April 5, 2019 Testimony: Keeping Small Premium Cigar Businesses Rolling

Testimony of Charles Maresca
Director of Interagency Affairs
Office of Advocacy
U.S. Small Business Administration

U.S. Senate Committee on Small Business and Entrepreneurship

Date: April 5, 2019
Time: 1:00 P.M.
Location: Performing Arts Building Auditorium, Hillsborough Community College, Ybor City Campus, 2112 N. 15th Street, Tampa, FL
Topic: Keeping Small Premium Cigar Businesses Rolling

Created by Congress in 1976, the Office of Advocacy of the U.S. Small Business Administration (SBA) is an independent voice for small business within the federal government. The Chief Counsel for Advocacy, who is appointed by the President and confirmed by the U.S. Senate, directs the office. The Chief Counsel advances the views, concerns, and interests of small business before Congress, the White House, federal agencies, federal courts, and state policy makers. Issues are identified through economic research, policy analyses, and small business outreach. The Chief Counsel’s efforts are supported by offices in Washington, D.C., and by Regional Advocates. For more information about the Office of Advocacy, visit https://advocacy.sba.gov/, or call (202) 205-6533.

Chairman Rubio, Ranking Member Cardin, Members of the Committee, I am honored to be here today on behalf of the U.S. Small Business Administration (SBA) Office of Advocacy (Advocacy) to present testimony to you about the Food and Drug Administration’s (FDA) regulation of premium cigars.

As the Director of Interagency Affairs, I manage a team of attorneys who work with federal government agencies during the rulemaking process to reduce regulatory burdens on small businesses and to implement the requirements of the Regulatory Flexibility Act (RFA). The RFA requires federal agencies to consider the effects of their proposed rules on small businesses and other small entities, including small governments and small nonprofits. Advocacy is an independent office within the SBA that speaks on behalf of the small business community before federal agencies, Congress, and the White House. The views in my testimony do not necessarily reflect the views of the Administration or the SBA, and this statement has not been circulated to the Office of Management and Budget for clearance.

Advocacy’s Involvement in the Regulation of Premium Cigars

The Family Smoking Prevention and Tobacco Control Act was signed into law in 2009; it amended the Federal Food, Drug, and Cosmetic Act and gives FDA the power to regulate “all cigarettes, cigarette tobacco, roll-your-own tobacco, and smokeless tobacco” and “any other tobacco products that the Secretary by regulation deems to be subject to this subchapter.” On April 24, 2014, FDA issued a proposed rule (the “Deeming Rule”) that would deem formerly unregulated or uncovered products subject to FDA regulation, including premium cigars. The proposed rule subjected newly covered products to regulatory requirements applicable to cigarettes, cigarette tobacco, roll-your-own tobacco, and smokeless tobacco. These requirements included general controls, health warnings, and sales and marketing restrictions. Additionally, the proposed rule required a previously uncovered product to be subject to FDA premarket authorization before being marketed in the United States if the product was “new.” A “new” tobacco product was one that was not marketed as of February 15, 2007. Manufacturers of such products must submit either a Premarket Tobacco Application or a Substantial Equivalence (SE) Report to or request a Minor Modification Exemption from FDA.

On June 11, 2014, Advocacy submitted a comment letter on the Deeming Rule to FDA, addressing the agency’s Initial Regulatory Flexibility Analysis (IRFA) under the RFA. An IRFA is required to contain: (1) a description of the reasons why action by the agency is being considered; (2) a succinct statement of the objectives of, and legal basis for, the proposed rule; (3) a description of and, where feasible, an estimate of the number of small entities to which the proposed rule will apply; (4) a description of the projected reporting, recordkeeping and other compliance requirements of the proposed rule, including an estimate of the classes of small entities which will be subject to the requirement and the type of professional skills necessary for preparation of the report or record; (5) an identification, to the extent practicable, of all relevant federal rules which may duplicate, overlap, or conflict with the proposed rule; and (6) a description of any significant alternatives to the proposed rule which accomplish the stated objectives of the applicable statutes and which minimize any significant economic impact of the proposed rule on small entities. In its letter, Advocacy stated that FDA’s IRFA was deficient because it neither adequately: (1) described the impacts on all of the types of newly covered small entities, nor (2) explained significant alternatives that might reduce those impacts. Advocacy suggested that FDA publish a Supplemental IRFA for public comment before proceeding with the Deeming Rule.

FDA did not publish a Supplemental IRFA, and on May 10, 2016, the Deeming Rule became final. Notably, one alternative FDA had considered in the proposed rule was the possible exemption of premium cigars from the rule. However, FDA found “no appropriate public health justification to exclude premium cigars;” therefore, premium cigars were not exempted from the final Deeming Rule.

On July 28, 2017, FDA announced a new comprehensive plan for regulating tobacco and nicotine. To that end, on March 26, 2018, it published an advance notice of proposed rulemaking entitled Regulation of Premium Cigars, requesting more information related to the regulation of premium cigars. Specifically, FDA requested comments related to the definition of premium cigars, the use patterns of premium cigars, and the public health considerations associated with premium cigars.

On July 25, 2018, Advocacy submitted a comment letter on the advanced notice of proposed rulemaking to FDA. As we stated in our 2014 comment letter on the Deeming Rule, Advocacy again urged FDA to include a more robust economic analysis of the rule’s impact on small businesses and a description of significant alternatives that would minimize that impact when it publishes an IRFA for its proposed rule on the regulation of premium cigars. Advocacy also resubmitted its 2014 Deeming Rule comment letter to FDA. To date, FDA has not published a notice of proposed rulemaking for the regulation of premium cigars. Advocacy’s request is consistent with the Congressional intent underlying the RFA, that when adopting regulations to protect the health, safety, and economic welfare of the nation, federal agencies should seek to achieve statutory goals as effectively as possible without imposing unnecessary burdens on the public.

Between June 2017 and September 2018, Advocacy hosted 33 regional roundtables in 22 states to hear from small businesses about the regulatory issues with which they are most concerned. We hosted three such roundtables in Florida, including one here in Tampa. Advocacy heard compelling stories from small business owners in the premium cigar industry at many of those roundtables. In December 2018 Advocacy published its progress report about the issues discussed at those regional roundtables. I am also pleased to announce that Advocacy’s RFA Annual Report for fiscal year 2018 was delivered to Congress this week.

The Deeming Rule’s Effect on Premium Cigars

Attached to this testimony is a thumbnail sketch of the premium cigar industry. Advocacy believes that small businesses dominate the premium cigar industry. There are at least 50 manufacturers of premium cigars across 19 states or more, all small businesses. Indeed, over 20 of those manufacturers are in Florida alone. Additionally, there are over 3,000 retailers of premium cigars located in all 50 states, some of which also roll their own cigars and are considered manufacturers under FDA’s Deeming Rule.

According to FDA’s own estimates, the Deeming Rule’s compliance costs will have significant impacts on small businesses. Specifically, FDA states that some “low-volume cigar” manufacturers may end their domestic operations entirely. Premium cigar manufacturers are the very definition of “low-volume” cigar manufacturers. Their cigars are handmade and labor intensive, manufactured by the hundreds per day as opposed to the thousands an hour for mass-marketed, machine-made cigars.

For a small business cigar manufacturer, FDA estimates compliance costs to be $278,000 to $397,000 in the first year, $292,000 to $411,000 in the second year, and $235,000 to $257,000 in the third year. Although many small businesses have argued that the costs will be much higher than FDA’s estimates, the agency’s own numbers will prove to be too much for most small businesses to pay to continue to manufacture premium cigars. Included in those costs would be applying for premarket approval or completing an SE Report. An SE Report for cigars includes a detailed chemical analysis of: (1) the cigar itself, (2) the cigar band paper and ink, (3) the wood of the cigar box, and (4) the cellophane wrapper in which the cigars are wrapped. The premium cigar industry has argued that one SE Report could cost up to $250,000.

For manufacturers who cannot afford the Deeming Rule’s compliance costs and are forced to shutter their factories, there will be thousands of employees who will no longer be employed. Cigar Rights of America estimates that there are approximately 35,000 jobs associated with the premium cigar industry, which includes manufacturing employees, retail employees, and other employees throughout the industry’s supply chain.

Conclusion

While FDA has stated the objectives of the deeming rule under the authorizing statute, it is still required by the RFA to consider significant alternatives to the rule that would minimize the impact on small businesses. Advocacy and small businesses are extremely concerned about the Deeming Rule’s effects on small premium cigar businesses. Indeed, Advocacy made its concerns known to FDA in 2014, and those concerns have not changed. FDA must conduct a more robust economic analysis on the rule’s impacts on small businesses, specific to the affected premium cigar industry, and consider significant alternatives to those impacts to accomplish the agency’s stated objective while keeping small premium cigar manufactures and retailers in business. I would be happy to answer any questions you may have.

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