Rule: Alcoholic Beverages: Flavored Malt Beverages

Monday,
January 3, 2005
Part III
Department of the
Treasury
Alcohol and Tobacco Tax and Trade
Bureau
27 CFR Parts 7 and 25

Flavored Malt Beverage and Related
Regulatory Amendments (2002R–044P);
Final Rule
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194 Federal Register / Vol. 70, No. 1 / Monday, January 3, 2005 / Rules and Regulations
DEPARTMENT OF THE TREASURY III. Discussion of Specific Proposals in TTB A. Information Quality Act
Notice No. 4 B. ‘‘Alcohol is Alcohol’’
Alcohol and Tobacco Tax and Trade A. Standard for Added Alcohol and C. Marketing of FMBs to Underage
Bureau Alcohol from Fermentation Drinkers
B. Proposed 0.5% Added Alcohol by D. More Explicit Labeling of FMBs
Volume Standard for ‘‘Beer’’ under the E. Establishing Another Category of
27 CFR Parts 7 and 25 IRC Alcohol Beverages
[TTB T.D.–21; Re: TTB Notice No. 4] C. Proposed 0.5% Added Alcohol by F. Other Comments
Volume Standard for Malt Beverages XIV. Implementation Dates
RIN 1513–AA12 under the FAA Act A. Effective Date for Compliance with the
D. Alternative 51/49 (Majority) Alcohol New Added Alcohol Standard
Flavored Malt Beverage and Related Standard B. Effect on Products in the Marketplace
Regulatory Amendments (2002R–044P) E. Proposed Alcohol Content Labeling C. Additional TTB Comment on the
Statement for Flavored Malt Beverages Effective Date
AGENCY: Alcohol and Tobacco Tax and F. Use of Distilled Spirits Terms in Malt XV. Comments on the Proposed Regulatory
Trade Bureau, Treasury. Beverage Labeling and Advertising Text; Regulatory Text Changes
G. Filing Formulas for Fermented A. Reference to Malt Beverage Standards,
ACTION: Final rule; Treasury decision. Beverages §§ 7.10 and 7.11
H. Samples; Formulas and Samples for B. Comments on Alcohol Flavoring
SUMMARY: The Department of the
Imported Malt Beverages Material Reference, §§ 7.11 and 25.15
Treasury and its Alcohol and Tobacco I. Other Issues Raised in Notice No. 4 C. Malt Beverages Above 6.0% Alc/Vol;
Tax and Trade Bureau adopt as a final IV. Rulemaking History Status of ATF Ruling 96–1
rule certain proposed changes to the V. Comments Received in Response to Notice D. Changes to § 7.31
regulations concerning the production, No. 4 E. Reference to Standards for Beer, §§ 25.11
taxation, composition, labeling, and A. General Discussion of Comments and 25.15
advertising of beer and malt beverages. B. Overview of Comments F. Other § 25.15 Issues
This final rule permits the addition of C. Summary of TTB Final Rule Decisions G. Comments on Formula Proposals,
VI. Comments on Whether the Rulemaking Is §§ 25.55–25.58
flavors and other nonbeverage materials XVI. Regulatory Analysis and Notices
Necessary and Fair
containing alcohol to beers and malt A. Is There a Need to Engage in A. Executive Order 12866
beverages, but, in general, limits the Rulemaking on this Issue? B. Regulatory Flexibility Act
alcohol contribution from such flavors B. Fairness and Notice Issues C. Paperwork Reduction Act
and other nonbeverage materials to not VII. Regulatory Burden and Cost-Related XVII. Drafting Information
more than 49% of the alcohol content of Issues XVIII. List of Subjects
the product. However, if a malt beverage A. Costs of Complying with the Proposed XIX. Amendments to the Regulations
contains more than 6% alcohol by 0.5% Standard
B. Effect on Current Products and New Notes to Readers
volume, not more than 1.5% of the
volume of the finished product may Product Development A. ATF–TTB Transition
C. Effect on Competition
consist of alcohol derived from flavors D. Effect on the Retail Licensing System Effective January 24, 2003, section
and other nonbeverage ingredients that and Overall Marketplace 1111 of the Homeland Security Act of
contain alcohol. This final rule also E. TTB Response 2002 (Public Law 107–296, 116 Stat.
amends the regulations relating to the VIII. The 0.5% Standard vs. the 51/49 2135), divided the Bureau of Alcohol,
labeling and advertising of malt Standard—Other Issues Tobacco and Firearms (ATF) into two
beverages, and adopts a formula A. Comments in Favor of the 0.5% new agencies, the Alcohol and Tobacco
requirement for beers. Standard Tax and Trade Bureau (TTB) in the
We issue this final rule to clarify the B. Comments in Favor of the 51/49
Standard
Department of the Treasury, and the
status of flavored malt beverages under Bureau of Alcohol, Tobacco, Firearms
C. TTB Response
the provisions of the Internal Revenue IX. State Concerns and Explosives in the Department of
Code of 1986 and the Federal Alcohol A. Comments by State Regulatory Agencies Justice. The regulation and taxation of
Administration Act related to the B. Other Comments in Support of the 0.5% alcohol beverages remains a function of
production, composition, taxation, Standard the Department of the Treasury and is
labeling, and advertising of alcohol C. Other Comments in Support of the 51/ the responsibility of TTB. References to
beverages. This final rule also will 49 Standard the former ATF and the new TTB in this
ensure that consumers are adequately D. TTB Response document reflect the time frame, before
informed about the identity of flavored X. Mandatory Alcohol Content Labeling for
FMBs
or after January 24, 2003.
malt beverages.
A. Comments Supporting the Proposal B. Use of Plain Language
DATES: This rule is effective January 3, B. Other Comments
2006. C. TTB Response In this document, ‘‘we,’’ ‘‘our,’’ and
FOR FURTHER INFORMATION CONTACT: XI. Use of Distilled Spirits Terms on Labels ‘‘us’’ refer to the Department of the
Charles N. Bacon, Alcohol and Tobacco and in Advertisements Treasury and/or the Alcohol and
Tax and Trade Bureau, Regulations and A. Comments Received Tobacco Tax and Trade Bureau (TTB).
B. TTB Response ‘‘You,’’ ‘‘your,’’ and similar words refer
Procedures Division, P.O. Box 5056, XII. New Formula Requirements
Beverly Farms, MA 01915; telephone to members of the alcohol beverage
A. Fermented Products Requiring Formulas industry and others to whom TTB
(978) 921–1840. under § 25.55 regulations apply.
SUPPLEMENTARY INFORMATION: B. Standards for Formula Approval
C. Alcohol Information in Formulas I. Background Information
Table of Contents D. Reasonable Range of Ingredients
Notes to Readers E. Formula Confidentiality
Flavored malt beverages are brewery
A. ATF–TTB Transition F. Standard Form for Formulas products that differ from traditional
B. Use of Plain Language G. Formula Proceedings malt beverages such as beer, ale, lager,
I. Background Information H. Placement in the CFR porter, stout, or malt liquor in several
II. TTB Notice No. 4 XIII. Other Issues Raised by Commenters respects. Flavored malt beverages
Federal Register / Vol. 70, No. 1 / Monday, January 3, 2005 / Rules and Regulations 195
exhibit little or no traditional beer or set forth guidance on the labeling and most of the flavored malt beverages
malt beverage character. Their flavor is advertising of flavored malt beverages studied was derived from alcohol
derived primarily from added flavors and again reiterated its intention to flavoring materials and that in some
rather than from malt and other engage in rulemaking on the use of cases this figure rose to more than 99%.
materials used in fermentation. At the alcohol flavoring materials in the In contrast, the alcohol derived from
same time, flavored malt beverages are production of malt beverages. flavors constituted 50% or less of the
marketed in traditional beer-type bottles In the interim, State regulatory and overall alcohol in only 4 of the 114
and cans and distributed to the alcohol taxation agencies started to express products studied.
beverage market through beer and malt concerns about the status of flavored
beverage wholesalers, and their alcohol malt beverages, and these agencies Based on the study’s results, ATF also
content is similar to other malt requested that ATF or TTB take action concluded that most flavored malt
beverages—in the 4-6% alcohol by to clarify the status of these products as beverages contained very little actual
volume range. either malt beverages or distilled spirits. beer base. Only 15 out of the 114
Although flavored malt beverages are In 2002, ATF examined the flavored malt beverages studied
produced at breweries, their method of formulation of 114 alcohol beverage contained 51% or more by volume
production differs significantly from the products labeled and marketed as fermented beer; the remaining volume
production of other malt beverages and flavored malt beverages. ATF undertook of those 15 products consisted of
beer. In producing flavored malt this study to find out how these flavors, water, and other ingredients.
beverages, brewers brew a fermented products were produced, what Two of the flavored malt beverages
base of beer from malt and other ingredients were used, and from where studied contained only 1% fermented
brewing materials. Brewers then treat the alcohol in them was derived. This beer by volume.
this base using a variety of processes in study did not examine malt beverages
order to remove malt beverage character labeled and marketed as flavored beers, II. TTB Notice No. 4
from the base. For example, they remove flavored ales, and so forth (such as
the color, bitterness, and taste generally ‘‘cherry beer’’ or ‘‘pumpkin ale’’) since On March 24, 2003, we proposed a
associated with beer, ale, porter, stout, these types of malt beverages typically number of regulatory changes
and other malt beverages. This leaves a have the character of malt beverages and concerning beer and malt beverages in
base product to which brewers add their alcohol is derived primarily from TTB Notice No. 4 (published in the
various flavors, which typically contain fermentation. The major results of the Federal Register at 68 FR 14292;
distilled spirits, to achieve the desired study are set forth in the tables below: corrected at 68 FR 15119). Among other
taste profile and alcohol level. things, Notice No. 4 solicited comments
While the alcohol content of flavored TABLE 1.—ALCOHOL DERIVED FROM on whether certain products marketed
malt beverages is similar to that of most ADDED ALCOHOL FLAVORING MATE- as flavored malt beverages should be
traditional malt beverages, the alcohol RIALS classified as malt beverages or distilled
in many of them is derived primarily spirits products under the Federal
from the distilled spirits component of Number of Alcohol Administration Act (FAA Act)
the added flavors rather than from Alcohol percentage derived flavored
and the Internal Revenue Code of 1986
fermentation. A review of approved from added alcohol favors malt
beverages (IRC). We recognized that the answer to
formulas showed that more than 99% of this question would affect the rate of tax
the alcohol in some flavored malt 0–25% ....................................... 4 applicable to these products, the
beverages was derived from added 26–0% ....................................... 0 premises on which they may be
flavorings containing distilled spirits 51–75% ..................................... ≤5
instead of from fermentation at the 76–100 ...................................... 105 produced, and the way that the products
brewery. are labeled, advertised and marketed.
Flavored malt beverages are sold Maximum alcohol derived from Furthermore, their classification as malt
under many proprietary names and added alcohol flavors: beverages or as distilled spirits under
99.98%. Total: 114 Federal law could affect State oversight
include alcohol beverages such as
alcoholic lemonades, alcoholic colas, and control of these products, since
cooler-type products, and other flavored TABLE 2.—VOLUME OF BEER BASE many States follow the Federal
alcohol beverages. In recent years, PRESENT IN FLAVORED MALT BEV- classification of alcohol beverages.
brewers have partnered with distilled ERAGES Notice No. 4 included a proposal to
spirits producers in order to label limit the quantity of alcohol derived
flavored malt beverages using Number of from added flavors or other ingredients
prominent distilled spirits brand names. Volume of flavored malt bev- flavored
erage derived from fermented malt containing alcohol to less than 0.5%
In ATF Ruling 96–1 (ATF Quarterly beer base
Bulletin 1996–1, p. 49), our predecessor beverages alcohol by volume. The notice also
agency announced its intention to requested comments on an alternative
0–25% ....................................... 95 standard requiring that a malt beverage
engage in rulemaking on the issue of 26–50% ..................................... 4
whether it should consider the derive a minimum of 51% of its alcohol
51–75% ..................................... 1
prohibition, restriction, or limitation of 76–100% ................................... 14 content from fermentation at the
the use of flavor materials containing brewery, thus allowing no more than
alcohol at any stage in the production of ATF concluded that the great majority 49% of the alcohol content to be derived
malt beverages. Pending rulemaking, the of the alcohol in most flavored malt from added flavors containing alcohol.
ruling held that for malt beverages with beverages was not derived from As discussed below, Notice No. 4 also
an alcohol content in excess of 6% fermentation of malt and grain. Instead, included proposed amendments to the
alcohol by volume, a maximum of 1.5% most of the alcohol in these products regulations involving the filing of
alcohol by volume could be derived was derived from distilled spirits formulas, and the labeling and
from alcohol flavoring materials. Six contained in added alcohol flavors. ATF advertising of malt beverages.
years later, in ATF Ruling 2002–2, ATF found that over 75% of the alcohol in
III. Discussion of Specific Proposals in ingredients containing alcohol. As a its predecessor agencies have allowed
TTB Notice No. 4 consequence of the proposed new these ingredients in malt beverage
section, those products would be taxed products.
A. Standard for Added Alcohol and
and classified as distilled spirits. This TTB and its predecessor agencies
Alcohol From Fermentation
proposed section also would allow the
In Notice No. 4, we proposed to have rarely examined the question of
use of barley malt, malted grains other
delineate how much of the alcohol what constitutes ‘‘wholesome food
than barley, unmalted grains, sugars,
content of a beer or malt beverage must syrups, molasses, honey, fruit, fruit products’’ under the FAA Act, other
be derived from fermentation at the juice, fruit concentrate, herbs, spices than to state that the ingredients added
brewery, and how much of the product’s and other food materials in the to malt beverages must be recognized as
alcohol content may be derived from production of a beer. It did not provide safe for food use by the Food and Drug
alcohol added through the use of flavors any standards for the use of these Administration and must have some
and other ingredients containing ingredients. intended purpose in malt beverage
alcohol. In Notice No. 4, TTB noted that this production. We and our predecessor
Neither the IRC nor the FAA Act 0.5% alcohol standard had long been agencies have considered flavorings
provides specific limits on the quantity used to determine whether a beverage is containing distilled spirits to be
of flavors that may be added to beer or considered an alcohol beverage. For wholesome food products and have
malt beverages; nor does either statute example, many beverages, including allowed their use in producing malt
set forth how much of the alcohol juice, soft drinks, and soda, contain a beverages.
content of those products must result small amount of alcohol derived from
from fermentation at the brewery. While The use of flavors containing distilled
the use of flavoring materials containing
neither statute expressly sanctions the distilled spirits. As long as the overall spirits can introduce a significant
direct addition of distilled spirits or alcohol content of the product is below amount of distilled spirits into a malt
other alcohol to beer or malt beverages, 0.5% alcohol by volume, these products beverage. Adding alcohol or distilled
TTB and its predecessor agencies, as set are not considered alcohol beverages, spirits in this fashion reduces the need
forth in ATF Rulings 96–1 and 2002–2, and are not taxed as such. If the alcohol to use fermented malt in the production
have historically allowed flavors, content of the a product reaches 0.5% of a malt beverage in order to attain
including flavors containing alcohol, to alcohol by volume, the product would alcohol content. When carried to
be added to these products. be subject to the tax imposed on extremes, this practice results in a
In Notice No. 4, TTB suggested that distilled spirits products, since it would product in which most of the alcohol
the definition of ‘‘beer’’ in the IRC, fall within the statutory definition of a content is derived from added flavors
which refers to beer, ale, porter, stout, distilled spirits product. rather than from fermentation at a
and ‘‘other similar fermented brewery.
beverages,’’ requires that a product C. Proposed 0.5% Added Alcohol by
Volume Standard for Malt Beverages Based on the above considerations,
derive a substantial portion of its
Under the FAA Act we stated in Notice No. 4 our belief that
alcohol from fermentation at a brewery
since the definition does not In Notice No. 4, TTB proposed adding the definition of a malt beverage in the
contemplate a product that derives most to the regulations a new § 7.11 (27 CFR FAA Act supports limiting the amount
of its alcohol content from distilled 7.11) that would classify a fermented of alcohol that is not ‘‘made by the
spirits. As the ATF study referred to product as a malt beverage only if it alcoholic fermentation * * * of malted
above demonstrated, few products contains less than 0.5% alcohol by barley with hops.’’ Further, we stated
marketed as flavored malt beverages volume derived from flavors or other our belief that labeling a beverage that
derive a substantial portion, or even a ingredients containing alcohol. This derives most of its alcohol content from
bare majority, of their alcohol content proposed section would also have added alcohol flavors as a malt beverage
from fermentation. explicitly permitted filtration or other is inherently misleading since
We also stated that a similar standard processing to remove color, taste, aroma, consumers expect that malt beverages
should apply to the definition of a ‘‘malt bitterness, or other characteristics derive a significant portion of their
beverage’’ under the FAA Act. The FAA derived from fermentation. We alcohol content from fermentation of
Act defines a malt beverage as a product specifically solicited comments on this barley malt and other ingredients at the
made from the fermentation of malted proposed standard and on any other brewery.
barley with the addition of hops. While standard that might be consistent with
the definition in the FAA Act allows for the FAA Act definition of a malt D. Alternative 51/49 (Majority) Alcohol
the addition to malt beverages of ‘‘other beverage. Standard
wholesome food products’’ such as Notice No. 4 noted that the FAA Act’s
definition of ‘‘malt beverage’’ was Although Notice No. 4 stated that
flavors, we stated that we do not believe both the IRC and the FAA Act would
that Congress intended for these added intended to cover all products made by
brewers at the time of the enactment of support a 0.5% added alcohol standard,
materials to represent the dominant
that Act in 1935. As already noted it also stated that the IRC would support
source of a product’s alcohol content.
above, this definition requires that a the issuance of a regulation requiring
B. Proposed 0.5% Added Alcohol by malt beverage be made from the that a beer or malt beverage product
Volume Standard for ‘‘Beer’’ Under the fermentation of malted barley with must derive a majority of its alcohol
IRC hops, with or without the addition of content from fermentation at the
In Notice No. 4, TTB proposed adding ‘‘other wholesome food products.’’ For brewery. Accordingly, TTB sought
to the regulations a new § 25.15 (27 CFR years, brewers have used many comments on both the 0.5% standard
25.15) that would have the effect of substances, including starches, sugars, and a 51/49 standard, which would
treating as a distilled spirits product any honey, fruits, flavors (including those allow up to 49% of the alcohol in a beer
fermented product that contains 0.5% or containing alcohol), colors, and adjuncts or malt beverage to be derived from
more alcohol by volume derived from to aid in fermentation, clarification, and flavors or other materials containing
flavors, taxpaid wine, or other preservation of malt beverages. TTB and alcohol.
E. Proposed Alcohol Content Labeling to the type size requirements in 27 CFR Center in Cincinnati, Ohio, as part of the
Statement for Flavored Malt Beverages 7.28. Brewer’s Notice for any fermented
beverage that the brewer intends to
In Notice No. 4, TTB suggested that, F. Use of Distilled Spirits Terms in Malt
market under a name other than ‘‘beer,’’
due to the unique character of these new Beverage Labeling and Advertising
‘‘lager,’’ ‘‘ale,’’ ‘‘porter,’’ ‘‘stout,’’ or
types of flavored malt beverages, many Notice No. 4 pointed out that some ‘‘malt liquor.’’ Under 27 CFR 25.76, a
consumers have limited experience with newer flavored malt beverages use the brewer must file an amended Brewer’s
them. At the same time, due to their names of well-known brands of distilled Notice if there are changes to an
label appearance and the use of the spirits as part of their own brand names. approved statement of process. When a
brand names of well-known distilled The labels of these flavored malt brewer files a statement of process with
spirits products, TTB believed that beverage brands are often designed to the National Revenue Center, a
consumers are likely to be confused as resemble the labels of the distilled specialist at TTB’s Advertising, Labeling
to the actual alcohol content of the spirits brand used in their names. In and Formulation Division in
products. TTB suggested that consumers addition, when first introduced, some of Washington, DC, examines the proposed
are likely to assume that some flavored these flavored malt beverages bore label statement of process to ensure that
malt beverages are high in alcohol statements referring to the class and authorized materials will be used, to
content like the distilled spirits type of distilled spirits used in determine the correct class and type,
products whose brand names they bear. producing the nonbeverage-flavoring and to ensure that the fermented
Likewise, while other brands of flavored component. For these reasons, a number product may be made at a brewery.
malt beverages are not labeled with of State regulatory and taxing Notice No. 4 proposed significant
distilled spirits brand names, their authorities questioned the classification changes to the filing requirements
labeling or packaging, which often of flavored malt beverages and described above. These changes
resembles that of nonalcoholic requested that we take action to clarify included the removal of §§ 25.62(a)(7),
beverages such as juices, sodas, bottled their status as either malt beverages or 25.67 and 25.76 and the addition of new
water, and energy drinks, is likely to distilled spirits. §§ 25.55 through 25.58 (27 CFR 25.55
confuse consumers as to their identity As previously noted, ATF Ruling through 25.58). These changes would:
as alcohol beverages. 2002–2 clarified permissible labeling • Replace the statement of process
and advertising practices for flavored requirements found at §§ 25.62(a)(7) and
To avoid consumer confusion over the
malt beverages, and gave brewers and 25.67 with a formula requirement;
alcohol content in flavored malt
importers labeling guidelines to prevent • Describe more clearly the fermented
beverages, we proposed the addition of
the misleading impression that flavored products for which a formula is
a new paragraph (a)(5) in § 7.22, (27 CFR
malt beverages are distilled spirits or necessary;
7.22), setting forth a mandatory
requirement to state on the brand label
contain distilled spirits. Notice No. 4 • Require brewers to provide specific
proposed to incorporate the holdings of information about ingredients,
the alcohol content of any malt beverage
the ruling in a new 27 CFR 7.29(a)(7) for processes, and alcohol content in
that contains any alcohol derived from
labeling purposes and a new 27 CFR formulas;
added flavors or other ingredients
containing alcohol. We suggested that
7.54(a)(8) for advertising purposes. • Allow brewers to file formulas
These proposed provisions would add directly with the Advertising, Labeling
this requirement would help consumers
to the malt beverage regulations and Formulation Division in
identify these products as alcohol
language similar to that found in the Washington, DC;
beverages and would help consumers to
FAA Act wine regulations regarding • Permit brewers to produce certain
understand that their alcohol content is
distilled spirits statements. The fermented beverages solely for research
similar to that of traditional malt
proposed language would prohibit and product development purposes
beverages. This alcohol content labeling
labeling and advertising statements that without having to receive formula
would also draw attention to any
imply that malt beverages are similar to approval;
flavored malt beverages that might lie • Allow brewers to file formulas to
distilled spirits or that malt beverage
outside the customary 4 to 6% alcohol cover production at multiple breweries;
products are made with, or contain,
by volume range for malt beverages. For and
distilled spirits.
example, if a flavored malt beverage • Allow brewers to file superseding
The two new provisions in question
contained 10% alcohol by volume, formulas.
would allow the use of a brand name of
alcohol content labeling would inform Proposed § 25.55 would require the
a distilled spirits product as the brand
consumers about this important fact. filing of a formula with TTB for
name of a malt beverage. However, the
Since there is no provision in the TTB proposed provisions would have the specified products made at a brewery,
regulations that uniquely identifies effect of prohibiting the use of a including saké, flavored saké, and
flavored malt beverages, we proposed distilled spirits brand name in any other sparkling saké. A formula also would be
that the mandatory alcohol content malt beverage labeling or advertising required for products to which any
labeling apply to any malt beverage that context. The use of a cocktail name as coloring or natural or artificial flavors
contains alcohol from a source other a brand name or fanciful name would be are added, or for any product to which
than fermentation at the brewery. For permitted if the malt beverage’s overall fruits, herbs, spices or honey are added.
example, if a brewer adds a flavoring formulation, label, or advertisement did This new section also would require the
containing alcohol to a malt beverage, not present a misleading impression filing of a formula for any fermented
whether it is labeled as a flavored malt about the identity of the product. product that undergoes special
beverage, as a flavored beer or ale, or as processing or filtration, or undergoes
a specialty malt beverage product, the G. Filing Formulas for Fermented any other process not used in traditional
requirement to display alcohol content Beverages brewing. The proposed § 25.55 text
on the brand label would apply. We Notice No. 4 noted that the TTB included examples of processes that
proposed no changes to the form of the regulations at 27 CFR 25.62 and 25.67 would require the filing of a formula,
alcohol content statement, to the require brewers to file a statement of including reverse osmosis, ion exchange
tolerances provided in 27 CFR 7.71, or process with TTB’s National Revenue treatments, filtration that changes the
character of beer or removes material of formulas would be easier and less market could be made under the
from beer, concentration or confusing than the present statement of proposed 0.5% added alcohol standard.
reconstitution of beer, and freezing or process requirement. Finally, as previously noted, TTB
superchilling of beer. However, the requested comments on whether
H. Samples; Formulas and Samples for
proposed Notice No. 4 text would not another standard, such as a standard
Imported Malt Beverages
require filing a formula for traditional requiring that a minimum of 51% of the
brewing processes such as Notice No. 4 also included a proposed alcohol in a malt beverage be derived
pasteurization, filtration prior to new section, § 25.53 (27 CFR 25.53), from fermentation at the brewery (in
bottling, filtration in lieu of specifically authorizing a TTB officer at other words, setting a maximum limit of
pasteurization, centrifuging (for any time to require the submission of 49% for the alcohol content derived
clarification), lagering, carbonation and samples. This section recognized TTB’s from added flavors or other materials),
the like. authority to require a brewer to submit would be more appropriate than the
Notice No. 4 also proposed more a sample of a beer or a material used in proposed 0.5% added alcohol standard.
specific requirements for the producing a beer. For example, we We asked for supporting data, facts, or
information required in formulas, occasionally examine samples of beer or studies to back up any suggestions or
especially in the realm of flavoring ingredients in connection with our comments for different added alcohol
materials and special processes. review of statements of process or standards. Since we recognized that any
Proposed § 25.57 spelled out in more formulas and in order to determine the new standard would constitute a
detail the information required in proper tax classification of fermented substantial change from existing
formulas, and included requirements products. regulations and policy, we also sought
found in ATF Rulings 94–3 (which Finally, Notice No. 4 also included a
comments on the amount of time
concerned the production of ice beer), proposed amendment to § 7.31 (27 CFR
needed to comply with any new rule
96–1, and 2002–2. In keeping with the 7.31) to reflect TTB’s statutory authority
limiting the amount of alcohol that may
current practice of listing ranges of to require an importer to submit a
formula for a malt beverage, or a sample be added to products taxed as beer.
ingredients in statements of process, Notice No. 4 encouraged comments on
proposed § 25.57(a)(1) would permit of a malt beverage or materials used in
producing a malt beverage, in the amount of time necessary to develop
brewers to indicate a ‘‘reasonable range’’ and implement new formulas for these
of ingredients used in formulas. connection with the filing of a
certificate of label approval on TTB products and the possible costs
However, in order to establish a useful involved.
limit, Notice No. 4 requested comments Form 5100.31. This proposal recognized
on how to define a ‘‘reasonable range’’ the fact that, occasionally, TTB has had IV. Rulemaking History
for the quantity of ingredients used in to examine a statement of process or
analyze samples of a malt beverage in Notice No. 4 provided for the
making fermented products. Also in submission of comments through June
keeping with current policy that permits order to determine the proper
classification of a product, whether a 23, 2003. At the request of the E. & J.
using special processes in making
particular product is a malt beverage, or Gallo Winery, on June 2, 2003, we
fermented products, the proposed
whether a product is correctly labeled published Notice No. 10 (68 FR 32698)
§ 25.57 text specifically permitted such
under the part 7 regulations. to extend the period for the submission
special processes, but required brewers
of comments for an additional 120 days,
to describe them in detail in their I. Other Issues Raised in Notice No. 4 until October 21, 2003.
formulas.
As noted in Notice No. 4, § 25.67 In addition to the very specific In Notice No. 4 we stated our
requires brewers to file a statement of proposals made by Notice No. 4, TTB intention to place all comments on the
process prior to producing any requested comments and information on TTB Web site on the Internet. We stated
fermented product at the brewery that is a number of general topics relating to that the names of commenters would be
not to be marketed under a traditional the production and labeling of flavored included in the posting of comments on
designation. This regulation does not malt beverages. our Web site, but that street addresses,
provide any exception permitting TTB requested comments on the telephone numbers, or e-mail addresses
research or development of fermented proposed 0.5% added alcohol standard would be deleted on these postings. We
products without a statement of process. for beer. Specifically, we solicited did state that this information would
With the removal of § 25.67, a brewer information regarding any studies, appear on copies of comments available
could produce certain fermented laboratory trials, or other empirical data in the TTB reference library in
beverages for research and development that may have existed for added alcohol Washington, DC.
purposes under proposed § 25.55(c)(2) in flavored malt beverages. We also Due to the large number of comments,
without receiving formula approval; sought comments on how adoption of we were unable to redact street address,
however, a brewer could not sell or the proposed standard would affect the telephone number, or e-mail address
market such products until receiving taste, shelf life, stability, or other information from the comments we
formula approval. characteristics of flavored malt posted on our Web site. Redacting this
Proposed § 25.55(e) stated that beverages. In addition, we sought information from the large number of
previously approved statements of comments on whether production comments received would have
process would remain valid after practices are available to produce prevented us from posting comments on
adoption of the new regulation, flavored malt beverages with the desired the Web site in a timely manner.
provided that the finished product is in product profile that would comply with Therefore, we issued TTB Notice No. 23
compliance with any new requirements the proposed standard. We also solicited on December 2, 2003 (68 FR 67388).
relating to the definition of beer. comments relating to the effect of the This notice advised the public of our
The proposed formula regulations did proposed regulation on the viability of inability to redact the information from
not specify any Government form to be products currently on the market. comments posted on the Web site and
used for their filing. TTB also solicited Notice No. 4 further stated that we were provided an opportunity for
comments on whether the proposed particularly interested in comments commenters to request that we redact
regulations on the preparation and filing addressing whether products on the this information from their individual
comments if we received their request to commenters stated that the proposed • Over 4,000 e-mail submissions
do so by December 23, 2003. standard is the best way to maintain came from consumers of FMBs. These
clear distinctions between beer and comments opposed the proposed rule
V. Comments Received in Response to
liquor (distilled spirits) and to preserve and suggested that there was no need to
Notice No. 4
the flavored malt beverage category. amend the regulations. Many of the
A. General Discussion of Comments • Over 2,000 comments were received commenters stated that they like FMBs
from beer distributors across the United just the way they are and that the
Before the close of the comment
States. Many of these commenters stated proposed changes will be expensive and
period, TTB received over 15,000
that the proposed rule is consistent with will result in increased costs to
comments in response to Notice No. 4.
the historical interpretation of what consumers.
Of these, over 14,000 consisted of • Over 600 comments came from
variations on several form letters, which constitutes beer and other malt
beverages. They suggested that beer is a employees of a large producer of FMBs.
were submitted by mail, facsimile These commenters opposed the
transmission, or e-mail. unique product that has been regulated
and taxed differently from other alcohol proposed rule and suggested TTB
In addition, we received over 1,000 instead adopt the ‘‘51% compromise.’’
comments after the close of the beverages throughout our Nation’s
history. The commenters advocated The commenters suggested that
comment period. Due to the large compliance with the proposed standard
volume of comments received in adopting the proposed 0.5% standard in
order to ensure the integrity of beer and would cost millions of dollars in new
response to Notice No. 4, and because equipment purchases, reformulation of
of the need to provide expeditious the brewing process. They also stated
that the proposed rule would help products, and development of new
guidance to State regulatory agencies, processes. They urged TTB to adopt
the industry, and consumers on this maintain an orderly marketplace and
avoid costly and confusing disruptions regulations that promote fair
issue, we determined that it was not competition and provide a level playing
practical to consider the late-filed in State licensing, taxation, and
distribution policies, any of which field, and they suggested the proposed
comments. rule would mark a dramatic change in
Most of the comments focused on the would deal a blow to beer wholesalers.
• Approximately 900 comments were how these products have been
proposed 0.5% standard or the 51/49 produced, marketed, and sold for 30
standard for beer and malt beverages. In received from individuals who
identified themselves as employees of years. Finally, the commenters stated
particular, the ‘‘form letter’’ comments, that the proposed rule could regulate
which made up the vast majority of the another major brewer. These comments
supported the proposed rule as a FMBs out of the marketplace, depriving
comments, generally commented for or consumers of a drink they enjoy, costing
against the proposed rule, and either clarification that will ensure that if
millions in tax revenue, and resulting in
explicitly or implicitly commented on FMBs were sold as malt beverages, they
the loss of thousands of jobs.
the standard for added alcohol. The would be made according to traditional • Over 400 small retailers located
hundreds of comments received from brewing methods and practices. The across the United States expressed their
State legislators also focused primarily commenters suggested that without the opposition to the ‘‘new regulations’’ and
on this issue. While Notice No. 4 proposed rule, retailers and wholesalers ‘‘rule changes.’’ Many of these retailers
solicited comments on whether there would face a patchwork of individual asked TTB to reach a ‘‘compromise’’
was a different standard that would be State laws and regulations. that would allow FMBs to remain in
appropriate, only a few comments • Over 170 submissions came from existence. The commenters suggested
addressed this question. beer consumers located primarily in two that the regulatory changes would raise
Furthermore, only a small percentage States. Many of these commenters stated the price of FMBs, sabotage this
of the total comments focused on issues that the proposed rule would provide a category of products by making it
such as alcohol content statements or clear understanding to legislators, State impossible or costly to sell them, and
formula requirements. Accordingly, the and Federal regulators, and beer adversely impact small businesses.
following breakdown of comments consumers as to what beer is and what • More than 40 comments were
focuses on the commenters’ position on beer is not. received from employees of FMB
the proposed 0.5% standard. • More than 50 employees of a distributors. These commenters opposed
domestic subsidiary of a foreign brewer the 0.5 percent standard and urged TTB
B. Overview of Comments expressed their support for the proposed to adopt a ‘‘more reasonable’’ majority
In the following comment discussion, rule. They suggested that the proposed standard instead. The commenters
the abbreviations ‘‘FMB’’ and FMBs’’ are rule would maintain an orderly focused on the potential impact of the
used in place of ‘‘flavored malt marketplace, meet consumer proposed rule on the future of FMB
beverage(s).’’ expectations for consistent products, producers and the businesses that rely
and help sustain the long-term on the viability of these products.
1. Form Letters development of the product category.
Of the over 14,000 form letter These commenters suggested that the 2. Other Comments
submissions referred to above, over reformulated products would be FMB Producers. We received
8,000 supported adoption of the consistent with State tax, license, and comments from several major producers
proposed 0.5 percent standard and over distribution laws, allowing wholesalers of FMBs. The Beer Institute submitted a
5,000 opposed adoption of that and retailers to continue their comment in support of the proposed
standard. The submissions in support of operations. Furthermore, they stated 0.5% standard, on behalf of Anheuser-
the proposed rule (or specifically in that without a standard, individual Busch, Miller Brewing Company
support of the 0.5 percent standard) States would adopt their own (‘‘Miller’’), and Coors Brewing Company
break down as follows: regulations and create a patchwork of (‘‘Coors’’). The Beer Institute stated that
• Over 5,000 e-mail comments came different standards. these three senior and sustaining
from individuals who identified The submissions in opposition to the members produce or import well over
themselves as employees of one major 0.5 percent standard break down as 75% of the beer and other malt
U.S. brewer and its subsidiaries. These follows: beverages sold in the United States,
including many successful FMB brands. survival would be in jeopardy under the consumers are not deceived as to
In addition, these three brewers each proposed rule. product content.
submitted individual comments in Brown-Forman Corporation (‘‘Brown- TTB also received comments
support of the proposed 0.5% standard. Forman’’), the producer of an FMB opposing the proposed rule from
These commenters argued that the known as Jack Daniel’s Country taxpayer and citizen organizations.
proposed 0.5% standard is consistent Cocktails, also commented in favor of These commenters suggested that the
with TTB’s statutory authority and will the 51/49 standard. Finally, E. & J. Gallo proposed rule would limit consumer
preserve the integrity of the products Winery (Gallo), which produces 13 FMB choice, decrease competition, and waste
known as beer or as malt beverages. products, submitted a comment in taxpayer dollars. The commenters stated
More importantly, these commenters which it took no position on whether it that the Government should
suggested that only a 0.5% standard preferred the 0.5% standard or the 51/ accommodate legitimate consumer,
would maintain an orderly marketplace 49 standard. industry, and employment needs. They
and foreclose actions by individual Other Comments from the Beer suggested that the majority standard
States, which could adopt their own Industry. The National Beer Wholesalers would achieve these goals better than
potentially differing and conflicting Association (NBWA) and the Brewer’s the proposed 0.5% standard.
standards. Anheuser-Busch and Miller Association of America (BAA) both State Regulatory Agencies and
stated that they could take steps to commented in favor of the proposed Lawmakers. TTB received comments
reformulate their products within the 0.5% standard. TTB also received many from 31 State regulatory or tax agencies
0.5% standard and, in fact, have comments from craft brewers, beer and one county liquor commission.
produced FMBs that achieve the same wholesalers, employees of the major Most of these comments specifically
taste and appearance as existing brewers, and others in the beer industry supported the proposed rule. The
products. remaining comments generally
supporting the proposed rule. Many of
The Flavored Malt Beverage Coalition supported the concept of a uniform
these comments suggested that FMBs
(FMBC) submitted a comment on behalf standard for FMBs, without specifically
are not beer or malt beverages as
of its members: City Brewing Company; supporting the proposed 0.5% standard.
consumers understand these terms and
Diageo North America, Inc.; High Falls Two States simply provided information
that the proposed rule would preserve
Brewing Company; Mark Anthony about their State laws, without taking a
the integrity of the malt beverage
Brands, Inc.; Pernod Ricard USA; position on the standard. We also
category. Some brewers suggested that
Todhunter International; and United received comments in support of the
competition from FMB producers is
States Beverage LLC. The FMBC stated proposed rule from three Governors, one
hurting the beer industry.
that, together, its members marketed Lieutenant Governor, and over 200 State
and/or produced approximately 56% of Consumer/Taxpayer Groups. The legislators. A smaller number of State
the FMBs sold in the United States in Center for Science in the Public Interest legislators commented in favor of the
2002. The FMBC also stated that its (CSPI), the Pacific Institute for Research 51/49 standard.
members, as companies that collectively and Evaluation, and several other Some comments that specifically
spent hundreds of millions of dollars to associations commented in favor of the favored the proposed rule suggested
develop products now threatened by a proposed rule. CSPI stated that the use that, in many States, malt beverages
change in Federal policy, have a of popular, well-known distilled spirits containing distilled spirits would be
particular interest in the outcome of the brand names in the advertising and classified as spirits rather than malt
rulemaking. labeling of malt beverage products beverages. Several States indicated that
The FMBC, and several of its misleads consumers. CSPI also if TTB does not take expeditious action
individual members, questioned TTB’s suggested that these ‘‘alcopops’’ are on this issue, they would go ahead and
statutory authority to impose extremely popular with underage issue their own standards. Other States,
restrictions on the current practice but drinkers, and that since most ‘‘alcopop’’ however, simply stressed the need for a
also stated that, as a matter of policy, products currently do not comply with uniform standard and urged TTB to take
they would support a final rule that the 0.5% standard, classifying and expeditious action to create a standard
adopts the 51/49 standard. Furthermore, taxing them as distilled spirits products for FMBs.
these commenters raised a number of would help reduce youth access to such Members of Congress. We received
legal challenges to the basis for the products by placing them in liquor comments in favor of the proposed rule
proposed rule, and they argued that the stores in many States rather than in from nine members of the United States
proposed 0.5% standard was not grocery and convenience stores. House of Representatives. We received
supported by either the consumer The National Consumers League comments in favor of the 51/49 (or
protection rationale or the need to take (NCL) commented against the 0.5% majority) standard from 28 members of
action before the States do so. standard, stating that it opposed the the House of Representatives and eight
Several of these commenters stressed perpetuation of policies that United States Senators.
the economic impact of the proposed differentiate malt-based alcohol Many of the members of Congress
rule. Many FMB producers suggested beverages from distilled alcohol who commented in favor of the 51/49
that the proposed 0.5% standard would beverages, and suggesting that ethyl standard expressed concern about the
require reformulation of popular FMB alcohol is the same, regardless of negative economic impact that the
products, with a potentially adverse whether it is in beer, wine, or distilled proposed rule would have on employers
impact on consumer acceptance of those spirits. NCL agreed, however, that and jobs within their districts or States.
products. The FMBC submitted an requiring compliance with a ‘‘majority’’ Many of these comments noted that
economic study indicating that adoption standard will ensure that an FMB existing FMB products were formulated
of the proposed rule would have an actually contains malt, and in a in reliance on the longstanding policies
adverse impact on the FMB industry, significant concentration. While NCL of our predecessor agency.
amounting to over $600 million over the questioned whether source of alcohol is Miscellaneous comments. We
next 4 years. Comments from a few in any way material to consumer choice, received a comment from the Flavor and
small brewers that produce and bottle it concluded that FMB compliance with Extract Manufacturers Association of
FMB products indicated that their the majority rule would ensure that the U.S. (FEMA), the national trade
association of companies that create and standards adopted in the final rule. In labeling and advertising statements that
manufacture flavors for use in a wide reaching these decisions, we note that are false or tend to mislead consumers.
variety of products, including FMBs. Executive Order 12866 provides that, Finally, we have modified the
FEMA urged TTB to reconsider the when an agency determines that a language of the formula regulations in
proposed 0.5% standard, stating that it regulation is the best available method response to several comments about
would significantly restrict the amount of achieving an objective, it shall design whether the proposed requirements
of alcohol contributed to the finished its regulation in the most cost-effective were overly burdensome. For example,
product from flavors and thus make it manner to achieve that objective. we are no longer requiring formulas to
technically impossible for flavor The comments on Notice No. 4 have disclose the alcohol content of the
chemists to satisfy the consumer desire persuaded us that implementation of the product at each interim stage of
for the distinctive, fresh, fruity malt proposed 0.5% standard might impose production. We have also clarified the
beverages currently being sold. economic burdens on a sector of the language of these provisions in response
We received a few comments FMB industry and have adverse effects to several technical comments.
suggesting revisions to the system of on the viability of small brewers who
taxing alcohol beverages as a way to VI. Comments on Whether the
produce FMBs, as well as their ability Rulemaking Is Necessary and Fair
take care of the classification issue to compete within the malt beverage
posed by FMBs. These comments could industry. In this section, we discuss some of the
not be adopted without legislative We believe that adoption of the general issues raised by commenters
amendments to the IRC. Since the rest alternative ‘‘51/49 standard’’ for beers regarding the need for engaging in
of the comments focused primarily on and malt beverages would achieve the rulemaking and the fairness of the
the two standards that we aired in important regulatory goals of protecting proposed change in agency policy.
Notice No. 4, the 0.5% standard and the the revenue, ensuring that consumers A. Is There a Need To Engage in
51/49 standard, our discussion of the have adequate information about the Rulemaking on This Issue?
comments will focus on those two identity of FMB products, and
standards. The first issue presented is whether
establishing a Federal standard for such there is a need to engage in rulemaking
A small number of commenters
products, while at the same time at all. Many commenters suggested that
focused on the remaining issues raised
reducing the compliance costs to the TTB should not amend its regulations in
for comment in Notice 4. While we
FMB industry. It is noteworthy that, any manner, but should instead allow
received several comments from States
with the exception of one producer that the continued production of FMBs
and consumer groups in support of the
remained neutral on this issue, according to current policy. Other
proposed mandatory alcohol content
comments from the producers of FMBs commenters supported the idea of
labeling for FMBs, many comments
from industry members suggested that all supported either the more restrictive rulemaking on FMBs.
FMBs were being unfairly singled out, 0.5% standard or the more liberal 51/49
standard. Thus, most of the FMB 1. Comments Opposed to Rulemaking
and that any such requirement should
apply to all malt beverages or to none. industry expressed support for creating As indicated above in the comment
We also received a few comments in some type of standard for FMBs that overview, TTB received over 4,000 e-
opposition to the proposed limitations would set a limit on the alcohol derived mail comments that questioned the need
on the use of distilled spirits terms in from added flavors. for rulemaking on FMBs. These
malt beverage labeling and advertising. The final rule also adopts the other comments came from consumers who
Some of these commenters claimed that proposals aired in Notice 4, with certain stated that they enjoyed drinking FMBs,
the proposed restrictions violated the modifications in response to the and that they opposed the proposed
First Amendment. comments. We are adopting the regulation, which would mandate
Finally, we received a small number proposed mandatory alcohol content changes in the way those products were
of comments from brewers and brewery labeling requirements, as we have made. The commenters stated that they
trade associations regarding the concluded that this requirement will liked FMBs the way they are, that the
proposed new formula filing provide consumers important changes would be expensive, and that
requirements. These commenters information about these FMBs. Since we consumers will end up paying more
generally favored the new requirements, specifically stated in Notice No. 4 that under the proposed rule.
but they expressed concerns regarding we were not proposing mandatory Many of these commenters suggested
certain aspects of the proposal and alcohol content labeling for all malt that the Federal Government should not
requested that TTB clarify some of the beverage products, comments waste tax dollars on ‘‘trivial’’ issues
proposed formula requirements. advocating such a position were such as how FMBs are made, and that
considered to be outside the scope of companies should make changes that
C. Summary of TTB Final Rule the current rulemaking. We may consumers want, not what the
Decisions consider such a proposal in the future. Government demands. Finally, many of
After carefully analyzing the We are also adopting the labeling and these comments suggested that the
comments, which are discussed in advertising proposals, with Government should focus on bigger
greater detail below, we are adopting the modifications to respond to the First issues, such as job creation, improving
proposals set forth in Notice No. 4 with Amendment concerns raised by several the economy, and fighting terrorism.
certain important modifications. The commenters. As modified, the These comments did not directly
final rule adopts the less stringent ‘‘51/ regulation will prohibit the use of address the 51/49 standard.
49 standard’’ (allowing up to 49% of the labeling or advertising statements, A few comments were also received
alcohol content to come from flavors designs, devices, or representations that from organizations representing
and other nonbeverage ingredients) for tend to create a false or misleading taxpayer and citizen groups, including
beers and malt beverages. We are impression that the malt beverage Americans for Tax Reform, the National
providing affected industry members contains distilled spirits or is a distilled Taxpayers Union, and Citizens Against
one year to reformulate their FMB spirits product. These modifications Government Waste. One of these
products or otherwise conform to the clarify that we are only prohibiting commenters stated that the proposed
rule would limit consumer choice, 3. TTB Response Service issued Revenue Procedure 71–
decrease competition, and waste We acknowledge that FMBs are a 26 over 30 years ago.
taxpayer dollars. This commenter popular category of alcohol beverage • In 1980, ATF issued Industry
suggested that the Government should and that many consumers enjoy Circular 80–3, which advised brewers
accommodate legitimate consumer, drinking these products. We recognize that adjunct materials listed in the beer
industry, and employment needs before the concerns of many consumers that industry’s Adjunct Report (later referred
engaging in rulemaking. Another proposed regulatory changes may to as the Adjunct Reference Manual
commenter expressed concerns that the increase the cost of these beverages, and (ARM)), were suitable for use in beer
0.5% standard would force either a we have given serious consideration to and cereal beverages when used in
significant tax increase and/or a change cost issues in drafting this final rule. We accordance with the conditions
in the production process for FMBs. It have also given serious consideration to described in the report. That Adjunct
should be noted that while these the issues of decreased competition and Report, as well as all subsequent
comments generally criticized the consumer choice. editions of the ARM, lists ethyl alcohol
proposed rule, they expressed a Nonetheless, after reviewing the as a permitted additive for use in
preference for either the 51/49 standard thousands of comments received in flavoring beer, without any limitations.
or some compromise over the 0.5% response to this notice, we believe more Several commenters stated that they
standard. strongly than ever that rulemaking on have relied on these policies to create
2. Comments Supporting Rulemaking this issue is necessary. The beverages that consumers enjoy and that
overwhelming majority of the State they have invested millions of dollars
TTB also received approximately regulatory agencies that commented on promoting those brands.
11,000 comments urging that TTB set a FMBs urged TTB to adopt a Federal Some commenters argued that the
limit on the quantity of alcohol derived standard for these products in order to industry had ample warning that TTB’s
from added flavors in malt beverages. avoid a patchwork of inconsistent State predecessor agency was contemplating a
While these comments were divided requirements. In addition, comments limitation on the use of flavors
over whether the limit should be set at from the beer industry overwhelmingly containing alcohol in the production of
the 51/49 standard or the proposed favored the adoption of a Federal beer and malt beverages. These
0.5% standard, these commenters standard, including many commenters commenters noted that in 1996 ATF
believed that it was important that TTB who pointed to the importance of notified the industry, through ATF
set a standard and clarify the maintaining a distinction between malt Ruling 96–1, that rulemaking limiting
classification of these products as malt beverages, in which alcohol is derived the alcohol contribution from flavors in
beverages or distilled spirits. It should from fermentation, and distilled spirits, FMBs under 6% alc/vol was
be noted that we received comments in in which alcohol is derived from forthcoming. This ruling clearly stated
support of setting a standard from the distillation. that TTB would initiate future
beer industry, producers of flavored Treasury and TTB believe it is rulemaking to consider the prohibition,
malt beverages, consumers, members of important, in order to protect both the restriction, or limitation on alcohol
Congress and other elected officials, and revenue and the consumer, to set a limit derived from the distilled spirits
State regulatory agencies. on the use in FMBs of alcohol not components of added flavors, a
These commenters supported the derived from fermentation at the statement that was reiterated in ATF
setting of a uniform Federal standard for brewery and prevent the unlimited use Ruling 2002–2.
a variety of reasons. Some commenters of alcohol derived from distilled spirits However, commenters who opposed
expressed concern that current labels in FMB production. Thus, we do not the proposed 0.5% standard suggested
mislead consumers. Many consumers adopt the views of those commenters that ATF’s actions after 1996 sent mixed
and brewers suggested that the Federal who urged that TTB take no action on signals to the industry. For example, a
government has the responsibility to this matter. U.S. Senator stated that although the
maintain a distinction between Bureau in 1996 suggested that
B. Fairness and Notice Issues
traditional beer products and distilled rulemaking ‘‘in the near future’’ might
spirits, and that the line between these 1. Comments Received limit the use of flavors in such products,
two well-established categories should Many commenters argued that it is it abandoned that rulemaking project
not be blurred by allowing the unfair for TTB to change a policy upon and did not even mention it in the
production of malt beverages that derive which brewers and importers have unified regulatory agenda that every
most of their alcohol content from the relied for several decades. These Federal agency must publish on a semi-
distilled spirits components of added commenters made the following annual basis. Another U.S. Senator
flavors. arguments: noted that although the 1996 ruling
Many commenters expressed concern • Since the 1950s, TTB and its mentioned rulemaking, no such
that, in the absence of a Federal predecessor agencies have required the rulemaking proposal appeared until
standard, the States would each set their review and approval of a statement of 2003. The Senator suggested that:
own standards, leaving members of the process (SOP) for any beer produced In the intervening 7-year time period,
beer industry facing a confusing with flavors. By reviewing and manufacturers have relied on the existing law
patchwork of regulatory standards. approving SOPs for the various FMBs and the Bureau’s formula approvals to invest
Finally, of the FMB producers who on the market today, TTB has accepted hundreds of millions of dollars in the
commented on this issue, almost all them as beer and malt beverages, and formulation and marketing of new products.
supported action to set a standard to has endorsed the use of nonbeverage These investments have created hundreds of
limit the quantity of alcohol derived jobs and a vibrant fast-growing U.S. market
flavors up to the quantities indicated in sector in which tens of millions of cases of
from added flavors. While one major the SOPs. FMBs have already been sold. Without a
FMB producer expressed neutrality on • Our predecessor agencies have reasonable public health or safety rationale,
the issue, the rest favored either the officially recognized the use of flavoring it does not seem prudent or fair to revise
proposed 0.5% standard or the 51/49 materials in the production of malt these rules dramatically at this stage of the
standard. beverages since the Internal Revenue game.
Accordingly, the Senator urged TTB to Ruling 96–1 that require explicit 444 F.2d 841, 852 (1970) (footnote
adopt the 51/49 standard, as it would ingredient listing and alcohol content omitted), cert. denied, 403 U.S. 923
‘‘accomplish the same goals and have a information in statements of process, (1971).)
lesser impact on these products and the but instead delayed enforcement of New manufacturing processes and
industry that produces them.’’ these provisions until the issuance of marketing trends created a need for TTB
Other members of Congress made ATF Ruling 2002–2 in 2002. and our predecessor agency to
similar comments. A letter signed by 26 reevaluate longstanding policies on the
members of the House of 2. TTB Response use of flavors containing alcohol in the
Representatives supported the TTB agrees with the commenters who production of beer and malt beverages.
‘‘majority’’ standard, stating that over note that for many years ATF and its As the above-cited cases demonstrate,
the past 5 years, ‘‘hundreds of millions predecessors allowed brewers to use an agency may make changes in policy,
of dollars have been invested in the alcohol-flavoring ingredients, without as long as the interpretation of the
development of the FMB category. limitation, when producing malt applicable statutes and the rest of the
These investments, and the thousands beverages. Our predecessor agencies administrative record reflects reasoned
of jobs created, were all made on the approved statements of process and deliberation.
reliance of long-standing federal policy certificates of label approval for these Finally, even if the agency in the two
and rules.’’ The letter suggested that products and, before 1996, never rulings referred to by the commenter
Notice No. 4 intends to ‘‘change the suggested that there was any limit on had not given notice of its intention to
established rules mid-stream on those the use of flavoring materials in FMBs. engage in rulemaking on this issue, and
who have successfully created the Accordingly, we acknowledge that the even if the agency sent mixed signals on
category. This is especially troubling in FMB industry relied on existing policies this issue prior to 2002, an agency is not
that it threatens to stifle the only growth in formulating these products. precluded from engaging in rulemaking
sector in the brewing industry over the It is important to note, however, that simply because it would change even a
last several years.’’ we know of no evidence that would longstanding policy. By publishing a
Diageo stated that, in the summer of suggest that producers of FMBs in the notice of proposed rulemaking and
2000, company officials met with ATF 1970s or 1980s were using nonbeverage soliciting comments on this issue, we
representatives and revealed Diageo’s flavors in their products at the high have clearly met the notice and
plans to enter the FMB market in the levels disclosed in the 2002 ATF study. comment requirements of the
near future in reliance on existing To the best of our knowledge, the Administrative Procedure Act (APA).
policy. Diageo stated that company production of FMBs that derived the Notice No. 4 provided specific notice of
officials advised ATF that it would majority (and in some cases, up to 99%) the proposed changes to the industry
reconsider these plans if ATF planned of their alcohol content from added and the public, and we provided the
to place new limits on the use of flavors flavors is a trend that began in the industry and the public almost 7
in FMBs containing not more than 6% 1990s. As the trend accelerated, ATF months to submit comments on those
alc/vol. Diageo also stated that, after the concluded that it was necessary to proposed changes.
meeting, ATF officials indicated that the reevaluate the prior policy and consider As reflected in this discussion of
agency did not plan to change existing the need for placing limits on the comments, we have carefully
policy towards FMB formulation. quantity of alcohol derived from added considered the comments from all
Diageo claims that, in reliance on those flavors. Furthermore, many State interested parties, and we have given
assurances, Diageo introduced Smirnoff regulatory agencies began requesting full consideration to options that would
Ice in December 2000. that ATF create a Federal standard for minimize any adverse economic impact
The FMBC also stated that a number the production of FMBs because of the flowing from the rule and that would
of its members had received assurances confusion caused by the marketing and afford industry members an adequate
from ATF, in the summer of 2000, that labeling of these products. period of time to reformulate their
ATF planned no change in policy Agencies may change policies, as long products, if necessary. In crafting a
towards the addition of alcohol to FMBs as the agency follows the appropriate standard on the use of flavors
containing 6% alcohol by volume or procedures under the Administrative containing alcohol in the production of
less. The FMBC stated that it sought Procedure Act. The Supreme Court has FMBs, we have also taken into
these assurances after an ATF official recognized that ‘‘[r]egulatory agencies consideration past and current agency
sent a letter indicating that the Bureau do not establish rules of conduct to last policy. Accordingly, we have taken
was considering rulemaking, which forever.’’ (See American Trucking fairness and equity into consideration in
might limit the alcohol from added Assns., Inc. v. Atchison, T. & S. F. R. drafting the final rule.
flavors to no more than 25% of the total Co., 387 U.S. 397, 416 (1967).) The
alcohol content of the product. Court has also stated that agencies must VII. Regulatory Burden and Cost-
A commenter pointed out that be given ample latitude to ‘‘adapt their Related Issues
although ATF Ruling 96–1 stated that rules and policies to the demands of One of the most important issues
ATF would undertake rulemaking to changing circumstances.’’ (See Permian raised in the comments is the difference
limit alcohol from flavors in beer and Basin Area Rate Cases, 390 U.S. 747, in regulatory burdens and costs
malt beverages, ATF labeling and 784 (1968).) Furthermore, the Court has associated with the proposed 0.5%
formula specialists never qualified recognized that ‘‘[a]n agency’s view of standard and the 51/49 standard.
approvals of statements of process or what is in the public interest may Opponents of the proposed 0.5%
labels by stating that the approval was change, either with or without a change standard gave more weight to this issue
conditioned on future rulemaking. in circumstances. But an agency than did supporters of that standard.
Instead, these commenters claimed that changing its course must supply a However, many commenters who would
ATF continued to approve statements of reasoned analysis * * *.’’ (See Motor be directly impacted by the proposed
process and labels without qualification. Vehicle Mfrs. Ass’n v. State Farm Mut. 0.5% standard urged TTB to adopt the
Another commenter stated that ATF Auto. Ins. Co., 463 U.S. 29, 57 (1983), 51/49 standard instead because it would
personnel did not immediately quoting Greater Boston Television Corp. be less costly and because it would not
implement the provisions in ATF v. FCC, 143 U. S. App. D. C. 383, 394, distort competition in the FMB market.
The major issues raised by commenters spirits. Such reclassification would Loss of Sales Due To Reformulation.
on both sides of this question are negatively affect wholesalers and Several FMB producers commented that
summarized below. retailers because in certain States they even if they can reformulate their
would no longer be able to sell these products to comply with the 0.5 percent
A. Costs of Complying With the
products. standard, they believe they may not be
Proposed 0.5% Standard
able to achieve the same taste profile as
2. Comments Opposed to the 0.5%
1. Comments in Support of the 0.5% their existing products. They indicate
Standard
Standard that this would cause them to lose
Many industry members who Opponents of the proposed 0.5% customers, thereby reducing their sales
commented in support of the 0.5% standard submitted a great deal of data and revenue.
standard downplayed the importance of about the estimated economic impact of ECS Study. The FMBC contracted
economic issues. For example, the Beer the proposed rule. The FMBC submitted with Economic Consulting Services,
Institute stated that the economic well an economic study indicating that LLC (ECS) to conduct an economic
being of certain sectors of the economy adoption of the proposed rule would assessment of the impact that both the
should not be a consideration in have an adverse impact on the FMB 0.5 percent standard and the majority
straightforward application of properly industry amounting to over $600 standard would have on the domestic
enacted Federal statutes. It also million over the next 4 years. Other industry. The ECS assessment relied on
suggested that some of the comments commenters argued that the proposed information available to the public as
were based on erroneous information 0.5% standard would have negative cost well as information it obtained by
that was provided to retailers, notably implications for the industry, the surveying the FMBC’s members. Sales
the false threat that FMBs will disappear public, and the Federal Government, as by the members of the FMBC comprise
from the marketplace if the proposed set forth below. approximately 56 percent of the FMB
TTB standard is finally adopted. Consumer Prices. Many commenters market.
Instead, the Beer Institute suggested that expressed concerns that the cost of FMB The ECS found that, for various
these products would continue either as products would rise if the proposed rule reasons, the FMBC’s members
distilled spirits products or as were adopted. As previously noted, unanimously responded that they
reformulated FMBs. several thousand consumers commented would choose to reformulate their
Some individual FMB producers also against the proposed rule on various products to comply with either standard
suggested that the economic issues were grounds, including the concern rather than sell them as distilled spirits
not significant. Anheuser-Busch expressed by many that the 0.5% specialty products. They expected
acknowledged that, as with any new standard would result in higher prices substantial costs associated with
process, there may be associated for consumers. reformulating current products to
transition costs, and it stated that even Disruption to Existing Businesses. The comply with either standard. ECS
the 51/49 standard would require FMBC commented that the proposed estimated losses based on expected loss
process changes and associated 0.5% standard would profoundly in volume, expected upfront capital
transition costs for most producers. threaten the FMB business of its costs, expected upfront research and
Anheuser-Busch commented that it members. It stated that these companies development and test marketing costs,
expected the total cost impact across the had relied on longstanding Federal expected losses in operating income,
company’s system to be minimal, policies to create beverages that and expected capital losses. ECS then
ranging between a small investment in consumers enjoy and had invested extrapolated the data they obtained from
capital and a net cost savings due to millions of dollars in promoting these FMBC members to the entire FMB
process and material changes. In either brands. The FMBC suggested that any industry based on market share data.
case, the brewer did not anticipate that change would disrupt and possibly Specifically, the ECS estimated the
the slight change in cost would impact damage the business of its members; cost to comply over the next four years
FMB prices for its wholesalers, retailers however, they were willing to adjust to to be:
or consumers. a majority standard. The FMBC argued
Miller commented that there are costs that the proposed 0.5% standard COSTS TO COMPLY (IN MILLIONS)
that have been, and will be, incurred as presented a much more dire threat to OVER 4 YEARS
a result of the proposed new standard; the business investment of its members,
however, it accepted those costs as a without a sound policy justification Majority 0.5%
Costs to
behind it. standard Standard
part of doing business in a regulated
industry. Neither brewer submitted an Research and Development Costs. FMBC Members ....... 186.2 340.5
estimate of the costs they expected to Many commenters suggested that Entire FMB Industry .. 332.5 608.1
incur; nor did they explain precisely compliance with a new standard would Federal Taxes Fore-
how they would reformulate their force brewers to incur extensive upfront gone ...................... 139.1 291.8
products to minimize the cost of manufacturing costs for research and
compliance. development to create new formulations ECS indicated that the 0.5 percent
Some supporters of the 0.5 percent for existing products. According to these standard imposes significantly higher
standard commented that the standard commenters, the 0.5 percent standard costs because it ‘‘would drive several of
would not adversely affect wholesalers would require most manufacturers to the products off retailer shelves
or retailers, and that in fact, the reformulate their existing products. completely, denying the producers,
standard will bring clarity to the They stated that reformulation would be distributors and retailers a source of
marketplace and preserve the FMB quite costly in that it would require business and profits and denying
category for wholesalers and retailers. large amounts of capital to purchase customers a product they have come to
Without a clear standard, these new equipment, investment in enjoy.’’
commenters believe that the States expensive technologies and treatment Indirect Costs. Several commenters
would take action and may ultimately processes, and to advertise the newly focused on the indirect costs associated
classify these products as distilled reformulated products. with the proposed rule. For example,
some commenters suggested that Wisconsin, which employs 350 people. would affect taste, shelf life, stability, or
Federal Government’s revenue The brewery was closed in 1999, but other characteristics of these products.
collections would suffer because the resumed operations in 2000 capitalized We also sought comments on whether
0.5% standard would cause sales of with funds contributed by employees production practices are available to
FMB products to decline. Several FMB and local investors. It adopted a produce FMBs with the desired product
wholesale distributors and other contract-brewing business strategy profile and still comply with the
commenters expressed concern that the because the beer brands formerly proposed standard. Finally, we sought
0.5 percent standard would cause produced by the brewery were comments as to whether another
existing FMBs to be reclassified as purchased and are now controlled by a standard, such as the 51/49 standard,
distilled spirits, with the result that major brewery. City Brewing Company would be more appropriate for these
wholesale distributors would no longer stated that the consolidation of U.S. products.
be permitted to distribute them in breweries had virtually eliminated all
certain States. These commenters also excess brewing capacity for beer 1. Comments Supporting the 0.5%
noted that this reclassification would marketers other than the largest U.S. Standard
affect retailers because, in many States, brewers. The brewery stated that it has Anheuser-Busch commented that it is
only State stores can sell distilled been profitable since resuming capable of producing FMBs under the
spirits. operation, but it expressed concerns that 0.5% standard and is preparing to do so.
Effect on Small Businesses. Many the proposed rule might result in a loss The brewer stated that its brew masters
commenters suggested that the proposed of business for FMB producers, which have already developed reformulated
0.5% standard would have adverse would have a significant negative products that will be indistinguishable
effects on small businesses. Some of impact on the brewery. from the current FMB products they
these commenters suggested that the A small brewery in North Carolina, produce and sell. Anheuser-Busch
costs of complying with any new Carolina Beer & Beverage Company, indicated that these reformulated
standard would hurt small companies stated that adoption of the 0.5% products would have the same clarity,
the most since larger companies possess standard would have a ‘‘profound aroma, and taste profile of their current
economy of scale advantages. adverse impact’’ on both this brewery products. Anheuser-Busch further stated
TTB received a few comments from and similar small brewers. The brewery that reformulation could be done and
companies that identified themselves as urged adoption of the majority standard that no FMB producer should lead TTB
small brewers that would be adversely instead. Carolina Beer & Beverage stated to believe otherwise.
impacted by the proposed rule. It that 70% of its revenues are derived Miller also commented that its
should be noted that, pursuant to the from FMBs, and it noted that it had products could be produced under the
regulations issued by the Small invested significant amounts of capital proposed standard without
Business Administration, a small brewer and resources in order to produce FMBs compromising their taste or their high
is one that has no more than 500 that comply with longstanding Federal quality standards. Furthermore, the
employees. (See 13 CFR 121.201). These policies. This brewery suggested that if brewer indicated that it has successfully
commenters urged TTB to adopt the 51/ TTB adopted the 0.5% standard, it was produced prototype products that
49 standard. They suggested that the unlikely that it could to maintain its comply with the 0.5% standard and has
proposed rule would have a competitiveness in the FMB industry tested the acceptability of these
disproportionately large impact on and that such a standard could even products with expert tasters and others.
small businesses because they are less threaten the company’s ability to stay in These tests confirm that the
able to adapt to the new technology business. reformulated product satisfies the taste
necessary to comply with the proposed In addition, many distributors profile of the original product.
0.5% standard. commented on the adverse impact of the Miller further stated that shelf life and
Mark Anthony Brands (MAB), a 0.5% standard. For example, United product stability are not expected to be
member of the FMBC, is the national States Beverage, a small distributor barriers to complying with the new
distributor and marketer of several located in Connecticut, commented that standards. Miller stated that:
popular FMB products. MAB and its it employs 85 people and that FMB
production affiliate, Mark Anthony Shelf life will be reduced to that of a
products support over 70% of its traditional beer, i.e., approximately four
Brewing, Inc., contract with four U.S. revenues. This commenter stated that months which is a significant reduction from
co-packing facilities to produce its FMB the proposed 0.5% standard would have the six to 12 month shelf life currently
products. [In this document, references ‘‘devastating’’ effects on the industry. applicable to Flavored Malt Beverages
to ‘‘co-packing’’ cover situations where United States Beverage also suggested produced today. Because it will be consistent
one brewer produces and bottles for that while reformulation might be only with traditional beers, however, we do not
another brewer pursuant to a contract or an inconvenience to the largest brewers, anticipate shelf life or product stability to be
where a brewer uses another brewer’s it would be an ‘‘operational an insurmountable problem with the
premises under an alternating proprietor reformulated products.
impossibility’’ for a smaller brewer.
arrangement.] MAB suggested that TTB Other commenters stated that since
should abandon the 0.5% proposal in B. Effect on Current Products and New certain brewers have already
favor of the majority standard because Product Development demonstrated their ability to produce
the latter did not threaten the In Notice No. 4, TTB sought FMBs in accordance with the 0.5%
competitive viability of small comments relating to the effect of the standard, they believe that these
companies like MAB and its co-packers. proposed regulations on the viability of products will be available to
MAB suggested that the 0.5% standard products currently on the market. We wholesalers and retailers in all States
would threaten the viability of the few stated we were particularly interested in with no interruption and no discernable
regional breweries that currently co- comments addressing whether products taste differences.
pack FMB products for MAB and others. on the market could be made under the Coors commented that the 0.5%
City Brewing Company stated that it proposed standard. Additionally, we standard ‘‘is also fair because it does not
owns and operates a 5-million barrel sought comments on how the adoption prohibit any current product. Just
capacity brewery in La Crosse, of the 0.5% added alcohol standard because many of the current ‘flavored
malt beverages’ may need to be the consumer desire for the distinctive less acceptable beverage. The change in
reclassified as distilled spirits does not FMBs currently sold. flavor will be caused by a combination
mean that the TTB proposed regulation FEMA noted that flavors contain ethyl of increased malt base percentages and
will ‘kill the category,’ as some might alcohol because it is a safe, economical, off-flavor contributed by the malt.
claim.’’ Coors suggested that under the and effective extraction medium for FEMA stated that limiting either the
proposed rule, products containing fruits, nuts, and botanicals, as well as a ingredients that may be used in flavors
0.5% or more alcohol from the distilled diluent for polar and non-polar flavor or the alcohol contributions from flavors
spirits components of added flavors chemicals. FEMA also stated that fruit would make it impossible for
could continue to be produced, but essences and distillates, which are used manufacturers to continue producing
would be regulated as distilled spirits extensively in the creation of natural many of the malt beverages being sold
products. fruit flavors, contain an appreciable today and would severely limit the
amount (up to 20–25%) of naturally flavor industry’s opportunity for new
2. Comments Supporting the 51/49 occurring ethyl alcohol.
Standard product development.
FEMA stated that, because of their
While the major brewers claimed that composition, alcohol beverages require 3. Neutral Comment
product reformulation under the 0.5% higher flavor loads to deliver pleasing Finally, Gallo stated that it had
standard would not be a problem, as characterizing flavors. It stated that conducted a study involving the aging
previously noted in this preamble, other while many non-alcoholic beverages use of reformulated products under normal
FMB producers suggested that this emulsions to deliver flavor systems, this conditions to determine the impact of
would have a significant impact on their is not possible in alcohol beverages the proposed changes to the alcohol
businesses, resulting in higher costs for because the destabilizing effect of the source standards on FMBs. Gallo
research and development, new ethyl alcohol will produce precipitation studied two of its 13 FMB products,
equipment, and marketing, and the and oil separation in the final beverage. comparing their current formulation
possibility of reduced sales due to According to FEMA, this means that the with both standards aired in Notice No.
consumer rejection of reformulated higher flavor level and the dependence 4. Due to the limited time available,
products. on ethyl alcohol as the only reliable Gallo noted that it was only able to
Furthermore, several members of solvent makes it necessary to exceed the evaluate these products as they would
Congress expressed concerns about the 0.5% limitation to manufacture age under normal shipping and storage
costs of reformulation and the possible acceptable and stable products. conditions 31⁄2 months after production.
risks posed by such reformulations to FEMA noted that the ATF study After evaluating the results, Gallo
the FMB industry. For example, one referenced in Notice No. 4 found that determined that the study was
U.S. Senator stated: most FMBs formulated their products in inconclusive. According to Gallo, it
If the new formulation standards increase accordance with ATF Ruling 96–1. appeared that the change in malt
the costs of producing FMBs, and alter their FEMA stated this has resulted in the percentage impacted each product
taste such that consumers are reluctant to evolution of beverages that deliver to differently. Gallo concluded that ‘‘[t]he
purchase them, the FMB market will decline. the consumer a clean, pleasant flavor indication is that all of our products
This decline in profitability will surely drive and that have a reasonable shelf life.
some FMB manufacturers out of the market, must be studied individually to
FEMA further stated that producers understand the full impact of the
and reduce competition in the marketplace. have used various treatments to reduce proposed change. There was no time to
This Senator urged adoption of the the inherent bitterness and off-flavor explore this issue in time for these
51/49 standard. Another Senator characteristics associated with
comments.’’ Gallo stated that, in light of
suggested that the proposed standard fermented malt beverages. FEMA
the inconclusive results from the study,
‘‘would likely change the taste and suggested that if TTB limits the
it took no position on the proposed
character of FMBs—products which contribution of alcohol from flavors to
definitions for beer and malt beverages.
have attained broad consumer loyalty. less than 0.5%, that restriction would
Gallo did indicate that it plans to
There is no doubt that this outcome negatively impact the taste of FMBs and
continue to produce and market FMBs
would provide FMB’s rivals with a limit the shelf life of these products.
under either of the standards aired for
distinct competitive advantage.’’ FEMA noted that malt-based
comment in Notice No. 4. However, it
Numerous State lawmakers opposed beverages require a higher percentage of
pointed out that either new standard
to the 0.5% standard commented that if flavor addition than other alcohol
would require Gallo to invest in new
TTB establishes the 0.5% standard, it beverages due to the more pronounced
equipment to produce additional
would force FMB brewers to make organoleptic properties of the malt base
volumes of malt base. Either standard
costly changes to their current itself. Malt-based products have an
would also force Gallo to develop new
production processes. They indicated aftertaste that is difficult to overcome.
malt fermentation techniques and
that TTB’s adoption of the 0.5% The aftertaste and malty off-characters
production techniques to provide a malt
standard would force FMB brewers to tend to accentuate with increased
base that results in products with a
increase the amount of malted barley exposure to heat. Limiting the amount
flavor and taste profile that meets
and other traditional ingredients used in of alcohol derived from flavor severely
current consumer expectations. This,
an FMB, probably resulting in very limits the opportunity to use vanilla,
Gallo noted, might require development
differently tasting products. cocoa, coffee, and other botanical
As indicated earlier in this comment of new technology and different
extracts that often require usage levels
discussion, the Flavor and Extract equipment.
of 3% or higher in the finished
Manufacturers Association of the United products. C. Effect on Competition
States (FEMA) urged TTB to reconsider In conclusion, FEMA stated that
the proposed 0.5% standard because it limiting the contribution of alcohol 1. Comments in Support of the 0.5%
would significantly restrict the amount content by flavors to less than 0.5% Standard
of alcohol contributed to the finished would change the overall taste profile of Many small craft brewers expressed
product from flavors, thus making it these products, and the consumer will support for the 0.5% standard based on
impossible for flavor chemists to satisfy ultimately receive a different tasting, their view that the arrival of FMBs in
the marketplace has had a negative technologies and capabilities similar to with the high failure rate of new
effect on sales of traditional malt those apparently possessed today by the products, production capacity presents
beverage products. Some commenters largest brewers. The FMBC added that a formidable barrier to entry to the U.S.
suggested that TTB should adopt the the marketplace, not the Government, beer market.
0.5% standard for added alcohol should determine the industry’s Accordingly, MAB stated that the
because this action would benefit small winners and losers. The FMBC urged ‘‘few remaining ‘old regional’ brewers
brewers who generally do not produce TTB to avoid crafting a rule that hands today represent the only realistic way to
FMBs. a competitive advantage to some FMB quickly access significant production
Many small brewers and their producers at the expense of others. capacity in the U.S.’’ MAB argued that
employees expressed their concern that Mark Anthony Brands (MAB) stated the demise of America’s ‘‘second-tier’’
the arrival of FMBs during the past that: brewers over the past 10 years has taken
years has weakened the brewing [F]ederal policies favoring competition vast amounts of brewing capacity off-
industry. They explained that over the demand that TTB consider anticipated anti- line, and that a few old regional
past 25 years there has been a major competitive effects in choosing between breweries, which currently co-pack
revitalization of the brewing industry, policy alternatives and seek to adopt that FMB products for MAB and others, own
with smaller brewers and brewpubs alternative which promotes competitive the remaining excess U.S. brewing
now found in every State and outcomes. The 0.5% standard would favor capacity. MAB concluded that a decline
metropolitan area and in many small larger companies, particularly America’s (and in FMB sales would ‘‘likely’’ cause these
towns. They indicated that the number the world’s) largest brewers, and would
brewers to close their doors altogether
of microbreweries closing since the therefore decrease competition in the FMB
market segment. MAB accordingly urges TTB and that this resulting loss of
arrival of the newer FMBs has exceeded production capacity in the United States
to reject the proposed 0.5% standard in favor
the number of microbreweries of one that allows FMB producers to compete would add costs and drive jobs
opening—reversing the trend and on a level playing field and supports future overseas.
weakening the industry. competition. MAB also suggested that the 0.5%
One small brewer stated that he standard represented a ‘‘win-win’’
expects to compete with other quality MAB suggested that Federal policy
strongly favors marketplace competition scenario for the largest brewers if they
small brewers in the region, but would indeed possess the technology to
not like to see huge corporations with and discourages the unhealthy
concentration of market power in the produce FMBs under that standard that
unlimited legal and marketing funds achieve the same taste profile as existing
compete against him with products that hands of a few dominant players. MAB
also argued that ensuring competition in products. MAB stated that this
are not real beer. Another small brewer technology would allow them to
commented that if he can make a the alcohol beverage industry played an
important role in motivating Congress to dominate the FMB category with their
wonderful tasting product with this products. On the other hand, if
standard, then the larger competitors enact the FAA Act, and it cited a
provision of the legislative history of the consumers reject FMBs produced under
could do it also. A third brewer the 0.5% standard, MAB stated that ‘‘the
indicated that the manner of FMB FAA Act, which indicated that its
promoters wanted to ‘‘enable small largest brewers will benefit because the
production explained in Notice No. 4 elimination of the FMB category will
avoids many of the costs associated with units to get into the liquor industry.’’
MAB also noted that the burdens of protect their extensive investments in
the volume demands of beer production the production and distribution of
and storage. He indicated that he regulation fall disproportionately on
small companies, citing a provision of traditional beer and malt beverage
believes this results in an unfair
the legislative history of the Regulatory products.’’
competitive advantage over traditional Several members of Congress
and craft brewers. Flexibility Act which recognized that
even if actual regulatory costs are equal indicated that the 0.5% standard seems
2. Comments in Support of the 51/49 between competing large and small designed to distort the existing market
Standard firms, small firms have fewer units of by providing an artificial competitive
Many opponents of the 0.5% standard output over which to spread such costs advantage for companies that currently
suggested that adoption of the standard and are thus unable to take advantage of dominate the domestic beer industry but
would have an anti-competitive effect. the economies of scale. that have introduced under-performing
For example, the FMBC suggested that As noted earlier in this comment and less popular FMB products.
support for the 0.5% standard appeared discussion, MAB argued that TTB We also received a comment from the
to come from the many industry should abandon the 0.5% proposal in British Embassy suggesting that the
members who, for competitive reasons, favor of the majority standard. MAB proposed rule would place an unfair
would benefit from the complete demise stated that the past two decades have competitive disadvantage on companies
of the FMB category or would derive a seen the concentration of brewing based in the United Kingdom (U.K.),
competitive advantage from a 0.5% rule. capacity in the United States into a very including the U.S. market leader,
The FMBC stated that the 0.5% small number of hands and that while threatening jobs in the U.K. and the
standard, if adopted, would give a America is home to over 1,400 United States, as well as thousands of
competitive advantage to some FMB breweries, the three largest brewers own dollars in investment.
producers at the expense of others. In the facilities responsible for producing D. Effect on the Retail Licensing System
support of this claim, the FMBC pointed over 90% of domestic beer and malt and Overall Marketplace
out that America’s largest brewer beverages. Noting that most other
claimed that it could already produce brewers are small ‘‘micro’’ and ‘‘regional 1. Comments in Support of the 0.5%
FMBs meeting the 0.5% standard specialty’’ operations that produce their Standard
without compromising product taste or own products, the commenter argued Many commenters stated that the
availability. The FMBC stated that this that these small brewers would not have 0.5% standard would ensure product
illustrates that, if adopted, the standard the capacity to produce a successful integrity, preserve long standing
would adversely affect competition by new brand. MAB suggested that because distinctions imposed on beer, wine, and
forcing competitors to acquire of the costs of a new brewery, combined spirits, and provide a uniform and
consistent classification system on production of FMBs and contract comments from brewers that identified
which States, wholesalers, retailers, and production has occurred at five non- themselves as small businesses
consumers can rely. They stated that, if Diageo facilities during the past three producing FMBs that would be
adopted, the standard would help to years. adversely impacted by the proposed
maintain an orderly marketplace, meet A U.S. Senator commented that FMB 0.5% standard.
consumer expectations for consistent bottling facilities provide jobs and Nor do we believe that the proposed
products, and help sustain the long-term millions in dollars to local economies rule would have been a significant
development of the FMB category. through wages, taxes, services regulatory action within the meaning of
According to several commenters, purchased, and other means. He stated Executive Order 12866, notwithstanding
implementation of the 0.5% standard that any regulation that threatens the the suggestion to the contrary in the ECS
would avoid costly and confusing market position of these products puts Study. The primary data for the analysis
disruptions in State licensing, taxation, those jobs at risk. Other U.S. Senators in that study comes from FMBC
and distribution policies. Several commented that this proposal could members. Because much of the
retailers and wholesalers feared that any have a profound and devastating impact economic data submitted by FMBC
other standard could have significant on employees in their States and across members is proprietary and
consequences for the industry and for the nation. Two U.S. Senators indicated confidential, TTB cannot verify the
thousands of alcohol beverage licensees, that FMBs constitute a booming accuracy of the figures.
most of which are small businesses. industry that has brought a direct Furthermore, we are concerned that
Without a clear standard, some benefit to their State, and they do not certain parameter assumptions and
commenters believed that the States wish to see its growth and associated calculations in the ECS study are
would take action and may ultimately jobs curtailed in such an unnecessary questionable and could lead to an
classify these products as distilled fashion. overstatement of loss. For example,
spirits. Such reclassification would A wholesaler expressed concern over since the study separately included
negatively affect beer wholesalers and some small brewers’ claims that the estimates of declines in Federal
retailers because in certain States they 0.5% standard will not harm America’s corporate tax revenue, it should have
would no longer be able to sell these small brewers. This commenter asserted presented its estimates of declines in
products. that these small brewers have never profits net of taxes. Under the 0.5%
produced an FMB product and have no standard, ECS calculated that Federal
2. Comments in Support of the 51/49 corporate tax revenue would decline by
Standard intention of competing in the FMB
category in the future. Since these small $94 million in present value due to
In opposition to the 0.5% standard, brewers have no stake in the outcome of reduced profits for FMBC firms over the
several FMB wholesalers expressed this proposed rulemaking, their claims period 2004–2007. Accordingly, the
concern that the standard would cause expected after-tax decline in profits for
should not be considered as
TTB to reclassify existing FMBs as FMBC firms would be $247 million
authoritative. Other commenters
distilled spirits. Some commenters rather than the $341 million decline in
pointed out that it is not the job of TTB
expressed a fear that if TTB reclassifies profits listed in the study. The study’s
to favor one industry over another.
these products, certain States will no use of discount rates of 20 and 30
longer permit beer wholesalers to E. TTB Response percent to account for the increased
distribute them. Some commenters uncertainty of future income appears to
1. Regulatory Burdens and Costs
pointed out that this reclassification assume a large risk-premium. The
Imposed by the Proposed Rule
would also affect retailers because in treatment of capital expenditures is
many States only State-operated stores When we issued Notice No. 4, we unclear, and the measurement of capital
can sell distilled spirits. certified that the proposed rule would stock and capital losses is questionable.
Many commenters, chiefly not have a significant impact on a Furthermore, there is a
wholesalers and their employees, as substantial number of entities. We methodological flaw in deriving private
well as employees of FMB producers, stated our belief that 10 or fewer and public loss totals because the ECS
expressed the fear that they will lose qualified small breweries manufacture study looked at FMB operations in
their jobs if TTB approves the 0.5% FMBs subject to the rule. We asked any isolation, without accounting for the
standard. One industry association small brewery that believed it would be potential for increased sales of other
cautioned that approval of this standard significantly affected by this rule to let types of alcohol beverages. For example,
would cost jobs in production facilities us know and tell us how it would affect we do not agree that either the proposed
all across the country. Another them. We also certified that the 0.5% standard or the 51/49 standard
commenter pointed out that thousands proposed rule was not a significant would result in significant losses of
of businesses rely on sales of FMBs for regulatory action, as defined by Federal tax revenues as a result of
revenue, from the product itself and Executive Order 12866, because it lowered sales of FMBs. Even if the
from secondary sales. The commenter would not have an annual effect of $100 reformulation of popular FMB products
indicated that, if implemented, Notice million or more on the United States results in lowered sales for these
No. 4 would threaten sales and put economy. products, it does not necessarily follow
further pressure on small businesses After reviewing the comments, we that the Federal Government would lose
already pushed to the brink. have not changed our position on these tax revenues as a result. Because of
Diageo explained that its products matters. We do not believe that the changes in consumer preference and
have generated numerous jobs proposed rule would have had a other factors, the relative market share
throughout the country. Diageo noted significant economic impact on small of specific products often fluctuates.
that it not only employs numerous businesses, within the meaning of the However, it is logical to assume that
production and sales employees, but Regulatory Flexibility Act. While we most of the FMB consumers who might
also generates work for numerous received many comments suggesting abandon their favorite products as a
suppliers in areas such as glassware and that there would be numerous indirect result of changes in taste profile would
packaging materials. Diageo stated that effects on wholesalers and retailers of substitute other alcohol beverages for
two of its facilities are involved in the FMBs, we received only a few them.
Thus, it is unlikely that any changes complying with a 51/49 standard would intention in this rulemaking action to
in the relative market share of FMB be significantly lower. Those FMB favor any one segment of the FMB or
products would result in a significant producers that commented in favor of beer industry over another, to remove
net loss of the Federal excise taxes the 0.5% standard did not specifically competition in the marketplace, or to
collected on alcohol beverages. address the relative costs of the two destroy a particular category of malt
Furthermore, because many FMB standards, although one brewer noted beverages simply because it is preferred
producers also manufacture other types that either standard would impose some by many consumers over more
of alcohol beverages, losses in sales of costs. traditional brewery products. Our
FMB products may be offset by In addition to the costs associated statutory mission under the FAA Act is
increased sales of other types of alcohol with producing new FMBs that met the to promote fair competition within the
beverages. new standards, many FMB producers malt beverage industry, not to favor one
Finally, we do not believe that the expressed concerns that they would not segment of the industry over another.
economic impact on FMBC members be able to achieve the same taste profile Accordingly, the purpose of the final
can necessarily be extrapolated to the under the proposed 0.5% standard, and rule is to treat all segments of the beer
rest of the FMB industry based simply that the 51/49 standard would afford and FMB industries in a fair and even
on market share. In fact, the FMBC, as them more flexibility in meeting the fashion.
well as other commenters opposed to expectations of consumers in this area.
the proposed 0.5% standard, have These producers are concerned that if 2. Options To Reduce Regulatory
argued in this rulemaking proceeding they attempt to reformulate their Burdens and Costs
that the 0.5% standard would benefit products in accordance with the 0.5% Even if a rule is not a significant
America’s largest brewers at the expense standard, consumers will not accept the regulatory action, Executive Order
of their competitors. The comments reformulated products and product sales 12866 requires us to design the
show that the expected costs of will go down, possibly resulting in the regulation in the most cost-effective
compliance vary from producer to disappearance of some current FMB manner to achieve the regulatory
producer. For example, as previously products from the marketplace. objective.
noted, Anheuser-Busch commented that A comment from FEMA supported We have considered several options to
it expected the total cost impact to be this concern, noting that the 0.5% reduce the regulatory burdens and
minimal and did not anticipate the standard would make it impossible for economic costs imposed by the
‘‘slight change in cost’’ to impact FMB manufacturers to continue producing proposed rule. One of those options is
prices for wholesalers, retailers, or many of the malt beverages being sold to exempt small businesses from the
consumers. Opponents of the 0.5% today and would severely limit the requirements of the rule. However, this
standard cannot argue with any flavor industry’s opportunity for new option is not viable for several reasons.
consistency that the standard would product development. We also find First, one of the primary purposes of the
unfairly benefit their competitors, while persuasive the comment from Gallo, rule is to enhance consumer protection;
still maintaining that those competitors which did not take a position on the this purpose would be defeated by an
would suffer the same costs and losses 0.5% or 51/49 standard, but which exemption for small businesses.
as they would. noted the difficulty of predicting the Furthermore, some small brewers who
Nonetheless, after carefully impact of either standard on the taste produce FMBs do so under contract
considering all of the comments on this profile and shelf life of FMB products. with larger companies, and allowing an
issue, TTB is persuaded that Although the number of small exemption for these companies would
implementation of the proposed 0.5% brewers affected by this rule is not large, raise significant fairness issues. Finally,
standard might impose economic we note that several commenters and most important, since the IRC does
burdens on a sector of the FMB industry indicated that there are fewer regional not authorize such a difference in tax
and adversely affect the viability of brewers with excess production treatment for small producers of FMBs,
some small brewers who produce FMBs, capacity in the United States today than we do not believe we have statutory
as well as their ability to compete in the past. Many commenters indicated authority to implement such an
within the beer industry. that the proposed 0.5% standard could exemption by regulation.
The comments indicated that while have a significant impact on those A second option we considered was
some brewers would be able to regional brewers that co-pack FMBs for the delay of the effective date of the
reformulate without incurring other companies. In particular, we are final rule in order to provide adequate
significant costs, many producers of concerned that the economic impact of time for the industry to make the
FMBs believe that reformulation of their the proposed rule may be necessary changes to product
products to comply with a 0.5% disproportionately borne by those small formulation. As discussed in more
standard would result in significant brewers who lack the economies of scale detail later in this document, we have
costs. The FMB producers that possessed by their larger competitors, delayed the implementation of the final
commented on this issue indicated that and who would be less able to absorb rule for one year. We believe this one-
they would reformulate their products the costs associated with reformulation year delayed effective date will provide
as FMBs rather than produce them as of products in accordance with the more ample time for the FMB industry to
distilled spirits products. Accordingly, stringent 0.5% standard. conform to the requirements of the final
the costs associated with the 0.5% As a related matter, TTB is concerned rule.
standard are not connected with the that the proposed 0.5% rule might affect The final option we considered was
higher Federal excise tax imposed on the ability of some small brewers to adoption of the 51/49 standard instead
distilled spirits products. Instead, these compete within the brewing industry. It of the 0.5% standard. Based on the
costs are brought about by the need to should be noted that we do not agree information in the rulemaking record,
conduct research and development, and with those comments that suggested that we have concluded that compliance
to invest in new equipment and one of the purposes of the proposed rule with the 51/49 standard will be
technology necessary to produce FMBs was to protect either large or small significantly less burdensome and costly
that meet the 0.5% standard. Many FMB brewers from competition with than compliance with the 0.5%
producers indicated that the costs of producers of FMBs. It is not TTB’s standard. Furthermore, based on the
comments, it appears that adoption of a common sense approach to the comments suggesting that the proposed
the 51/49 standard would not adversely regulation of alcohol beverages 0.5% standard was the best way to
affect the ability of small brewers to considering that small amounts of maintain ‘‘clear distinctions between
compete in the FMB marketplace and alcohol are present in many other beer and liquor.’’
would reduce the impact of the changes beverage products such as juice, soft Many commenters agreed that TTB
needed to reformulate existing products drinks, soda, and non-alcoholic beers has a responsibility to protect
to comply with the final rule. made by brewers.’’ consumers through accurate labeling, to
As we considered the comments and Several commenters noted that the ensure that products labeled as
weighed the relative merits of the 0.5% IRC and FAA Act definitions of ‘‘beer’’ ‘‘flavored malt beverages’’ are truly
standard and the 51/49 standard, we and ‘‘malt beverage,’’ respectively, products that have alcohol obtained by
also considered the issues of costs and contemplate that the alcohol content in the fermentation of malt. Others
other regulatory burdens. As shown in those products must be derived from believed the proposed rule would
the remainder of this document, we fermentation, not from added distilled promote consistency in consumer
have tried to address these issues at spirits. Coors argued that while some expectations, clarify Federal public
each step, so that our final rule will may argue that there is a difference policy, and end any confusion that may
achieve the goals of this rulemaking between combining distilled spirits linger from the past or that may arise
process—protecting the revenue, ‘‘directly’’ with a malt base and doing so from alternative proposals.
ensuring that FMB labels provide the ‘‘indirectly’’ through the addition of Several commenters suggested that, in
consumer with adequate information flavors, it believed that ‘‘this is a the absence of a national standard,
about the identity of the product and do distinction without a difference. States would enact differing standards
not mislead consumers, and setting a Congress clearly intended to classify under which the same product may be
Federal standard for the use of added any alcoholic beverage that contains a sold as a ‘‘beer’’ in one State and as a
alcohol flavors in malt beverage mixture or dilution of distilled spirits as ‘‘distilled spirits’’ product in another
products—while minimizing ‘distilled spirits.’ ’’ State. The commenters suggested that
unnecessary costs and other regulatory Several brewers commented that these inconsistent standards would
burdens on the affected industry. neither law nor good policy supported confuse consumers.
For these and other reasons set forth the 51/49 standard. Coors suggested that Many commenters focused on
later in this document, we have while the proposed 0.5% standard industry and consumer understanding
concluded that we should adopt the 51/ allowed the addition of a de minimis of the terms ‘‘beer’’ and ‘‘malt
49 standard for beers under the IRC and amount of flavors, a 51/49 rule went beverage.’’ For example, the Brewers’
for malt beverages under the FAA Act. beyond the allowance of a de minimis Association of America (BAA), a 62-
TTB believes that by allowing FMBs to quantity of flavors. Anheuser-Busch year-old trade association representing
comply with the less stringent 51/49 stated that neither the FAA Act nor the the interests of more than 1,400 small
standard rather than the proposed 0.5% IRC provided a basis for TTB to adopt American breweries, submitted a
standard, we meet the goals of this the 51/49 standard, arguing that ‘‘[t]he comment in support of the 0.5%
rulemaking proceeding and, at the same difference of only a couple of drops standard. The BAA stated:
time, lessen the potential economic between a product that is ‘mostly’ a beer
The perception of the general public is that
costs and other regulatory burdens versus ‘mostly’ a distilled spirit would beer is a beverage with malt flavor and hop
imposed on members of the FMB make a mockery of the law, public bitterness, flavor and aroma. Many small
industry. The other reasons for adopting policy and the many years of distinction brewers currently produce flavored malt
the 51/49 standard are set forth between malt beverages and distilled beverages that have these characteristics. The
elsewhere in this preamble. spirits.’’ products currently classified as FMBs and
recently analyzed by TTB display none of
VIII. The 0.5% Standard vs. the 51/49 2. Consumer Deception or Confusion these characteristics, and should not be
Standard—Other Issues Many commenters supported the considered or taxed as beer.
A. Comments in Favor of the 0.5% proposed 0.5% standard based on the Many commenters stated that many
Standard premise that it would reduce consumer FMBs do not meet the traditional
confusion. These commenters included definition of beer or ale and thus blur
1. Consistency With the IRC and the consumers, State senators and the line between spirits-based beverages
FAA Act representatives, beer distributors, and traditional beers and ales. Others
Many commenters found support for merchandisers, Members of Congress, argued that the consumer does not
the proposed 0.5% standard in the IRC State governors, State ABC expect beer to contain added distilled
provisions establishing 0.5% as a commissions, breweries, national alcohol from outside sources. Some
dividing point between products subject associations, State licensing and taxing suggested that it was deceptive to
to tax under the IRC and those that are authorities, State coalitions, and characterize FMBs as malt beverages
not subject to tax. For example, the Beer industry members. since many FMBs do not resemble or
Institute noted that the IRC ‘‘clearly As indicated in the comment taste like beer.
provides the Secretary with broad overview, several thousand commenters
authority to issue and enforce stated that the establishment of a 0.5 3. Preserving the Integrity of Beer
regulations, to classify products for tax percent standard would eliminate Many commenters stated that beer
purposes, and to establish a workable consumer confusion, preserve the and malt beverages are unique beverages
administrative system to collect taxes.’’ integrity of the beer category, or provide with a unique history. We received
The Beer Institute stated that classifying beer consumers with a clear thousands of comments from the beer
intoxicating liquors based on the 0.5% understanding of the product. Many industry urging TTB to maintain this
cutoff has a long history, dating back to commenters suggested that it was distinction by adopting the 0.5%
1902 and continuing through important to define the difference standard. These commenters noted that
Prohibition. Miller commented that the between beer and other alcohol Federal and State governments have
‘‘use of what could be characterized as beverages, such as distilled spirits. For historically regulated and taxed beer
a de minimis threshold such as 0.5% is example, we received thousands of and malt beverages differently from
distilled spirits. These commenters alcohol to be derived from fermentation. Some commenters stated that the
suggested that the 0.5% standard was The FMBC suggested that the IRC places proposed 0.5% standard would
the only way to maintain the integrity a practical limit on the use of flavors arbitrarily impose a more rigorous
of beer and the brewing process. because of the unpleasant taste of standard on FMBs and beer than TTB
Many commenters were of the nonbeverage flavors. The FMBC and imposes on other alcohol beverages. The
opinion that the 0.5 percent standard Diageo both argued that IRC section commenters allege, as examples of this
will ensure that FMBs are produced as 5001(a)(2) does not apply to products disparity in treatment:
traditional malt beverages using containing nonbeverage drawback • There is no regulatory restriction on
traditional brewing methods and flavors, and that it instead only applies the amount of alcohol flavorings used in
processes. A large number of to products containing distilled spirits wine specialty products;
commenters stated that the on which tax has not been paid or • Fortified wine has less stringent
classification of FMBs as beer threatens determined. standards for the addition of distilled
beer culture in the United States. In this Authority Under the FAA Act. Many spirits to the wine base than the
regard, they pointed out that beer has commenters also noted that the FAA proposed 0.5% standard;
unique attributes as a beverage— Act does not place limits on the use of • Distilled spirits products may
including malt-flavor, hop-bitterness, flavors in a malt beverage but instead contain up to 50% wine on a proof
and aroma. Many of these commenters explicitly authorizes the use of gallon basis;
argued that the integrity of beer and the • Certain wines may be labeled with
‘‘wholesome food products’’ in malt
brewing process must be preserved. a varietal designation if 51% of the
beverage production (see 27 U.S.C.
Some commenters suggested that beer grapes are of the labeled grape variety;
211(a)(7)). Furthermore, the comments
and FMBs are produced differently and and
suggested that since the Volstead Act • A TTB regulation, 27 CFR 5.22(b),
should be categorized separately in the explicitly restricted the use of
alcohol beverage market. Many requires bourbon whiskey to be
nonbeverage flavors to make a beverage, produced from a fermented mash of not
commenters pointed to the history of the silence of the FAA Act indicates a
alcohol beverages in the United States less than 51 percent corn. The other 49
deliberate choice by Congress to allow percent may come from any other grain.
as evidence of the longstanding the unlimited use of flavoring materials
distinction between malt beverages and Additionally, a number of
in malt beverage production. commenters argued that TTB’s general
distilled spirits. They stated that these
differences are well defined by the 2. Standard Best Supported by Law policy on beer ingredients, allowing as
taxation structures at the State and little as 25% of the fermentable
Many commenters suggested that if ingredients to be from malted barley, is
Federal levels and these differences TTB has statutory authority to impose a
should be maintained. significantly more lenient than the
limit under the IRC or the FAA Act, the proposed 0.5% standard. Some
B. Comments in Favor of the 51/49 0.5% standard has no basis in Federal commenters further noted that to label
Standard law; rather, the 51/49 standard is the a product ‘‘beer,’’ 50 percent of the
proper standard. These commenters fermentable base must be a grain.
1. TTB’s Statutory Authority Under the pointed out that in Notice No. 4, TTB
IRC and the FAA Act Accordingly, these commenters argued
indicated that IRC section 5052 also that the 51/49 standard was more
Several FMB producers suggested that would support the issuance of a consistent with TTB’s regulatory
TTB lacks statutory authority to impose regulation requiring that a beer or malt policies than the 0.5% standard.
a 0.5% limit on the use of alcohol beverage must directly derive a majority
derived from flavoring materials in the of its alcohol content from fermentation. 4. Burden of Establishing Consumer
production of FMBs. It should be noted The commenters argued that since both Deception
that while these commenters also the FAA Act and the IRC would support In support of their position against the
believe TTB lacks authority to impose such a standard, TTB did not provide proposed 0.5% standard, FMBC, as well
any limits on the use of alcohol derived sufficient reasons why it proposed the as several FMB producers, argued that
from flavoring materials in the much stricter 0.5% standard. TTB failed to meet its burden of
production of malt beverages, they 3. IRC Regulatory Policy establishing that consumer deception or
nonetheless supported the 51/49 option confusion results from use of the term
as a matter of policy. Many commenters suggested that the ‘‘malt beverage’’ on the label of a
Authority Under the IRC. Several 51/49 standard would actually protect product that derives most of its alcohol
commenters stated that the current the revenue by placing a meaningful from added flavors. These commenters
definition of the term ‘‘beer’’ in the IRC, limit on the addition of alcohol suggested that TTB must first produce
at 26 U.S.C. 5052, gives brewers flavorings to FMBs in a manner evidence to back up its assertion that
substantial discretion in formulating consistent with TTB’s regulatory policy. use of the term ‘‘malt beverage’’ on a
their products and places no limits on For example, one commenter argued label leads consumers to believe that a
the use of nonbeverage flavors in that the 0.5% standard is punitive and significant portion of the product’s
products taxed as beer. They noted that has no basis in recent TTB policy. This alcohol derives from fermentation of
prior IRC provisions included commenter suggested that ATF Ruling barley malt and other ingredients at the
restrictions on producing a beverage 96–1 actually weakened the case for the brewery, and must secondly
from nonbeverage articles such as 0.5% standard since the ruling permits demonstrate that the consumer
flavors, and they suggested that the the addition of up to 1.5% alc/vol confusion it asserts is material in that it
current IRC’s silence on the issue derived from flavors in beer and malt actually affects consumers’ purchasing
represents a deliberate choice by beverages over 6.0% alc/vol. The decisions.
Congress not to restrict flavor use in the commenter stated that in view of this FMBC suggested that TTB had not
production of beer. Furthermore, the ruling, TTB has failed to present met either of those burdens in Notice
comments noted that the statutory evidence why a far stricter standard, No. 4. This commenter argued that the
definitions of beer and malt beverages 0.5%, should be used for the definitions notice contained no evidence of
do not specify any minimum amount of of beer and malt beverages. consumer confusion, cited to no
consumer survey, and did not point to about the source of alcohol in FMBs why someone would choose an FMB,
a single consumer complaint about the were likely to influence the purchasing providing as one of the reasons whether
alcohol source in FMBs. FMBC decisions of consumers. the alcohol comes from the fermentation
suggested that a final rule could not To determine if the term ‘‘malt or distillation process. The respondents
cure this deficiency as the APA requires beverage’’ confused consumers, the were asked to choose their top three
TTB to provide the public an research group provided respondents reasons. The results were as follows:
opportunity to comment on the basis of with a bottle of the FMB ‘‘Mike’s Hard [In percent]
new regulations. FMBC also stated that Lemonade.’’ The term ‘‘malt beverage’’
Federal courts today virtually require appeared prominently on the front label. The Taste ........................................... 81
survey evidence to back up a claim of The survey asked the respondents to Alcohol Strength ................................. 47
consumer confusion; mere assertions of look at the bottle and to state if they Convenience ....................................... 42
administrative expertise, without more, believed the alcohol came from a Cost .................................................... 32
would not carry TTB’s evidentiary distillation or fermentation process, or if What My Friends/Family/Co-Workers
burden. they had no belief about the product’s are Drinking ..................................... 32
Finally, FMBC suggested that TTB alcohol source. The results were as Advertising and Marketing .................. 21
The Design of the Packaging and
bears an even heavier evidentiary follows: Bottle ............................................... 9
burden since Notice No. 4’s assertion of [In percent] The Image I Want to Portray to Peo-
confusion directly contradicts its ple ................................................... 8
predecessor’s pronouncements on the No belief about the source of alcohol .. 80 Whether the Alcohol Comes from a
same subject. FMBC pointed out that Alcohol comes from a distillation proc- Fermentation or Distillation Process 0.2
when TTB’s predecessor agency, ATF, ess ..................................................... 11
decided not to pursue further Alcohol comes from a fermentation MAB suggested that the Luntz survey
rulemaking on the use of cocktail names process .............................................. 9 demonstrates that alcohol source is
on labels of malt beverage coolers, it totally immaterial to the purchasing
concluded, in a letter dated November As noted in the table, the Luntz decisions of FMB consumers. When
17, 1997, as follows: survey found that four out of five FMB asked for their top two reasons for
consumers had no belief about the choosing an FMB, not a single
Evidence introduced indicates that alcohol source in an FMB product after
flavored malt beverages are viewed by respondent gave alcohol source as a
examining a bottle of a well-known reason. Indeed, taste-related responses
consumers as coolers or low alcohol
refreshers, and not as a distilled spirits FMB product prominently labeled as a topped consumers’ criteria for selection,
product. Evidence introduced also indicates ‘‘malt beverage.’’ Consumers who had a followed by the FMB’s difference from
that the presence of distilled spirits or any belief about the alcohol source roughly beer and its convenience. Even when
similarity of these products to a distilled split into those who believed that it presented with a list of 9 reasons for
spirits drink is not a criteria in their selection contained alcohol from fermentation selecting an FMB that included alcohol
by consumers. and those who believed that it source, just one respondent chose
Accordingly, FMBC, like many other contained alcohol from distillation. Of alcohol source as a reason for selecting
commenters, suggested that TTB’s the 9% of the respondents (54 out of an FMB. MAB suggested that this
statement in the preamble to Notice No. 600) who believed the product derived evidence conclusively demonstrates that
4 was inconsistent with the conclusion its alcohol from fermentation, alcohol source is not material to
of its predecessor agency, reached just 6 approximately 2% (14 out of 600) based consumers’ purchasing decisions, and
years before, that consumers did not this belief on the product’s labeling as that to label an FMB as a ‘‘malt
care about the alcohol source of malt a malt beverage. MAB asserted that the beverage’’ is not misleading as a matter
beverage products. The commenters case law requires a level of confusion far of law.
noted that ATF had reached this greater than 2% in order to find the
existence of consumer confusion in the 6. Standard That Best Prevents
conclusion after soliciting public
marketplace. Consumer Deception
comments on the use of cocktail names
in the labeling of malt beverages, and To determine whether the source of Some commenters suggested that
that its conclusion was consistent with alcohol in FMBs affected purchasing adoption of the 51/49 standard would
consumer surveys submitted by malt decisions, the survey asked respondents better prevent consumer deception than
beverage producers in that rulemaking to name the top two most important implementation of the proposed 0.5%
proceeding. reasons why they drink FMBs. The standard. The FMBC suggested that if
results were as follows: TTB was concerned about consumer
5. Consumer Survey Conducted by the [In percent] confusion, it had failed to bear its
Luntz Research Companies burden of establishing why the 0.5%
MAB retained the Luntz Research Taste/Flavor .......................................... 52 standard prevents consumer deception
Companies (‘‘Luntz’’) to survey New/Different/Not Beer ......................... 28 better than a majority or 51/49%
consumer beliefs about the alcohol Convenience/Availability ....................... 13 standard. As noted earlier in the
source in FMBs, and to ascertain Refreshing/Thirst Quenching ................ 12 comment overview, the National
whether any of these beliefs were Easy to Drink/No Alcohol Taste ........... 12 Consumers League (NCL) made a similar
Females Like Them .............................. 9
material to FMB purchasing decisions. Effect of Alcohol ................................... 6
comment, noting that requiring that the
Luntz conducted 600 face-to-face Friends/Family Drink It ......................... 7 product derive a majority of its alcohol
interviews of FMB consumers in 3 Given to Me/Bought For Me ................. 5 content from malt fermentation would
metropolitan areas—Baltimore, Chicago, assure that an FMB actually contains a
and San Diego. The purpose of the The survey noted that not one of the significant concentration of malt. The
survey was to determine if the term 600 respondents stated that the source NCL also questioned whether source of
‘‘malt beverage’’ led consumers to of alcohol was an important reason for alcohol was in any way material to
believe erroneously that the alcohol in choosing an FMB. consumer choice, and urged more
an FMB comes from a fermentation The survey then provided the complete labeling information on
process and whether consumer beliefs respondents with a list of nine reasons alcohol beverage containers.
As noted earlier in this comment contrary, we have concluded that we TTB does not agree with this
discussion, several commenters pointed have authority, under both the IRC and interpretation of the IRC. Section
out that TTB and its predecessor agency the FAA Act, to issue regulations that 5001(a)(2) provides as follows:
had adopted ‘‘majority’’ or establish those limits. (2) Products containing distilled spirits. All
‘‘predominance’’ standards for other Statutory Definitions. Fermentation is products of distillation, by whatever name
products. These commenters noted that the process by which yeast converts known, which contain distilled spirits, on
wine can constitute up to 50% of a sugar into alcohol and carbon dioxide. which the tax imposed by law has not been
distilled spirits product; thus, Both the definition of ‘‘beer’’ under IRC paid, and any alcoholic ingredient added to
nonbeverage flavors should be able to section 5052 and the definition of ‘‘malt such products, shall be considered and taxed
as distilled spirits.
contribute up to half (or 49%) of the beverage’’ under the FAA Act focus on
alcohol content of a malt beverage fermentation as the source of the alcohol The commenter misreads this section
product. in these products. by suggesting that the critical issue is
The study conducted by ATF in 2002 whether the distilled spirits contained
7. Preserving the Integrity of Beer in the product have been taxpaid.
established that for many FMB
The FMBC noted that several products, the major source of alcohol Instead, the statute clearly imposes a tax
supporters of the 0.5% standard cast was distilled alcohol rather than on all products of distillation that
themselves as defenders of ‘‘traditional’’ fermented alcohol. The results of this contain distilled spirits, as long as the
and ‘‘age-old’’ production techniques, study raised the question: Should a tax imposed by law on the finished
but suggested that the brewing industry product that derives the majority (in product has not been paid.
‘‘long ago departed from the brewing some cases up to 99%) of its alcohol This provision of the IRC must be
methods employed at the time current from the distilled spirits components of read in conjunction with other IRC
federal and state alcohol control laws added flavors qualify as a ‘‘beer’’ under requirements. Subject to certain
were enacted.’’ The FMBC suggested the IRC, and as a ‘‘malt beverage’’ under exceptions not relevant here, a person
that several techniques currently used the FAA Act? TTB concluded that who manufactures, mixes, or otherwise
by brewers are not specifically Congress never intended to allow such processes distilled spirits is a processor
authorized by law such as the use of within the meaning of IRC section
products to qualify as beers or malt
high-tech enzymes to enhance 5002(a)(5). The definition of a
beverages. At the same time, neither
fermentation, the use of ‘‘high-gravity’’ ‘‘processor’’ does not revolve around
statutory definition explicitly excludes
brewing to produce a high-alcohol whether the distilled spirits in question
beverages that contain alcohol in
product to which water is added just are taxpaid or not, and neither does the
addition to that produced during their
before packaging to make beer, new imposition of tax under section
fermentation. Accordingly, we proposed
fermentation techniques that have 5001(a)(2). The critical issue is not
a regulation that would allow only less
pushed the upper strength limit of beer whether the original distilled spirits
than 0.5% alcohol by volume derived
to 25% alcohol by volume, and the used in the product were taxpaid;
from flavors, and we also sought
thousands of adjuncts authorized by the instead, the issue is whether the final
comments on an alternative proposal product has been taxpaid as a distilled
ARM. that would require that at least 51% of
The FMBC argued that ‘‘tradition’’ spirits product.
the alcohol in a beer or malt beverage Furthermore, IRC section 5002(a)(8)
arguments play upon the real must be derived from fermentation at
differences in taste and appearance defines the term ‘‘distilled spirits’’ to
the brewery. mean ‘‘that substance known as ethyl
between conventional beers and FMBs. After carefully considering the
However, the FMBC asserted that alcohol, ethanol, or spirits of wine in
comments on this issue, as well as the any form (including all dilutions and
Federal policy long ago abandoned any statutes that provide us with authority
taste, aroma, or color criterion for mixtures thereof from whatever source
to issue regulations on standards for or by whatever process produced).’’ The
products classified as beer or malt beer and malt beverages, we have
beverages. Finally, the FMBC noted that application of this definition does not
concluded that we have statutory depend upon whether the spirits are
supporters of the 0.5% standard claim authority to limit the alcohol that may taxpaid or not.
that brewers can produce, under the be added to ‘‘beers’’ under the IRC, and TTB also believes that those
0.5% standard, FMBs that look and taste to ‘‘malt beverages’’ under the FAA Act, commenters who questioned TTB’s
exactly like FMBs on the market today. and to ensure that they derive most of authority under the IRC are overlooking
Thus, claimed the FMBC, ‘‘in a their alcohol from fermentation at a our broad authority over the production
wonderfully ironic twist, supporters of brewery rather than from the distilled of flavoring materials under the
the 0.5% standards wrap themselves in spirits components of added flavors. nonbeverage drawback provisions of the
the banner of brewing tradition while Authority Under the IRC. TTB does IRC. This authority includes the ability
championing a rule that will accelerate not agree with those commenters who to ensure that nonbeverage flavors are
the development and deployment of suggested that malt beverages may not being misused as the primary source
high-technology processes necessary to contain unlimited quantities of distilled of alcohol in beverage products such as
produce an FMB under the Notice 4 alcohol from added flavors without malt beverages.
standard.’’ falling under the statutory definition of Pursuant to section 5132 of the IRC
C. TTB Response a distilled spirit. One commenter argued (26 U.S.C. 5132), the Secretary has
that the provisions of IRC section authority to issue ‘‘rules and regulations
1. Statutory Authority 5001(a)(2) apply only to products * * * to secure the Treasury against
In the preamble to Notice No. 4, TTB containing distilled spirits on which the frauds.’’ This authority is not new, and
set forth, in great detail, its authority to tax has not been paid. Because the it has been used in the past to issue
engage in rulemaking to place limits on distilled spirits used in nonbeverage regulations placing a 21⁄2 percent limit
the use of alcohol derived from drawback products are tax determined on the quantity of nonbeverage
flavoring materials in the production of or taxpaid, the commenter argued that drawback flavors used in the production
malt beverages. After carefully this section does not apply to products of distilled spirits products. (See T.D.
considering the comments to the containing flavors. 5573.) Congress recognized this
regulatory limit when it enacted section the use of non-beverage flavors in the adopt a limit on the use of added flavors
5010 of the IRC in 1980, limiting the production of beer, wine, and distilled containing alcohol, it is very possible
quantity of flavors eligible for a tax spirits. The IRC does not require us to that producers will find new ways to
credit in distilled spirits products to 21⁄2 adopt a 0.5% standard. Accordingly, take advantage of this policy, by
percent. Our broad authority to limit the companies that have invested millions producing at breweries more and more
use of drawback flavors in the of dollars in reliance on the existing products that used to be produced at
production of alcoholic beverages also policy argued that if TTB has discretion distilled spirits plants. Accordingly, we
allows us to place limits on the use of to implement either standard, the believe that, at a minimum, the alcohol
such flavors in the production of beer. Bureau should choose the standard that derived from added flavors and other
Authority Under the FAA Act. The imposes the least burden on FMB nonbeverage ingredients must be
FAA Act also gives the Secretary of the producers. restricted to less than half the alcohol
Treasury authority to issue regulations After carefully considering the content of the finished FMB product.
to prevent deception in the labeling and comments, we agree with those We are persuaded by the comments
advertising of malt beverages and to commenters who stated that TTB has that suggested that the proposed 0.5%
ensure that labels provide consumers some discretion in this area. Beers limit was not the appropriate standard,
with adequate information about the subject to taxation under the IRC are not notwithstanding its historical use to
identity and quality of malt beverages. nonalcoholic beverages like soft drinks; distinguish alcohol beverages from non-
(See 27 U.S.C. 205(e).) One of the thus, the 0.5% limit on added alcohol alcoholic beverage products, because we
questions raised by this rulemaking in nonalcoholic products does not apply are dealing here with a taxable
process is whether the term ‘‘malt to beers, which are already being taxed commodity—beer—not a nonalcoholic
beverage’’ is an accurate description of under the IRC. However, our authority beverage such as a soda or juice. In
a product that derives up to 99% of its under the IRC includes the authority to other words, when we use the 0.5%
alcohol from the distilled spirits set standards for the production of beer limitation to limit the use of alcohol
components of added flavors. Our and for the use of nonbeverage flavors from flavorings in nonalcoholic
authority under the FAA Act requires us in beer production, to ensure that the beverages, we are drawing a line
to issue regulations setting forth revenue is adequately protected. between products that are subject to tax
standards for terms such as ‘‘malt under Chapter 51 of the IRC and those
3. Which Interpretation Is Consistent
beverage’’ to ensure that use of this that are not. However, FMBs are clearly
With Our Regulatory Policy and
designation on alcohol beverage labels subject to tax under Chapter 51; the only
Practice?
does not mislead consumers but instead question is whether they are
provides consumers with adequate After careful consideration of the
comments, we have concluded that it is appropriately taxed as beers or distilled
information about the identity and spirits.
quality of the product. necessary, for purposes of implementing
Accordingly, TTB has concluded that the relevant statutes, to adopt a limit on While either the proposed 0.5%
it has authority, under both the IRC and the use of alcohol derived from standard or the 51/49 standard would be
the FAA Act, to set limits on the flavoring materials in the production of consistent with the statutory language,
quantity of non-fermented alcohol, beer. As explained below, we believe we have concluded that the 51/49 limit
derived from added flavors, that is used that the 51/49 standard interprets the is more consistent with TTB regulatory
in the production of flavored malt statutes as issue in a way most policy and practice. As previously
beverages. consistent with our regulatory policy on noted, the revenue issue posed is how
revenue classification issues. to ensure that we maintain a meaningful
2. Which Standard Is Better Supported The unlimited use of flavors distinction between beer and distilled
Under the IRC? containing alcohol in the production of spirits under the IRC. Because the
In Notice No. 4, we stated that we FMBs poses a threat to the revenue. statute does not provide us with specific
believed that the IRC would support Once FMBs start deriving 51%, or 75%, guidance on this issue, we are guided by
either the proposed 0.5% standard or or even 99% of their alcohol content our regulatory policy on similar
the alternate 51/49 standard. After from the distilled spirits components of classification issues.
carefully examining the comments, we added flavors, it can be argued that With regard to those commenters who
have concluded that valid arguments these products are properly classified as argued that the proposed limits on the
may be made in favor of both standards. distilled spirits rather than as beers. As use of alcoholic flavorings in the
The primary argument in favor of the previously noted, the IRC definitions of production of beer are inconsistent with
0.5% standard is that it establishes a de these terms make it clear that beers are our treatment of wines under the IRC,
minimis standard for the addition to products of fermentation, and distilled and who suggested that the regulations
beer of flavors containing alcohol. spirits are generally products of do not place limits on the use of flavors
Essentially, the use of this a standard distillation. The tax rate on beer is containing alcohol in the production of
treats beers in the same way that soft significantly lower than the tax rate on wine, we believe that these statements
drinks and other non-alcoholic products distilled spirits. Accordingly, allowing are not entirely accurate. In the first
are treated; they may contain less than such products to be produced at a place, it should be noted that the
0.5% added alcohol from flavors. brewery and taxpaid as beers rather than statutes and regulations governing the
The arguments against the 0.5% distilled spirits renders meaningless the production of wine under the IRC differ
standard are both practical and distinction between distilled spirits significantly from the statutes and
statutory. We are not starting from a products and beers. regulations governing the production of
blank slate; instead, we are facing a Clearly, a standard must be beer under the IRC. While the IRC does
marketplace in which many of the most established in order to avoid the current not specifically authorize the direct
popular FMB products derive the vast situation whereby a product deriving as addition of distilled spirits to beer, it
majority of their alcohol content from much as 99% of its alcohol content from does specifically authorize the addition
added flavors. The policies of TTB and the distilled alcohol component in of wine spirits to wines. (See 26 U.S.C.
its predecessor agencies have allowed added flavors is classified, and taxpaid, 5373.) Thus, many wines contain
this practice for years. We have allowed as a beer. Furthermore, if we do not distilled alcohol from wine spirits.
Secondly, the IRC regulations Brewers will pay the same tax rate on beverage, provided that the overall label
governing the production of wine do beer regardless of whether the beer does not present a misleading
place limits on the use of essences derives 10% or 49% of its alcohol impression about the identity of the
containing spirits. In particular, the content from added flavors. Because product.
regulations provide that where an beer is taxed on a volume basis, a Consumer Survey Conducted by the
essence contains spirits, use of the brewer derives no tax advantage by Luntz Companies. We have carefully
essence may not increase the volume of increasing the flavors content of the reviewed the results of the consumer
the wine more than 10 percent nor its product to the maximum allowed by the study conducted by Luntz. The
alcohol content more than four percent regulations. Thus, the 51/49 standard commenter that submitted this study
by volume. (See 27 CFR 24.85.) Thus, will accord maximum flexibility to the argues that it establishes two essential
the regulations do place limitations on industry in formulating their products points: alcohol source is immaterial to
the use of essences containing spirits in according to the taste preferences of consumers, and consumers are not
the production of wine. As previously their consumers, without jeopardizing confused about the source of alcohol in
noted, there is a 21⁄2% limit on the use the revenue. an FMB product. We disagree.
of drawback flavors eligible for credit in Accordingly, TTB is amending the First, we will address the materiality
the production of distilled spirits proposed regulation in 27 CFR 25.15 to issue. Other commenters have raised
products under 26 U.S.C. 5010. provide that flavors and other this issue as well, noting that in 1997
TTB believes that because of the nonbeverage ingredients containing our predecessor agency concluded that
different statutory provisions, our alcohol may contribute no more than there was evidence indicating that
treatment of the use of flavors in wines 49% of the overall alcohol content of similarity to distilled spirits products
and distilled spirits does not provide the finished beer. was not a major factor in consumers’
clear guidance as to how to limit the use purchasing decisions with regard to
5. FAA Act, Consumer Deception FMB products. A major producer of
of alcohol derived from flavors in beer
production. However, we believe that a After carefully considering all the FMB products has submitted new
more analogous regulatory provision comments on this issue, TTB has consumer evidence, the Luntz survey,
concerns the use of wine in distilled concluded that current FMB labels do which purports to establish that the
spirits products. Regulations issued not provide consumers with adequate source of alcohol in an FMB is not a
under both the FAA Act and the IRC information about the product. For this material factor in a consumer’s decision
define the term ‘‘distilled spirits’’ to reason, we have decided to set new to purchase the product. Accordingly,
exclude mixtures of distilled spirits and standards for use of the designation several commenters have argued that
wine, bottled at 48 degrees proof or less, ‘‘malt beverage’’ on labels. TTB can justify action based on
if the mixture contains more than 50 TTB concludes that the term ‘‘malt consumer deception only if consumers
percent wine on a proof gallon basis. beverage’’ does not accurately describe are being misled in a material fashion.
(See 27 CFR 5.11 and 19.11.) This a product that derives up to 99% of its TTB does not agree that the Luntz
longstanding distinction signifies the alcohol content from the distilled spirits survey conclusively establishes that
intent to distinguish between two components of nonbeverage flavoring consumers do not care whether the
categories of taxable alcohol beverages, materials. However, it is important to product is a result of fermentation or
wine and distilled spirits, based on a stress that this in no way means that distillation. Furthermore, we do not
predominance standard. producers of FMBs currently on the agree that we are required to conduct
market have intentionally misled consumer surveys to find out if alcohol
4. Reasons for Adoption of the 51/49 consumers by using this term on labels. source is a material issue to consumers
Standard Under the IRC Regulations Instead, these producers have relied on before setting standards that distinguish
After carefully considering the record, the policies of TTB and our predecessor malt beverages from distilled spirits
TTB has concluded that the 51/49 agency. Accordingly, the focus of TTB is products.
standard is most consistent with our on which standard for FMBs will best Since the enactment of the FAA Act
regulatory policy on revenue achieve our statutory mandate of in 1935, we and our predecessor
classification issues. Accordingly, we ensuring that malt beverage labels agencies have issued regulations setting
are adopting the 51/49 standard in the adequately inform consumers about the class and type designations or standards
regulations setting forth the standards, identity of the product. of identity for wines, distilled spirits,
under the IRC, for addition of flavoring Consistency With 1997 Decision on and malt beverages. These standards of
materials that contain alcohol to beer. Cocktail Names. We do not believe that identity are largely based on industry
As noted previously, TTB has our predecessor agency’s 1997 decision and consumer understanding of the
determined that the adoption of the not to pursue further rulemaking on the meaning of certain terms. The FAA Act
0.5% standard for all beers under the use of cocktail names in the labeling or provides us with authority to issue
IRC would impose additional economic advertising of malt beverages precludes labeling regulations that will prevent
costs and regulatory burdens on the beer us from making this decision. In the first consumer deception and provide the
industry. Since we have concluded, place, we recognize that we are consumers with adequate information
after careful analysis of the record, that changing longstanding policy with about the identity and quality of the
either interpretation is allowed under regard to the labeling of FMB products; product. (See 27 U.S.C. 205(e).)
the relevant statutes, we are adopting that is why we engaged in notice and The FAA Act provides for three broad
the alternative that is less costly to the comment rulemaking before categories of alcohol beverages: distilled
industry, and imposes fewer regulatory implementing this change. Secondly, spirits, wines, and malt beverages. The
burdens. the proposed and final rules are classification of a product within one of
It should be emphasized that adoption consistent in many respects with ATF’s these categories is the most fundamental
of this standard reflects a decision on a 1997 decision about cocktail names. As decision that must be made before the
tax classification issue, and will in no set forth later in this document, the product can be properly labeled or
way reduce the tax liability of brewers regulations in this final rule continue to advertised under the Act. To say that
that utilize the maximum amount of allow the use of a cocktail name as a consumers do not care whether the
flavors in the FMBs that they produce. brand name or fanciful name of a malt alcohol in a product comes from
fermentation or distillation is equivalent was not confined to a requirement of As previously noted, TTB does not
to saying that consumers do not care truthful and informative labeling.’’ (See agree that it needs to conduct a
whether the product is a distilled spirits 318 U.S. at 230.) The Court held that consumer survey to establish standards
product or a malt beverage. Yet, our ‘‘provisions for standards of identity for the use of labeling terms based on
most basic responsibility under the FAA thus reflect a recognition by Congress of consumer and industry understanding
Act labeling provisions is to provide the the inability of consumers in some cases of the terms. As the U.S. Court of
consumer with adequate information to determine, solely on the basis of Appeals for the D.C. Circuit has
about the identity of the product. There informative labeling, the relative merits recognized, ‘‘while consumer surveys
can be no question that the starting of a variety of products superficially conducted by independent experts may
point of this responsibility is informing resembling each other.’’ (See 318 U.S. at arguably constitute the best way to
the consumer whether the beverage is a 230–231.) In the same way, regardless of establish consumer understanding and
wine, malt beverage, or distilled spirits whether we have consumer surveys preference * * * such surveys are not
product. establishing that consumers care the exclusive form of probative evidence
In Federal Security Administrator v. whether a product derives its alcohol of public perception.’’ (See FTC v.
Quaker Oats Co., 318 U.S. 218 (1943), from distilled spirits or beer, it is our Brown & Williamson Tobacco Corp., 778
the Supreme Court upheld revised responsibility to ensure that the label F.2d 35, 41 (D.C. Cir. 1985).) Our
standards of identity for ‘‘farina’’ and truthfully and adequately describes the conclusion in this matter is bolstered by
‘‘enriched farina’’ under the Federal contents of the product. In order to do comments from beer and malt beverage
Food, Drug and Cosmetic Act. A this, we must establish basic standards industry members urging us to preserve
manufacturer had challenged these for use of the terms ‘‘distilled spirits’’ the integrity of the beer and malt
standards, alleging that under the and ‘‘malt beverage’’ on alcohol beverage classifications by establishing
revised standards, its product, beverage labels. limits on the use of flavors containing
previously marketed as farina enriched The second issue addressed by the alcohol.
with Vitamin D, would qualify as Luntz survey is whether current labels Based on the above analysis, TTB
neither farina nor enriched farina. The mislead consumers, and whether they
concludes that current FMB labels may
Court of Appeals found that the provide adequate information about the
mislead or confuse consumers by
Administrator’s findings as to probable identity of the product. MAB argues that
labeling as ‘‘malt beverages’’ products
consumer confusion in the absence of consumers are not confused about the
that derive up to 99% of their alcohol
prescribed standards of identity were source of alcohol based on the fact that
content from added flavors rather than
speculative and conjectural, in the of the 20 percent of consumers that had
from fermentation at the brewery. We
absence of evidence that the a belief about the source of alcohol, less
believe that our statutory mandate to
respondent’s product had in fact than half believed that the alcohol came
prevent consumer deception, and to
confused or misled anyone. The from fermentation, and slightly more
ensure that alcohol beverage labels
Supreme Court overturned this than half believed that it came from
decision, stressing the deferential nature distillation. TTB draws very different provide consumers with adequate
of its review of the Administrator’s conclusions from this survey. information about the identity of the
decision. The Supreme Court rejected The survey was conducted for a ‘‘hard product, support an amendment to the
the argument that the Administrator lemonade’’ product labeled as a regulations that would limit the
relied on speculative and conjectural ‘‘flavored malt beverage.’’ Yet 80% of quantity of alcohol derived from flavors
testimony as to whether the marketing the respondents, after reading the label, in a malt beverage product.
of products that do not conform to had no belief whatsoever as to whether 6. Reasons for Adopting the 51/49
standards of identity would tend to the product was derived from fermented Standard for FMBs
confuse and mislead consumers, finding alcohol or distilled alcohol. This would
that: seem to indicate that the vast majority After careful consideration of the
of the respondents were very confused record, we have decided to adopt the
The exercise of the administrative rule- 51/49 standard for malt beverages under
making power necessarily looks to the future. as to the classification of this FMB
The statute requires the Administrator to product. the FAA Act. We agree with those
adopt standards of identity [which], in his Because the vast majority—80%—of commenters who suggested that the 51/
judgment, ‘‘will’’ promote honesty and fair the respondents had no belief on this 49 standard is consistent with certain
dealing in the interest of consumers. Acting issue whatsoever, and the remaining other limits in our FAA Act labeling
within his statutory authority he is required respondents were almost evenly divided regulations. See, for example, 27 CFR
to establish standards which will guard on the question, the survey clearly does 5.11 (the definition of the term
against the probable future effects of present not establish that current FMB labels ‘‘distilled spirits’’ excludes mixtures
trends. (See 318 U.S. at 228.)
provide consumers with adequate containing wine, bottled at 48° proof or
Similarly, our authority under the FAA information about the identity of the less, if the mixture contains more than
Act requires us to prescribe labeling product. Indeed, the only thing that is 50 percent wine on a proof gallon basis)
regulations that will ensure that clear from the results of the survey is and 27 CFR 5.22(b)(1)(i) (the standard of
consumers are adequately informed as that, of the 600 FMB consumers that identity for ‘‘bourbon whisky’’ provides,
to the identity and quality of alcohol participated in the survey, only a very among other things, that it must be
beverages. small percentage (11%) recognized that produced from a mash of not less than
Although the Quaker Oats case deals the alcohol in the product might come 51 percent corn). We believe the 51/49
with the Federal Food, Drug and from distillation rather than standard will adequately inform
Cosmetic Act (FD&C Act), rather than fermentation. Thus, to the extent that consumers about the identity of the
the FAA Act, many of the Court’s the survey’s results establish anything at product. Furthermore, as noted
observations about the FD&C Act are all, they would appear to resoundingly previously, adoption of the 51/49
equally applicable to the FAA Act. For support the conclusion that there is standard for FMBs will minimize
example, the Court noted that ‘‘the text significant confusion among FMB economic costs and regulatory burdens
and the legislative history of the present consumers about the identity of these placed on members of the FMB
statute plainly show that its purpose products. industry.
IX. State Concerns standard for these beverages is Department of Alcoholic Beverage
As noted in the preamble to Notice established, state legislatures and Control indicated that California had
No. 4, one of our concerns in this administrators can make an informed ‘‘always deferred to your agency’s
rulemaking process has been to provide decision as to whether it is in the state’s professional expertise concerning the
a Federal standard for the guidance of interest to comply with or deviate from classification of alcoholic beverages into
State regulatory agencies. Several State the national standard.’’ The Washington one of three primary categories: beer,
regulatory and taxation agencies State Liquor Control Board commented wine, or distilled spirits’’ and it
expressed concerns to TTB about FMBs that ‘‘[a]ddressing these issues at the intended to continue deferring to TTB’s
and requested that TTB take action to federal level will ensure consistency classification of FMBs. A comment from
clarify their status as either malt and preclude the various states from the Comptroller of Maryland and its
beverages or distilled spirits. Many having to create separate regulations.’’ Alcohol and Tobacco Tax Division
States have urged us to define FMBs and supported the proposed 0.5% standard
2. Need for Expeditious Action
establish regulatory limits on the but stated that Maryland ‘‘adopts federal
Many States urged TTB to resolve the standards with respect to labeling and
addition of alcohol to beer and malt
issue expeditiously. For example, the content of alcoholic beverages’’ and thus
beverages through the use of flavors. In
Superintendent of the Idaho Liquor was ‘‘prepared to apply whatever
the absence of such a Federal definition
Dispensary did not express support for standards your agency ultimately
and regulation, several States have said
either the 0.5% standard or the 51/49 determines to be most appropriate.’’
that they will develop their own
standard, but urged TTB ‘‘to take action
definitions for FMBs. 5. Possibility of Unilateral State Actions
TTB received more than 650 to reach a decision on a standard.’’ The
Director of Minnesota’s Alcohol and To Classify FMBs
comments addressing the creation of a
Gambling Enforcement Division also did Several State agencies commented
Federal standard for beer or malt
not express a preference for either that without prompt action by TTB, it
beverages or addressing Federal-State
standard but noted that the introduction would be necessary for them to
relationship issues. Thirty-one State
of FMBs into the marketplace ‘‘has been undertake this regulatory activity on
liquor control boards, revenue
a complicated and confusing situation their own. For example, Maine’s
departments, or other State agencies
for regulators as well as the consuming Department of Public Safety Liquor
having jurisdiction over alcohol
public’’ and stated that the Federal Licensing Division commented that if
beverages, as well as one county liquor
efforts to establish a uniform national TTB delays or fails to adopt the
commission, submitted comments.
standard were of great importance to the proposed 0.5% standard, many States
Twenty-four of these comments ‘‘will find the need to act under their
supported the proposed rule. Of the State. The Director of Oklahoma’s
Alcoholic Beverage Laws Enforcement independent authority to determine the
remaining 8 comments, 6 supported the alcohol beverage category, label
concept of a uniform standard for Commission expressed his appreciation
of Federal efforts to clarify issues disclosures, tax, necessary wholesale
flavored malt beverages and 2 provided and retail license requirements in order
information about State laws without concerning FMBs.
to continue the selling of these products
expressing an opinion on the TTB 3. Importance of Consistent Federal in their state.’’
proposals. Standard Some States have already begun
We also received comments in regulatory proceedings on this issue.
Many States noted the importance of
support of the proposed rule from three The Nebraska Liquor Control
a consistent Federal standard. For
Governors, one Lieutenant Governor, Commission commented that it has
example, the Director of the Montana
and many State legislators. A smaller already determined that FMBs
Department of Revenue supported the
number of State legislators commented containing more than 0.5% alcohol
proposed 0.5% standard, noting that
in favor of the 51/49 standard. derived from distillation should be
Montana, ‘‘like many other states,
A. Comments by State Regulatory believe[s] it could be detrimental to both classified as distilled spirits, and has set
Agencies regulatory agencies and the industry if a deadline for industry compliance with
there are inconsistent classifications of this standard. The Tennessee Alcoholic
1. Federal Leadership Role Beverage Commission commented that
these products in different states.’’
Several State regulatory agencies it had already conducted administrative
commented that it was only in the last 4. States That Follow the Federal proceedings on the classification issue
year that they became aware of the Standard and that it believed that TTB’s proposed
actual composition of flavored malt Many commenters stated that State 0.5% standard would be consistent with
beverages and that is up to TTB to governments have traditionally followed the position taken at its hearing. The
establish a national standard. Some Federal policy in the taxation, licensing, issuance of an order in this matter is
stated that a Federal definition for beer and distribution of alcohol beverages. awaiting the TTB final rule.
and malt beverages would ease the For example, the Kentucky Alcoholic Other States commented that they
burden on State regulators by providing Beverage Control Board stated that the would defer action pending completion
a uniform definition. ‘‘Board has long felt that this standard of the TTB rulemaking proceedings. A
Several of these agencies also should be set by the Federal Regulatory comment from the Virginia Department
commented that individual State Authorities, not the individual states. of Alcoholic Beverage Control noted
governments do not have the time or Such Policy consistency is important that while Virginia had accepted
resources necessary to establish because while states enjoy regulatory Federal classification of products in the
definitions of beer or malt beverages, or power over alcohol, most follow federal past, under State law a product
to properly identify new alcohol regulatory guidelines.’’ containing alcohol from spirits and beer
beverages. They suggested that the Some comments from States indicated is classified as a distilled spirits
Federal Government has these that they would follow the Federal product, even if the majority of the
resources. For example, the Delaware standard regardless of what decision is alcohol is contributed by beer. The
Alcoholic Beverage Control reached by TTB. For example, a commenter suggested that TTB’s recent
Commissioner noted that ‘‘[i]f a national comment from the California study revealed that most FMBs were
incorrectly classified in Virginia, and Customers, along with regulators, have ‘‘beer’’ in one State and as ‘‘hard liquor’’
stated that the Department was delaying been unsure what this hybrid product in another. These comments suggested
action pending the outcome of the TTB really is.’’ that this was already happening in
rulemaking. Nebraska and will almost certainly
A comment from the Massachusetts 8. State Law Issues
happen in other States as well. Other
Alcoholic Beverages Control In Notice No. 4, TTB solicited commenters pointed out that such
Commission expressed support for the comments on whether States would different standards could result in
proposed 0.5% standard, stating that the have to enact new legislation if TTB subjecting a product to two entirely
Commission ‘‘in the past has amended its regulations to establish different sets of laws and regulations
substantially deferred to federal either the 0.5% standard or the 51/49 regarding production, distribution,
standards concerning the identity of a standard. Some States advised that the place of sales, labeling, and advertising.
specific product, but the information proposed 0.5% standard would not Many commenters stated that this
that has come to light recently during require amendments to State law, but discrepancy would jeopardize
the review and discussion of FMB is they did not address the issue of nationwide marketing and distribution
troubling to the Commission.’’ This whether a different standard would be efforts by industry members.
commenter indicated that inconsistent with State law. For A State lawmaker commented that
Massachusetts is deferring taking any example, the Oklahoma Alcoholic clear definitions of alcohol beverages
action pending completion of the TTB Beverage Laws Enforcement are important for the State legislative
rulemaking process. Commission advised that under process. Without definitions, the State
Oklahoma’s constitution, alcohol legislatures cannot study and act on
6. Tax Issues beverages were taxed and regulated beverage alcohol issues in an educated
Some State agencies focused on the based on whether the alcohol content of and professional manner.
taxation aspects of the proposed 0.5% the product exceeds 3.2%, regardless of Several members of the beer industry
standard, suggesting that taxing FMBs as whether the alcohol content is derived supported the 0.5% standard as being
distilled spirits would have positive from brewing or distilling. most likely to resolve the concerns of
revenue effects. For example, a A comment from the Georgia State administrators. For example, the
comment from the Maryland Department of Revenue advised that the Beer Institute commented that the 0.5%
Comptroller and Alcohol and Tobacco proposed 0.5% standard would most standard is the best option to maintain
Tax Division suggested that it seemed likely cause the State to enact new consistency among existing Federal and
‘‘inherently unfair to tax a product as a legislation, because Georgia’s alcoholic State statutes and regulations. While
‘malt beverage’ when the majority of the beverage code did not anticipate such noting that State officials must utilize
alcohol by volume contained in the products. However, this comment noted their respective definitions of alcohol
product is from distilled spirits that, regardless of the standard, it might beverages, the Beer Institute suggested
(flavoring or otherwise).’’ Delaware’s be necessary for the State to enact that almost all of the States that have
Office of Alcoholic Beverage Control legislation in order to bring clarity to the reviewed the issue can reconcile their
Commissioner commented in support of issues of taxation and distribution. statutes and regulations with the TTB
the proposed regulation and stated that Only a few States indicated that proposal, but that this is not true of
its concerns were not with distribution, adoption of a standard other than the alternative standards.
but with ‘‘the tax issue and the 0.5% standard would be inconsistent The Beer Institute suggested that
substantial reduction in the rate paid for with State law. A comment from the implementation of an alternative
beer * * * versus the rate paid for ‘low Virginia Department of Alcoholic standard would:
spirits’ * * *. Obviously, the amount of Beverage Control stated that while
money in controversy is large for the adoption of the proposed 0.5% standard unravel the consensus and relative stability
that have been achieved to date with respect
State, the industry, and the consumers.’’ would be consistent with State law, any to state statutes and regulations. The
standard allowing a higher percentage of alternative discussed in Notice No. 4, a
7. Consumer Deception
alcohol from a source other than the standard permitting a 51–49% blend of malt
Several State agencies focused on the brewing process would create a beverage and distilled alcohol would require
issue of consumer confusion or potential conflict with current State law, many changes in existing state tax and
deception. For example, a comment which classifies products containing regulatory systems or even worse, a return to
from Florida’s Division of Alcoholic mixtures of beer and distilled spirits as state-federal conflicts and inconsistent
Beverages and Tobacco supported the distilled spirits products, regardless of regulation.
0.5% standard as a ‘‘positive step whether the majority of the alcohol is Anheuser-Busch predicted that:
toward providing consumer information contributed by the beer. The Arkansas there will be complete disorder in the
and avoiding confusion.’’ A comment Alcoholic Beverage Control Division nationwide marketplace if FMBs are
from Kentucky’s Alcoholic Beverage indicated that if TTB allowed the use of permitted to contain 49 percent distilled
Control Board stated that the proposed distilled spirits products as a flavoring spirits alcohol under federal law, yet most
0.5% standard ‘‘maintains the clear agent, legislative changes would be states would only permit 0.5% spirit alcohol.
distinction between malt beverages and required in Arkansas if this product was A patchwork of states regulating identical
distilled spirits that were becoming to be sold by beer-only permittees. products as distilled spirits in most states,
blurred in the minds of many regulators, and as beer in others, would cause havoc and
including Kentucky.’’ The Oregon B. Other Comments in Support of the tremendous consumer confusion.
Liquor Control Commission stated that 0.5% Standard As one example of the confusion that
while FMBs were made in breweries, Hundreds of brewery employees could be caused by differing State
distributed through beer distribution submitted comments stating that classifications of the same product, the
channels, and taxed as beer, they without the proposed 0.5% standard, brewer noted that television
discovered that ‘‘their alcohol is mainly brewers, wholesalers and retailers may advertisements regularly cross State
or completely from distilled spirits face a patchwork of individual State lines.
sources, and their appearance and taste laws and regulations, where the same Anheuser-Busch also suggested that
usually do not resemble beer. product may ultimately be sold as while the 51/49 standard is nowhere to
be found in State laws, many State laws elevate the opinions of a few State guidance in classifying FMBs. However,
incorporate a 0.5% alcohol by volume regulators above other considerations it we have concluded that the 51/49
threshold in their definitions of malt must weigh. standard would achieve the same goal,
beverages and distilled spirits; The FMBC further stated that all with less cost to the industry, as
accordingly, adoption of the alternative States today classify FMBs as ‘‘beer,’’ discussed earlier in this document. We
51/49 standard by TTB would be ‘‘malt beverages,’’ or an equivalent agree with those commenters who
disruptive to the system of State laws. statutory term. The FMBC suggested suggested that the 51/49 standard will
The brewer suggested there is no basis that while definitions vary from State to achieve our regulatory goal of
to support the alternative standard in State, many resemble in material establishing a uniform standard that
existing State laws, and that such action respects one of the two Federal provides a meaningful distinction
would create a conflict between Federal definitions. Like these Federal statutes, between FMBs and distilled spirits
and State law. Additionally, Anheuser- State statutes are silent on the issue of products.
Busch stated that such Federal action how much alcohol nonbeverage flavors It is noteworthy that, while most of
would trigger disruptive State action can contribute to a malt beverage or the comments from State regulatory
since many States would no longer beer. Accordingly, the FMBC argued agencies supported the proposed rule,
follow TTB guidance, but would instead that even assuming that this silence only a few of these comments
have to develop and/or enforce their could support the imposition of limits specifically opposed the majority
own 0.5% standard, ‘‘effectively ending on the use of flavors, it would allow standard. Several State regulatory
federal leadership on the most State regulators to adopt either a agencies did not specifically support
important alcohol regulation issues.’’ majority standard, a 0.5% standard, or either standard, but simply supported
Coors commented that the 0.5% some other standard. TTB’s action in trying to resolve this
proposal is consistent with TTB’s role The FMBC also challenged the difficult issue by setting a uniform
under the 21st Amendment and noted characterization by other commenters of standard.
that it is the only approach or proposal State laws on this issue. The FMBC
Furthermore, while a few States
consistent with the vast majority of the noted that some supporters of the 0.5%
suggested that any standard other than
different State laws. Accordingly, Coors standard suggest that the presence of a
0.5% would be inconsistent with their
suggested that the 0.5% proposal ‘‘thus 0.5% alcohol by volume threshold in
State laws or regulations, none of these
fulfills TTB’s role as a leader of the many State statutes requires those states
comments pointed to laws that
states’ regulatory and tax collecting to limit the alcohol contribution of
specifically restricted the use of alcohol
organizations.’’ Coors acknowledged flavors to that de minimis amount.
derived from nonbeverage flavors in
that ‘‘[e]xamples of differences in the However, the FMBC pointed out that
FMB production. Like Federal law,
regulation of malt beverages at the state these thresholds do not address the
formulation of products but instead many State laws use 0.5% alcohol by
level do exist,’’ but suggested that ‘‘only
constitute a threshold that divides volume as the dividing point between
the TTB proposed regulation provides
taxable alcohol beverages from products products subject to tax and other
comity to the states and a marketplace
containing alcohol that are not subject regulations, and those that are not.
free from disruption * * *.’’ Miller
to taxation. The FMBC stated that it was Similarly, some State laws classify
suggested that, given the support of the
aware of no State statute that sets mixtures of beer and distilled spirits as
States for the proposed 0.5% standard
0.5%—or any other figure—as the distilled spirits products. However, we
and the reality of the FAA Act’s
penultimate provision, ‘‘considering mandatory limit on the amount of are not aware of any current State
other standards would be detrimental to alcohol that flavors or other alcohol statutes that specifically regulate flavor
the creation of a uniform standard.’’ sources can contribute to a malt use in FMB production, although at
beverage. The FMBC also noted that if least two States have apparently
C. Other Comments in Support of the initiated administrative procedures to
such an interpretation prevailed, many
51/49 Standard establish such a policy.
States would have to reclassify wines
Supporters of the 51/49 standard that derive alcohol from flavors or Several States have indicated that
challenged those comments that spirits. they will not follow TTB’s lead if we
suggested that only the proposed 0.5% The FMBC argued that while some adopt an alternative to the 0.5%
standard would meet the needs of the States have expressed support for Notice standard. Other States have indicated
States and result in a uniform Federal No. 4, none to date had indicated that that they will follow the Federal
standard. These commenters argued that they could not accept a majority standard, regardless of what it is. TTB’s
while a national standard would be standard. Finally, the FMBC stated that role is to provide Federal leadership on
beneficial, TTB has provided no in 2002, the Joint Committee of the this issue. However, it is up to the States
evidence in Notice No. 4 as to why the States (a body that represents the to decide whether they want to follow
proposed 0.5% standard is the only way interest of alcohol regulators from both Federal standards or not.
to accomplish this goal. Several the ‘‘control’’ and ‘‘open’’ States) voted Clearly, many brewers are concerned
commenters stated there is no reason to to recommend that States support a over facing a multitude of different State
assume the proposed 0.5% standard for position that more than 50% of the laws and regulations. Pursuant to the
added alcohol is the only standard volume of a finished FMB come from 21st Amendment, States have
supported by the various State the product’s beer/malt beverage base. significant authority to regulate the sale
authorities. The FMBC suggested that such a and distribution of alcohol beverages
The FMBC noted that Federal law standard would be more lenient than within their borders. Under the
remains independent of State law and the majority standard that FMBC can penultimate clause of the FAA Act,
that the views of State officials are not accept. Federal labeling and advertising
binding on TTB. The FMBC stated that regulations apply to malt beverages only
while it commended TTB for seeking to D. TTB Response to the extent that the State has adopted
craft a national standard to respond to We agree with those commenters who similar requirements for malt beverages
State concerns, TTB should not regulate suggested that the originally proposed sold within the State. Accordingly,
to the ‘‘least common denominator’’ and 0.5% standard would give States brewers, wholesalers and retailers must
follow State laws on these issues, consumer confusion over the alcohol companies place that labeling on their
regardless of what standard TTB adopts. content of FMBs. FMBs. This trade association noted that
We recognize that our adoption of the Two State liquor authorities although nearly all FMBs fall within a
51/49 standard may mean that some supported the Notice No. 4 proposal to 5.0 to 5.5 percent alcohol by volume
States will adopt a standard that differs require alcohol content labeling on range, so-called traditional malt
from the Federal standard. However, as FMBs and other malt beverages that beverages contain between 4% and 25%
many commenters noted, State derive alcohol content from sources alcohol by volume, a much wider range,
requirements on alcohol beverage other than the brewing process. They making alcohol content labeling more
classification issues already vary from agreed that this alcohol content labeling meaningful for so-called traditional malt
State to State. We do not believe that the is necessary because of the similarity of beverages than for FMBs. Since most
adoption of a different standard by some some FMB labels to distilled spirits malt beverage labels do not contain
States will cause major problems to the labels and because of the need to alcohol content information, the FMBC
beer industry; in any case, it is beyond distinguish FMBs from non-alcohol claims that consumers are less informed
TTB’s authority to control what the products. Both States cited the and more confused about the alcohol
States choose to do on this issue. We importance to consumers of having content of other malt beverages. The
would note, however, that although TTB alcohol content information available on FMBC therefore urged TTB to require
is adopting the 51/49 standard for malt beverage labels. alcohol content labeling on all malt
FMBs, brewers are free to adopt the beverages.
B. Other Comments
stricter 0.5% standard for their own CSPI similarly urged TTB to adopt
FMB products, thus ensuring Several commenters opined that the alcohol content labeling for all malt
compliance with those State laws and proposed alcohol labeling requirement beverages, stating that there is no reason
regulations that are amended to should not be restricted to FMBs and to require such labeling only for FMBs
incorporate this standard. Finally, by other products containing added alcohol and other malternative-type products,
adopting a one-year effective date but should apply to all malt beverages. but not for all malt beverages. Another
provision for this final rule, we hope to These commenters generally stated that consumer organization, the NCL, also
provide States with an adequate period there was no reason to single out FMBs supported mandatory alcohol labeling
of time in which to decide whether they for mandatory alcohol content labeling. for all malt beverages. The NCL stated,
wish to follow the Federal rule or not, Diageo commented that Notice No. 4 ‘‘Mandatory labeling will provide
and to make any corresponding changes provides no basis for requiring alcohol consumers with the information they
in their own laws or policies. content statements only on the labels of need to make better, more informed
malt beverages that derive alcohol from choices about alcoholic beverage
X. Mandatory Alcohol Content Labeling added flavors or other ingredients. consumption.’’
for FMBs Diageo stated that the intended alcohol Anheuser-Busch opposed the
TTB received 31 comments content labeling bears no relationship to proposal to require alcohol content
expressing opinions about the proposed its cited justification in Notice No. 4, labeling on FMBs and other malt
mandatory alcohol content labeling for where TTB stated that consumers may beverages containing alcohol from
flavored malt beverages. Five believe either that spirits-branded malt added ingredients. Anheuser-Busch
commenters were brewers, six were beverages contain the same high alcohol stated that consumers do not assume
from State licensing or regulatory content as distilled spirits or that other malt beverages with distilled spirits
agencies, seven were from interest FMBs may contain no alcohol due to brand names are higher in alcohol
groups, six were from individuals, and their unconventional appearance. As an content, noting also that most FMBs
smaller numbers were from other example of the contradictory policy this already have alcohol content labeling.
sources. Although we received requirement would cause, Diageo Anheuser-Busch further stated that any
thousands of form letters supporting the asserted that the regulations would not alcohol content labeling should be at the
Notice No. 4 proposals, none of these require alcohol content labeling on a discretion of the brewer and should not
letters specifically addressed alcohol product with a distilled spirits brand be applied to only one kind of malt
content labeling. name such as ‘‘Jack Daniels Pilsner’’ but beverage.
would require alcohol content labeling
A. Comments Supporting the Proposal C. TTB Response
on a traditional malt beverage product
Miller supported the proposed made with alcohol flavoring materials The intent of TTB’s proposal for
alcohol content labeling requirement for like ‘‘Strawberry Blonde Ale.’’ Diageo alcohol content labeling was to provide
FMBs and other malt beverages that further stated that they have placed this important information to consumers
derive any alcohol from added alcohol content on labels of their FMBs who may not be familiar with FMBs, or
ingredients. Miller’s comment stated since 2000. who may be misled by distilled spirits
that it would oppose a requirement to Brown-Forman also commented that brand labels into believing that their
label all malt beverages with an alcohol TTB has no basis for treating FMBs alcohol content is higher than of other
content statement. Miller also differently from other malt beverages. malt beverages. For the reasons outlined
commented that the regulations should Brown-Forman argued that alcohol in the preamble to Notice No. 4, TTB is
provide flexibility by allowing the content labeling is important consumer adopting the amendment to § 7.22(a) to
alcohol statement on any label rather information that should be required for require alcohol content labeling on the
than on the brand label (front label) as all malt beverages. Gallo also supported brand labels of malt beverages that
proposed. Miller commented that extending alcohol content labeling to all derive any amount of alcohol from
allowing the alcohol content statement malt beverages but requested that it be flavors or other ingredients containing
on any label is consistent with other optional because of labeling alcohol. TTB believes this requirement
mandatory labeling requirements such prohibitions in Oklahoma and New will provide consumers with better
as the Government warning label, and York State. information about these malt beverage
that the proposed placement on the The FMBC commented that alcohol products and will help prevent
brand label is unnecessary since there is content is important consumer consumer confusion over their identity.
no empirical evidence concerning information and that all of their member Moreover, this requirement applies to
the addition of flavors or other We recognize that brewers may be the color of dark rum’’ as a truthful
nonbeverage materials containing required to print different labels for malt statement that describes the color of an
alcohol at any step in the production beverages intended for sale in those FMB product but which would be
process. At the same time, we are States in which alcohol content prohibited. Another commenter cited
modifying the new § 7.22(a)(5) text to statements on malt beverage labels are the example of ‘‘Beer aged in Bourbon
exclude from this requirement the use of prohibited. However, TTB does not Barrels’’ as a truthful, informative
hop extract that contains alcohol since believe this is a sufficient reason not to statement that would similarly be
hops are an essential ingredient in the adopt mandatory alcohol content prohibited by the proposed regulations.
production of malt beverages. It should labeling statements for malt beverages
be noted, however, that TTB will count B. TTB Response
that derive alcohol from flavors or other
any alcohol contained in added hop ingredients. Brewers have always been We are incorporating the general
extract toward the 49% limitation under required to conform labels to State holdings of ATF Ruling 2002–2 into
the 51/49 standard. requirements when those requirements §§ 7.29 and 7.54. However, in response
TTB notes that the final rule text, like conflict with part 7 requirements under to the comments received on this issue,
the proposed rule text, does not separate the FAA Act. we are modifying the language of the
FMBs that derive a substantial portion With regard to the requirement that regulation to clarify that the regulation
(up to 49%) of their alcohol content the alcohol content statement appear on prohibits only those labeling and
from added flavors from those the brand label, we have concluded that advertising representations that tend to
traditional malt beverages that contain consumers are more likely to notice the create a false or misleading impression
small amounts of added alcohol from statement if it appears on the brand that the malt beverage contains distilled
flavors. Thus, this alcohol content label. Furthermore, this requirement is spirits or is a distilled spirits product.
labeling requirement applies to flavored consistent with the regulations In addition, we are keeping ‘‘safe
beers, flavored ales, and so forth that are applicable to the mandatory alcohol harbor’’ provisions in §§ 7.29 and 7.54
produced using alcohol flavorings. content statements for wine (see 27 CFR that incorporate the specific practices
While many comments supported 4.32(a)(3) and distilled spirits (see 27 that we do not consider misleading.
alcohol content labeling for all malt CFR 5.32(a)(3)). The proposed language in §§ 7.29 and
beverages, TTB is unable to issue such
XI. Use of Distilled Spirits Terms on 7.54 was patterned after the existing
a broad regulation at this time. In Notice
Labels and in Advertisements language in 27 CFR part 4, Labeling and
No. 4, we specifically stated that we
Advertising of Wine. In response to the
were not proposing to require alcohol A. Comments Received issues raised by the commenters, we are
content statements on all malt beverage
TTB received 10 comments revising these sections to clarify that we
containers at that time. Thus, we have
not aired this issue for comment. We addressing the proposed limitations on are not banning truthful and non-
also believe that such a requirement the use of distilled spirits terms in malt misleading speech about malt beverage
represents a significant departure from beverage labeling and advertising. Three products. Instead, we are incorporating
past labeling requirements that, until of these comments came from brewers, the holdings of ATF Ruling 2002–2,
the addition of § 7.71 in 1993, actually two were from State licensing and which were intended to ensure that
prohibited the placement of alcohol regulatory agencies, and the rest were labeling and advertising statements
content statements on malt beverage from other sources. The majority of the comparing FMBs to distilled spirits
labels (unless required by State law), comments favored limiting the use of products do not mislead consumers.
due to the prohibition within the FAA distilled spirits terms on FMBs. ATF Ruling 2002–2 noted the
Act (this prohibition was found to be Several brewers requested assurances existence of a recent trend in the
unconstitutional in Rubin v. Coors that the policy in ATF Ruling 2002–2, marketing of FMBs. Brewers and
Brewing Co., 514 U.S. 476 (1995)). Thus, allowing the use of distilled spirits importers had begun to associate FMBs
while we are not unsympathetic to the brand names on FMBs, will continue. with well-known brands of distilled
comments suggesting mandatory alcohol They commented that industry members spirits, by using distilled spirits brand
content labeling for all malt beverages, have made large investments in the names as the brand names for FMB
we are not in a position to implement labeling and advertising of these products; by using labeling and
such a rule without notice and public distilled spirits brand names based on packaging that resemble the labeling
comment. We also note that we have existing government policies. and packaging of well-known distilled
received several petitions from various Several commenters believed the spirits brands; and by the use of specific
consumer and public interest groups for proposed language of §§ 7.29 and 7.54 is distilled spirits terms in describing
additional labeling information on vague, and they requested clearer flavorings added to malt beverages. The
alcohol beverage containers, including language that directly addresses TTB’s ruling noted that these products were
alcohol content labeling. TTB intends to stated purpose. The Washington Legal drawing media attention, in part
pursue these labeling issues in future Foundation, a nonprofit public interest because of the impression given that
rulemaking. law and policy center, submitted a these FMBs are made with distilled
TTB acknowledges Gallo’s comment comment in opposition to the proposed spirits or contain distilled spirits.
regarding two States’ prohibition of language, asserting that the regulation Certain FMBs were using labels that
alcohol content statements on malt would not accommodate the First used distilled spirits brand names or
beverage labels. Pursuant to the Amendment rights of malt beverage distilled spirits class and type
penultimate paragraph of the FAA Act, industry members to make truthful designations to describe a flavor
the labeling requirements of the FAA statements about their products. element as part of the statement of
Act apply only to the extent that State One commenter pointed out that the composition on the label. For example,
law imposes similar requirements on use of certain non-misleading these labels used a distilled spirits
malt beverages sold within the State. statements would be prohibited by the brand name, and then stated ‘‘Flavored
Thus, brewers have to comply with the proposed limitations on the use of malt beverage made with natural flavors
labeling laws of the State in which the distilled spirits terms on FMBs. This containing vodka’’ or ‘‘Flavored malt
malt beverages are being sold. commenter cites a statement of ‘‘having beverage with natural flavors containing
genuine [Distilled Spirits Brand infringe upon the First Amendment beverage is not in itself misleading. The
Name].’’ rights of producers and importers of ruling further held that the use of a
The ruling held that such statements FMBs. Information on alcohol beverage cocktail term as the brand name or
were misleading. The labels create the labels is considered commercial speech. fanciful name of a malt beverage is not
misleading impression that the product (See Rubin v. Coors Brewing Co., 514 misleading if there is no misleading
is made with, or contains, distilled U.S. 476, 481 (1995).) The First impression about the identity of the
spirits. In fact, however, distilled spirits Amendment protects commercial product, based on the overall labeling
used to manufacture flavors lose their speech only if that speech concerns and advertising of the product.
class and type when blended with other lawful activity and is not false or Consistent with the proposed rule,
ingredients to make a flavor extract. misleading. (See Central Hudson Gas & and in response to the comments that
Thus, it is misleading to represent that Electric Corp. v. Public Serv. Comm’n, specifically request affirmation that the
the malt beverage contains a particular 447 U.S. 557, 563–564 (1980).) use of distilled spirits brand names will
class or type of distilled spirits, such as Similarly, our statutory authority under be permitted, we are incorporating these
vodka, rum or tequila. Furthermore, this the FAA Act is to ensure that labels ‘‘safe harbor’’ provisions from the ruling
kind of labeling created the misleading provide consumers with adequate into §§ 7.29 and 7.54. We are
impression that the product contained information as to the quality and reconfiguring the text as three
distilled spirits, or in fact was a distilled identity of malt beverages, and to ensure subparagraphs in § 7.29(a)(7) and
spirits product. that labels and advertisements for such § 7.54(a)(8). Subparagraph (i) permits
Accordingly, the purpose of the ruling products do not tend to mislead the truthful statement of alcohol content
was to set forth specific labeling and consumers. (See 27 U.S.C. 205(e) and in labeling and advertising in
advertising statements that would be (f).) It is not TTB’s intention to prohibit conformity with existing requirements
considered misleading. The ruling held any labeling or advertising statements in § 7.71. Subparagraph (ii) in each case
that the use of a brand name of a that are truthful and non-misleading. permits the use of a distilled spirits
distilled spirits product as the brand The final rule regulatory texts brand name as the brand name of a malt
name of a malt beverage was not in itself incorporate the proposal to prohibit the beverage provided the overall label or
misleading. However, the use of a types of references to distilled spirits advertisement does not present a
distilled spirits term found in the brand names and class and type misleading impression about the
standards of identity in 27 CFR part 5 designations in FMB statements of identity of the product. Similarly,
(such as whisky, rum, vodka, brandy, compositions that were addressed in subparagraph (iii) permits the use of a
gin, and so forth) as the brand name for ATF Ruling 2002–2. However, those cocktail name as the brand name or
a malt beverage or as part of the texts will allow truthful non-misleading fanciful name of a malt beverage, with
statement of composition or as the statements that may draw similarities the same proviso.
fanciful name of a malt beverage, is between the taste or character of a malt
beverage and the taste or character of a XII. New Formula Requirements
misleading. The use of a cocktail term
as the fanciful name of a malt beverage distilled spirits product, but that do not TTB received a small number of
would not be considered misleading if imply in a false or misleading fashion comments from brewers and brewery
the overall labeling and advertising does that the product contains distilled trade associations on the proposed new
not create a misleading impression spirits or is a distilled spirits product. formula filing requirements that would
about the identity of the product. Moreover, this general prohibition will replace the existing statement of
TTB still takes the view that the use not prohibit truthful and non- process. These commenters generally
of a distilled spirits brand name as the misleading statements such as ‘‘beer favored the new formula filing
brand name of an FMB is not inherently aged in whiskey barrels’’, provided that requirements, but they expressed
misleading. Furthermore, we do not such a statement is not in the context of concerns regarding certain aspects of the
believe that the use of a cocktail name implying that the FMB contains whisky proposal and requested that TTB clarify
as part of a fanciful name of an FMB is as the result of the aging process. some of the proposed formula
Finally, this standard will not prohibit requirements.
always misleading, as long as the
the use of cocktail terms as a brand
remaining labeling and advertising of A. Fermented Products Requiring
name or fanciful name on malt beverage
the product do not create a misleading Formulas Under § 25.55
labels or in advertising provided the use
impression as to the identity of the
of those terms does not draw a 1. Comments Received
product. We are not changing our
misleading comparison between the two
position with respect to these issues. Several brewers and brewing industry
types of alcohol beverages. To the extent
In response to the concerns voiced by trade associations commented on the
that labeling or advertising comparisons
the commenters, we are changing the proposed requirements that would
between malt beverages and distilled
wording of the amendments to §§ 7.29 trigger the filing of a formula by a
spirits are false or misleading in a
and 7.54 contained in the proposed rule. brewer. These commenters requested
manner that is not covered by these new
Instead of the specific prohibitions that we more clearly communicate
regulations, they would fall under the
proposed in those sections, we are general prohibition on the use of false which fermented products require filing
adding the following to the prohibited or misleading statements in the labeling formulas.
statements with respect to labeling and or advertising of malt beverages. (See 27 One brewer stated that because of the
advertising of malt beverages: CFR 7.29(a)(1) and 7.54(a)(1).) wording of the proposal, it appears that
Any statement, design, device, or ATF Ruling 2002–2 held that certain most fermented products would require
representation that tends to create a false or labeling and advertising practices by a formula. A brewery trade association
misleading impression that the malt beverage themselves are not misleading if their argued that the requirement to file
contains distilled spirits or is a distilled use does not give a misleading formulas showing special processing is
spirits product. impression about the malt beverage. The so broad that the proposal would
Because this language prohibits only ruling specifically held that the use of require brewers to file formulas for most
labeling and advertising statements that a brand name of a distilled spirits products. This association noted that
are false and misleading, it does not product as the brand name of a malt many traditional malt beverages contain
fruits, herbs, spices, or honey and that products require the filing of a formula. does not require a formula.
the proposed requirement to file a Thus, in this final rule document, we Subparagraph, (a)(1)(ii) of § 25.55 lists
formula for fermented products have changed § 25.55 in order to state examples of these processes. These
containing any of these ingredients more clearly when a brewer must file processes were listed in the preamble to
would greatly increase the number of and receive approval of a formula in Notice No. 4 as examples of traditional
products for which a formula is order to produce a fermented product. processes not requiring a formula. Other
required. The association further alleged We have added a provision to this processes exist that are considered
that products containing some of these section that allows a brewer to request traditional and will not require filing a
types of ingredients are considered information on whether a formula is formula.
traditional malt beverages or beer and required in specific instances. Subparagraph (a)(1)(iii) of § 25.55
that, therefore, filing formulas for them Additionally we have amended this provides that brewers may request a
would simply increase the number of section to make it clear that TTB determination from us as to whether a
formulas filed without assisting TTB in approval of a formula is required prior particular process used in producing
classifying them for tax purposes. One to using it to produce a fermented beer will require a formula. Procedures
brewer and one trade association product. for requesting this determination are
suggested adding a paragraph to the Paragraph (a) of § 25.55 lists contained in new paragraph (f) of
formula requirements in § 25.55 to state processes, materials, or specific types of § 25.55.
that a formula is not required when fermented products that will require a Paragraphs 25.55(a)(2) through (a)(5)
processes or ingredients are used in the brewer to file a formula. Paragraph (a)(1) list the other instances when a formula
production of traditional beers. contains the general rule to file a is required to produce a fermented
One brewer commented that proposed formula for a fermented product that is product. These correspond to those
§ 25.55 requires a formula when honey produced using certain processes. Based formula requirements in proposed
is used but does not specifically require on the comments to Notice No. 4, which § 25.55(a).
a formula when maple syrup is added indicated that the term ‘‘special Paragraph (a)(3) requires brewers to
to beer. Further, this brewer commented processing’’ is so broad that formulas file formulas when they use coloring or
that TTB should rewrite § 25.55 in the would be required for most fermented natural or artificial flavors in producing
final rule to require formulas only for products, we have changed the criteria a fermented product. Paragraph (a)(4)
beer made with the use of processes or in § 25.55(a)(1) that trigger filing a requires brewers to file a formula for
ingredients that the TTB Administrator formula. Section 25.55(a)(1) now any fermented product to which fruit,
has not declared as standard brewing requires filing a formula for the use of fruit juice, fruit concentrate, herbs,
processes or ingredients. TTB would any process, filtration, or other method spices, honey, maple syrup, or other
then implement this regulation by of manufacture that is not generally food materials are added. In response to
periodically publishing a list of recognized as a traditional process in the above comments regarding the
processes or ingredients declared to be the production of a fermented beverage production of traditional brewery
traditional and therefore not requiring designated as ‘‘beer,’’ ‘‘ale,’’ ‘‘porter,’’ products to which certain flavors or
the filing of a formula for their use in ‘‘stout,’’ ‘‘lager,’’ or ‘‘malt liquor.’’ We other material are added without filing
beer production. have also removed the language from a statement of process, we have added
this proposed section that would have a reference to § 25.55(f). This section
2. TTB Response permits brewers to request a
used a change in the character of beer
The formula requirement proposed in or the removal of material from beer as determination from us as to whether a
§ 25.55 would replace the statement of a criterion for the filing of a formula particular ingredient used in producing
process now required by § 25.67. The since it is impossible to quantify these beer will require a formula.
existing section currently requires standards. Thus, under § 25.55(a)(1), the
brewers to file a statement of process 3. New Procedural Requirements
sole criterion for filing a formula for a
whenever they propose to produce a process depends on whether or not the New paragraph (f)(1) of § 25.55
fermented product not marketed as process is traditionally used in authorizes TTB to determine whether
‘‘beer,’’ ‘‘ale,’’ ‘‘porter,’’ ‘‘stout,’’ ‘‘lager,’’ producing fermented products the use of a particular process or a
or ‘‘malt liquor.’’ As several commenters designated as beer, ale, and so forth. particular ingredient will require the
noted, some traditional malt beverage Non-traditional processes such as ion filing of a formula. Under § 25.55(f)(2),
products are made with added flavors exchange treatment, reverse osmosis, a brewer may request a determination
but are marketed under those traditional concentration of beer, separation of beer on whether the use of a proposed
designations and not as flavored or into different components, and filtration process or a proposed ingredient will
specialty products. Because of the to substantially change the color, flavor, require the filing of a formula.
present wording in § 25.67, which uses or character of beer are processes that Paragraph (f)(2)(i) sets forth the
the marketing designation as the filing require the filing of a formula. These information that a brewer must submit
criterion, some brewers may not file a processes are those specifically to TTB in order to request a
statement of process for some fermented included in proposed § 25.55(a)(1) as determination as to whether a formula
products that contain flavors or other requiring filing a formula. We note that is required when using a particular
materials. While these fermented these are only examples, and the process. For use of a proposed process,
products do not require a statement of exclusion of a process from this listing the brewer must submit a full
process under § 25.67, the proposed does not mean that its use in making a description of the process, evidence of
regulation would require a formula and fermented product would not require whether the process is generally
perhaps additional labeling for these the filing of a formula. recognized as a traditional process in
traditional fermented products. Conversely, processes such as the production of fermented beverages
The intent of this proposal was not to pasteurization, filtration prior to designated as beer, ale, and so forth, and
require a statement of process or bottling, filtration in lieu of an explanation of the intended effect of
formula for additional kinds of pasteurization, centrifuging for clarity, the process.
fermented products. Rather, it was lagering, carbonation, blending, and so Similarly, a brewer may request an
intended to clarify which fermented forth are clearly traditional and their use exemption from the formula filing
requirement under § 25.55(a)(3) and process is appropriate for the and criteria that TTB will use in
(a)(4) when certain flavors or other production of a fermented beverage that evaluating beer produced by special
ingredients are used in a fermented is to be sold under a traditional processes.
product. Under § 25.55(f)(2)(ii), a brewer designation such as ‘‘beer’’ or ‘‘ale’’.
2. TTB Response
must submit information about the We will maintain on the TTB Web site
proposed ingredient, including a a list of new processes and ingredients TTB has not incorporated in this final
description of the ingredient, evidence determined by TTB under § 25.55(f) to rule its informal administrative policy
establishing that the proposed require, or not to require, the filing of regarding the percentage of fermentable
ingredient is generally recognized as a a formula. materials in a beer that must be grain-
traditional ingredient in the production based because we did not air this issue
B. Standards for Formula Approval for comment in Notice No. 4. However,
of a fermented beverage designated as
beer, ale, and so forth, and what effect 1. Comments Received we agree with the FMBC that the
the use of the proposed ingredient has proposed regulatory text did not
The FMBC and one FMB producer adequately distinguish between
on the fermented product. However, commented that proposed § 25.15(a)
there is no exemption from the formula fermentable materials and fermentable
gives brewers a wide variety of adjuncts. The term ‘‘beer’’ is defined in
requirement in § 25.55(a)(2) with respect ingredients for producing beer. The
to the use of flavors and other section 5052(a) of the IRC as:
FMBC agreed that the statutory
ingredients containing alcohol, because definition of beer permits the use of a beer, ale, porter, stout, and other similar
this information is essential for wide range of fermentable materials at fermented beverages (including saké or
purposes of administering the 51/49 similar products) of any name or description
the brewery and that this listing of containing one-half of 1 percent or more of
standard.
ingredients reflects existing TTB policy. alcohol by volume, brewed or produced from
As suggested by the comments, there
However, both commenters stated that malt, wholly or in part, or from any
may be many fermented beverages
produced and marketed under the the proposed formula regulations substitute therefor.
traditional designations of ‘‘beer,’’ ‘‘ale,’’ provide no standard for using these In 1889, the Commissioner of Internal
and so forth that contain flavors or other materials in producing beer. The FMBC Revenue stated that the term ‘‘substitute
ingredients and which are produced commented that proposed § 25.15(a) for malt’’ included rice, grain of any
without statements of process. The appears to blur the distinction between kind other than malt, sugar, bran,
information submitted by brewers under beer and wine since TTB taxes as wine glucose, and molasses.
paragraph (f) will allow us to evaluate products made primarily from honey, The comment from the FMBC rightly
whether or not these fermented fruit, fruit juice, and fruit concentrate, pointed out that the proposed language
products made with flavors or other which are all materials listed in of new § 25.15(a) seemed to authorize
ingredients should be subject to the proposed § 25.15(a). These commenters unlimited use of materials such as
formula approval and possible requested that TTB provide to the honey and fruit as substitutes for malt.
additional labeling provisions. TTB will industry regulatory standards to as to This was not our intention.
give consideration to the past usage of when the use of honey, fruit, and other Accordingly, we have revised the
those flavors or other ingredients and to materials would result in classification language in paragraph (a) of proposed
whether the fermented products are of a product as a wine. As an example § 25.15. The first and second sentences
considered to be traditional products of a suggested standard, these of paragraph (a) address the basic
that are entitled to be marketed as commenters cited TTB’s unofficial brewing materials, and we have revised
‘‘beer,’’ ‘‘ale,’’ and so forth without policy that half of the fermentable this list to conform the substitutes for
formula approval and without material in a beer must be derived from malt to those specifically listed in the
additional labeling information. As part barley malt and other fermentable Internal Revenue Commissioner’s letter
of our evaluation, we will take into grains. These commenters suggested in 1889. Accordingly, § 25.15(a) lists the
consideration the class and type that incorporating this policy of following materials as the only
regulations in § 7.24(a) that require that ingredient use in the regulations would permissible substitutes for malt: rice,
statements of class and type conform to provide brewers with necessary grain of any kind, bran, glucose, sugar,
the designation of the product as known guidance in determining what and molasses. We note the term ‘‘grain
to the trade. Additionally, § 7.24(e) fermented products qualify as a beer, of any kind’’ includes both malted and
requires products designated as ‘‘ale,’’ especially when other fermentable unmalted grains.
‘‘porter’’’ or ‘‘stout’’ to be produced ingredients such as honey or fruit are The third sentence of paragraph (a)
without the use of coloring or flavoring used. lists other materials that may be used in
materials (other than those recognized The FMBC further commented that brewing but that are not considered
in standard brewing practices). We will although Notice No. 4 stated that one basic brewing ingredients as
consider these criteria when evaluating use of the formula submission is for contemplated by the IRC. Extensive use
a request for a determination on the use TTB to evaluate whether a certain of those other materials in fermentation
of flavors or other materials in process constitutes distillation, the could yield a fermented product that
producing fermented products without actual proposed formula regulations do might be considered wine rather than
obtaining a formula approval. not contain any standards that could be beer; thus, the revised text distinguishes
With respect to the use of processes, used for this purpose. The FMBC stated between those materials that we
we recognize that the listings in that without such regulatory guidelines, categorize as ‘‘adjuncts’’ and the basic
§ 25.55(a)(1)(i) are not complete and that producers would be uncertain whether brewing materials covered by the first
brewers may propose to use new a proposed process constitutes two sentences of § 25.15(a).
processes in the production of distillation and, further, that this lack of In the absence of a regulatory
fermented beverages. Thus, a request to a standard will lead to arbitrary and standard, TTB will continue to rely on
TTB under paragraph (f) of § 25.55 will uneven decision-making. The FMBC its current administrative guideline,
permit us to determine, for example, therefore requested that TTB seek which requires at least 50% of the
whether a process may constitute comments on proposed regulations fermentable material in an IRC ‘‘beer’’ to
distillation, and whether a proposed containing both criteria for distillation be one or more of the following: barley
malt, other malted grains, unmalted will not exceed the overall limit will make it clear that the use of
grains, rice, bran, sugars, or molasses. established by § 25.15. alternative ingredients is permitted and
Brewers may use the other materials This brewer also commented that the that it is not necessary to list the alcohol
listed in the third sentence of § 25.15(a) requirement to state the alcohol content contribution of each individual
as fermentable adjuncts in the of the fermented product at each step in ingredient in the formula.
production of a beer at a brewery. We production is overly restrictive. This We also have removed the proposed
will consider the comments requirement, according to the requirement in § 25.57(c) for listing in a
summarized above as suggestions for commenter, would eliminate formula the alcohol content of a
future amendments of the part 25 streamlining of operations, forcing fermented beverage at every step in
regulations, and we may address this production by batches rather than in- production. We agree with the
issue in the near future in connection line blending and other methods. The commenter that this requirement is
with the planned revision of the part 25 commenter therefore suggested burdensome and not useful in
brewery regulations. requiring a single statement for alcohol evaluating a formula. This paragraph
content at the final stage of production. now requires listing only the alcohol
With regard to the FMBC comment
requesting regulatory standards for 2. TTB Response content of the fermented product after
distillation and for the evaluation of fermentation and the alcohol content of
TTB will continue to require the finished product.
other processes in producing beer, TTB information about individual flavors
notes that Notice No. 4 did not propose and other ingredients in fermented D. Reasonable Range of Ingredients
to adopt either of those standards. beverages, not only for tax classification
Moreover, determinations of whether 1. Comment Received
purposes under the IRC, but also for
distillation has occurred are highly labeling purposes under the FAA Act. Only one commenter addressed TTB’s
technical matters. The determination Thus, we are retaining the requirement request for comments on how to define
often depends on laboratory in § 25.57 to provide information about a ‘‘reasonable range’’ of ingredients used
examination of the process and the separate flavors and other ingredients. in formulas in § 25.57(a)(1). This
materials produced. Therefore, we Additionally, we need to know at what commenter, Diageo, recommended that
believe that it is preferable to continue stage in production flavorings are added TTB prescribe specific ranges for
to examine processes on a case-by-case since this information impacts the various ingredients. For ‘‘major
basis. However, we will consider these classification and labeling of the ingredients’’ or those composing more
comments as suggestions for future fermented product. Thus, we have than 3% of a product’s total weight or
regulatory amendments. amended § 25.57(a)(2) to require volume, Diageo recommended that the
C. Alcohol Information in Formulas brewers to state the point of range should vary by no more than 30%
production’during, before, or after over or under the actual amount used in
1. Comment Received fermentation’that flavors are added. production. For ‘‘minor’’ ingredients
We do agree that brewers need that represent less than 3% of the
One brewer commented that since flexibility to use alternate ingredients in product’s weight or volume, this
Notice No. 4 proposed limits on the producing fermented beverages and that comment recommended the reasonable
amount of alcohol that can be added to brewers should not be required to file range could vary by up to 200% of the
fermented beverages through the use of new or amended formulas every time actual quantity used.
flavors and other ingredients containing they make slight changes in the use of
alcohol, it was unnecessary to require 2. TTB Response
flavors or in the ratio of certain flavors
detailed information about those used in a product. Nevertheless, we TTB is still seeking broad industry
ingredients in formula submissions. again emphasize that the proposed input on what constitutes a ‘‘reasonable
This commenter stated that since the formula requirements are intended to range’’ of ingredients in a formula. Since
proposal would limit the amount of clarify existing statement of process only one commenter responded to this
added alcohol, the detailed information requirements and are not intended to question, we do not believe we have
in proposed § 25.57 is not needed and impose new requirements on brewers. enough information to take final rule
should not be required. It is our intention to permit the use of action on its meaning. Thus, we are not
Another brewer expressed its concern alternate or optional flavors in defining ‘‘reasonable range’’ of
about the requirement to state maximum producing fermented products, and, to ingredients for purposes of § 25.57(a)(1),
volumes of flavoring materials in this end, we have added the following and have removed the word
formulas. This brewer commented that sentence at the end of proposed ‘‘reasonable’’ from this provision.
they need significant flexibility in the § 25.57(a)(1): ‘‘You may include TTB will continue to permit brewers
amounts and types of flavorings to optional ingredients in a formula if they who submit formulas to indicate a range
accommodate price changes or do not impact the labeling or identity of of ingredients. A range of ingredients
acceptability of ingredients in foreign the finished product.’’ We have also may not be so large as to change the tax
countries. Furthermore, they may use clarified our position on alcohol content classification of a fermented beverage or
two or more flavors alternatively in a contributed by alternative flavors and to change the designation of the
formulation. Although, on examination, other nonbeverage ingredients fermented beverage. For example, a
the use of the maximum amounts of containing alcohol in a formula by formula for a ‘‘wheat beer’’ cannot
each flavor listed would appear to adding the following sentences at the indicate a range of fermentable
exceed overall added alcohol end of § 25.57(a)(3)(iv): ‘‘You are not ingredients of 5 to 95% wheat malt
limitations, this brewer stated this is not required to list the alcohol contribution since a minimum of 25% wheat malt is
the intention of using or listing of individual flavors and other required for a beer to have this
alternative flavors in a formula. Thus, nonbeverage ingredients containing designation. We will evaluate formulas
this brewer requested that TTB add a alcohol. You may state the total alcohol submitted by brewers, and make a case-
provision in § 25.57 specifying that the contribution from these ingredients to by-case determination whether the
amount of alcohol contributed by all of the finished product.’’ We believe the range of ingredients indicated in a
the flavoring material in a formulation addition of these sentences to § 25.57 formula is appropriate. We note that,
under § 25.57(e), we will have authority restrictions on the disclosure of that revocation is by operation of law or
to request additional information from proprietary information. regulation. In those cases, it is the new
brewers when we evaluate a formula. law or regulation that requires the
F. Standard Form for Formulas
We intend to revisit the question of revocation of the formula, and TTB has
what constitutes a ‘‘reasonable’’ range in 1. Comments Received no choice but to comply with the
the future through rulemaking or other Three commenters suggested that TTB requirements of the law or regulation.
appropriate procedure. should develop a standardized form for This issue was not specifically aired
formulas and that industry members for comment in Notice No. 4.
E. Formula Confidentiality
should be able to provide input on the Accordingly, we are treating the single
1. Comments Received development of the form. One brewer comment that we did receive on the
One brewer expressed a strong commented that TTB should develop a issue as a suggestion for future
concern regarding the need for formula formula form for FMBs that is similar to rulemaking. Pending the issuance of
confidentiality. Another commenter the form used for flavored wine regulations specifically addressing this
stated that formula protection from products. Another brewer requested that issue, we will continue to provide due
public disclosure is a very important TTB develop a unique formula form that process to formula holders by applying
issue in the competitive market. is unlike the formula form for wine. procedures similar to those set forth in
Another brewer commented that the part 13 to any cancellation or revocation
2. TTB Response of an approved formula.
confidentiality issue for formulas
should be resolved in the final rule as At this time, TTB declines to adopt a H. Placement in the CFR
a separate regulation. standard formula form for part 25
purposes, but we will consider 1. Comments Received
2. TTB Response developing a standardized form for One brewer noted that the proposed
TTB agrees that formulas filed by formulas in the future. We may consider formula requirements appear in part 25,
brewers, like statements of process, are combining a formula form for beer with which applies to domestic beers, but not
confidential and are not generally the form used for wine in order to in part 7, which applies to all malt
subject to public disclosure. To the achieve standardization, and we will beverages. This brewer stated that the
extent that formulas are filed under the consider comments or suggestions from formula requirement should apply
requirements of part 25, they are industry members and the public in equally to domestic and imported
classified as ‘‘return information’’ developing any form for beer formulas. products and should therefore be placed
subject to the disclosure restrictions of In the meantime, brewers may continue in part 7.
26 U.S.C. 6103. Furthermore, formulas to prepare their formulas for fermented
filed under either part 7 or part 25 are products on their own letterhead 2. TTB Response
treated as confidential business stationary. Placement of the formula requirement
information under the Freedom of G. Formula Proceedings in part 25 is deliberate. This action
Information Act, 5 U.S.C. 552(b)(4), and implements TTB’s existing statutory
are thus exempt from that statute’s 1. Comments Received authority permitting it to request certain
mandatory disclosure provisions. A brewer commented on the information from domestic brewers.
Finally, TTB has always treated statement in § 25.55 that a formula Many domestic brewers do not operate
statements of process and formulas as remains in effect until surrendered or in interstate commerce and do not
trade secrets subject to the disclosure superseded by a new formula or until obtain certificates of label approval for
restrictions of 18 U.S.C. 1905. TTB cancels or revokes it. This their products because they are not
At this time, TTB is not adopting the commenter noted that no formal or packaged but rather are sold from tanks
suggestion of the commenter who informal procedure is given in the at the tavern on brewery premises. The
advocated placement of confidentiality regulation that would apply to the formula provisions must apply to these
provisions in the formula regulations in cancellation or revocation of a formula. brewers as well as brewers who obtain
part 25 and part 7. At present, we This commenter stated that any attempt certificates of label approval since the
believe that the existing TTB and to revoke a formula without proper same requirements exist regarding the
Treasury disclosure regulations procedures would raise serious due classification of fermented products and
adequately address the protection of this process issues. The commenter the appropriate use of ingredients. Thus,
type of data. Furthermore, it would not requested inclusion of those procedural we must include the formula
be an efficient use of government safeguards and that they be at least requirements in part 25 in order to
resources to address this issue for beer similar to the procedural safeguards apply them to all brewers, regardless of
formulas, without addressing the similar afforded certificate of label approval their size or the method of distribution
issues presented by formulas for wine revocations. of their products.
and distilled spirits products. Finally, TTB has no statutory authority to
before adopting such regulations, it 2. TTB Response require foreign producers to submit
would be preferable to specifically air In 1999, ATF issued regulations formulas. In the case of imported malt
the proposal for comments from the setting forth procedures for the beverages, our authority to require
public and affected industry members. revocation of approved labels in 27 CFR formula information applies to U.S
Notice No. 4 did not contain any such part 13, Labeling Proceedings. Although importers rather than to foreign brewers.
proposal. we have not prescribed specific Thus, this final rule document adopts
Accordingly, TTB will consider these procedures for the revocation of the proposal to add a new paragraph to
comments as suggestions for future formulas in the regulations, it has been § 7.31 to reflect this authority. This
rulemaking actions. In the interim, our policy to afford formula holders due provision recognizes TTB’s authority to
submitters of formulas required under process by giving them advance notice, request formula or sample information
parts 7 and 25 should accept our and an opportunity to respond, before from an importer in conjunction with
assurances that TTB will comply with revoking the formula. An exception, of the filing of a certificate of label
all applicable statutory and regulatory course, applies to the extent that the approval for a malt beverage. We believe
we can obtain adequate information In compliance with these proceeding, we have considered all the
about an imported malt beverage under requirements, both the Department of data presented by the commenters,
this new provision to determine the the Treasury and our predecessor including the consumer surveys
class and type of an imported malt agency, ATF, published guidelines on previously conducted on this issue, as
beverage and to resolve any ingredient information quality. (See ‘‘Subdivision well as a new consumer survey
or labeling issues that may arise during of Treasury Information Technology (IT) submitted by another FMB producer. It
a certificate of label approval Manual,’’ Ch. 14: Information Quality is our conclusion that the evidence
submission. (‘‘Treasury Guidelines’’), and ‘‘Process establishes that current labels may
for Requesting Correction of Information mislead consumers and that they do not
XIII. Other Issues Raised by Disseminated by the Bureau of Alcohol, provide adequate information about the
Commenters Tobacco and Firearms’ (‘‘ATF identity of these products. As we
A number of commenters raised Guidelines’’).) Both the Treasury and specifically stated in this document, we
issues regarding FMBs that were not ATF Guidelines stress that the are not concluding that FMB producers
directly addressed in Notice No. 4, and guidelines are not legally enforceable, intentionally misled consumers;
thus are outside the scope of this and do not affect any otherwise instead, these producers appear to have
rulemaking document. However, TTB available judicial review of agency relied on the policies of TTB and its
wishes to comment on some of these action. Pursuant to the provisions of the predecessor agencies in labeling and
issues and may consider some of them Homeland Security Act of 2002, and classifying these products.
to be appropriate for future rulemaking Treasury Order No. 120–01 (Revised), However, we have also concluded
on beer or malt beverages. published on January 24, 2003, ATF’s that the term ‘‘malt beverage’’ may tend
orders still apply to TTB until to mislead consumers when applied to
A. Information Quality Act superseded or revised. Accordingly, a product deriving the majority of its
1. Comment Received TTB continues to rely upon the alcohol content from the spirits
published procedures of ATF, as well as components of added flavors and other
A law firm representing a major FMB
the published procedures of the nonbeverage ingredients. We have also
producer filed a request under the Department of the Treasury, in
Information Quality Act (IQA) for concluded that such a term does not
responding to requests for correction of provide adequate information to
correction of TTB’s statement in Notice information under the IQA.
No. 4 that existing FMB labels may consumers about the identity of such a
Section 14.5.3(C) of the Treasury product. Accordingly, the final rule
confuse and mislead consumers as to guidelines provides that in most cases,
both the source and amount of alcohol limits use of the labeling term ‘‘malt
absent unusual circumstances, requests beverage’’ to products that derive at
in these beverages, arguing that Notice for correction of information contained
No. 4 did not provide any supporting least 51% of their alcohol content from
in a notice of proposed rulemaking fermentation at the brewery. We are
data for these assertions. In response to should be addressed through the
this request, TTB stated that it would confident that the data in support of the
rulemaking process. TTB found that final rule comply with the requirements
treat the letter as a comment to the there were no unusual circumstances in
proposed rule. of the IQA.
this case, and there was no evidence
2. TTB Response that the requester had a reasonable B. ‘‘Alcohol is Alcohol’’
likelihood of suffering actual harm if the 1. Comment Received
Section 515 of the Treasury and issue was not resolved before the
General Government Appropriations issuance of the final rule on FMBs. In its comment, the National
Act for Fiscal Year 2001, Public Law Accordingly, we advised the requester Consumer League (NCL) stated, ‘‘alcohol
106–554, directed the Office of that we would treat the letter as a is alcohol, regardless of source.’’ The
Management and Budget (OMB) to comment on the proposed rule, and that NCL suggested that, from a consumer
issue, by September 30, 2001, the final rule would address the issues standpoint, only the actual alcohol
government-wide guidelines that raised in the letter. content in a product matters and not the
‘‘provide policy and procedural The issues raised by this comment are source of that alcohol. This commenter
guidance to Federal agencies for addressed elsewhere in this preamble. stated that most single servings of
ensuring and maximizing the quality, As we stated, TTB remains of the alcohol beverages contain roughly an
objectivity, utility and integrity of opinion that it is inherently misleading equal amount of alcohol, a fact of which
information (including statistical to label as FMBs products that derive up many consumers are unaware. Further,
information) disseminated by Federal to 99% of their alcohol content from the this commenter cited experts who agree
agencies.’’ On September 28, 2001, OMB distilled spirits components of added that all types of alcohol beverages are
issued guidelines; revised final flavors and other nonbeverage products. functionally equivalent on a serving-to-
guidelines were published on February As stated earlier in this preamble, we serving basis and that no differences
22, 2002. (See 67 FR 8452.) have determined that both the FAA Act exist between hard liquor and beer.
The law also requires Federal and the IRC provide us with authority Because of the ‘‘alcohol is alcohol’’
agencies to issue their own to define the terms ‘‘malt beverage’’ and argument, NCL opposed the proposed
implementing guidelines, including ‘‘beer’’ in order to set limits on the use rule because it perpetuates the
administrative mechanisms that allow of alcohol from added flavors and in differences between different types of
affected persons to seek and obtain order to ensure that the majority of the alcohol beverages and would continue
correction of information maintained alcohol is derived from fermentation at to accord alcohol beverages different
and disseminated by the agency, where the brewery. regulatory status based on their source
such information does not comply with As already pointed out in this of alcohol. This commenter suggested
the OMB Guidelines. Finally, the law preamble, we have also concluded that there is no scientific or public policy to
requires agencies to report periodically we are not required to conduct support these distinctions. As
to OMB on the number and nature of consumer surveys every time we define previously noted, NCL did state that
complaints received by the agency, and a labeling term applicable to alcohol there was greater merit to the majority
how such complaints were handled. beverages. In this rulemaking standard, as it ‘‘may reduce the
potential for consumers to be misled or convenience and grocery stores. Several will continue to consider labels and
confused,’’ and that compliance with commenters argued that convenience advertisements on a case-by-case basis,
the majority standard ‘‘will assure that and grocery stores are more conducive to determine if the overall presentation
consumers are not deceived as to to underage sales than are State-licensed misleads consumers as to the identity of
product content.’’ retailers selling distilled spirits, and the product.
they supported classifying FMBs as We note that not a single FMB
2. TTB Response distilled spirits products so that their producer indicated an intention to
TTB acknowledges that, depending on distribution would be more strictly produce FMBs that would be classified
the alcohol content of the product, regulated in most States. Other as distilled spirits products under either
single servings of different types of commenters expressed various concerns the proposed 0.5% standard or the 51/
alcohol beverages may contain roughly about the public health consequences of 49 standard we are adopting. Thus,
the same amount of ethyl alcohol and alcohol abuse. under either standard, FMBs would
that the ethyl alcohol found in these is On the other hand, some commenters continue to be produced as malt
chemically the same substance. pointed to the recent study conducted beverages rather than distilled spirits.
However, longstanding Federal and by the Federal Trade Commission (FTC). We recognize the concerns of many
State laws recognize very significant (See ‘‘Alcohol Marketing and commenters that FMBs may be
differences between distilled spirits, Advertising: A Report to Congress,’’ particularly attractive to young drinkers.
wine, and beer or malt beverages for Sept. 2003.) The FTC’s report noted that The public health issue posed by
production, tax, labeling, advertising, it had previously reviewed this issue in underage consumption of alcohol
and distribution purposes. Thus, to the response to a complaint by CSPI, and it beverages is significant. In September of
extent that the NCL comment suggests had found no evidence of intent to 2003, the National Research Council
that Federal law should ignore these target minors with the FMB products, and Institute of Medicine of the
distinctions, it lies outside the scope of packaging, or advertising. Furthermore, National Academies released a report to
the proposals made in Notice No. 4 and after reviewing the consumer survey Congress on underage drinking, in
would require significant statutory evidence submitted by CSPI in support which it found that the societal cost of
changes. of the proposition that FMBs were underage drinking has been estimated at
predominantly popular with minors, the $53 billion, including $19 billion from
C. Marketing of FMBs to Underage FTC concluded that flaws in the traffic crashes and $29 billion from
Drinkers survey’s methodology limited the ability violent crime. (See ‘‘Reducing Underage
1. Comments Received to draw conclusions from the survey Drinking: A Collective Responsibility.’’)
data. The report calls for a comprehensive
A number of commenters, including The FTC reviewed this issue again in prevention strategy to create and sustain
many individuals and several public response to a request by Congress to a broad societal commitment to reduce
interest organizations, commented that study the impact on underage underage drinking.
FMBs should be treated as distilled consumers of the significant expansion TTB appreciates the importance of
spirits. These commenters claimed that of ads for flavored malt beverages. The these prevention efforts. However, many
FMBs are designed for the youth market FTC’s investigation again found no of the issues that are of concern to the
due to their taste and the way in which evidence of targeting underage commenters in this regard are beyond
they are marketed. Further, these consumers in the marketing of FMBs. the scope of our authority. For example,
commenters stated that the introduction However, the report recognized that ad the FAA Act does not prohibit the
of FMBs has substantially increased content that appeals to new legal advertisement of distilled spirits
distilled spirits brand awareness and drinkers, as well as the sweet taste of products on television; voluntary
loyalty among young people. Some FMBs, may be attractive to minors, and industry codes in the broadcasting and
commenters claimed this is a deliberate the FTC urged the industry to exercise distilled spirits industries govern this
strategy on the part of producers. significant caution when introducing matter. Furthermore, it is the States that
One commenter suggested that TTB new alcohol beverage products, to decide whether products such as FMBs
should take action against producers ensure that they are not marketed to an are sold in liquor stores or grocery
and collect distilled spirits taxes on underage audience. (See ‘‘Alcohol stores. As previously noted, the
products marketed as malt beverages. Marketing and Advertising: A Report to rulemaking record indicates that
CSPI requested that TTB classify FMBs Congress,’’ September 2003, p.22.) producers of FMBs will reformulate
as distilled spirits in order to reduce their products so that they will continue
youth access to them by limiting the 2. TTB Response to be classified as malt beverages under
range of outlets where they can be sold. As stated in Notice No. 4, we do not Federal law, regardless of whether we
An individual commenter suggested believe that the use of distilled spirits adopt the 0.5% standard or the 51/49
that TTB undertake any action that brand names or cocktail names on FMB standard. Thus, we do not conclude that
would make FMBs more expensive in labels is inherently misleading. We adoption of the 0.5% standard would
order to reduce their availability to recognize that many commenters result in the reclassification, under
underage youth. believe that these names confuse Federal law, of FMBs as distilled spirits
CSPI further commented that its own consumers as to the identity of the products.
data found that both teens and adults products. However, if a product is Our mandate is to ensure the proper
think that so-called ‘‘alcopop’’ products clearly labeled with a designation such classification of FMBs under the IRC
such as FMBs, which have the brand as ‘‘malt beverage with natural flavors,’’ and the FAA Act, and to ensure that
names of distilled spirits products, are we believe that the use of a distilled these alcohol beverages are labeled and
more like liquor than beer or wine. spirits brand name on the label does not advertised in a manner that does not
Some commenters suggested that these mislead consumers. Accordingly, we are mislead consumers. We do not believe
products are particularly appealing to not adopting the suggestion that we that the concerns of those commenters
underage consumers and noted that prohibit the use of distilled spirits brand who wish to reduce underage alcohol
these products are marketed on names or cocktail names in the labeling consumption, important as they are, are
television and are widely available in or advertising of FMBs. However, we directly addressed by this rulemaking.
D. More Explicit Labeling of FMBs standard for flavored malt beverages. adopt this standard in the minimum
Among these comments, 6 were from period needed to assure industry
1. Comments Received
brewers, 3 were from Members of compliance.
Several commenters requested that Congress, 2 were from State licensing
TTB implement more specific labeling agencies, 3 were from national brewery 2. TTB Response
for FMBs, including label items such as trade associations, and the rest were
calories, serving size, ingredients, TTB is sensitive to the time needs and
from individuals. excise tax concerns of the FMB industry
alcohol content, and so forth. These
commenters claimed this action would A. Effective Date for Compliance With during this period of transition. We
provide essential information to the New Added Alcohol Standard realize that adoption of any added
consumers regarding these products. alcohol standard will impact production
methods, ingredients, suppliers, costs,
2. TTB Response Comments concerning and other facets of the business.
TTB believes that these comments are implementation, or a regulatory Moreover, we recognize that
outside the scope of the current effective date, varied from a minimum considerable time is needed to develop
rulemaking, as we did not specifically of ‘‘as short a period as is reasonable’’ new products that not only conform to
solicit comments on these issues in to a maximum of two years after an added alcohol standard, but which
Notice No. 4. However, the CSPI, the publication of the final rule containing
taste the same or are similar to existing
NCL, and other public interest groups an added alcohol standard for FMBs.
All brewers that commented on this non-conforming FMBs.
have recently petitioned TTB to require
additional labeling of all alcohol issue expressed concerns regarding the Based on the submitted comments
beverages. TTB will separately study the time needed for reformulating products, and the considerations noted above, we
petition in order to determine whether and for the purchase, installation, and are prescribing a one-year delayed
to propose such labeling for alcohol testing of new equipment. Among the effective date for the regulatory changes
beverages. Therefore, TTB is not reasons presented for establishing a adopted in this final rule document. We
considering this request for additional longer effective date were: the need to believe this will allow ample time to
labeling of flavored malt beverages as develop the correct taste profile in a develop new products and to acquire
part of this rulemaking. reformulated product; the need to invest the necessary equipment to place them
and install new equipment to produce into production. We believe the three-
E. Establishing Another Category of reformulated FMBs; the time needed to month and six-month periods requested
Alcohol Beverages gear up for mass production of by two commenters are too short for
1. Comments Received reformulated products; the time some industry members to make the
required to invest in co-packers necessary transition to the new rules.
Some commenters suggested that, equipment; and the need to test new
instead of attempting to classify FMBs We also believe that industry members
formulations of FMBs. One brewer will be able to comply with the new
as either beer or distilled spirits, TTB stated that reformulation of their
should seek an amendment to Federal rules in considerably less time than the
products would require them to produce
law to define a new class of alcohol 2-year period requested by one
as much as 8 times the amount of
beverages. These commenters suggested fermented malt base and that they commenter, especially since we are
that with a new category of alcohol would require significant time to adopting the less stringent 51/49
beverages, TTB could better address procure the necessary equipment. standard for FMB products.
taxation, labeling, and other issues that Another brewer commented that they In adopting a one-year delayed
apply to FMBs. This suggestion would would be able to comply with a 0.5% effective date, we also note that, due to
establish a unique category of alcohol alcohol standard, as proposed, within 3 the complex nature of this rulemaking,
beverages unlike distilled spirits or months time, and requested, at most, a more than one year has already passed
traditional beer. 6-month delayed effective date. Six since the publication of the proposed
2. TTB Response brewers requested effective dates of 6 rule. Thus, brewers have already had a
This comment is beyond the scope of months, 6 to 9 months, 1 year (two substantial period of time to focus on
the current rulemaking procedure, as its comments), 18 months, and 2 years. the research and development necessary
implementation would require Three trade associations commented to bring their products into compliance
amendments to Federal law. on this issue. One brewery trade with a new standard.
association commented that 3 months
F. Other Comments was an adequate amount of time to Accordingly, we provide a one-year
comply with the new standard. Another period of time from publication of this
One commenter suggested that TTB
commented that 18 months would be final rule in the Federal Register for
require identification and labeling of the
source of alcohol in FMBs in order to required. The third, a wholesaler brewers and importers to comply with
inform consumers of their composition. association, requested that TTB the 51/49 standard as well as other new
TTB believes that this comment is establish a reasonable amount of time regulatory requirements. As of the
outside the scope of the proposals for brewers to comply with the new effective date of this final rule, products
contained in Notice No. 4. Accordingly, standard. that do not comply with the new 51/49
we are not addressing this subject in the One State regulatory authority standard may not be produced at a
final rule. requested swift action to re-classify brewery, bottled at a brewery, removed
FMBs to the 0.5 percent standard, from a brewery with or without the
XIV. Implementation Dates specifying that a TTB delay will force payment of tax, removed from customs
TTB received 20 comments them to initiate a more restrictive custody for consumption, or (in the case
expressing opinions about regulation for alcohol beverages. of products not destined for exportation)
implementation dates, and related tax Another State believed it would not transferred to a second customs bonded
issues, for adoption of either the 0.5 need new State legislation for the 0.5 warehouse.
percent standard or the majority percent standard, and urged TTB to
B. Effect on Products in the Marketplace status of these products, and may XV. Comments on the Proposed
reclassify FMBs as distilled spirits Regulatory Text; Regulatory Text
products, perhaps even before the Changes
Three brewers and two trade effective date of this final rule. Several commenters suggested
associations commented about FMBs
C. Additional TTB Comment on the changes to the proposed regulatory text
that are in the marketplace at the time
Effective Date amendments contained in Notice No. 4.
of the effective date of a new standard.
These comments are not directed to the
These commenters sought reassurance We are using a single effective date for policy behind the proposed regulatory
that these FMBs would not be subject to the new alcohol percent standards for amendments, but rather to their
a floor stocks tax at the higher distilled FMBs. This date will permit affected wording, clarity, or organization. In
spirits excise tax rate, and that these industry members to transition their
products would not be subject to addition, TTB has independently
product lines according to their own reviewed the texts of the proposed
destruction or recall from the market needs. Until the effective date of this
since they might be considered distilled amendments and has made a number of
final rule, industry members may changes as a result of that review. The
spirits at that time. One brewer continue to produce and remove, at the
requested a six-month delay from the comments submitted and the changes
beer tax rate, FMBs that do not meet the made that are not of a minor editorial
final rule’s effective date so that new alcohol percent standards.
wholesalers could deplete their nature are discussed below.
Producers who cannot comply with
inventories of FMBs not in conformity the new 51/49 standard as of the A. Reference to Malt Beverage
with new alcohol standards. effective date of the final rule must stop Standards, §§ 7.10 and 7.11
2. TTB Response producing those FMB products at a 1. Comment Received
As noted above, the effective date for brewery. As of the effective date of the
The FMBC commented that creating a
implementation of the alcohol standard final rule, products deriving more than
new section to include standards for
impacts only the production and 49% of their alcohol content from the
malt beverages is unnecessary because
removal from a brewery, or the distilled spirits components of added
persons seeking information on this
importation and removal from customs flavors may only be produced at
topic would look at the definition of a
custody of malt beverage or beer distilled spirits plants. Such products
malt beverage in § 7.10. The FMBC
products. Thus, TTB will continue to would of course be subject to tax at the
suggested incorporating the standards
treat as beer or malt beverages those appropriate distilled spirits excise tax
proposed in § 7.11 into the definition of
products made according to previously rate.
malt beverage appearing in § 7.10.
existing standards and removed from Until the effective date of the final
the brewery or from customs custody rule, TTB’s Advertising, Labeling and 2. TTB Response
before the effective date. TTB will not Formulation Division (ALFD) will TTB does not agree with the comment
assess a distilled spirits tax on them or continue to approve statements of and suggested text change. The statutory
require their recall or destruction. process and certificates of label definition of a malt beverage is not
Wholesalers and retailers holding these approval (COLAs) for FMBs that may affected by this final rule; that definition
products on or after the effective date not comply with the new added alcohol cannot change without legislative
may continue to market them in the standards. During this interim period, action. Standards applying to
same manner as prior to the effective ALFD will qualify these statements of production or composition of a malt
date, until their supplies in the process and COLA approvals with beverage are more technical and may
marketplace are exhausted. reference to this final rule’s effective change from time to time. We wish to
Notwithstanding the above, it is date. However, whether qualified or not, separate the relatively simple statutory
incumbent on wholesalers and retailers statements of process for FMBs not in definition from the more technical
who hold these products to ensure compliance (including those permitting production requirements that we are
compliance with the requirements of the you to make a product not in adopting in this final rule. Further, we
States in which the products are held or compliance with the 51/49 standard) note that § 7.10 would become
introduced for sale. Many States have will become obsolete as of the effective unnecessarily long and technical if we
requested that TTB provide a Federal date of this final rule and will be were to place malt beverage standards in
FMB definition and added alcohol revoked by operation of the regulation. that section. Therefore, we have decided
percent standard that can serve as a This means that no individual to place the standards applying to
guide for State classification of alcohol proceedings are necessary in order to production and composition of malt
beverages. In adopting a 51/49 standard revoke those formulas. Similarly, beverages in § 7.11.
for malt beverages containing no more whether qualified or not, COLAs for We have provided a cross reference in
than 6% alcohol by volume, and by these products that do not comply with § 7.10 to the standards for malt
adding to the regulations a 1.5% the 51/49 standard as of the effective beverages appearing in § 7.11 in order to
standard for malt beverages with an date will also be considered revoked by alert readers that additional conditions
alcohol content in excess of 6% as operation of regulation unless the may apply to the production or
explained later in this preamble, TTB is underlying statement of process is composition of malt beverages. We also
furnishing guidelines to the various superseded by a new formula that is in have changed proposed § 7.10 by
States concerning the classification of compliance with the 51/49 standard. including a reference to ‘‘processes’’ as
flavored malt beverages. As already Because this final rule incorporates, well as standards for flavors in order to
noted in this preamble, while most in large part, the holdings of ATF alert the reader to the fact that malt
States look to Federal guidance in this Rulings 96–1 and 2002–2, while beverages may undergo certain
area and rely on Federal classification of establishing new standards for added processing specified in § 7.11.
alcohol beverages, there is certainly no alcohol from flavors and other TTB has changed the heading of
requirement for them to do so. Thus, nonbeverage products, these rulings will § 7.11 to read ‘‘Use of ingredients
individual States may take a different become obsolete as of the effective date containing alcohol in malt beverages;
view of the classification and taxable of the final rule. processing of malt beverages.’’ We
believe this title more accurately reflects the use of taxpaid wine in any malt As stated above, we have decided to
the provisions of this section, which beverage. adopt the more liberal 51/49 standard
permit the use of certain processes and Accordingly, in this final rule we instead of the proposed 0.5% standard.
authorize the use of certain ingredients have clarified our intent regarding the However, Coors has accurately pointed
containing alcohol in malt beverages. use of ingredients containing alcohol by out one hazard of extending the 51/49%
using the phrase ‘‘flavors and other majority rule to malt beverages of any
B. Comments on Alcohol Flavoring alcohol strength including those over
nonbeverage ingredients containing
Material Reference, §§ 7.11 and 25.15 6% alc/vol. To do so would facilitate
alcohol’’ in §§ 7.11 and 25.15. Use of
1. Comments Received this modified language makes it very the production of extremely high
clear that flavoring materials may strength malt beverages at breweries.
The FMBC commented on the contain alcohol and that other Prior to issuing ATF Ruling 96–1, our
wording in proposed § 7.11, specifically nonbeverage ingredients such as predecessor agency reviewed FMBs on
the phrase ‘‘alcohol flavoring materials blenders may contain alcohol. It does the market and determined that, based
and other ingredients containing not authorize the use of taxpaid distilled on approved statements of process, the
alcohol.’’ The FMBC supported this spirits or taxpaid wine in the only FMBs containing a significant
wording, and suggested that this production of malt beverages. amount of alcohol derived from flavors
language recognized that brewers may TTB notes that the FMBC also were for products that contained 6% or
add other ingredients containing supported the Notice No. 4 recognition less alcohol by volume in the finished
alcohol, such as taxpaid distilled spirits that various processes and treatments product. Although ATF had approved
and wine, to malt beverages. This may be used on malt beverages to statements of process under § 25.67 for
commenter suggested that the final rule remove color, aroma, bitterness or other FMBs containing in excess of 6%
further clarify this policy by authorizing characteristics derived from alcohol by volume, in no instance had
the use of ‘‘alcohol flavors, taxpaid fermentation. This provision remains the quantitative amount of alcoholic
wine, taxpaid distilled spirits, or any unchanged in § 7.11. flavoring materials used in such
other ingredient containing alcohol’’ in products contributed more than 1.5%
both § 7.11 and § 25.15. C. Malt Beverages Above 6.0% Alc/Vol; alc/vol to the finished product.
Status of ATF Ruling 96–1 Accordingly, to preserve the status quo
2. TTB Response
1. Comments Received pending rulemaking on this issue, ATF
TTB used the wording ‘‘alcohol ruled that FMBs containing in excess of
flavoring materials and other The FMBC commented that ATF 6% alcohol by volume may derive no
ingredients containing alcohol’’ in Ruling 96–1 limits the contribution of more than 1.5% alcohol by volume from
proposed § 7.11 to describe the kinds of added alcohol in malt beverages over added alcoholic flavoring materials.
materials that might contribute alcohol 6.0% alc/vol to not more than 1.5% of Based on the rulemaking record, there
to a finished malt beverage. We do not the total volume. This commenter stated is no need to liberalize the added
agree with this commenter’s suggestion that Notice No. 4 neither incorporated alcohol standard for FMBs with an
that this language includes, or should be nor addressed this limitation and alcohol content in excess of 6%. TTB
extended to include, the use of taxpaid requested that TTB clarify the status of believes that any such liberalization
distilled spirits or taxpaid wine. the limit in the ruling on alcohol would raise serious questions as to
addition for malt beverages over 6.0% whether the finished product was
The provision allowing the addition
alc/vol. appropriately classified as a malt
of flavors and other ingredients
Coors commented that the practical beverage or as a distilled spirits product.
containing alcohol to malt beverages
effect of the proposed 0.5% added Accordingly, this final rule
was specifically designed to permit the
alcohol limitation is to establish a incorporates the terms of ATF Ruling
addition of alcohol flavors to malt
natural limitation on the [upper] alcohol 96–1 with respect to malt beverages
beverages and to allow the addition of
content of malt beverages. This with an alcohol content of more than
certain other materials such as blenders
commenter noted that the TTB 6% alc/vol, by restricting the addition of
containing alcohol to malt beverages.
alternative 51/49 percent proposal alcohol to malt beverages above 6.0%
TTB in Notice No. 4 did not intend to
would permit a brewer to produce a alc/vol to not more than 1.5% of the
authorize the direct addition of distilled
35% alc/vol malt beverage by volume of the finished product. We
spirits to malt beverages. TTB reaffirms
combining a high alcohol fermented have incorporated this policy in the
its long-held position that the IRC does
malt beverage of 18% alc/vol with an regulatory texts by adding a new
not explicitly authorize the direct
additional 17% alc/vol through alcohol paragraph (a)(2) to § 7.11 and by
addition of distilled spirits to malt
flavor and blender use. Coors stated that modifying § 25.15(b) to include the
beverages. Thus, this final rule will not
ATF Ruling 96–1 clearly presented same 1.5% added alcohol qualification
authorize the addition of distilled spirits
TTB’s intention that alcohol in malt for malt beverages and beer over 6% alc/
to malt beverages.
beverages should be derived from vol.
TTB did include a reference to fermentation and not from fortification.
taxpaid wine in proposed § 25.15(b) and D. Changes to § 7.31
in proposed § 25.55(a)(2). However, this 2. TTB Response Although there is no substantive
final rule does not authorize that use of Notice No. 4 proposed to limit the change in the proposed amendment to
taxpaid wine. addition of alcohol to all malt beverages § 7.31, we have reversed the order of
Like distilled spirits, taxpaid wine is from flavors and other materials existing paragraph (d) and proposed
a beverage product. Neither the IRC nor containing alcohol to less than 0.5% new paragraph (e), so that paragraph (d)
the FAA Act specifically authorizes the alc/vol. This proposal would have contains the new provision for
use of taxpaid wine in the production of included malt beverages with an alcohol submitting a formula or sample of a malt
malt beverages. TTB will not allow content exceeding 6% alcohol by beverage to TTB in conjunction with the
taxpaid wine to make up to 49% of the volume. Thus, there was no need to filing of an application for a certificate
alcohol content of a malt beverage. separately address these malt beverages of label approval. We have also changed
Thus, this final rule does not authorize in the proposed regulations. the term ‘‘you’’ to ‘‘importer’’ to clarify
the person required to comply with the It has been TTB’s policy to authorize superseding formula. Under
regulation. the use of a formula covering § 25.58(b)(2), a superseding formula
production of a beer base that the retains the original formula number but
E. Reference to Standards for Beer,
brewer does not intend to market, but it must be annotated to show it is a
§§ 25.11 and 25.15
will use in the eventual production of superseding formula. If an existing
1. Comment Received a product such as an FMB. For example, certificate of label approval covers the
The FMBC commented that creating a a brewer might choose to file a formula product, the brewer may continue to use
new § 25.15 to include standards for for a beer base that the brewer has that certificate.
beer production is unnecessary because produced and removed character from We have changed the section
persons seeking this information would through a variety of processes. At a later headings in §§ 25.15 and 25.53 through
look at the definition of beer in § 25.11. stage, the brewer could produce several 25.58 by changing the question-style
The FMBC therefore suggested distinct fermented products by adding headings to declarative statement
incorporating the proposed § 25.15 different flavors to this base. We have headings. We believe the latter approach
standards into the existing definition of added a new paragraph (b)(2) to § 25.55 is more effective than question-style
beer in § 25.11. to reflect this practice. headings in helping the reader to find
If a brewer adds flavors to a beer base regulatory information. Additionally,
2. TTB Response or otherwise treats it to produce a we note that part 25 does not contain
TTB is not adopting this suggestion fermented beverage that the brewer other question-style headings at this
for the reasons previously set forth in intends to market, any approved beer time.
this comment discussion. We wish to base formula should be referenced in
the formula information specified in XVI. Regulatory Analysis and Notices
separate the relatively simple statutory
definition of beer from the more § 25.57. We have added a new A. Executive Order 12866
technical production requirements that paragraph (d) to § 25.57 to clarify this
point. As noted in the comment discussion
we are adopting in this final rule. in this final rule, several commenters
Further, we note that § 25.11 would Although we did not receive
comments directed to § 25.58, we have suggested that the proposed 0.5%
become unnecessarily long and standard would impose significant
technical if we were to include reorganized and revised this section in
order to clarify the distinction between regulatory burdens and economic costs
standards for beer in that section. on the FMB industry. One comment in
Therefore, we have retained the a new formula and a superseding
formula. We have not changed the particular, from the FMBC, suggested
proposed standards applying to the
substantive requirements in proposed that the costs of the proposed 0.5%
production and composition of beer in
§ 25.58. standard, when extrapolated to the
new § 25.15.
We believe that the inclusion of a Paragraph (a) sets forth conditions entire FMB industry, would exceed
cross reference at the end of the § 25.11 that trigger the filing of a new formula, $600 million over the next 4 years. In
beer definition to the standards for beer and these conditions are the same as addition, this commenter suggested that
appearing in § 25.15 is sufficient to alert those in paragraphs (a)(1) through (a)(6) the proposed 0.5% standard would have
readers that additional conditions may of proposed § 25.58. The revised a negative impact on revenue
apply to the production and introductory text of paragraph (a) collections by the Federal government
composition of beer. merely incorporates the terms of due to reductions in sales of FMBs.
proposed paragraph (c) regarding giving TTB believes that the FMBC comment
F. Other § 25.15 Issues each new formula a new formula may have overstated the regulatory
We have changed the title of § 25.15 number. burdens and economic costs that would
to read, ‘‘Materials for the production Paragraph (b) of § 25.58 combines be imposed by the proposed rule.
of beer.’’ This change better reflects the proposed paragraphs (b) and (d). The However, as already pointed out in this
content since this section specifies introductory text of revised paragraph document, we are persuaded by this and
materials that may be used in producing (b) clarifies when a brewer may file a other comments that imposition of a
beer at a brewery, and does not refer to superseding formula in lieu of filing an 0.5% standard for all FMBs would
the tax on beer. entirely new formula. Under this text, a impose greater regulatory burdens and
brewer may file a superseding formula economic costs than the 51/49 standard.
G. Comments on Formula Proposals, when the brewer makes a change to an In response to these comments, TTB
§§ 25.55–25.58 existing approved formula that is not of evaluated several options to minimize
We have conformed the language a type that would require a holder of a the regulatory burdens and economic
throughout §§ 25.55–25.58 to the use of certificate of label approval to file a new costs imposed by the rule. In particular,
the phrase ‘‘flavors and other application for label approval on TTB we adopted an option that we believe
nonbeverage ingredients containing Form 5100.31, regardless of whether the will meet the important regulatory goals
alcohol’’ in referring to the materials formula is for a product covered by a of this rulemaking project, while
containing alcohol that may be used in certificate of label approval. Thus, when reducing in a meaningful fashion the
producing beer. We have also removed a brewer replaces one ingredient with a regulatory burdens and costs imposed
the term ‘‘taxpaid wine’’ that appeared similar ingredient, and this replacement by the rule. In other words, we adopted
in proposed §§ 25.55(a)(2) and is not of a type that would require a new the more lenient alternative advocated
25.57(a)(3)(ii). As noted earlier in this certificate of label approval for the by the FMBC and others who opposed
comment discussion, these formula product, the brewer may file a the 0.5% rule; thus, the final rule allows
regulations do not authorize the use of superseding formula rather than a new products labeled as FMBs to derive up
taxpaid wine or taxpaid distilled spirits formula. to 49% of their alcohol content from the
in the production of beer. We also Paragraph (b)(1) specifies that distilled spirits components of added
added exception language regarding hop superseding formulas must be approved flavors and other nonbeverage products.
extract in § 25.55(a)(2) to clarify that the by TTB before they may be used, and In response to concerns raised by the
use of hop extract containing alcohol that TTB will cancel the original comments, TTB also adopted a one-year
does not require the filing of a formula. formula upon approval of the delayed effective date for the final rule,
to allow affected producers adequate the option of exempting small association representing more than
time to reformulate their products, if businesses from compliance with the 1,400 small brewers, supported the
necessary. We believe that this delayed requirements of the final rule. However, proposed rule without mentioning the
effective date also serves to address the for a number of reasons explained in alcohol content statement requirement.
concerns of affected industry members. detail earlier in the preamble to this Furthermore, we note that brewers are
Accordingly, for the reasons set forth document, we have adopted the more already required to keep records of
above, we have determined that the liberal 51/49 standard for products alcohol content under the IRC
final rule, as modified in response to the labeled as FMBs. We have also adopted regulations set forth in 27 CFR 25.293.
comments, is not a significant regulatory a one-year delayed effective date for the We have no information indicating that
action as defined in E.O. 12866. provisions of this final rule, to allow the requirement to disclose alcohol
Therefore, a regulatory assessment is not adequate time for those FMB producers content on brand labels for malt
required. that wish to reformulate their products beverages deriving alcohol from added
B. Regulatory Flexibility Act or otherwise conform to the flavors or other nonbeverage ingredients
requirements of the final rule regulatory would impose a significant economic
The Regulatory Flexibility Act texts. Accordingly, we believe that we burden on a substantial number of small
generally requires an agency to conduct have responded to the concerns raised entities. Accordingly, the record does
a regulatory flexibility analysis of any by small businesses and have not support such a finding.
rule subject to notice and comment meaningfully reduced the costs and Pursuant to section 7805(f) of the
rulemaking requirements unless the regulatory burdens imposed by the rule. Internal Revenue Code of 1986, we
agency certifies that the rule will not It should be noted that several small submitted the notice of proposed
have a significant economic impact on wholesalers and retailers commented rulemaking preceding this final rule to
a substantial number of small entities. that the proposed rule would have an the Chief Counsel for Advocacy of the
Small entities include small businesses, adverse impact on them, because State Small Business Administration (SBA)
small not-for-profit enterprises, and law might not allow them to sell FMB for comment on its impact on small
small governmental jurisdictions. products that are reclassified as distilled businesses. We received no comment
We have determined that this final spirits products. We believe that the from the SBA in response to that
rule will not have a significant modifications discussed above address submission.
economic impact on a substantial their concerns. Furthermore, the FMB
number of small entities. Accordingly, a C. Paperwork Reduction Act
producers that commented on this issue
regulatory flexibility analysis is not all indicated an intention to reformulate In Notice No. 4, TTB stated that the
required. their products within the requirements provisions of the Paperwork Reduction
In Notice No. 4, we stated our belief of the final rule, rather than produce Act of 1995, 44 U.S.C. chapter 35, and
that 10 or fewer qualified small beverages that would be classified as its implementing regulations, 5 CFR part
breweries actually manufacture flavored distilled spirits products under Federal 1320, did not apply to the notice of
malt beverages subject to this rule. We law. Finally, we would note that the proposed rulemaking, because we were
specifically solicited comments on the Regulatory Flexibility Act does not not proposing any new or revised
number of small breweries that may be require us to consider indirect effects on recordkeeping requirements. After
affected by this rule and on the impact businesses that are not directly subject review of the comments on this issue,
of this rule on those breweries. We to the requirements of the final rule; TTB has determined that the final rule
asked small breweries that believe they instead, the relevant economic impact is includes a new reporting requirement
would be significantly affected by this ‘‘the impact of compliance with the and a revision of an existing reporting
rule to let us know and to tell us how proposed rule on regulated small requirement. The new reporting
the rule would affect them. entities.’’ Mid-Tex Electric Cooperative, requirement involves the specific detail
In response to Notice No. 4, we Inc. v. FERC, 773 F.2d 327, 342 (D.C. that must be included in the formulas
received only a few comments from Cir. 1985). Wholesalers and retailers of for certain fermented products produced
brewers that identified themselves as FMBs are not directly subject to the at a brewery. The revision involves the
small brewers that would be affected by requirements of the final rule. mandatory alcohol content statement for
the rule. These comments, as well as Finally, a comment from the FMBC malt beverages that derive alcohol from
other comments submitted by FMB suggested that the alcohol content added flavors or other ingredients.
producers, suggested that the proposed labeling requirement would have a Because the final rule does not take
0.5% standard would unfairly burden significant economic impact on a effect for one year from publication of
small brewers, and could result in substantial number of small entities, this document in the Federal Register,
putting these companies out of business. including many small brewers that there is time to air these requirements
The comments indicated that the small produce beers and ales that contain only for public comment prior to the effective
brewers would be able to comply with a small quantity of flavors. The FMBC date of the rule.
the 51/49 standard without such comment conceded that it did not know These collections of information have
significant adverse consequences. how many brewers might be impacted been reviewed and, pending receipt and
In response to these comments and by this requirement but suggested that evaluation of public comments,
others, we have modified the regulatory many small brewers would be affected. approved by the Office of Management
texts contained in this final rule to The FMBC stated that its members and Budget (OMB) under 44 U.S.C.
reduce the potential economic impact of already label their FMB products with 3507(j) and assigned control numbers
the rule on small businesses that alcohol content statements. 1513–0118 and 1513–0087. An agency
produce FMBs. As indicated earlier in TTB did not receive any comments may not conduct or sponsor, and a
the preamble to this document, we from small brewers who produce person is not required to respond to, a
considered several options to reduce the traditional flavored beers and ales collection of information unless it
economic impact on small businesses. suggesting that the requirement for an displays a valid control number
For various reasons, most importantly alcohol content statement would impose assigned by OMB.
because the pertinent statutes would not a significant economic burden. The The collection of information in this
authorize such an option, we rejected Brewer’s Association of America, a trade regulation covered by OMB control
number 1513–0118 is found in • The accuracy of the agency’s dioxide, and with or without other
§§ 25.55–25.58. This collection is estimate of the information collection wholesome products suitable for human
necessary to ensure that producers of burden; food consumption. Standards applying
certain beers provide enough • Ways to enhance the quality, utility, to the use of processing methods and
information to TTB to ensure the proper and clarity of the information to be flavors in malt beverage production
tax classification of the products. The collected; appear in § 7.11.
likely respondents are businesses. • Ways to minimize the information * * * * *
• Estimated total annual reporting collection burden on respondents, ■ 3. We amend subpart B by adding a
and/or recordkeeping burden: 500 including through the use of automated new § 7.11 to read as follows:
hours. collection techniques or other forms of
• Estimated average annual burden information technology; and § 7.11 Use of ingredients containing
hours per respondent and/or • Estimates of capital or start up costs alcohol in malt beverages; processing of
recordkeeper: 5 hours. and costs of operations, maintenance, malt beverages.
• Estimated number of respondents and purchase of services to provide (a) Use of flavors and other
and/or recordkeepers: 100. information. nonbeverage ingredients containing
• Estimated annual frequency of XVII. Drafting Information alcohol—
responses: 5. (1) General. Flavors and other
The collection of information in this This principal author of this nonbeverage ingredients containing
regulation covered by OMB control document is Charles N. Bacon. Other alcohol may be used in producing a
number 1513–0087 is in § 7.22, which personnel in the Alcohol and Tobacco malt beverage. Except as provided in
imposes a requirement for an alcohol Tax and Trade Bureau and in the paragraph (a)(2) of this section, no more
content statement on labels of malt Department of the Treasury participated than 49% of the overall alcohol content
beverages deriving any alcohol from in the drafting of the document. of the finished product may be derived
added flavors or other nonbeverage List of Subjects from the addition of flavors and other
ingredients. This information is nonbeverage ingredients containing
required to ensure that consumers are 27 CFR Part 7 alcohol. For example, a finished malt
not misled as to the alcohol content of Advertising, Authority delegations, beverage that contains 5.0% alcohol by
malt beverages that derive alcohol from Beer, Consumer protection, Customs volume must derive a minimum of
sources other than fermentation at a duties and inspection, Imports, 2.55% alcohol by volume from the
brewery. The likely respondents are Labeling, Packaging and containers, fermentation of barley malt and other
businesses. This information constitutes Reporting and recordkeeping materials and may derive not more than
one element of the labeling information requirements. 2.45% alcohol by volume from the
on alcohol beverages required under addition of flavors and other
27 CFR Part 25 nonbeverage ingredients containing
authority of the Federal Alcohol
Administration Act (FAA Act), and it Beer, Claims, Electronic fund alcohol.
relates to only one sector of the alcohol transfers, Excise taxes, Exports, (2) In the case of malt beverages with
beverage industry. The policy of TTB Labeling, Liquors, Packaging and an alcohol content of more than 6% by
and its predecessor agency has been to containers, Reporting and recordkeeping volume, no more than 1.5% of the
treat all labeling requirements under the requirements, Research, Surety bonds. volume of the malt beverage may consist
FAA Act as resulting in one burden of alcohol derived from added flavors
Amendment to the Regulations and other nonbeverage ingredients
hour per respondent. Accordingly,
because the producers of malt beverages ■ For the reasons discussed in the containing alcohol.
already know the alcohol content of preamble, TTB amends 27 CFR parts 7 (b) Processing. Malt beverages may be
their products and displaying that and 25 as follows: filtered or otherwise processed in order
content on the label constitutes only a to remove color, taste, aroma, bitterness,
small portion of the existing labeling PART 7—LABELING AND or other characteristics derived from
requirements, the burden estimate ADVERTISING OF MALT BEVERAGES fermentation.
associated with this alcohol content ■ 1. The authority citation for 27 CFR ■ 4. We amend § 7.22 by adding a new
labeling requirement is minimal. part 7 continues to read as follows: paragraph (a)(5) to read as follows:
Comments concerning each collection
of information should be directed to the Authority: 27 U.S.C. 205. § 7.22 Mandatory label information.
Office of Management and Budget, ■ 2. We amend § 7.10 by revising the * * * * *
Attention: Desk Officer for the definition of ‘‘malt beverage’’ to read as (a) * * *
Department of the Treasury, Office of follows: (5) Alcohol content in accordance
Information and Regulatory Affairs, with § 7.71, for malt beverages that
Washington, DC 20503. A copy should § 7.10 Meaning of terms. contain any alcohol derived from added
also be sent to the Chief, Regulations * * * * * flavors or other added nonbeverage
and Procedures Division, Alcohol and Malt beverage. A beverage made by ingredients (other than hops extract)
Tobacco Tax and Trade Bureau, 1310 G the alcoholic fermentation of an containing alcohol.
Street, NW., Washington, DC 20220. infusion or decoction, or combination of * * * * *
Any such comments should be both, in potable brewing water, of ■ 5. We amend § 7.29 by revising the
submitted not later than March 4, 2005. malted barley with hops, or their parts, introductory text of paragraph (a) and by
Comments are invited on: or their products, and with or without adding a new paragraph (a)(7) to read as
• Whether the collection of other malted cereals, and with or follows:
information is necessary for the proper without the addition of unmalted or
performance of the functions of the prepared cereals, other carbohydrates or § 7.29 Prohibited practices.
agency, including whether the products prepared therefrom, and with (a) Statements on labels. Containers of
information will have practical utility; or without the addition of carbon malt beverages, or any labels on such
containers, or any carton, case, or (ii) The use of a brand name of a the brewery and may derive not more
individual covering of such containers, distilled spirits product as a malt than 2.45% alcohol by volume from the
used for sale at retail, or any written, beverage brand name, provided that the addition of flavors and other
printed, graphic, or other material overall advertisement does not present a nonbeverage ingredients containing
accompanying such containers to the misleading impression about the alcohol. In the case of beer with an
consumer, must not contain: identity of the product; or alcohol content of more than 6% by
* * * * * (iii) The use of a cocktail name as a volume, no more than 1.5% of the
(7) Any statement, design, device, or brand name or fanciful name of a malt volume of the beer may consist of
representation that tends to create a beverage, provided that the overall alcohol derived from added flavors and
false or misleading impression that the advertisement does not present a other nonbeverage ingredients
malt beverage contains distilled spirits misleading impression about the containing alcohol.
or is a distilled spirits product. This identity of the product. ■ 11. We amend subpart F by adding two
paragraph does not prohibit the * * * * * undesignated center headings, and by
following on malt beverage labels: adding new §§ 25.53 and 25.55 through
(i) A truthful and accurate statement PART 25—BEER 25.58, to read as follows:
of alcohol content, in conformity with
§ 7.71; ■ 8. The authority citation for part 25 Samples
(ii) The use of a brand name of a continues to read as follows:
§ 25.53 Submissions of samples of
distilled spirits product as a malt Authority: 19 U.S.C. 81c; 26 U.S.C. 5002, fermented products.
beverage brand name, provided that the 5051–5054, 5056, 5061, 5091, 5111, 5113,
5142, 5143, 5146, 5222, 5401–5403, 5411–
The appropriate TTB officer may, at
overall label does not present a any time, require you to submit samples
misleading impression about the 5417, 5551, 5552, 5555, 5556, 5671, 5673,
5684, 6011, 6061, 6065, 6091, 6109, 6151, of:
identity of the product; or (a) Cereal beverage, saké, or any
6301, 6302, 6311, 6313, 6402, 6651, 6656,
(iii) The use of a cocktail name as a
6676, 6806, 7011, 7342, 7606, 7805; 31 U.S.C. fermented product produced at the
brand name or fanciful name of a malt 9301, 9303–9308. brewery,
beverage, provided that the overall label
(b) Materials used in the production
does not present a misleading ■ 9. We amend § 25.11 by revising the
of cereal beverage, saké, or any
impression about the identity of the definition of ‘‘beer’’ to read as follows:
fermented product; and
product.
§ 25.11 Meaning of terms. (c) Cereal beverage, saké, or any
* * * * * fermented product, in conjunction with
* * * * *
■ 6. We amend § 7.31 by redesignating the filing of a formula.
Beer. Beer, ale, porter, stout, and other
paragraph (d) as paragraph (e) and by similar fermented beverages (including
adding a new paragraph (d) to read as (26 U.S.C. 5415, 5555, 7805(a))
saké and similar products) of any name
follows: or description containing one-half of Formulas
§ 7.31 Label approval and release. one percent or more of alcohol by § 25.55 Formulas for fermented products.
* * * * * volume, brewed or produced from malt,
(a) For what fermented products must
(d) Formula and samples. The wholly or in part, or from any substitute
a formula be filed? You must file a
appropriate TTB officer may require an for malt. Standards for the production of
formula for approval by TTB if you
importer to submit a formula for a malt beer appear in § 25.15.
intend to produce:
beverage, or a sample of any malt * * * * * (1) Any fermented product that will
beverage or ingredients used in ■ 10. We amend subpart B by adding an be treated by any processing, filtration,
producing a malt beverage, prior to or in undesignated center heading and a new or other method of manufacture that is
conjunction with the filing of a § 25.15 to read as follows: not generally recognized as a traditional
certificate of label approval on TTB process in the production of a fermented
Standards for Beer
Form 5100.31. beverage designated as ‘‘beer,’’ ‘‘ale,’’
* * * * * § 25.15 Materials for the production of ‘‘porter,’’ ‘‘stout,’’ ‘‘lager,’’ or ‘‘malt
■ 7. We amend § 7.54 by revising the beer. liquor.’’ For purposes of this paragraph:
introductory text of paragraph (a) and by (a) Beer must be brewed from malt or (i) Removal of any volume of water
adding a new paragraph (a)(8) to read as from substitutes for malt. Only rice, from beer, filtration of beer to
follows: grain of any kind, bran, glucose, sugar, substantially change the color, flavor, or
and molasses are substitutes for malt. In character, separation of beer into
§ 7.54. Prohibited statements. addition, you may also use the different components, reverse osmosis,
(a) General prohibition. An following materials as adjuncts in concentration of beer, and ion exchange
advertisement of malt beverages must fermenting beer: honey, fruit, fruit juice, treatments are examples of non-
not contain: fruit concentrate, herbs, spices, and traditional processes for which you
* * * * * other food materials. must file a formula.
(8) Any statement, design, device, or (b) You may use flavors and other (ii) Pasteurization, filtration prior to
representation that tends to create a nonbeverage ingredients containing bottling, filtration in lieu of
false or misleading impression that the alcohol in producing beer. Flavors and pasteurization, centrifuging for clarity,
malt beverage contains distilled spirits other nonbeverage ingredients lagering, carbonation, and blending are
or is a distilled spirits product. This containing alcohol may contribute no examples of traditional processes for
paragraph does not prohibit the more than 49% of the overall alcohol which you do not need to file a formula.
following in advertisements for malt content of the finished beer. For (iii) If you have questions about
beverages: example, a finished beer that contains whether or not use of a particular
(i) A truthful and accurate statement 5.0% alcohol by volume must derive a process not listed in this section
of alcohol content, in conformity with minimum of 2.55% alcohol by volume requires the filing of a formula, you may
§ 7.71; from the fermentation of ingredients at request a determination from TTB in
accordance with paragraph (f) of this TTB officer may also exempt the use of (2) You must serially number each
section. a particular coloring, flavoring, or food formula, commencing with ‘‘1’’ and
(2) Any fermented product to which material from the formula filing continuing in numerical sequence.
flavors or other nonbeverage ingredients requirement of paragraph (a)(3) or (3) You must date and sign each
(other than hop extract) containing paragraph (a)(4) of this section upon a formula.
alcohol will be added. finding that the coloring, flavoring, or (4) You must file two copies of each
(3) Subject to paragraph (f) of this food material in question is generally formula with TTB.
section, any fermented product to which recognized as a traditional ingredient in (b) Where do I file a formula? File
coloring or natural or artificial flavors the production of a fermented beverage your formula with the Assistant Chief,
will be added. designated as ‘‘beer,’’ ‘‘ale,’’ ‘‘porter,’’ Advertising, Labeling and Formulation
(4) Subject to paragraph (f) of this ‘‘stout,’’ ‘‘lager,’’ or ‘‘malt liquor.’’ Division, Alcohol and Tobacco Tax and
section, any fermented product to which (2) You may request a determination Trade Bureau, 1310 G Street, NW.,
fruit, fruit juice, fruit concentrate, herbs, from TTB on whether or not the use of Washington, DC 20220.
spices, honey, maple syrup, or other a process not listed in paragraph (a)(1)
food materials will be added. (26 U.S.C. 5401, 7805)
of this section will require the filing of
(5) Saké, including flavored saké and a formula or whether the use of a § 25.57 Formula information.
sparkling saké. particular coloring, flavoring or food (a) Ingredient information. (1) For
(b) Are separate formulas required for material may be exempted from the each formula you must list each
different products? formula filing requirement of paragraph
(1) You must file a separate formula separate ingredient and the specific
(a)(3) or paragraph (a)(4) of this section. quantity used, or a range of quantities
for approval for each different
You should mail your request to the used. You may include optional
fermented product for which a formula
Assistant Chief, Advertising, Labeling ingredients in a formula if they do not
is required.
(2) You may file a formula for a beer and Formulation Division, Alcohol and impact the labeling or identity of the
base to be used in the production of one Tobacco Tax and Trade Bureau, 1310 G finished product.
or more other fermented products. The Street, NW., Washington, DC 20220. (2) For fermented products containing
beer base must conform to the standards (i) When requesting a determination flavorings you must list for each
set forth in § 25.15. as to whether a process is subject to the formula: The name of the flavor; the
(c) When must I file a formula? formula filing and approval product number or TTB drawback
(1) Except as provided in paragraph requirement, the request must include: number and approval date of the flavor;
(c)(2) of this section, you may not (A) A detailed description of the the name and location (city and State)
produce a fermented product for which proposed process; of the flavor manufacturer; the alcohol
a formula is required until you have (B) Evidence establishing that the content of the flavor; and the point of
filed and received approval of a formula proposed process is generally production at which the flavor was
for that product. recognized as a traditional process in added (that is, before, during, or after
(2) You may, for research and the production of a fermented beverage fermentation).
development purposes (including designated as ‘‘beer,’’ ‘‘ale,’’ ‘‘porter,’’ (3) For formulas that include the use
consumer taste testing), produce a ‘‘stout,’’ ‘‘lager,’’ or ‘‘malt liquor’’; and of flavors and other nonbeverage
fermented product without an approved ingredients containing alcohol, you
(C) An explanation of the effect of the
formula, but you may not sell or market must explicitly indicate:
proposed process on the production of
this product until you receive approval (i) The volume and alcohol content of
a fermented product.
of the formula for it. the beer base;
(ii) When requesting an exemption (ii) The maximum volumes of the
(d) How long is my formula approval
from the formula filing requirement in flavors and other nonbeverage
valid? Your formula approved under
paragraph (a)(3) or paragraph (a)(4) of ingredients containing alcohol to be
this section remains in effect until: you
this section regarding coloring, used;
supersede it with a new formula; you
flavoring, or food material ingredients, (iii) The alcoholic strength of the
voluntarily surrender the formula; TTB
the request must include the following flavors and other nonbeverage
cancels or revokes the formula; or the
information: ingredients containing alcohol;
formula is revoked by operation of law
or regulation. (A) A description of the proposed (iv) The overall alcohol contribution
(e) Are my previously approved ingredient; to the finished product provided by the
statements of process valid? Your (B) Evidence establishing that the addition of any flavors or other
statements of process approved before proposed ingredient is generally nonbeverage ingredients containing
January 3, 2006 are considered recognized as a traditional ingredient in alcohol. You are not required to list the
approved formulas under this section, the production of a fermented beverage alcohol contribution of individual
provided that any finished product that designated as ‘‘beer,’’ ‘‘ale,’’ ‘‘porter,’’ flavors and other nonbeverage
could be made under the statement of ‘‘stout,’’ ‘‘lager,’’ or ‘‘malt liquor’’; and ingredients containing alcohol. You may
process would be in compliance with (C) An explanation of the effect of the state the total alcohol contribution from
the provisions of this part. You do not proposed ingredient in the production these ingredients to the finished
need to submit a formula for approval of a fermented product. product; and
if a statement of process that remains (v) The final volume and alcohol
§ 25.56 Filing of formulas. content of the finished product.
valid covers the product.
(f) Determinations by TTB regarding (a) What are the general requirements (b) Process information. For each
specific processes and ingredients. for filing a formula? (1) You must file formula you must describe in detail
(1) The appropriate TTB officer may your formula in writing. Your formula each process used to produce a
determine whether or not use of a must identify each brewery where the fermented beverage.
process not listed in paragraph (a)(1) of formula applies by including each (c) Alcohol content. For each formula
this section requires you to file a brewery name, address, and registry you must state the alcohol content of the
formula for approval. The appropriate number. fermented product after fermentation
and the alcohol content of the finished (3) Delete ingredients from an existing superseding formula replaces, but you
product. formulation; must annotate the formula number to
(d) Beer base formulas. You must refer (4) Change the quantity of an indicate it is a superseding formula
in your formula to any approved ingredient used from the quantity or number. (For example, ‘‘Formula 2,
formula number that covers the range of usage in an approved formula; superseding.’’)
production of any beer base used in (5) Change an approved processing, (c) When you file a new or
producing the formula product. If the filtration, or other special method of superseding formula with TTB, you
beer base was produced by another manufacture that requires the filing of a must follow the procedures and other
brewery of the same ownership, you formula; or requirements of §§ 25.56 and 25.57.
must also provide the name and address (6) Change the contribution of alcohol
or name and registry number of that from flavors or ingredients that contain § 25.62 [Amended]
brewery. alcohol.
(e) Additional information. The ■ 12. We amend § 25.62 by removing and
(b) Superseding formulas. You may
appropriate TTB officer may at any time reserving paragraph (a)(7).
file a superseding formula, instead of a
require you to file additional new formula, if you have made any § 25.67 [Removed and Reserved]
information concerning a fermented change listed in paragraphs (a)(2)
product, ingredients, or processes, in through (a)(6) of this section and that ■ 13. We amend Subpart G by removing
order to determine whether a formula change is not of a type that would and reserving § 25.67.
should be approved or disapproved or require a holder of a certificate of label
whether the approval of a formula § 25.76 [Removed and Reserved]
approval to file a new application for
should be continued. label approval on TTB Form 5100.31.
(26 U.S.C. 5415, 5555, 7805(a)) ■ 14. We amend Subpart G by removing
(1) A superseding formula replaces an and reserving § 25.76.
§ 25.58 New and superseding formulas. existing formula, and you should file Signed: August 6, 2004.
(a) New formulas. Except as otherwise one only if you do not intend to use the
Arthur J. Libertucci,
provided in paragraph (b) of this existing formula any more. A
superseding formula must be filed with Administrator.
section, you must file a new formula
TTB for approval. When TTB approves Approved: December 22, 2004.
(with a new formula number) for
approval by TTB if you— a superseding formula, TTB will cancel Timothy E. Skud,
(1) Create an entirely new fermented your previous formula. Deputy Assistant Secretary (Tax, Trade, and
product that requires a formula; (2) You may use the same formula Tariff Policy).
(2) Add new ingredients to an existing number for a superseding formula that [FR Doc. 04–28460 Filed 12–29–04; 8:45 am]
formulation; you used for the formula the BILLING CODE 4810–31–P

Rule: Alcoholic Beverages: Flavored Malt Beverages

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