Tobacco Marketing Quotas, Acreage Allotments, and Production Adjustment

DEPARTMENT OF AGRICULTURE

Agricultural Stabilization and Conservation Service

7 CFR Part 723

RIN 0560-AD56

Tobacco Marketing Quotas, Acreage Allotments, and Production

Adjustment

AGENCY: Agricultural Stabilization and Conservation Service, USDA.

ACTION: Proposed rule.

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SUMMARY: The Omnibus Budget Reconciliation Act of 1993 (the 1993 Act)

was enacted on August 10, 1993. Section 1106 of the 1993 Act amended

the Agricultural Adjustment Act of 1938 (the 1938 Act) by adding new

section 320C that imposes a domestic tobacco content requirement for

cigarettes made in the United States by any ``domestic manufacturer of

cigarettes'' as defined in the 1938 Act. Under the provisions of the

Act, as amended, each such manufacturer of cigarettes must certify the

percentage of tobacco produced in the United States which was used by

the manufacturer to produce cigarettes during the preceding calendar

year. If the percentage of United States produced tobacco used by a

domestic manufacturer of cigarettes in the manufacture of cigarettes is

less than 75 percent, the manufacturer will be subject to a domestic

marketing assessment and must purchase a quantity of tobacco from

inventories of the producer owned burley and flue-cured cooperative

marketing associations in an amount equal to the quantity of imported

tobacco used by the manufacturer to produce cigarettes during the

preceding calendar year that exceeds 25 percent of the total quantity

of tobacco used in such cigarette production. When a manufacturer is

subject to a domestic content marketing assessment, the assessment rate

will be based on the amount by which \1/2\ the sum of the average

prices per pound received during the most recent marketing year, by

producers of domestically produced burley tobacco and flue-cured

tobacco, respectively, exceeds the average price per pound paid for

unmanufactured imported tobacco during the preceding calendar year.

This proposed rule would amend the regulations to implement the

provisions of section 320C.

DATES: Comments must be received on or before February 10, 1994, in

order to be assured of consideration.

ADDRESSES: Interested persons are invited to submit written comments

to: Director, Tobacco and Peanuts Division, Agricultural Stabilization

and Conservation Service, United States Department of Agriculture, P.O.

Box 2415, Washington, DC 20013-2415.

FOR FURTHER INFORMATION CONTACT: Michael D. Thompson, Agricultural

Program Specialist, Tobacco and Peanuts Division, Agricultural

Stabilization and Conservation Service, United States Department of

Agriculture, P. O. Box 2415, Washington, DC 20013-2415, telephone 202-

720-4281.

SUPPLEMENTARY INFORMATION:

Executive Order 12886

This proposed rule is issued in conformance with Executive Order

12866. Based on a preliminary regulatory impact analysis, this proposed

rule has been determined to be economically significant. To obtain a

copy of the Preliminary Regulatory Impact Statement, contact Dr. Robert

Miller, Director, Tobacco and Peanut Analysis Division, Agricultural

Stabilization and Conservation Service, United States Department of

Agriculture, P. O. Box 2415, Washington, DC 20013-2415, telephone (202)

720-8839.

The 75 percent domestic tobacco content requirement is expected to

increase the usage of domestic tobacco by 188 million pounds for 1994

which will cost domestic manufacturers about $200 million. Since the

cost of domestic tobacco is about double that of imported tobacco,

domestic cigarette manufacturers are expected to shift cigarette

production to foreign based operations. As this shift in production

occurs, domestic cigarette production is expected to decline about 9

percent a year for the next four years. This will result in the loss of

about 11,000 jobs in domestic cigarette manufacturing plants. The use

of domestically produced tobacco will eventually decline to a level

less than if there were no domestic content requirement. Domestic

cigarette output is expected to decline about 40 percent by 1998. The

impact statement indicates little effect on the consumer prices for

cigarettes because the tobacco accounts for only about 3 percent of the

cost of cigarettes. The regulatory impact analysis does not consider

any effects that an increase in cigarette excise tax may have on

domestic cigarette production.

The initial increase in the use of domestic tobacco is expected to

draw down current loan stocks of burley and flue-cured tobacco. This

will benefit tobacco producers in the short term since the Commodity

Credit Corporation's net loan outlays for the 1994 marketing year are

estimated to be about $380 million less as a result of the domestic

tobacco content requirement. This will reduce the amount of the no-net-

cost assessments paid by producers and purchasers of tobacco.

Except for the cigarette manufacturing sector, this proposed

regulatory action is not expected to have an adverse effect on the

environment, public health or safety, or State, local, or tribal

governments or communities. This regulatory action is not expected to

be inconsistent nor interfere with an action taken or planned by

another federal agency. Other than as indicated in the summary of the

regulatory impact statement, this action would not alter the budgetary

impact of entitlements, grants, user fees, loan programs, or the rights

and obligations of the recipients thereof. This proposed rule would be

consistent with the President's priorities and principles set forth in

Executive Order 12866.

Regulatory Flexibility Act

It has been determined that the Regulatory Flexibility Act is not

applicable to this proposed rule since the Agricultural Stabilization

and Conservation Service is not required by 5 U.S.C. 553 or any other

provision of law to publish a notice of proposed rule making with

respect to the subject matter of this rule.

Federal Assistance Program

The title and number of the Federal Assistance Program, as found in

the Catalog of Federal Domestic Assistance, to which this rule applies

are:

Commodity Loans and Purchases--10.051.

Environmental Evaluation

It has been determined by an environmental evaluation that this

action will have no significant impact on the quality of the human

environment. Therefore, neither an environmental assessment nor an

environmental impact statement is needed.

Executive Order 12372

This activity is not subject to the provisions of Executive Order

12372 which requires intergovernmental consultation with State and

local officials. See the notice related to 7 CFR part 3015, subpart V,

published at 48 FR 29115 (June 24, 1983).

Executive Order 12778

This proposed rule has been reviewed in accordance with Executive

Order 12778. The provisions of this proposed rule are not retroactive

and preempt State laws to the extent that such laws are inconsistent

with the provisions of this proposed rule. Before any legal action is

brought regarding determinations made under the provisions of 7 CFR

part 723, the administrative appeal provisions set forth at 7 CFR part

780 must be exhausted.

Paperwork Reduction Act

This proposed rule would impose new record keeping and information

collection requirements on domestic manufacturers of cigarettes and

related tobacco industry business beginning January 1, 1994. The

contents of and justification for the reporting and record keeping

requirements will be submitted to the Office of Management and Budget,

under OMB No. 0560-0058, for review and approval in accordance with the

requirements of the Paperwork Reduction Act of 1980, as amended.

Comments regarding these requirements in this proposed rule and

suggested alternatives may be sent to the Office of Management and

Budget, Paperwork Reduction Project, Washington, DC 20503; and to the

Department of Agriculture, Clearance Officer, OIRM, room 404-W,

Washington, DC 20250.

Summary of Statutory Provisions

Section 320B of the 1938 Act imposes certain requirements on

``domestic manufacturers of cigarettes'' and those manufacturers are

defined in section 301 of the 1938 Act to be those that produce and

sell at least one percent of the cigarettes produced and sold in the

United States. Section 320B requires that those manufacturers specify

each year, in advance, their expected purchases of burley and flue-

cured tobacco. The sanction for failing to do so accurately, within

certain limits, is that the manufacturer must pay an additional

assessment to offset the cost of the Federal tobacco program.

Section 320C provides for additional requirements that must be met

by ``domestic manufacturers of cigarettes'' to avoid additional

assessments. The provisions of section 320C are set out in greater

detail below in the description of the content and organization of the

proposed rule. Generally, under section 320C manufacturers who are

``domestic manufacturers of cigarettes'' must certify each year the

percentage of U.S. tobacco used in their cigarettes. If more than 25

percent is imported tobacco, the manufacturer must pay an assessment.

Also, if this limit is exceeded, the manufacturer must make

compensatory purchases of tobacco from the burley and flue-cured

producer loan associations and may be required to pay a penalty for

failing to make such compensatory purchases in a timely manner. Under

section 320C(f), the 75/25 ratio may be reduced if the Secretary

determines that U.S. tobacco supply conditions warrant a reduction due

to conditions beyond the control of producers. Also, section 320C

requires that manufacturers file reports and maintain records as

specified by the Secretary to enforce that section. Failure to file

required reports or maintain records, or the submission of false

information can lead to criminal penalties as well as other sanctions.

Other new provisions concerning assessments on imported tobacco enacted

in the 1993 Act will be implemented in a separate rule.

Coverage of the Proposed Rule; Definition of Tobacco

The 75/25 ratio is referred to in the rule as the ``domestic

content requirement.'' Since this requirement is a calendar year

requirement under section 320C, the proposed rule would apply the

requirement first in 1994. The authorizing statute was enacted well

into 1993. There is nothing in the Act to provide for making the

provisions retroactive.

The requirement applies only to ``domestic manufacturers of

cigarettes.'' The statute does not limit, as such, the content

requirement to cigarettes produced by those manufacturers in the United

States. The fact that section 320C applies the requirement only to

certain ``domestic'' manufacturers, and given other provisions of

section 320C, the proposed rule limits the coverage to cigarettes

produced by subject manufacturers in the United States. For that

purpose, the rule defines ``United States,'' consistent with section

301 of the 1938 Act, to be the fifty States, the territories of the

United States, the District of Columbia and Puerto Rico. With respect

to limiting coverage to domestic production, section 320C(b) provides

that the sanctions in 320C(c), (d), and (e) will apply when the use of

``imported tobacco'' exceeds 25 percent. Tobacco becomes ``imported''

only by reference to a domestic market. Hence, it appears clear that

the statute was intended to cover only domestic production of

cigarettes.

The domestic content requirement requires counting all the

``tobacco'' in the cigarettes and computing the amount of ``imported

tobacco'' in those cigarettes. The 1938 Act covers many commodities,

including tobacco. Until recently the tobacco provisions of the 1938

Act dealt mainly with regulating the production of tobacco by domestic

producers and the definition of ``tobacco'' in section 301 of the 1938

Act, which is made generally applicable to the entire 1938 Act, appears

to have been drafted accordingly when it was enacted in 1938. The term

``tobacco'' is used in section 320C without a modifier and in

combination with the word ``imported.'' Tobacco is classified by kind

and by type number. For example, domestic burley tobacco is commonly

referred to as type 31. Section 301 refers to the ``Service and

Regulatory Announcement 118 of the U.S. Department of Agriculture

(USDA) Bureau of Agricultural Economics'' published in 1929 and defines

tobacco to mean certain specified tobacco types by type number as

identified in Announcement 118. All of the identified types, however,

are identified in Announcement 118 as domestic tobaccos. Foreign

tobaccos are assigned other type numbers and, thus, under the section

301 definition, they technically would not appear to be, ``tobacco'' at

all under that definition. However, section 320C clearly was intended

to measure the amount of use of ``imported tobacco,'' as those words

would be defined in their common meaning as compared with domestic

tobacco use. Use of the section 301 definition of ``tobacco'' would

make that comparison impossible and make the statute essentially

meaningless. Thus, the proposed rule presumes that the Congress did not

intend for the section 301 definition of ``tobacco'' to be used for the

section 320C purpose. The proposed rule has been drafted accordingly.

``Tobacco'' is defined in the proposed rule to mean that which is

commonly considered to be ``tobacco'' in the trade. As there is no

provision in the statute to do otherwise, that would include all

foreign tobacco, including those like Turkish and Oriental tobaccos,

which may not have as close a domestic counterpart as other tobaccos.

This inclusion is consistent with the Conference report issued with the

1993 Act (H. Conf. Report No. 103-213) where the Conference managers

stated their belief that the 75/25 ratio, by allowing the maintenance

of current blends, would be sufficient to ``permit the continued

importation of Turkish and Oriental tobaccos.'' If Turkish and Oriental

tobaccos were not subject to section 320C, the ratio would be

irrelevant. These conclusions, as with all aspects of the proposed

rule, are subject to further consideration on receipt of comments.

Discussion of Proposed Rule

1. Domestic Tobacco Content Requirement (Sec. 723.502)

A ``domestic manufacturer of cigarettes'' is defined in section

301(b)(17) of the 1938 Act as ``a person that produces and sells more

than 1 percent of the cigarettes produced and sold in the United

States.'' To avoid the domestic marketing assessment and other

sanctions imposed by section 320C of the amended 1938 Act, beginning in

1994 and each succeeding calendar year, each domestic manufacturer of

cigarettes must use at least 75 percent domestically grown tobacco in

the cigarettes manufactured by such manufacturer. In determining

compliance with the domestic content requirement, the proposed rule

specifies that imported tobacco will include all tobacco imported into

the United States including Oriental and Turkish tobaccos. The domestic

tobacco content requirement will apply to all cigarettes manufactured

in the United States by a domestic manufacturer of cigarettes without

regard to whether the manufactured cigarettes are sold domestically or

exported. The domestic content requirement would not apply to

cigarettes manufactured outside the United States by a domestic

manufacturer of cigarettes. Likewise, the domestic tobacco content

requirement would not apply to tobacco processed in the United States

for use in making cigarettes outside the United States. Domestic

manufacturers of cigarettes with operations located outside the United

States would not be required to file reports for cigarettes

manufactured in such foreign based operations for foreign-made

cigarettes and the domestic content rules would not apply to such

cigarettes.

2. Reports and Certifications by Domestic Manufacturers of Cigarettes

(Sec. 723.502)

Under the proposed rule, beginning with the 1994 and each

succeeding calendar year, each domestic manufacturer of cigarettes

would be required to maintain records, file reports and certify to the

quantities of domestic and imported tobacco used by such manufacturer

to manufacture cigarettes in the United States. Determinations as to

content percentages would be based on the weight of the tobacco when it

is ready for the cigarette manufacturing process. Adjustments, to avoid

double-counting, will be made for any tobacco which loses its identity

during the manufacturing process and is recaptured and reused to

manufacture cigarettes by the same manufacturer and for tobacco in any

cigarettes returned to the manufacturer and reused by such manufacturer

to manufacture other cigarettes. Such adjustments will be made only to

the extent that records are maintained which prove the reuse of such

tobacco. For the purpose of determining the domestic content

percentage, any tobacco reconstituted, or otherwise processed, so as to

lose its respective identity as either imported tobacco or domestic

tobacco, before being acquired by a domestic manufacturer of cigarettes

shall be considered to be imported tobacco when it is used to produce

cigarettes by a domestic manufacturer of cigarettes. The proposed rule

provides that reports and certifications must be mailed or otherwise

delivered to Director, Tobacco and Peanuts Division, Agricultural

Stabilization and Conservation Service, U. S. Department of

Agriculture, P. O. Box 2415, Washington, DC 20013-2415 by February 15

of the year after the calendar year for which reports and

certifications apply. Failure to file timely reports or make required

certifications will result in all tobacco used by the manufacturer in

the manufacturing of cigarettes in the United States being considered

as imported tobacco and sanctions would be applied accordingly. Such a

presumption is provided for in section 320C(b) of the 1938 Act.

3. Domestic Marketing Assessment and Required Purchases of Tobacco

(Secs. 723.503 and 723.504)

Section 320C(c) of the Act provides that if the quantity of

imported tobacco used by a domestic manufacturer for making cigarettes

for the year exceeds 25 percent, such manufacturer must pay a domestic

marketing assessment on each pound of imported tobacco used in excess

of 25 percent. In addition, as provided in section 320C(d) and (e),

such manufacturer must purchase tobacco from the existing burley and

flue-cured tobacco inventories of producer owned cooperative marketing

associations in an amount equal to the weight of imported tobacco used

in excess of 25 percent.

The per pound domestic marketing assessment rate set by section

320C(c) is the difference between one-half the sum of the average

market prices received by domestic producers of burley tobacco and

flue-cured tobacco, respectively, and the average price of

unmanufactured imported tobacco. Domestically produced burley and flue-

cured tobaccos are marketed on a marketing year basis. The average

price per pound paid to domestic producers for a kind of tobacco is

determined for the marketing year. The marketing years are: for burley

tobacco, October 1 through September 30; and for flue-cured tobacco,

July 1 through June 30. Under the proposed rule, the average prices for

domestically produced burley tobacco and flue-cured tobacco would be

calculated using data published by the Department of Agriculture's

National Agricultural Statistics Service (NASS). For the other side of

the comparison, a weighted average price of all unmanufactured tobacco

imported for consumption in the United States, with no allowance for

tobacco reexported, would be calculated from Bureau of Census data. For

example, if the calculated average market prices were $1.83 per pound

for burley tobacco and $1.73 per pound for flue-cured tobacco, the

average price would be $1.78 per pound. If the weighted average price

of unmanufactured imported tobacco for the relevant period was $1.28

per pound, a domestic marketing assessment rate of $0.50 per pound

would apply. That rate would be multiplied by the pounds of imported

tobacco used in excess of the 25 percent limit (unless a higher limit

had been set under the Secretary's discretionary authority to adjust

the limit as provided for in section 320C(f)). If noncompliance is

indicated, the cigarette manufacturer will have an opportunity for an

administrative hearing before any domestic marketing assessments or

other sanctions are imposed. Under the proposed rule payment of the

assessment would be required to be made within 30 days after the

manufacturer is notified of the amount due.

Where a domestic content violation has occurred, the compensatory

purchases of tobacco by a manufacturer, as required by section 320C(d)

and (e), must be in equal quantities of burley and flue-cured tobacco

and must be from the inventories of producer owned cooperative

marketing associations that handle price support loans for tobacco.

However, the statute provides that if the total required compensatory

purchases by all noncomplying manufacturers would reduce the

associations inventories of loan stocks of burley or flue-cured tobacco

below the reserve stock level for the respective kind of tobacco, the

required purchase of such kind of tobacco, for each manufacturer, may

be reduced proportionately. These provisions of section 320C would be

implemented by Sec. 723.504 of the proposed rule. The required

purchases of burley tobacco could be made from either of the two

producer owned marketing associations for burley tobacco: the Burley

Tobacco Growers Cooperative Association and the Burley Stabilization

Corporation. There is only one applicable producer association for

flue-cured tobacco, the Flue-Cured Tobacco Cooperative Stabilization

Corporation. Under the proposed rule, required purchases of tobacco

must be at the applicable list price published by the association

without discounts of any kind. The manufacturer would be allowed to

make such purchases from any grade or grades of uncommitted tobacco in

the association's inventories. Compensatory purchases of tobacco would

be required to be made within 30 days after the manufacturer is

notified of the quantities of burley and flue-cured tobacco that must

be purchased. However, the time could be extended if the manufacturer

requests reconsideration of the compensatory purchase determination. As

provided in sections 320C (d) and (e) of the statute, if a manufacturer

fails to make the required compensatory purchases in a timely manner,

the manufacturer, under the proposed rule, would be subject to a

penalty of 75 percent of the average market price for the applicable

kind of tobacco for the most recent marketing year multiplied by the

quantity of tobacco involved. Further, as provided in sections

320C(d)(5) and (e)(5), these compensatory purchases could not be

counted by the manufacturer for purchases in the application of section

320B of the 1938 Act.

4. Reduction of Domestic Content Required Percentage (Sec. 723.505)

Section 320C(f) provides that the Secretary may reduce the 75

percent domestic content requirement for a calendar year following a

crop loss if the Secretary, in consultation with the producer owned

tobacco associations, determines that: (1) Because of drought, insect

or disease infestation, or other natural disaster or other conditions

beyond the control of producers, the total quantity of a crop of

domestic burley or flue-cured tobacco which is harvested and suitable

for marketing is substantially less than the expected production for

the crop and (2) loan stock inventories for the kind of tobacco have

been depleted. Under the proposed rule, the expected production would

be calculated based on the planted acreage of the kind of tobacco, as

reported by the NASS, multiplied by the average of the 5 most recent

years' average yields per acre as published by the NASS for that kind

of tobacco. The loan stock inventory of a kind of tobacco would be

considered to be depleted if the Secretary, in consultation with the

associations, concluded that the loan stock inventories at the

beginning of the next marketing year for such kind of tobacco would not

likely exceed 25 percent of the reserve stock level. Under the proposed

rule, the Secretary would make the determination to announce any

reduced percentage for the domestic content requirement by November 30

of the year preceding the year of the reduction. Under the proposed

rule, the Secretary's authority for making the determinations on

reducing the domestic content percentage would be delegated to the

Director, Tobacco and Peanuts Division.

5. Required Records and Reports (Sec. 723.506); False Statements

(Sec. 723.507); and Confidentiality (Sec. 723.508)

Section 320C(b) of the 1938 Act requires that manufacturers

maintain records and make such reports as are necessary to show

compliance with the domestic tobacco content requirement. That section

also provides that the Secretary and the USDA Office of Inspector

General may examine such records and other matters as the Secretary has

reason to believe may be relevant and that the Secretary may charge a

fee to the manufacturer for the reasonable cost of any such

examination. Section 320C(b) provides, as well, that any person who

fails to provide requested information or provides false information

shall be subject to 18 U.S.C. 1001 which, generally, provides that

persons who knowingly and willfully supply false or misleading

information, or cover up information, on matters within the

jurisdiction of federal agencies, may be fined up to $10,000 or

imprisoned up to five years. Section 320C(b) also provides that

information submitted regarding cigarette content and levels of

production will be exempt from disclosure to other members of the

public under the Freedom of Information Act provisions of 5 U.S.C. 552.

These provisions of section 320C are implemented in Sec. 723.506

through Sec. 723.508 of the proposed rule.

Under the proposed rule, with respect to records and reports,

manufacturers would be required, at a minimum, to file reports and

maintain records concerning the kind, quantity, form (stemmed,

unstemmed, reconstituted, etc.), and country of origin of all tobacco

which is:

(1) In inventory at the beginning of the calendar year,

(2) Acquired during the calendar year,

(3) Used to manufacture cigarettes in the United States during the

calendar year, and

(4) Disposed of other than through the manufacture of cigarettes in

the United States during the calendar year.

Separate records would be required for each lot, batch, or blend

that is used to manufacture cigarettes. These records would be required

to indicate the quantity of tobacco by category, domestic or import,

and the total quantity of tobacco for each specific lot, batch, or run

of tobacco. Regarding confidentiality, while the provisions of the

statute controls disclosure of information regarding individual

manufacturers, summary statistical data and general statements that are

not related to a specific cigarette manufacturer could be released.

List of Subjects in 7 CFR Part 723

Acreage allotments, Assessments, Marketing quotas, Penalties,

Recording and recordkeeping requirements, Tobacco.

For the reasons set out in the preamble, it is proposed that 7 CFR

part 723 be amended as follows:

PART 723--TOBACCO

1. The authority citation for part 723 is revised to read as

follows:

Authority: 7 U.S.C. 1301, 1311-1314, 1314-1, 1314b, 1314b-1,

1314b-2, 1314c, 1314d, 1314e, 1314f, 1314i, 1315, 1316, 1362, 1363,

1372-75, 1421, 1445-1, and 1445-2.

2. Part 723 is amended by adding subpart E to read as follows:

Subpart E--Domestically Produced Cigarettes

Sec.

723.501 Definitions.

723.502 Domestic tobacco content.

723.503 Domestic content marketing assessment.

723.504 Required purchases from tobacco loan stocks.

723.505 Reduction of domestic content percentage.

723.506 Required records and reports; Burden of proof.

723.507 False reports; Failure to file reports; and Examination of

records.

723.508 Reconsideration and appeal.

723.509 Confidentiality of information.

Subpart E--Domestically Produced Cigarettes

Sec. 723.501 Definitions.

In addition to the definitions set forth at Sec. 723.104, the

definitions set forth in this section shall be applicable for purposes

of administering the provisions of this subpart.

Domestic manufacturer of cigarettes. A person that produces and

sells more than 1 percent of the cigarettes produced and sold in the

United States.

Domestic tobacco. Any quantity of harvested tobacco which has been

cultivated, grown, and produced in the United States.

Imported tobacco. Any tobacco, including Oriental and Turkish

tobaccos, not produced in the United States if such tobacco has been

entered into the United States. Any tobacco that cannot be verified as

being domestic tobacco shall be presumed to be imported tobacco.

Manufactured tobacco. Tobacco that has been processed and packaged

into cigarettes or other consumer tobacco products.

Producer owned cooperative marketing association. Those loan

associations that offer price support for burley and flue-cured tobacco

through contractual agreements with the Commodity Credit Corporation of

USDA. These associations are the Burley Tobacco Growers Cooperative

Association, the Burley Stabilization Corporation, and the Flue-Cured

Tobacco Cooperative Stabilization Corporation.

Tobacco. Any commodity or substance that is commonly considered to

be tobacco in the trade.

United States. The 50 States of the United States, the District of

Columbia, Puerto Rico, or any Territory or Possession of the United

States.

Unmanufactured tobacco. Any tobacco that is not processed and

packaged as a consumer tobacco product.

USDA. The U.S. Department of Agriculture.

Sec. 723.502 Domestic tobacco content.

(a) General requirement. (1) Except as provided in Sec. 723.505 of

this part, during each calendar year beginning with 1994, the total

domestic tobacco used for cigarettes manufactured in the United States

by a domestic manufacturer of cigarettes shall, for the calendar year,

equal or exceed 75 percent of the total quantity of tobacco used by

such manufacturer in such cigarettes.

(2) Any tobacco that has been reconstituted, or otherwise processed

to the extent that it has lost its respective identity as either

domestic tobacco or imported tobacco before its acquisition by such

domestic manufacturer of cigarettes, shall be considered as imported

tobacco when determining compliance with the domestic tobacco content

requirements of this subpart.

(3) Any tobacco having lost its identity with respect to its origin

of production during the manufacturing process which is recaptured and

reused to manufacture cigarettes in the United States by the same

manufacturer and any cigarettes returned to the manufacturer and reused

by such manufacturer to manufacture cigarettes in the United States

shall not be recounted. The burden of establishing such re-use shall be

on the manufacturer.

(b) Reports required by manufacturers. (1) Beginning with the 1994

calendar year, a domestic manufacturer of cigarettes shall report to

the Director, for each calendar year, the following on the basis of

weights of tobacco as it begins use in manufacturing cigarettes:

(i) The total quantity of tobacco used by the manufacturer to

produce cigarettes in the United States during such calendar year.

(ii) The total quantity of imported tobacco used by the

manufacturer in the production of cigarettes in the United States

during such calendar year.

(iii) The total quantity of domestic tobacco used by the

manufacturer in the production of cigarettes in the United States

during such calendar year.

(2) For purposes of the report required by paragraph (b)(1) of this

section, tobacco weights shall be reported based on the weight of

tobacco when it is ready for manufacturing into cigarettes and to the

extent, if any, that a conversion is needed, tobacco weight shall be

converted to such weights based on normal processing yields with

respect to the various forms and kinds of tobacco, subject to review by

the Director.

(c) Where and when to report. The reports required by this subpart

shall be mailed or otherwise delivered to Director, Tobacco and Peanuts

Division, Agricultural Stabilization and Conservation Service, USDA,

P.O. Box 2415, Washington, DC 20013-2415 by February 15 of the year

after the calendar year for which the report applies.

(d) Failure to report. A manufacturer who fails to report the

quantities of domestic and imported tobacco used for manufacturing

cigarettes shall be presumed to have used only imported tobacco in such

cigarettes. The Director may determine the total quantity of tobacco

used by any method determined reasonable by the Director to arrive at

that estimate.

(e) Failure to comply. Each domestic manufacturer of cigarettes who

fails to comply with the requirements of this section shall pay a

domestic marketing assessment and shall purchase loan stocks of tobacco

in accordance with Secs. 723.503 and 723.504.

Sec. 723.503 Domestic content marketing assessment.

(a) General. Each domestic manufacturer of cigarettes who fails to

comply with the domestic content requirement in Sec. 723.502 shall pay

a nonrefundable domestic marketing assessment to the Commodity Credit

Corporation as provided in this section.

(b) Assessment rate. A domestic marketing assessment rate, for

purposes of this section, shall be determined for each calendar year.

The assessment rate shall be equal to the difference between one-half

the sum of the average prices per pound received by domestic producers

of burley tobacco and flue-cured tobacco, respectively, for the

previous marketing year as determined by the Director. The Director may

use for that purpose data published by the National Agricultural

Statistic Service of USDA and the weighted average price of

unmanufactured tobacco which was imported during the previous calendar

year, as calculated from Bureau of Census data for such calendar year.

Other data may be used in lieu of that data.

(c) Amount of assessment due. The Director shall assess a domestic

marketing assessment against each domestic manufacturer of cigarettes

who fails to comply with the domestic content requirement of this

subpart. The domestic marketing assessment shall be determined by:

(1) Multiplying the required percentage of domestic content by the

total pounds of tobacco used to produce cigarettes during the

applicable calendar year;

(2) Subtracting the pounds of domestic tobacco used in such

cigarettes from the result determined in paragraph (c)(1) of this

section, and

(3) Multiplying the result determined in paragraph (c)(2) of this

section, if a positive number, by the assessment rate determined under

the provisions of paragraph (b) of this section.

(d) Time for paying assessment. The manufacturer shall pay the

domestic marketing assessment provided for in this section within 30

calendar days after demand for payment. However, if the manufacturer

timely requests reconsideration or timely appeals the determination,

the time for payment of the amount in dispute may be extended by the

Director to a date no later than 30 calendar days after the final

determination is rendered.

(e) Failure to timely pay assessment. If a domestic manufacturer of

cigarettes fails in a timely manner to pay any assessment under this

section, such manufacturer shall be subject to a penalty in an amount

equal to twice the amount of the initial assessment. The penalty shall

be payable in addition to the initial assessment and any other charges

that apply.

Sec. 723.504 Required purchases from tobacco loan stocks.

(a) General. In addition to paying a domestic marketing assessment,

each domestic manufacturer of cigarettes who fails to comply with

Sec. 723.502, as determined by the Director, shall purchase a quantity

of burley and flue-cured tobacco from the loan stocks of the producer

owned cooperative marketing associations as provided in this section.

(b) Purchase quantity. The amount of tobacco that must be purchased

shall be an amount equal to the amount of imported tobacco on which the

assessment in Sec. 723.503 can be levied. The total amount of required

purchases shall be divided equally between burley and flue-cured

tobacco. If it is determined that the required amount of purchases by

all manufacturers would reduce the inventories of burley or flue-cured

tobacco below the reserve stock level, the Director may reduce the

required purchase quantity on a pro rata basis. Required purchases

under this section shall not be considered as purchases for purposes of

meeting the manufacturer's purchase intentions under section 320B of

the 1938 Act.

(c) Purchase price. In order to receive credit for a purchase to

satisfy a purchase required by this section, the purchase price must

not be less than published offer list price of the applicable producer

cooperative marketing association. Credit for required purchases shall

not be allowed if discounts, rebates, or other special incentives have

been offered and received in connection with purchases of tobacco loan

stocks from association inventories.

(d) Failure to purchase required amount. Each manufacturer shall

have 30 calendar days from date of notification of the required

purchase amount to complete the purchases required under this section.

The producer cooperative marketing association shall report to the

Director the quantities of required purchases that have been made. A

manufacturer who fails to purchase within the allotted time the

required quantity of burley or flue-cured tobacco shall be liable for

penalty on each pound of tobacco for which there has been a failure to

make a timely purchase. The penalty rate shall be the amount determined

to be equal to 75 percent of the average market price for the kind of

tobacco required to be purchased for the year preceding the year of the

violation.

Sec. 723.505 Reduction of domestic content percentage.

(a) General. The Director, in consultation with the producer owned

cooperative marketing associations, may reduce the domestic content

level to a percentage below 75 percent for any calendar year, when the

Director determines that the production of burley or flue-cured tobacco

for the preceding year was substantially reduced because of natural

disaster or other conditions beyond the control of producers for the

immediately preceding crop year and that the loan stock inventory for

the kind of tobacco involved will be depleted to 25 percent of the

reserve stock level for that kind of tobacco.

(b) Expected production. For purposes of this section, the Director

may determine, but shall not be required to determine, the expected

production of tobacco based on the planted acreage as reported by the

National Agricultural Statistics Service for the respective kind of

tobacco multiplied by the simple average of the five most recent years'

average yields per acre for the respective kind of tobacco.

(c) Deadline for determination. The Director shall announce the

reduced percentage level for domestic content by November 30 of the

year preceding the calendar year to which the reduced percentage will

apply.

Sec. 723.506 Required records and reports; Burden of proof.

(a) Required records. (1) Each domestic manufacturer of cigarettes,

for all manufacturing plants producing cigarettes chargeable to the

manufacturer under this subpart, shall maintain records, on a calendar

year basis, by kind of tobacco, the quantity, form and country of

origin of all unmanufactured tobacco which is:

(i) In inventory at the beginning of the calendar year,

(ii) Acquired during the calendar year,

(iii) Used to manufacture cigarettes in the United States during

the calendar year, and

(iv) Used, or otherwise disposed of, other than to manufacture

cigarettes during the calendar year.

(2) Each domestic manufacturer of cigarettes shall maintain a

record with respect to each batch or lot of tobacco used in each

separate run or blend of cigarettes for the subject manufacturing

plants as follows:

(i) The total quantity of tobacco used,

(ii) The quantity of domestic tobacco used,

(iii) The quantity of imported tobacco used,

(iv) The quantity of reconstituted tobacco used in the

manufacturing of cigarettes and with respect to such tobacco:

(A) The quantity that resulted from tobacco that lost its identity

during the manufacturing process and was recaptured and reused to

manufacture cigarettes by such manufacturer.

(B) The quantity that resulted from cigarettes returned to the

manufacturer and reused by such manufacturer to manufacture other

cigarettes.

(3) Records shall be retained for at least 3 calendar years after

the calendar year for which the report and certification in

Sec. 723.502 is made. Records shall be retained for a longer period

upon written notification by the USDA Office of Inspector General, the

Administrator, Deputy Administrator or Director. In any case, the

destruction of records shall not release any party from any burden that

may be lawfully imposed and shall not release any manufacturer from the

burden of proof imposed by this section.

(b) Required reports. In addition to the reports and certifications

required in Sec. 723.502, each domestic manufacturer of cigarettes

shall submit a report of the information required by paragraph (a)(1)

of this section.

(c) When and where to report. The report required by this section

shall be mailed or otherwise delivered to the Director, Tobacco and

Peanuts Division, Agricultural Stabilization and Conservation Service,

USDA, P.O. Box 2415, Washington, DC 20013-2415 by February 15 of the

year after the calendar year for which the report and certification

applies.

(d) Burden of proof. The manufacturer shall bear the burden of

proof on all issues arising under this subpart.

Sec. 723.507 False reports; Failure to file reports; and Examination

of records.

(a) False reports, failure to file report. In addition to any other

sanction or remedy or presumption that may apply, a person shall be

subject to all other remedies provided for by law including, but not

limited to, those that apply under section 320C of the 1938 Act and 18

U.S.C. 1001 for any:

(1) False report, certification, or statement, or

(2) Failure to provide required information.

(b) Examination of records. The Director, the Office of Inspector

General, or an authorized representative may examine such records,

books, computer files, or any other material to determine the

correctness of any report or information provided to the Director or to

obtain required information. The reasonable cost incurred by such audit

may be charged to the cigarette manufacturer who is the subject of the

audit or examination.

Sec. 723.508 Reconsideration and appeal.

A domestic manufacturer of cigarettes may request that the Director

reconsider any determination of such manufacturer's failure to comply

with the provisions of this subpart. A request for reconsideration

shall be made within 15 calendar days after the date of the

notification of failure to comply. If such manufacturer is dissatisfied

with the determination rendered with respect for reconsideration, such

manufacturer may appeal the determination to the Director, National

Appeals Division in accordance with part 780 of this title.

Sec. 723.509 Confidentiality of information.

The reports, certifications, and other information furnished by a

cigarette manufacturer shall be kept confidential by all officials and

employees of the Department of Agriculture. Only such data as may be

determined relevant shall be disclosed to investigative authorities,

under court orders, or at administrative hearings and to the extent

permitted by law. Such information shall not be available to the public

under the provisions of the Freedom of Information Act contained in 5

U.S.C. 552. Aggregate data and general statements not identified to an

individual manufacturer may be released if otherwise allowed by law.

Signed at Washington, DC, on January 7, 1994.

Grant Buntrock,

Administrator, Agricultural, Stabilization and Conservation Service.

[FR Doc. 94-712 Filed 1-7-94; 1:02 pm]

BILLING CODE 3410-05-P