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WITHDRAWAL FROM BOND, TAX FREE, OF DOMESTIC

ALCOHOL.

JANUARY 31, 1907.-Committed to the Committee of the Whole House on the

state of the Union and ordered to be printed.

Mr. Hill, of Connecticut, from the Committee on Ways and Means,

submitted the following

REPORT.

[To accompany H. R. 24816.)

The Committee on Ways and Means, to whom was referred the bill (H. R. 24816) entitled “Å bill to amend an act entitled 'An act for the withdrawal from bond, tax free, of domestic alcohol when rendered unfit for beverage or liquid medicinal uses by mixture with suitable denaturing materials,'” approved June 7, 1906, beg leave to submit the following report, and recommend that said bill do pass, with the following amendments:

On page 2, section 2, lines 7 and 8, after the word " distilleries " strike out the words“ but not exceeding five in number of such central plants in any one collection district."

Also in line 10, same section, after the word " warehouses" insert “ without the payment of internal revenue tax.”

Also, on the same page strike out the whole of section 3, and insert in lieu thereof the following:

Sec. 3. That alcohol of the required proof may be drawn off, for denaturation only, from receiving cisterns in the cistern room of any distillery for transfer by pipes direct to any denaturing bonded warehouse on the distillery premises, or to closed metal storage tanks situated in the distillery bonded warehouse, or from such storage tanks to any denaturing bonded warehouse on the distillery premises, and denatured alcohol may also be transported from the denaturing bonded warehouse, in such manner and by means of such packages, tanks or tank cars, and on the execution of such bonds, and under such regulations as the Commissioner of Internal Revenue, with the approval of the Secretary of the Treasury, may prescribe. And further, alcohol to be denatured may be witbdrawn without the payment of internal-revenue tax from the distillery bonded warehouse for shipinent to central denaturing plants in such packages, tanks, and tank cars, under such regulations, and on the execution of such bonds, as may be prescribed by the Commissioner of Internal Revenue with the approval of the Secretary of the Treasury.

On page 3, after section 4, insert as section 5:

SEC. 5. That the provisions of this act shall take effect on September first nineteen hundred and seven.

Thus far in the second session of the Fifty ninth Congress there have been introduced five bills for the amendment of the free-alcohol act approved June 7, 1906. One by Mr. Hill, of Connecticut, providing for the application of the law to the manufacture of ether, chloroform, and other definite chemical substances where the alcohol is changed into some other chemical substance and does not appear in the finished product; also for the establishment of denaturing bonded warehouses other than those provided for in the original law, which restricted these establishments to applications from distilleries only; also for chea pening the cost of the product to the consumer by providing for transportation of such product by tank cars and other more economical methods of transportation than obtain for beverage spirits.

A bill introduced by Mr. Marshall, of North Dakota, added to the provisions of the bill introduced by Mr. Hill, to provide for cheaper and more economical methods of handling alcohol to be denatured at the large industrial distilleries, and also for the practical adoption of the German locked still and tank system for agricultural distilleries; but made no reference to the capacity of such distilleries.

A bill introduced by Mr. Volkstead, of Minnesota, providing for somewhat similar regulations with reference to agricultural distilleries limited to a capacity of not exceeding 30 gallons output

A bill introduced by Mr. Gronna, of North Dakota, looking to a similar liberalizing of the provisions of the law with reference to agricultural distilleries with an output not exceeding 15 gallons

per day.

per day.

By direction of the committee the bills introduced by Mr. Marshall and Mr. Hill were referred to the Treasury Department for examination and report thereon, and the following replies were received, accompanied by a new bill as a practical substitute for all pending measures, and under instructions of the committee this bill was introduced by Mr. Hill, of Connecticut, and has become H. R. 24816, the bill now under consideration.

TREASURY DEPARTMENT,

Washington, January 18, 1907. The honorable SECRETARY OF THE TREASURY.

SIR: I have the honor to return herewith House bill No. 22657 and House bill No. 24131, with letters addressed to you concerning these bills by the chairman of the Ways and Means Committee of the House of Representatives, and, as requested by you, I give the opinion of this office relative to these measures

I agree with the main purposes of both bills and have the honor to recommend the passage of a bill hereto attached, embracing the provisions of both, with such modifications as I deem proper, and for which I give reasons.

Section 1 of both of the House bills is identical. I suggest that this section be amended by adding at the end thereof the words “as alcohol," believing that the addition of these words would make the object of the section absolutely clear and leave nothing to be inferred. The office bill inclosed contains this addition.

It will be noted that if this section becomes law it will allow the use of denatured alcohol for the production of ether, chloroform, and similar sulstances which are used both for medicinal purposes and also for industrial and manufacturing purposes, as there is no limitation upon the use to which the product will be placed.

SECTION 2. Section 2 of House bill No. 22657 is identical with section 3 of House bill No. 24131.

The object of these sections is to afford to every dealer and consumer mutual

and equal facilities for securing denatured alcohol. I believe that this object can be accomplished without the establishment of a denaturing bonded warehouse at the place of business of every wholesale dealer handling this product and manufacturer using it in his processes. The expense of governmental supervision of these proposed denaturing bonded warehouses will be borne by the Government. For the protection of the revenue it will be necessary that close and continued surveillance of same be hud. This is the rule abroad, as must be here. In Great Britain denaturing is done in the presence of two Government officers. The expense to the Government of maintaining at each denaturing warehouse proper supervision for the adequate safeguarding of the revenues, provided denaturing bonded warehouses are established at each wholesale dealer's and manufacturer's place of business, as contemplated by the bills as introduced, would be exceedingly large, and it is not believed that a compensating benefit to dealers and consumers would follow.

I suggest in lieu of said two sections the second section of the office bill submitted herewith.

This proposed substitute contemplates the establishment of centrally located denaturing bonded warehouses, but fixes the limit of same in each collection district at five. These will be in addition to any denaturing warehouses on distillery premises. Under the substitute proposed there could be established in the United States 325 central denaturing bonded warehouses, as there are 65 collection districts in the United States. These would be locaed at such manufacturing and distributing points as the interested consumers of and dealers in the denatured product might demand.

In view of the fact that under existing law a denaturing bonded warehouse can be established at each distillery producing alcohol, it is believed that with the number of central warehouses increased, as is proposed in the substitute, ample facilities will be furnished all consumers, and that the contlicting inter ests of the several classes of consumers can be protected, and at the same time the expenditures of the Government in this line of work kept within reasonable limits, and that the scheme is sufficiently elastic and comprehensive to afford full protection to all interests.

SECTIONS 3 AND 4.

Sections 3 and 4 of the proposed substitute bill cover the general provisions embraced in the other sections of the two House bills noted.

Section 3 of the proposed bill provides fully and distinctly for the transfer from receiving cisterns to denaturing bonded warehouses or to closed metal storage tanks in distillery bonded warehouses, or from these tanks to the denaturing house, and for the transportation of denatured alcohol by means of pipes, tanks, tank cars, packages, etc. The object of this is to secure cheapness in the production and handling at the distillery and the warehouses, and also to secure reduced transportation charges.

Section 4 of the proposed substitute bill refers more directly to what is commonly termed the farm distillery, or a distillery operated for the production alone of alcohol for denaturing. The provosions of this section are, to a certain extent, a reversal of the general internal-revenue laws with regard to the production of distilled spirits, but it is believed and hoped that at these small plants there may be some relaxation of the close and continued surveillance of distillery operations necessary at larger plants, and where alcoliol is produced both for commercial and denaturing purposes.

At any rate, to meet the demand it is not deemed unwise by tbis office to make the test, and to allow alcohol to be produced for denaturing purposes alone at these small plants without the constant presence of a Government official. Therefore, locked cisterns or tanks are provided for, into which the alcohol may pass, and under the provision that these distilleries, limited in daily producing capacity of not exceeding 100 proof gallons, may be exempted from such provisions of existing law relating to distilleries as may be deemed expedient by yourself and this office.

If Congress adopts this legislation, then for the purpose of releasing the Government from the heavy charge of having a subordinate official stationed at each distillery where alcohol is produced for denaturing purposes alone, the test would be made as to the use of locked tanks and receiving cisterns with the presence only of a Government official, to be called an inspector, when the distillery begins operations, when the tank is filled, when the owner of the distillery desires to remove the same from the tank for denaturing purposes

alone, and at such other times as may be necessary either to the distiller or to the Government in its work of supervision.

Being of opinion that the proposed substitute contains every provision necessary for the purposes desired, and presents them in a somewhat better form for administrative purposes, I recommend to you its passage. I am, very respectfully,

John W. YERKES,

Commissioner.

TREASURY DEPARTMENT,

Washington, January 19, 1907. MY DEAR SIR: Replying to your favor of January 15, inclosing H. R. 24131, to amend an act known as the denatured alcohol law, I beg to submit a copy of a substitute bill prepared by the Commissioner of Internal Revenue and a copy of his letter explaining the reasons therefor, all of which I indorse and approve. Very truly, yours

L. M. SHAW. Hon. SERENO E. PAYNE, Chairman Committee on Ways and Means,

House of Representatives.

The purpose and general scope of this supplementary legislation and its direct relation to the farming interests of the country is shown by the following letter from ex-Governor Nahum J. Bachelder, master of the National Grange, and chairman of the legislation committee of that organization:

CONCORD, N. H., January 22, 1907. Hon. SERENO E. PAYNE, Chairman Committee on Ways and Means,

House of Representatives, Washington, D. C. DEAR SIR: Complying with your suggestion, on the occasion of the recent interview had with you by the legislative committee of the National Grange, we would respectfully submit the following memorandum in regard to the legislation amending the laws governing the distillation and denaturing of untaxed industrial alcohol, which we are urgently desirous of having enacted at the present session of Congress.

The purpose of the desired legislation is to still further reduce the cost of denatured alcohol, by giving greater facilities for its production and distribution. While the act approved June 7, 1906, providing for untaxed denatured alcohol, is in most respects satisfactory, there are some defects which tend to limit the production and distribution of the denatured product. With one or two exceptions these defects are not found in the untaxed alcohol law, but in the revenue laws relating to distilled spirits, which were not amended or changed in any way by the act of June 7, 1906.

The nature of the amendments to the laws governing the distillation and denaturing of alcohol, which we advocate, are:

First. Giving the Commissioner of Internal Revenue power to authorize farmers or other persons wishing to produce alcohol on a small scale to distill it in suitable locked stills, and to have it denatured without the expense of a denaturing bonded warehouse. It is believed that the conditions at present imposed on parties wishing to engage in the distillation of alcohol for industrial purposes tend to limit its production to large distillers, and that the expense of the required distillery warehouses and bonded denaturing warehouses adds considerably to the cost of the alcohol.

We believe that it is entirely feasible for the Commissioner of Internal Revenue to devise regulations which will effectively protect the Government against fraud on the revenues, and at the same time permit small producers of alcohol to have their alcohol denatured under the supervision of an internal revenue officials, without being put to the expense of a specially bonded de

naturing warehouse. The Commissioner of Internal Revenue should certainly have the power to prescribe such regulations, and there would seem to be no good reason why Congress should not give him this authority.

Second. The establishment of denaturing bonded warehouses in various sections of the country into which alcohol may be transferred from distilleries without payment of tax, under proper bonds and official supervision. There is absolutely no reason why the denaturing of alcohol should not be separate and distinct from the distilling of alcohol, where and wherever the commercial distribution of the product makes such separation desirable. As the law now stands it is manifestly impossible for a small distiller to supply alcohol for manufacturing purposes which would require special denaturing owing to the expense and difficulty of complying with the regulations. The law as it now stands tends to give the large distillers a monopoly of supplying alcohol for manufacturing purposes. The proposed changes, therefore, are necessary in order to make it profitable for the small producers to supply the manufacturing and city demand, by enabling a number of them to ship their alcohol to a conveniently located central denaturing plant, where all the advantages of a special denaturing or shipping in bulk to distant points can be fully utilized. The advantage to the Government in simplifying and reducing the cost of supervision is obvious.

Third. Authorizing the Commissioner of Internal Revenue to prescribe regulations fixing the kind and capacity of the packages, including tank cars, and other methods of transportation for denatured alcohol. The present law limits the size of the packages containing alcohol, and thus prevents its shipment in tank cars, a method of transportation which would effect a material reduction in its cost. Regulations governing the use of such tank cars can easily be prescribed, which will effectually guard against any loss in revenue through the sale of denatured alcohol as a substitute for taxed spirits.

This question of tank cars is a matter of prime importance in reducing the price of alcohol for fuel uses to a competitive basis with kerosene, gasoline, and other liquid fuels. Without tank cars the market of small distilleries must of necessity be local, and the tank car is absolutely necessary to give the smaller distilleries the opportunity of securing a share in supplying the alcohol to be used in a more widely extended area.

The importance of the tank car will be fully appreciated, as also the other provisions called for, if the natural order of development of the denaturedalcohol industry is clearly understood.

Before local distilleries can be profitably built and operated a local demand must have been created, and that demand can only come after there shall have been a considerable local distribution of alcohol lamps, stoves, heaters, engines, and other alcohol-consuming appliances. As long as the demand in any locality is only for a few gallons or barrels weekly it is manifest that that locality must depend on some outside source of supply. The true order of precedence is, first the large central distilleries supplying a scattered demand over a wide territory; then the development of the manufacturing industries supplying alcohol apparatus; and finally, the local distilleries. Consequently, the farmer has a grave concern in providing by all possible ways for the cheap distribution of the alcohol from the large central distilleries. We are not opposed to the latter distilleries because they are large, but simply urge the enactment of legislation which will give small distilleries an equal show before the law, wbich the law, as it now stands, is believed not to do.

Fourth. Under the present law no provision can be made for pumping alcohol from the distillery cistern to the distillery warehouse or from that warehouse to the denaturing bonded warehouse. There is no good reason why distillers should not be allowed to pump their product from the cisterns to the warehouses through suitable locked pipes, the keys to which could be kept in pos. session of the internal-revenue officials charged with the supervision of the distillery. The adoption of such a system would save considerable expense in filling and emptying casks in the process of denaturing.

Fifth. Provision for the use of untaxed alcohol in the manufacture of ether, chloroform, and other definite chemical substances in which alcohol does not appear in the finished product, but is changed into some other substance. The Commissioner of Internal Revenue has ruled that the provision of the untaxed alcohol law prohibiting the use of that material in the manufacture of " liquid medicinal preparations " applies to ether, collodion, and other products which are sometimes to a small extent used as a medicine. The effect

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