TECHNICAL EXPLANATION OF THE 

REVENUE PROVISIONS OF H.R. 976, 

THE “CHILDREN’S HEALTH INSURANCE PROGRAM 

REAUTHORIZATION ACT OF 2007,” 

AS PASSED BY THE HOUSE ON SEPTEMBER 25, 2007 

Prepared by the Staff 

of the 

JOINT COMMITTEE ON TAXATION 

 

September 26, 2007 

JCX-91-07
i 

CONTENTS 

Page

I. LEGISLATIVE BACKGROUND......................................................................................... 1 

II. INCREASE TOBACCO TAX RATES AND MODIFY CERTAIN DEFINITIONS .......... 2 

A. Increase Excise Tax Rates on Tobacco Products and Cigarette Papers and Tubes 

(sec. 701 of the bill and sec. 5701 of the Code)............................................................... 2 

B. Modify Definition of Roll-Your-Own Tobacco (sec. 702(d) of the bill and 5702 

of the Code)...................................................................................................................... 6 

III. STRENGTHEN REGULATORY AND ENFORCEMENT AUTHORITY WITH 

RESPECT TO TOBACCO AND ALCOHOL ...................................................................... 7 

A. Permit, Inventory, Reporting, and Recordkeeping Requirements for Manufacturers 

and Importers of Processed Tobacco (sec. 702 of the bill and secs. 5702, 5712, 

5713, 5721, 5722, and 5741 of the Code)........................................................................ 7 

B. Broaden Authority to Deny, Suspend, and Revoke Tobacco Permits (sec. 702 

of the bill and secs. 5712 and 5713 of the Code)............................................................. 8 

C. Clarify Statute of Limitations Pertaining to Excise Taxes Imposed on Imported 

Alcohol, Tobacco Products and Cigarette Papers and Tubes (sec. 702 of the bill 

and sec. 514 of the Tariff Act of 1930).......................................................................... 10 

D. Impose Immediate Tax on Unlawfully Manufactured Tobacco Products and 

Cigarette Papers and Tubes (sec. 702 of the bill and sec. 5703 of the Code)................ 12 

IV. MISCELLANEOUS PROVISIONS.................................................................................... 13 

A. Modifications to Corporate Estimated Tax Payments (sec. 703 of the bill).................. 13 
1 

I. LEGISLATIVE BACKGROUND 

This document1

 describes the revenue provisions (Title VII) of H.R. 976, as passed by the 

House on September 25, 2007. 

The House Committee on Ways and Means held a mark-up on July 26, 2007, to consider 

H.R. 3162, (the “Children’s Health and Medicare Protection Act of 2007”), providing for the 

five-year reauthorization of the State Children’s Insurance Program (“SCHIP”), for certain 

Medicare and Medicaid beneficiary matters, and for revenue to fund that program. The 

Committee ordered the bill, as amended, favorably reported.2 The House passed H.R. 3162, as 

amended, on August 1, 2007. 

The Senate Committee on Finance held a mark-up on July 19, 2007, to consider an 

original bill, S. 1893 (the “Children’s Health Insurance Reauthorization Act of 2007”), providing 

for the five-year reauthorization of the State Children’s Insurance Program (“SCHIP”), and for 

revenue to fund that program.3 The Committee ordered the bill, as amended, favorably reported. 

In the Senate, an amendment in the nature of a substitute, consisting of the contents of S. 1893, 

was made to H.R. 976. The Senate passed H.R. 976, as amended, on August 2, 2007.4

The House passed H.R. 976 as received from the Senate, with further amendment, on 

September 25, 2007. 

 1

 This document may be cited as follows: Joint Committee on Taxation, Technical Explanation 

of the Revenue Provisions of H.R. 976, the “Children’s Health Insurance Program Reauthorization Act of 

2007,” as Passed by the House on September 25, 2007 (JCX-91-07), September 26, 2007. This 

document can also be found on the web at www.house.gov/jct. Except where otherwise stated, all section 

references are to the Internal Revenue Code of 1986, as amended (the “Code”). 

2

 See H.R. Rept. 110-284, Part 1, August 1, 2007. 

3

 See Joint Committee on Taxation, Description of the Revenue Provisions for Markup of the 

State Children’s Health Insurance Program (JCX-43-07), July 13, 2007. This document can also be 

found on the web at www.house.gov/jct. 

4

 See Joint Committee on Taxation, Comparison of Tax Provisions of H.R. 3162, the “Children’s 

Health and Medicare Protection Act of 2007,” as Passed by the House, and H.R. 976, the “Children’s 

Health Insurance Program Reauthorization Act of 2007,” as Passed by the Senate (JCX-64-07), 

September 5, 2007. This document can also be found on the web at www.house.gov/jct. 
2 

II. INCREASE TOBACCO TAX RATES AND MODIFY CERTAIN DEFINITIONS 

A. Increase Excise Tax Rates on Tobacco Products 

and Cigarette Papers and Tubes 

(sec. 701 of the bill and sec. 5701 of the Code) 

Present Law

Rates of excise tax on tobacco products and cigarette papers and tubes

Tobacco products and cigarette papers and tubes manufactured in the United States or 

imported into the United States are subject to Federal excise tax at the following rates: 

• Cigarettes weighing not more than three pounds per thousand (“small cigarettes”) are 

taxed at the rate of $19.50 per thousand ($0.39 per pack); 

• Cigarettes weighing more than three pounds per thousand (“large cigarettes”) are 

taxed at the rate of $40.95 per thousand, except that, if they measure more than six 

and one-half inches in length, they are taxed at the rate applicable to small cigarettes, 

counting each two and three-quarter inches (or fraction thereof) of the length of each 

as one cigarette; 

• Cigars weighing not more than three pounds per thousand (“small cigars”) are taxed 

at the rate of $1.828 per thousand; 

• Cigars weighing more than three pounds per thousand (“large cigars”) are taxed at the 

rate equal to 20.719 percent of the manufacturer’s or importer’s sales price but not 

more than $48.75 per thousand; 

• Cigarette papers are taxed at the rate of $0.0122 for each 50 papers or fractional part 

thereof, except that, if they measure more than six and one-half inches in length, they 

are taxable by counting each two and three-quarter inches (or fraction thereof) of the 

length of each as one cigarette paper; 

• Cigarette tubes are taxed at the rate of $0.0244 for each 50 tubes or fractional part 

thereof, except that, if they measure more than six and one-half inches in length, they 

are taxable by counting each two and three-quarter inches (or fraction thereof) of the 

length of each as one cigarette tube; 

• Snuff is taxed at the rate of $0.585 per pound, and proportionately at that rate on all 

fractional parts of a pound; 

• Chewing tobacco is taxed at the rate of $0.195 per pound, and proportionately at that 

rate on all fractional parts of a pound; 

• Pipe tobacco is taxed at the rate of $1.0969 per pound, and proportionately at that rate 

on all fractional parts of a pound; and 
3 

• Roll-your-own tobacco is taxed at the rate of $1.0969 per pound, and proportionately 

at that rate on all fractional parts of a pound. 

Floor stocks tax and foreign trade zones

The Balanced Budget Act of 1997 increased excise taxes on tobacco products and 

cigarette papers and tubes.5 That provision also imposed a tax (“floor stocks tax”) on cigarettes 

removed before the effective date of the tax increase and held on that date for sale by any 

person.6

 The amount of the floor stocks tax was the excess of the amount of tax on such items at 

the increased rate over the amount of tax at the old rate. Each person was allowed a $500 credit 

against the floor stocks tax. 

Special tax and duty rules apply with respect to foreign trade zones. In general, 

merchandise may be brought into a foreign trade zone without being subject to the general 

customs laws of the United States. Such merchandise may be stored in a foreign trade zone or 

may be subjected to manufacturing or other processes there. The United States Customs and 

Border Protection agency of the Department of Homeland Security (“Customs”) may determine 

internal revenue taxes and liquidate duties imposed on foreign merchandise in such foreign trade 

zones. Articles on which such taxes and applicable duties have already been paid, or which have 

been admitted into the United States free of tax, that have been taken into a foreign trade zone 

from inside the United States, may be held under the supervision of a customs officer. Such 

articles may later be released back into the United States free of further taxes and duties.7

Explanation of Provision

Rate increases

Under the provision, the rates of excise tax on tobacco products and cigarette papers and 

tubes are increased, generally in a proportionate manner. The special rules under present law 

relating to large cigarettes and cigarette papers and tubes longer than six and one-half inches 

remain the same. The rates under the provision are as follows: 

• Small cigarettes are taxed at the rate of $50.00 per thousand ($1.00 per pack); 

• Large cigarettes are taxed at the rate of $105.00 per thousand; 

 5

 Pub. L. No. 105-33, sec. 9302 (1997). 

6

 The floor stocks tax in the Balanced Budget Act of 1997 was originally imposed on tobacco 

products and cigarette papers and tubes. The Consolidated Appropriations Act, 2001 amended the floor 

stocks tax in the Balanced Budget Act of 1997 to apply only to cigarettes. Pub. L. No. 106-554, 

Appendix G, H.R. 5662, sec. 315(a)(1). 

7

 19 U.S.C. sec. 81c(a). 
4 

• Small cigars are taxed at the rate of $50.00 per thousand (the same rate applied to 

small cigarettes); 

• Large cigars are taxed at the rate equal to 52.988 percent of the manufacturer’s or 

importer’s sales price but not more than $3.00 per cigar; 

• Cigarette papers are taxed at the rate of $0.0313 for each 50 papers or fractional part 

thereof; 

• Cigarette tubes are taxed at the rate of $0.0626 for each 50 tubes or fractional part 

thereof; 

• Snuff is taxed at the rate of $1.50 per pound, and proportionately at that rate on all 

fractional parts of a pound; 

• Chewing tobacco is taxed at the rate of $0.50 per pound, and proportionately at that 

rate on all fractional parts of a pound; 

• Pipe tobacco is taxed at the rate of $2.8126 per pound, and proportionately at that rate 

on all fractional parts of a pound; and 

• Roll-your-own tobacco is taxed at the rate of $8.8889 per pound, and proportionately 

at that rate on all fractional parts of a pound. The rate for roll-your-own tobacco is 

intended to approximate the rate for small cigarettes. 

Floor stocks tax and foreign trade zone treatment

The provision also imposes a tax on floor stocks. Taxable articles (i.e., those articles 

listed above), except for large cigars, manufactured in the United States or imported into the 

United States which are removed before January 1, 2008 and held on that date for sale by any 

person are subject to a floor stocks tax. The floor stocks tax is equal to the excess of the 

applicable tax under the new rates over the applicable tax at the present-law rates. The person 

holding the article on January 1, 2008 to which the floor stocks tax applies is liable for the tax. 

Each such person is allowed a $500 credit against the floor stocks tax. 

Notwithstanding any other provision of law, the floor stocks tax applies to an article 

located in a foreign trade zone on January 1, 2008, provided that internal revenue taxes have 

been determined, or customs duties have been liquidated, with respect to such article before such 

date, or such article is held on a tax-and-duty-paid basis on such date under the supervision of a 

customs officer. 

For purposes of determining the floor stocks tax, component members of a “controlled 

group” (as modified) are treated as one taxpayer.8

 “Controlled group” for these purposes means 

a parent-subsidiary, brother-sister, or combined corporate group with more than 50-percent 

 8

 Controlled group is defined in section 1563. 
5 

ownership with respect to either combined voting power or total value. Under regulations, 

similar principles may apply to a group of persons under common control where one or more 

persons are not a corporation. 

The provision provides that the floor stocks tax shall be paid on or before April 1, 2008, 

in the manner prescribed by Treasury regulations. In general, all of the rules, including 

penalties, applicable with respect to taxes on tobacco products and cigarette papers and tubes 

apply to the floor stocks tax. The person who bore the ultimate burden of the floor stocks tax 

may be treated as the person entitled to a credit of refund of such tax. 

Effective Date

The provision applies to articles removed after December 31, 2007. 
6 

B. Modify Definition of Roll-Your-Own Tobacco 

(sec. 702(d) of the bill and 5702 of the Code) 

Present Law

Federal excise taxes are imposed upon tobacco products and cigarette papers and tubes.9

 

Tobacco products are cigars, cigarettes, snuff, chewing tobacco, pipe tobacco, and roll-your-own 

tobacco. A “cigar” is any roll of tobacco wrapped in leaf tobacco or in any substance containing 

tobacco, other than any roll of tobacco which is a cigarette. A “cigarette” is (i) any roll of 

tobacco wrapped in paper or in any substance not containing tobacco; and (ii) any roll of tobacco 

wrapped in any substance containing tobacco which, because of its appearance, the type of 

tobacco used in the filler, or its packaging and labeling, is likely to be offered to, or purchased 

by, consumers as a cigarette. “Roll-your-own tobacco” is any tobacco, which because of its 

appearance, type, packaging, or labeling, is suitable for use and likely to be offered to, or 

purchased by, consumers as tobacco for making cigarettes. “Cigarette paper” is paper, or any 

other material except tobacco, prepared for use as a cigarette wrapper. A “cigarette tube” is 

cigarette paper made into a hollow cylinder for use in making cigarettes.10

Wrappers containing tobacco are not within the definition of cigarette papers or tubes 

because they contain tobacco. They are also not generally within the definition of roll-your-own 

tobacco because they are usually used to make cigars, not cigarettes. For the same reason, loose 

tobacco suitable for making roll-your-own cigars is not considered to be roll-your-own tobacco. 

Explanation of Provision

Under the provision, roll-your-own tobacco also includes any tobacco, which because of 

its appearance, type, packaging, or labeling, is suitable for use and likely to be offered to, or 

purchased by, consumers as tobacco for making cigars, or for use as wrappers for making cigars. 

Effective Date

The provision applies to articles removed after December 31, 2007. 

 9

 Sec. 5701. 

10 Sec. 5702. 
7 

III. STRENGTHEN REGULATORY AND ENFORCEMENT AUTHORITY 

WITH RESPECT TO TOBACCO AND ALCOHOL 

A. Permit, Inventory, Reporting, and Recordkeeping Requirements for Manufacturers 

and Importers of Processed Tobacco 

(sec. 702 of the bill and secs. 5702, 5712, 5713, 5721, 5722, and 5741 of the Code) 

Present Law

Tobacco products and cigarette papers and tubes are subject to Federal excise tax.11 

Tobacco products are cigars, cigarettes, smokeless tobacco, pipe tobacco, and roll-your-own 

tobacco.12 Manufacturers and importers of tobacco products and export warehouse proprietors 

must obtain a permit from the Secretary of the Treasury or his delegate (“Secretary”).13 

Manufacturers and importers of tobacco products or cigarette papers or tubes, and export 

warehouse proprietors, must also periodically make an inventory and certain reports and keep 

certain records, all as prescribed by the Secretary.14 

Explanation of Provision

The provision creates a new category of manufacturers and importers who are subject to 

regulation but not to Federal excise tax. Under the provision, manufacturers and importers of 

“processed tobacco” are subject to the present-law permit, inventory, reporting, and 

recordkeeping requirements. Processed tobacco is any tobacco other than tobacco products. A 

manufacturer of processed tobacco is any person who processes any tobacco other than tobacco 

products, and an importer includes an importer of processed tobacco. However, the processing 

of tobacco does not include the farming or growing of tobacco or the handling of whole tobacco 

leaf solely for sale, shipment, or delivery to a manufacturer of tobacco products or processed 

tobacco. For example, under the provision an importer of “cut rag” tobacco or a leaf processor 

that manufactures such tobacco is subject to the general permit, inventory, reporting, and 

recordkeeping requirements of the Code but is not subject to Federal excise tax (unless it also 

imports or manufactures tobacco products or cigarette papers or tubes). 

Effective Date

The provision is effective on January 1, 2008. 

 11 Sec. 5701. 

12 Sec. 5702. 

13 Sec. 5713. 

14 Sec. 5721 (inventories); sec. 5722 (reports); sec. 5741 (records). 
8 

B. Broaden Authority to Deny, Suspend, and Revoke Tobacco Permits 

(sec. 702 of the bill and secs. 5712 and 5713 of the Code) 

Present Law

Manufacturers and importers of tobacco products and proprietors of export warehouses 

must obtain a permit to engage in such businesses.15 A permit is obtained by application to the 

Secretary. The Secretary may deny the application if (1) the business premises are inadequate to 

protect the revenue; (2) the activity to be carried out at the business premises does not meet such 

minimum capacity or activity requirements as prescribed by the Secretary; (3) the applicant is, 

by reason of his business experience, financial standing, or trade connections, not likely to 

maintain operations in compliance with the applicable provisions of the Code; or (4) such 

applicant has failed to disclose any material information required or made any material false 

statement in the application.16

A permit is conditioned upon compliance with the rules of the Code and related 

regulations pertaining to taxes and regulation of tobacco products and cigarette papers and tubes. 

The Secretary may suspend or revoke a permit after a notice and hearing if the holder (1) has not 

in good faith complied with those rules; (2) has violated any other provision of the Code 

involving intent to defraud; (3) has violated the conditions of the permit; (4) has failed to 

disclose any material information required or made any material false statement in the permit 

application; or (5) has failed to maintain the business premises in such a manner as to protect the 

revenue.17

Explanation of Provision

Under the provision, the Secretary may deny an application for a permit if the applicant 

has been convicted of a felony violation of a Federal or State criminal law relating to tobacco 

products or cigarette papers or tubes, or if, by reason of previous or current legal proceedings 

involving a violation of Federal criminal felony laws relating to tobacco products or cigarette 

papers or tubes, such applicant is not likely to maintain operations in compliance with the 

applicable provisions of the Code. 

Similarly, a permit may be suspended or revoked if the holder is convicted of a felony 

violation of a Federal or State criminal law relating to tobacco products or cigarette papers or 

tubes, or if, by reason of previous or current legal proceedings involving a violation of Federal 

criminal felony laws relating to tobacco products or cigarette papers or tubes, such applicant is 

not likely to maintain operations in compliance with the applicable provisions of the Code. 

 15 Sec. 5713. 

16 Sec. 5712. 

17 Sec. 5713. 
9 

Effective Date

The provision is effective on the date of enactment. 
10 

C. Clarify Statute of Limitations Pertaining to Excise Taxes 

Imposed on Imported Alcohol, Tobacco Products 

and Cigarette Papers and Tubes 

(sec. 702 of the bill and sec. 514 of the Tariff Act of 1930) 

Present Law

Under the Code, amounts of tax must generally be assessed within three years after a tax 

return is filed, and no proceeding in court without assessment for the collection of such tax may 

begin after such period has expired.18 If no return is filed (but is required), the tax may be 

assessed, or a proceeding in court for the collection of such tax may be initiated without 

assessment, at any time.19

Customs collects duties and excise taxes on imports. Importers of taxable articles 

relating to tobacco, distilled spirits, wines, and beer must file a tax return with Customs.20 In 

general, the limitations period for fixing and assessing duties and taxes with respect to an import 

is one year from the date of entry or removal.21 Under the applicable customs law, with some 

limited exceptions, any duty or tax imposed on an import is final and conclusive upon all 

persons, including the United States, unless a protest is filed within 180 days or a court action is 

timely commenced.22

Explanation of Provision 

The provision clarifies the tax and customs law in the area of alcohol and tobacco by 

providing that, notwithstanding customs law, the general statute of limitations for assessment 

under the Code (sec. 6501) applies with respect to taxes imposed under chapters 51 (relating to 

distilled spirits, wines, and beer) and 52 (relating to tobacco products and cigarette papers and 

tubes) of the Code. 

No inference is intended regarding the applicability of the statute of limitations under the 

Code to pending cases or to excise taxes imposed other than under chapters 51 and 52 of the 

Code. 

 18 Sec. 6501(a). 

19 Sec. 6501(c)(3). 

20 27 C.F.R. sec. 41.81(b) (tobacco products and cigarette papers and tubes); sec. 5061(a) 

(distilled spirits, wines, and beer). 

21 19 U.S.C. sec. 1504(a). The Secretary may extend this period under certain circumstances and 

with notice to the importer. 

22 19 U.S.C. sec. 1514(a) & (c)(3). 
11 

Effective Date

The provision is effective for articles imported into the United States after the date of 

enactment. 
12 

D. Impose Immediate Tax on Unlawfully Manufactured Tobacco 

Products and Cigarette Papers and Tubes 

(sec. 702 of the bill and sec. 5703 of the Code) 

Present Law

Manufacturers and importers of tobacco products and proprietors of export warehouses 

must obtain a permit to engage in such businesses.23 A permit is obtained by application to the 

Secretary of the Treasury or his delegate (“Secretary”).24 A manufacturer of tobacco products or 

cigarette papers or tubes, or an export warehouse proprietor, must file a bond and obtain 

approval of such bond from the Secretary.25 In general, excise taxes on tobacco products and 

cigarette papers and tubes manufactured in the United States are determined at the time of 

removal. In the case of taxes on tobacco products and cigarette papers and tubes removed during 

any semimonthly period under bond for deferred payment of tax, payment is due no later than 

the 14th day after the last day of such semimonthly period.26

Distilled spirits, wines, and beer produced at any place other than a place required by the 

Code are subject to tax immediately on production.27 There is no rule that imposes immediate 

tax on tobacco products and cigarette papers and tubes that are produced by an out-ofcompliance manufacturer. 

Explanation of Provision

Under the provision, in the case of any tobacco products or cigarette papers or tubes 

produced in the United States at any place other than the premises of a manufacturer that has 

obtained a permit (if required) and approval of a bond, the excise tax is due and payable 

immediately upon manufacture, unless they are produced solely for the person’s own personal 

consumption or use. 

Effective Date

The provision is effective on the date of enactment. 

 23 Sec. 5713. A “manufacturer of tobacco products” does not include (1) a person who produces 

tobacco products solely for the person’s own personal consumption or use, and (2) a proprietor of a 

customs bonded manufacturing warehouse with respect to the operation of such warehouse. Sec. 5702(d). 

24 Sec. 5712. 

25 Sec. 5711. 

26 Sec. 5703. 

27 Sec. 5006(c)(2) (distilled spirits); sec. 5041(f) (wines); sec. 5054(a)(3) (beer). There are 

exceptions for production of wine and beer for personal or family use. Sec. 5042(a)(2) (wines); sec. 

5053(e) (beer). 
13 

IV. MISCELLANEOUS PROVISIONS 

A. Modifications to Corporate Estimated Tax Payments 

(sec. 703 of the bill) 

Present Law

In general, corporations are required to make quarterly estimated tax payments of their 

income tax liability. For a corporation whose taxable year is a calendar year, these estimated tax 

payments must be made by April 15, June 15, September 15, and December 15. 

Under present law, in the case of a corporation with assets of at least $1 billion, the 

payments due in July, August, and September, 2012, shall be increased to 114.75 percent of the 

payment otherwise due and the next required payment shall be reduced accordingly. 

Explanation of Provision

The provision reduces the percentage from 114.75 percent to 113.75 percent. 

Effective Date

The provision is effective on the date of enactment.