estimates that no entities will be subject to monthly reporting
requirements. The decline in the number of entities subject to the
reporting requirements is due to the implementation of the PACT Act.
Because of this change, ATF estimates that there are no quantified
costs associated with the monthly reporting requirements.
In response to public comments, and to incorporate current industry
standards in light of advancing technology, ATF has amended the
regulation proposed in the NPRM to provide that records in electronic
form satisfy the rule's record-keeping requirements. This change is
consistent with ATF's enforcement practice in recent years. ATF is
codifying the permission to use electronic records in this final rule
because industry now almost exclusively uses electronic records.
In addition, the final rule extends the current record-keeping
requirement from three to five years. ATF estimates that there are no
quantified costs associated with retaining records beyond the existing
three-year requirement because no further action or capital will be
required to implement the time extension, as all records are electronic
and already produced in businesses' ordinary course of operations. Most
tobacco industry businesses already maintain sales records and invoices
electronically as part of standard business practices and to comply
with other requirements, such as for tax purposes or as required by
states, and this final rule does not require these entities to generate
additional records for ATF record-keeping purposes.
3. Benefits
Although, as discussed above, this rule does not include any
quantified benefits, it does generate qualitative benefits. ATF's
regulations implementing the CCTA already impose record-keeping
requirements for manufacturers and wholesalers who sell more than
60,000 cigarettes in one transaction, enabling ATF to inspect their
records and find indications of trafficking and other criminal
activities. These requirements increase public safety and benefit the
economy by reducing trafficking, thus impairing terrorism and other
criminal activities funded by trafficking. However, the
[[Page 25129]]
cigarette portion of the tobacco products market has been shrinking
over the past 20 years, so the number of sales over 60,000 cigarettes
in a single transaction has also diminished, and criminal enterprises
have instead increased sales of lower transaction amounts. In addition,
the decline in cigarette market share has been offset by a massive
increase in market share for smokeless tobacco and an increase in
illegal smokeless tobacco trafficking. These changes were a primary
reason the PATRIOT Improvement Act added smokeless tobacco to the CCTA,
added a requirement for keeping records on smokeless tobacco
transactions of at least 500 single-unit consumer-sized cans or
packages, and lowered the cigarette sale record-keeping threshold from
more than 60,000 cigarettes to more than 10,000 cigarettes in a single
transaction. These changes, and the change to the records retention
period, permit ATF to inspect more records that aid it in finding
traffickers.
This rule benefits the public by conforming ATF regulations with
the statutory changes discussed above, thereby reducing confusion and
providing clarity to regulated parties by eliminating discrepancies
between the two. It also provides additional detail to industry on the
scope of the record-keeping requirements, which helps inform regulated
parties about their duties.
B. Executive Order 14192
Executive Order 14192 (Unleashing Prosperity Through Deregulation)
requires an agency, unless prohibited by law, to identify at least ten
existing regulations to be repealed or revised when the agency publicly
proposes for notice-and-comment or otherwise promulgates a new
regulation that qualifies as an Executive Order 14192 regulatory action
(defined in OMB Memorandum M-25-20 as a final significant regulatory
action under section 3(f) of Executive Order 12866 that imposes total
costs greater than zero). In furtherance of this requirement, section
3(c) of Executive Order 14192 requires that any new incremental costs
associated with such new regulations must, to the extent permitted by
law, also be offset by eliminating existing costs associated with at
least ten prior regulations. However, this final rule is not an
Executive Order 14192 regulatory action because it does not impose any
more than de minimis regulatory costs.
C. Executive Order 14294
Executive Order 14294 (Fighting Overcriminalization in Federal
Regulations) requires agencies promulgating regulations with criminal
regulatory offenses potentially subject to criminal enforcement to
explicitly describe the conduct subject to criminal enforcement, the
authorizing statutes, and the mens rea standard applicable to each
element of those offenses. This final rule does not create a criminal
regulatory offense and is thus exempt from Executive Order 14294
requirements.
D. Executive Order 13132
This rule will not have substantial direct effects on the states,
the relationship between the federal government and the states, or the
distribution of power and responsibilities among the various levels of
government. Therefore, in accordance with section 6 of Executive Order
13132 (Federalism), the Director has determined that this final rule
does not impose substantial direct compliance costs on state and local
governments, preempt state law, or meaningfully implicate federalism.
It thus does not warrant preparing a federalism summary impact
statement.
E. Executive Order 12988
This rule meets the applicable standards set forth in sections 3(a)
and 3(b)(2) of Executive Order 12988 (Civil Justice Reform).
F. Regulatory Flexibility Act
Under the Regulatory Flexibility Act, (5 U.S.C. 601-612), agencies
are required to conduct a regulatory flexibility analysis of any rule
subject to notice-and-comment rulemaking requirements unless the agency
head certifies, including a statement of the factual basis, that the
rule will not have a significant economic impact on a substantial
number of small entities. Small entities include certain small
businesses, small not-for-profit organizations that are independently
owned and operated and are not dominant in their fields, and
governmental jurisdictions with populations of less than 50,000.
Although there might be small entities that distribute sufficient
tobacco products to trigger the thresholds for applying the PATRIOT
Improvement Act, costs to these small entities would be de minimis
because ATF is not requiring businesses to retain records more
extensive than those that businesses retain in their normal course of
operating, nor is ATF requiring that businesses deviate from their
typical practice of storing records electronically. Also, as discussed
in section VII.A of this preamble, the reporting requirements described
in this rulemaking are obsolete because of the PACT Act, and these
requirements accordingly will not affect any businesses, including
small ones. Furthermore, because records covered by this rule are
businesses' normal commercial records, ATF has already been inspecting
them and providing awareness and feedback to businesses for the
approximately two decades since the PATRIOT Improvement Act was
enacted. Familiarization costs arising from this rule would thus be de
minimis as well. Therefore, the Director certifies, after
consideration, that this final rule will not have a significant impact
on a substantial number of small entities.
F. Small Business Regulatory Enforcement Fairness Act of 1996
This rule is not likely to have a significant economic impact on a
substantial number of small entities under the Small Business
Regulatory Enforcement Fairness Act of 1996, 15 U.S.C. 657 and 5 U.S.C.
601 note, as it neither imposes additional costs nor adds any barriers
that would impact small businesses, as described above.
ATF does not anticipate taking enforcement actions against small
businesses related to this rule; small businesses generally do not meet
the threshold sales level for shipments, sales, or distributions that
would trigger the record-keeping requirements. However, ATF has worked
with and will continue to work with small businesses to ensure
training, awareness, and compliance by such businesses. In addition,
should an enforcement action be brought against a small business, ATF
includes in the enforcement process steps that ensure small businesses
are able to fully participate in and respond to any enforcement
actions, in compliance with the Small Business Regulatory Enforcement
Fairness Act.
G. Unfunded Mandates Reform Act of 1995
This rule does not include a federal mandate that might result in
the expenditure by state, local, and tribal governments, in the
aggregate, or by the private sector, of $100 million or more in any one
year, and it will not significantly or uniquely affect small
governments. Therefore, ATF has determined that no actions are
necessary under the provisions of the Unfunded Mandates Reform Act of
1995.
H. Paperwork Reduction Act of 1995
Under the Paperwork Reduction Act of 1995 (``PRA''), 44 U.S.C.
3501-3521, agencies are required to submit to OMB,
[[Page 25130]]
for review and approval, any information collection requirements a rule
creates or any impacts it has on existing information collections. An
information collection includes any reporting, record-keeping,
monitoring, posting, labeling, or other similar actions an agency
requires of the public. See 5 CFR 1320.3(c). The NPRM indicated that
this rule would necessitate a new information collection under the PRA.
The NPRM proposed a new information collection to capture the new
reporting requirement proposed in that rule.
In addition, 27 CFR part 646 already includes an information
collection in the form of record-keeping requirements, and this rule
revises the threshold that triggers those record-keeping requirements,
so ATF discusses that record-keeping here. Although those record-
keeping requirements pre-date this rule and are not created by it, ATF
did not previously include this record-keeping requirement under an
OMB-approved information collection request (``ICR'') because it did
not involve a form. However, this was an oversight, which ATF is now
correcting by creating a new ICR to cover the existing record-keeping
requirement in addition to the reporting requirement.
This ICR will also account for the new thresholds, created by the
PATRIOT Improvement Act and implemented by this rule, that trigger the
record-keeping requirement at 10,000 cigarettes or 500 single-unit
consumer-sized cans or packages of smokeless tobacco sales in one
transaction (instead of only cigarettes at 60,000 in a transaction).
Similarly, the ICR will account for the reporting requirement triggered
when a person engages in a delivery sale and ships, sells, or
distributes at least 10,000 cigarettes or 500 single-unit consumer-
sized cans or packages of smokeless tobacco, or their equivalent, in a
single month. As described in section VII.A.2 of this preamble, these
requirements do not result in more than a de minimis hour burden or
cost, so the description below of the ICR as impacted by this rule
shows a zero-hour burden. This rule changes the threshold for keeping
records and the period for retaining them but otherwise makes no change
to the record-keeping requirement.
The record-keeping portion of the information collection is
associated with Sec. Sec. 646.146, 646.147, and 646.150, and the
reporting portion of the information collection is associated with
Sec. 646.146. The information collection is necessary because covered
persons are required to maintain records on individual cigarette and
smokeless tobacco shipments, sales, or distributions that meet the
stated threshold requirements and to submit reports on monthly
transaction totals of such sales that meet the stated threshold
requirements. This information is required to implement the provisions
of the CCTA, as amended by the PATRIOT Improvement Act, regarding
trafficking in contraband cigarettes or smokeless tobacco. The likely
respondents are businesses.
Title: Cigarettes and Smokeless Tobacco Record-keeping and
Reporting Requirements.
OMB Control Number: 1140-[TBD].
Summary of the information collection: Each person who ships,
sells, or distributes cigarettes or smokeless tobacco must keep copies
of invoices, bills of lading, or other suitable commercial records
equivalent thereto on each disposition of more than 10,000 cigarettes
or of smokeless tobacco in excess of 500 single-unit consumer-sized
cans or packages, in accordance with the requirements in 27 CFR
646.146(a), 646.147, and 646.150. These records may be maintained in
electronic format and must be retained for five years.
In addition, each person, except for a tribal government, who
engages in a delivery sale and who ships, sells, or distributes more
than 10,000 cigarettes or 500 single-unit consumer-sized cans or
packages of smokeless tobacco, or their equivalent, within a single
month, must submit a Tobacco Industry and Direct Sales Report
(``report'') by the 10th day of the following calendar month, in
accordance with requirements in Sec. 646.146(b). The person must
include in the report the beginning and ending inventories of
cigarettes and cans or packages of smokeless tobacco (in total) for
such month, including the brand name and number of cigarettes or ounces
of smokeless tobacco; the total quantity of cigarettes and cans or
packages of smokeless tobacco that the person received within such
month from each other person (itemized by name and address), including
the brand name of the tobacco products; and the total quantity of
cigarettes and cans or packages of smokeless tobacco the person
distributed within such month to each person (itemized by name and
address) other than a retail purchaser, including the brand name of the
tobacco products. The person must submit a copy of each such report to
the Director, ATF, and to the attorneys general and the tax
administrators of the states from where the shipments, deliveries, or
distributions both originated and concluded.
Need for the information: The purpose of the record-keeping and
reporting requirements is so that revenue agencies and law enforcement
officers can inspect and identify persons who are moving tobacco
products into the black market or otherwise violating the law.
Proposed use of the information: ATF will inspect the records for
law-enforcement purposes.
Description of the respondents: For record-keeping requirement: Any
distributor, as defined in 27 CFR 646.143, is required to maintain this
information in commercial dated records for each disposition meeting
the statutory threshold as described in Sec. 646.147. For reporting
requirement: Any person except a tribal government who engages in a
delivery sale is required to report this information for each calendar
month in which the person meets the statutory threshold as described in
Sec. 646.146(b).
Number of respondents: For record-keeping requirement: 3,309
wholesalers and manufacturers. For reporting requirement: 0 persons.
Frequency of response: For record-keeping requirement: per sales
transaction above the threshold described in Sec. 646.147. For
reporting requirement: per calendar month in which the person engages
in a delivery sale and sells more than the threshold described in Sec.
646.146(b) during that month.
Time burden of response: Burden hours due to rule: 0. The record-
keeping requirement involves records that are already kept in the
ordinary course of business. In addition, no persons have engaged in
delivery sales for more than a decade, and ATF has no basis for
anticipating a change in that number in the future, so no persons will
trigger the reporting requirement. As a result, ATF assesses the impact
from this rule to be 0 hours.
Estimate of total annual time burden: Total annual burden hours due
to rule: 0 hours.
I. Congressional Review Act
This rule is not a major rule as defined by the Congressional
Review Act, 5 U.S.C. 804.
Severability
ATF has determined that this rule implements and is fully
consistent with governing law. However, in the event any provision of
this rule, an amendment or revision made by this rule, or the
application of such provision or amendment or revision to any person or
circumstance, is held to be invalid or unenforceable by its terms, the
remainder of this rule, the amendments or revisions made by this
[[Page 25131]]
rule, and application of the provisions of the rule to any person or
circumstance shall not be affected and shall be construed so as to give
them the maximum effect permitted by law.
List of Subjects in 27 CFR Part 646
Administrative practice and procedure, Cigars and cigarettes,
Excise taxes, Packaging and containers, Penalties, Reporting and
recordkeeping requirements, Seizures and forfeitures, Surety bonds,
Tobacco.
Accordingly, for the reasons discussed in the preamble, ATF amends
27 CFR part 646 as follows:
PART 646--CONTRABAND CIGARETTES AND SMOKELESS TOBACCO
0
1. The authority citation for part 646 continues to read as follows:
Authority: 18 U.S.C. 2341-2346, unless otherwise noted.
0
2. Revise the part heading as set forth above.
0
3. Revise Sec. 646.141 to read as follows:
Sec. 646.141 Scope of part.
The regulations in this part relate to delivery sales of smokeless
tobacco and cigarettes, and to distributing, either in a single
transaction or cumulatively, more than 10,000 cigarettes or 500 single-
unit consumer-sized cans or packages of smokeless tobacco within a
single month.
0
4. Amend Sec. 646.143 by:
0
a. Revising the definition for ``Business premises'';
0
b. Adding the definition for ``Cigarette'' in alphabetical order;
0
c. Revising the definition for ``Contraband cigarettes'';
0
d. Adding the definitions for ``Contraband smokeless tobacco'' and
``Delivery sale'' in alphabetical order;
0
e. Revising the definitions for ``Disposition'', ``Distributor'',
``Exempted person'', and ``Person''; and
0
f. Adding the definitions for ``Retail purchaser'' and ``Smokeless
tobacco'' in alphabetical order.
The revisions and additions read as follows:
Sec. 646.143 Meaning of terms.
* * * * *
Business premises. When used with respect to persons who sell
cigarettes or smokeless tobacco, the property on which the cigarettes
or smokeless tobacco are kept or stored.
The business premises include the property where distributors keep
their cigarette and smokeless-tobacco records.
Cigarette. A cigarette is:
(1) Any roll of tobacco wrapped in paper or in any substance not
containing tobacco; and
(2) Any roll of tobacco wrapped in any substance containing tobacco
which, because of its appearance, the type of tobacco used in the
filler, or its packaging and labeling, is likely to be offered to, or
purchased by, consumers as a cigarette described in paragraph (1) of
this definition.
* * * * *
Contraband cigarettes. Any quantity of cigarettes in excess of
10,000, if:
(1) The cigarettes bear no evidence that applicable state or local
cigarette taxes in the state or locality where such cigarettes are
found has been paid;
(2) The state or local government in which the cigarettes are found
requires a stamp, impression, or other indication to be placed on
packages or other containers of cigarettes to evidence payment of
cigarette taxes; and
(3) The cigarettes are possessed by any person other than an
exempted person.
Contraband smokeless tobacco. Any quantity of smokeless tobacco in
excess of 500 single-unit consumer-sized cans or packages, or their
equivalent, that any person other than an exempted person possesses.
Delivery sale. Any sale of cigarettes or smokeless tobacco in
interstate commerce to a consumer if:
(1) The consumer submits the order for such sale by means of a
telephone or other method of voice transmission, mail, the internet or
other online service, or by any other means in which the consumer is
not in the same physical location as the seller when the purchase or
sales offer occurs; or
(2) The cigarettes or smokeless tobacco are delivered through mail,
common carrier, private delivery service, or any other means in which
the consumer is not in the same physical location as the seller when
the consumer physically obtains possession of the cigarettes or
smokeless tobacco.
Disposition. The movement of cigarettes or smokeless tobacco from a
person's business premises, wherever situated, by distribution.
* * * * *
Distributor. Any person who distributes more than 10,000
cigarettes, or 500 single-unit consumer-sized cans or packages of
smokeless tobacco, in a single transaction.
Exempted person. An exempted person is:
(1) With respect to cigarettes in excess of 10,000, any person who
is:
(i) Holding a permit issued pursuant to chapter 52 of the Internal
Revenue Code of 1986 as a manufacturer of tobacco products or as an
export warehouse proprietor;
(ii) Operating a customs bonded warehouse pursuant to section 311
or section 555 of the Tariff Act of 1930 (19 U.S.C. 1311 or 1555);
(iii) An agent of a tobacco products manufacturer, an export
warehouse proprietor, or an operator of a customs bonded warehouse;
(iv) A common or contract carrier transporting the cigarettes
involved under a proper bill of lading or freight bill that states the
cigarettes' quantity, source, and destination;
(v) Licensed or otherwise authorized by the state in which the
person possesses cigarettes to account for and pay cigarette taxes
imposed by that state; and who has complied with the license or
authorization's accounting and payment requirements with respect to the
cigarettes involved;
(vi) An officer, employee, or other agent of the United States or a
state, or any department, agency, or instrumentality of the United
States or a state (including any political subdivision of a state)
possessing cigarettes in connection with performing official duties; or
(vii) Operating within a foreign-trade zone established under 19
U.S.C. 81b, when the cigarettes involved have been entered into the
zone under zone-restricted status or, in respect to foreign cigarettes,
have been admitted into the zone but have not been entered into the
United States.
(2) With respect to smokeless tobacco in excess of 500 single-unit
consumer-sized cans or packages, any person who is:
(i) Holding a permit issued pursuant to chapter 52 of the Internal
Revenue Code of 1986 as a tobacco products manufacturer or as an export
warehouse proprietor;
(ii) Operating a customs bonded warehouse pursuant to section 311
or section 555 of the Tariff Act of 1930 (19 U.S.C. 1311 or 1555);
(iii) An agent of a tobacco products manufacturer, an export
warehouse proprietor, or a customs bonded warehouse operator;
(iv) A common or contract carrier transporting the smokeless
tobacco under a proper bill of lading or freight bill that states the
smokeless tobacco's quantity, source, and destination;
(v) Licensed or otherwise authorized by the state in which the
person possesses smokeless tobacco to account for and pays smokeless
tobacco taxes imposed by that state; and who has complied with the
license or authorization's accounting and payment
[[Page 25132]]
requirements with respect to the smokeless tobacco involved;
(vi) An officer, employee, or agent of the United States or a
state, or any department, agency, or instrumentality of the United
States or a state (including any political subdivision of a state)
possessing smokeless tobacco in connection with performing official
duties; or
(vii) Operating within a foreign-trade zone established under 19
U.S.C. 81b, when the smokeless tobacco involved has been entered into
the zone under zone-restricted status or, in respect to foreign
smokeless tobacco, has been admitted into the zone but has not been
entered into the United States.
Person. Any individual, corporation, company, association, firm,
partnership, society, or joint stock company. The term includes within
the definition of ``person'' any business that operates at different
locations that function under common control, as well as businesses
that conduct commercial tobacco enterprises on tribal land.
Retail purchaser. With reference to a particular cigarettes or
smokeless tobacco sale, a consumer who purchases cigarettes or
smokeless tobacco in a face-to-face transaction in which the consumer
is physically present at the business premises of the person making the
sale; makes the order directly to the seller without using a telephone,
mail, the internet, other online service, or other means of remote
communication; and who physically obtains possession of the cigarettes
or smokeless tobacco in the same physical location as the seller, not
by having the cigarettes or smokeless tobacco delivered by mail, common
carrier, or private delivery service.
Smokeless tobacco. Any finely cut, ground, powdered, or leaf
tobacco that is intended to be placed in the oral or nasal cavity or
otherwise consumed without being combusted.
* * * * *
0
5. Revise the undesignated center heading preceding Sec. 646.146 to
read as follows:
Records and Reports
0
6. Revise Sec. 646.146 to read as follows:
Sec. 646.146 General record-keeping and reporting requirements.
(a) Persons subject to record-keeping requirements. Each person who
distributes cigarettes or smokeless tobacco must keep copies of
invoices, bills of lading, or other suitable commercial records
equivalent thereto relating to each disposition of more than 10,000
cigarettes, or smokeless tobacco in excess of 500 single-unit consumer-
sized cans or packages. Dividing a single agreement for the disposition
of more than 10,000 cigarettes, or smokeless tobacco in excess of 500
single-unit consumer-sized cans or packages, into delivery of smaller
components of 10,000 cigarettes or less, or smokeless tobacco of not
more than 500 single-unit consumer-sized cans or packages, does not
exempt persons from the record-keeping requirements of this part. Such
distributors must include the information prescribed in Sec. 646.147
in their commercial disposition records. Records persons generate in
the ordinary course of business suffice to satisfy this section.
(b) Reporting requirements and persons subject to them. (1) Except
for a tribal government, each person who engages in a delivery sale,
and who distributes cigarettes in excess of 10,000, or smokeless
tobacco in excess of 500 single-unit consumer-sized cans or packages,
or their equivalent, within a single calendar month, must prepare and
submit to the Director, ATF, a Tobacco Inventory and Direct Sales
Report (``report''), in accordance with instructions on ATF's website,
by the 10th day of the calendar month following the month in which the
delivery or distribution occurred. The report must include the
following information:
(i) The person's beginning and ending inventories of cigarettes and
cans or packages of smokeless tobacco (in total) for such month,
including the cigarettes' or smokeless tobacco's manufacturer and brand
family names, and the number of cigarettes or ounces of smokeless
tobacco inventoried.
(ii) The total quantity of cigarettes and cans or packages of
smokeless tobacco--including the cigarettes' or smokeless tobacco's
manufacturer and brand family names--the person received within such
month from each other person (itemized by name and address).
(iii) The total quantity of cigarettes and cans or packages of
smokeless tobacco--including the cigarettes' or smokeless tobacco's
manufacturer and brand family names--that the person disposed of within
such month to each person (itemized by name and address) other than a
retail purchaser.
(2) Each person described in paragraph (b)(1) of this section must
also submit a copy of each completed report to the attorneys general
and the tax administrators of the States from where the deliveries or
distributions both originated and concluded.
(Approved by the Office of Management and Budget under control number
1140-[TBD])
0
7. Revise Sec. 646.147 to read as follows:
Sec. 646.147 Required record-keeping information.
(a) Distributors who are exempted persons. Distributors who are
exempted persons as defined in Sec. 646.143 must show the following
information in their commercial records:
(1) For each disposition of more than 10,000 cigarettes, or 500
single-unit consumer-sized cans or packages of smokeless tobacco, to an
exempted person; or for each disposition of more than 10,000
cigarettes, or 500 single-unit consumer-sized cans or packages of
smokeless tobacco, to a person who is not an exempted person, which is
delivered by the distributor to the recipient's place of business, the
distributor must show on dated records--
(i) The full name of the purchaser (or the recipient if there is no
purchaser);
(ii) The street address (including city and State) to which the
cigarettes or smokeless tobacco are destined; and
(iii) The quantity of cigarettes or smokeless tobacco disposed of.
(2) For each disposition of more than 10,000 cigarettes, or 500
single-unit consumer-sized cans or packages of smokeless tobacco, other
than the dispositions specified in paragraph (a)(1) of this section,
the distributor must show on dated records--
(i) The full name of the purchaser (if any);
(ii) The name, address (including city and state), and signature of
the person receiving the cigarettes or smokeless tobacco;
(iii) The street address (including city and state) to which the
cigarettes or smokeless tobacco are destined;
(iv) The quantity of cigarettes or smokeless tobacco disposed of;
(v) The driver's license number of the individual receiving the
cigarettes or smokeless tobacco;
(vi) The license number of the vehicle in which the cigarettes or
smokeless tobacco are removed from the distributor's business premises;
(vii) A declaration by the individual receiving the cigarettes or
smokeless tobacco of the specific purpose for the items (such as
personal use, resale, delivery to another person, etc.); and
(viii) A declaration, by the person receiving the cigarettes or
smokeless tobacco when acting as an agent, of the name and address of
their principal.
(b) Distributors who are not exempted persons. Each distributor who
is not an exempted person as defined in
[[Page 25133]]
Sec. 646.143 must show on dated commercial records the information
specified in paragraphs (a)(2)(i) through (viii) of this section for
each disposition of more than 10,000 cigarettes or 500 single-unit
consumer-sized cans or packages of smokeless tobacco.
(Approved by the Office of Management and Budget under control number
1140-[TBD])
0
8. Amend Sec. 646.150 by revising the section heading and paragraphs
(a) and (b)(2) to read as follows:
Sec. 646.150 Retaining records.
(a) General. Each distributor that distributes more than 10,000
cigarettes, or 500 single-unit consumer-sized cans or packages of
smokeless tobacco in a single transaction must retain the records
required by Sec. Sec. 646.146 and 646.147 for five years following the
close of the year in which the records are made. Such distributors must
keep the required records on their business premises (or otherwise make
the records available from the business premises) and may keep them in
electronic form. If storing records electronically, the distributors
must maintain an electronic record-keeping system, including stored
information, on their business premises or remotely, using a server
located within the United States or its territories, or, if using a
host facility, the facility must have a business premises within the
United States or its territories that is subject to U.S. legal process.
The distributors must also ensure that ATF can access the electronic
records on the premises by request.
(b) * * *
(2) The tobacco products manufacturer will retain the required
record for each disposition of more than 10,000 cigarettes, or 500
single-unit consumer-sized cans or packages of smokeless tobacco, from
the agent's premises for the full retention period specified in
paragraph (a) of this section; and
* * * * *
(Approved by the Office of Management and Budget under control number
1140-[TBD])
0
9. Revise the undesignated center heading preceding Sec. 646.153 to
read as follows:
Other Provisions Relating to Distributing Cigarettes and Smokeless
Tobacco
0
10. Revise Sec. 646.153 to read as follows:
Sec. 646.153 Authority of appropriate ATF officers to enter business
premises.
Any ATF officer may, during normal business hours, enter the
business premises of any person described in Sec. 646.146 to inspect
the records required under Sec. Sec. 646.146 and 646.147, or to
inspect any cigarettes or smokeless tobacco kept or stored by the
person at the premises.
Sec. 646.154 [Amended]
0
11. Amend Sec. 646.154(a) by adding the text ``or contraband smokeless
tobacco'' after the text ``contraband cigarettes''.
0
12. Revise Sec. 646.155 to read as follows:
Sec. 646.155 Forfeitures.
(a) Any contraband cigarettes or contraband smokeless tobacco
involved in any violation of the provisions of 18 U.S.C. chapter 114
are subject to seizure and forfeiture. The provisions of 18 U.S.C.
chapter 46 relating to civil forfeitures extend to any seizure or civil
forfeiture under this section. Any cigarettes or smokeless tobacco so
seized and forfeited must be either--
(1) Destroyed and not resold; or
(2) Used for undercover investigative operations for detecting and
prosecuting crimes, and then destroyed and not resold.
(b) Any vessel, vehicle, or aircraft used to transport, carry,
convey, conceal, or possess any contraband cigarettes or contraband
smokeless tobacco with respect to which there has been committed any
violation of any provision of 18 U.S.C. chapter 114 or the regulations
in this part is subject to seizure and forfeiture pursuant to 49 U.S.C.
80302-03. The provisions of 18 U.S.C. chapter 46 relating to civil
forfeitures extend to any seizure or civil forfeiture under this
section.
Robert Cekada,
Director.
[FR Doc. 2026-09160 Filed 5-7-26; 8:45 am]
BILLING CODE 4410-FY-P
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</html>Indexed from Federal Register on May 8, 2026.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.