VES-13-18-R:IT:EC 113474 LLB
Chief, Liquidation Section
U.S. Customs Service
Post Office Box 2450
San Francisco, California 94126
RE: Vessel Repair Entry No. C31-0013814-9; M.S. SEAFISHER V-4; Modification; Repair; Parts; Materials; 19 U.S.C. 1466
Dear Sir:
Reference is made to your memorandum of June 12, 1995, which forwards for our consideration the Application for Relief from the assessment of vessel repair duties submitted on behalf of Cascade Fishing, Inc. The vessel SEAFISHER arrived in the Port of Anchorage, Alaska, on January 8, 1995, after undergoing extensive shipyard operations while in Japan. Our determinations regarding the various claims for relief from duty are contained in this ruling.
FACTS:
The United States-flag fishing vessel SEAFISHER departed from Dutch Harbor, Alaska, destined for Japan, in order to undergo extensive shipyard work in the form of modifications, repairs, and maintenance. The central purpose of the foreign operations was to alter the vessel in order to increase is crew-carrying capacity and to enhance its ability to remain at sea for longer periods of time in order to engage in fishing operations.
The agent for the owner has submitted an Application for Relief as permitted under the Customs Regulations, and that application is accompanied by numerous other documents which allege support for the claim. The documents include letters and cost breakdowns prepared by a firm in Japan regarding some of the foreign cost items, Customs Entry Summary documents
(CF 7501) listing numerous foreign purchases with general descriptions, and a work summary which includes briefly-worded descriptions of elements of the foreign work.
Your office has reviewed the entry and supporting documentation and has requested that this office consider and provide advice concerning 44 of the entered items. Relief from duty is claimed for these items for one or more specific reasons. For some, it is claimed that the work involved non-dutiable modification of the vessel. For others, it is stated that the cost under consideration is subject to treatment under recently enacted amendments to the vessel repair statute. In the case of two items, it is stated that the expenses are neither for equipment or repairs, nor for labor in connection with such expenditures. Finally, with regard to one category of expense, it is claimed that a court case holds such expenses to be free from duty.
Our review and advice is sought in regard to the following items:
1. Item 110-03, claimed modification to a conveyor shoot.
2. Item 110-21, claimed modification by addition of a conveyor gate.
3. Item 2-031, claimed modification for electrical work for fresh vegetable storeroom.
4. Item 5-531, claimed modification by addition of emergency stop device for auxiliary engine.
5. Item 6-091, claimed modification by addition of heater for expansion tank piping.
6. Item 11-01, claimed modification for electrical work for refrigeration system.
7. Item 11-02, claimed modification of electrical switchboard for load change on generator.
8. Item 11-05, claimed modification by wiring for future installation of additional conveyor.
9. Item 11-11, claimed modification for alarm system for low fresh water level in expansion tank.
10. Item 11-12, claimed modification for installation of lighting.
11. Item 3-02, claimed modification on rearrangement of fish hold cooling coils.
12. Item 4-012, claimed modification for insulation of refrigeration pipes.
13. Item 7-02, overhaul and inspection of vessel’s water-making plant.
14. Item 1-01, charges for dry-docking the vessel.
15. Item 2-02, claimed modification to size of fresh vegetable storeroom.
16. Item 2-03, claimed modification by installing new cooler in fresh vegetable storeroom.
17. Item 3-01, claimed modification by removing bulkhead sections between fish holds 1 and 2.
18. Item 5-01, exchange of zinc for the stern tube.
19. Item 5-18, overhaul of the rudder shaft.
20. Item 5-22, assistance work for the main engine.
21. Item 5-28, claimed section 1466 (h)(2), (h)(3) treatment for pump parts.
22. Item 5-511, claimed section 1466 (h)(2), (h)(3) treatment for engine parts.
23. Item 6-09, fabrication of water drain for fresh water expansion tank.
24. Item 9-04, removal of fish fillet plant from vessel.
25. Item 9-07, removal of fish roe machine from vessel.
26. Item 11-032, exchange of chain coupling for conveyor.
27. Item 11-111, claimed modification to emergency float for fresh water expansion tank.
28. Item 202-14, purchase of plywood claimed as subject to section 1466 (h)(3).
29. Item 101-05, claimed modification by 1.5 meter extension of boom for fishing net recorder.
30. Item 101-11, claimed section 1466 (h)(3) treatment for hand rail repair materials.
31. Item 101-18, claimed section 1466 (h)(3) treatment for hatch packings.
32. Item 101-24, claimed modification by fabricating steel cover between slipway roller and stern.
33. Item 105-31, finishing work on seal portion of both propellers.
34. Item 110-09, claimed modification by fabrication of fish fall protector.
35. Item 110-10, claimed modification by adjustment of floor height.
36. Item 110-14, exchange of conveyor cover.
37. Item 110-15, claimed section 1466 (h)(3) treatment for fabricating materials to repair door.
38. Item 110-17, claimed modification of “sukeko” table to pan-making table.
39. Item 5-52, claimed modification by fabricating a new rack to expand refrigeration capacity.
40. Item TA-16, claimed section 1466 (h)(3) treatment for stainless steel plate.
41. Item TA-18, exchange of discharge pipe for dish washer.
42. Item TA-21, protective coverings for bulkhead openings.
43. Item TA-23, claimed section 1466 (h)(2), (h)(3) treatment for work on sanitation piping.
44. Item TA-24, claimed section 1466 (h)(3) treatment for plywood purchase.
ISSUE:
Whether sufficient evidence is presented to establish that the items presented for our review are subject to remission or refund of duty assessed under 19 U.S.C. 1466 due to statutory, judicial, or administrative considerations.
LAW AND ANALYSIS:
Title 19, United States Code, section 1466, provides in pertinent part for payment of duty in the amount of fifty percent ad valorem on the cost of foreign repairs to vessels documented under the laws of the United States to engage in foreign or coastwise trade, or vessels intended to engage in such trade. A vessel documented for trade in the fisheries is considered to be intended for engagement in the foreign trade when it departs the United States for the purpose of obtaining foreign shipyard services. Pursuant to section 4.15, Customs Regulations (19 CFR 4.15), such a vessel must obtain a Permit to Touch and Trade from Customs prior to departing the United States, and is required to comply with all Customs requirements applicable to vessels documented for the named trades upon return to this country, including the declaration and entry of all foreign shipyard operations.
In its application of the vessel repair statute, the Customs Service has held that modifications, alterations, or additions to the hull and fittings of a vessel are not subject to vessel repair duties. Over the course of years, the identification of work constituting modifications on the one hand and repairs on the other has evolved from judicial and administrative precedent. In considering whether an operation has resulted in a modification that is not subject to duty, the following elements may be considered:
1. Whether there is a permanent incorporation into the hull or superstructure of a vessel (see United States v. Admiral Oriental Line, 18 C.C.P.A. 137 (1930)), either in a structural sense or as demonstrated by the means of attachment so as to be indicative of the intent to be permanently incorporated.
2. Whether in all likelihood an item under consideration would remain aboard a vessel during an extended lay-up.
3. Whether, if not a first time installation, an item under consideration constitutes a new design feature and does not merely replace a part, fitting, or structure that is performing a similar function.
4. Whether an item under consideration provides an improvement or enhancement in operation or efficiency of the vessel.
Additionally, in order to qualify as a modification rather than a repair it must be made clear that the element which has been enhanced was in full working order at the time of the enhancement. If it is necessary that shipyard services be sought in order to address a deficiency in a vessel, the fact that the component ultimately replaced is of improved design or results in increased efficiency or performance is not a relevant consideration.
Claims of modification comprise 22 of the 44 items under review. Of these 22 items, we have determined that sufficient proof of modification has been provided for 13 of them. The proof submitted for these items (numbers 2, 7,8,9,10,12, 15, 17, 29, 32, 34,35, and 39, as detailed in the Facts portion of this ruling), is in the form of photographs, diagrams, and detailed cost breakdowns with narrative explanations of the work accomplished which make it clear that these are vessel modifications rather than repairs which would be subject to duty under the statute.
The balance of the items for which modification treatment is claimed (numbers 1, 3, 4, 5, 6, 11, 16, 27, and 38, as detailed in the Facts portion of this ruling), are accompanied by nothing more than short self-serving claims of modification, with no substantive support. We find nothing in the record before us which expands upon the simple descriptions of these operations which we have already recounted. As such, we have determined these enumerated items to represent vessel repair operations which are subject to duty under section 1466 (a).
On August 20, 1990, the President signed into law the Customs and Trade Act of 1990 (Pub. L. 101-382), section 484E of which amended the vessel repair statute by adding a new subsection (h). Subsection (h) included two elements, as follows:
(h) The duty imposed by subsection (a) of this section shall not apply to--
(1) the cost of any equipment, or any part of equipment, purchased for, or the repair parts or materials to be used, or the expense of repairs made in a foreign country with respect to, LASH (Lighter Aboard Ship) barges documented under the laws of the United States and utilized as cargo containers, or
(2) the cost of spare repair parts or materials (other than nets or nettings) which the owner or master of the vessel certifies are intended for use aboard cargo vessel, documented under the laws of the United States and engaged in the foreign or coasting trade, for installation or use on such vessel, as needed, in the United States, at sea, or in a foreign country, but only if duty is paid under appropriate commodity classifications of the Harmonized Tariff Schedule of the United States upon first entry into the United States of each such spare part purchased in, or imported from, a foreign country.
The effective date of the amendment was stated as follows:
Effective Date.--The amendment made by this section shall apply to--
(1) any entry made before the date of enactment of this Act that is not liquidated on the date of enactment of this Act, and
(2) any entry made--
(A) on or after the date of enactment of this
Act, and
(B) on or before December 31, 1992.
Section 112 (b) of Pub. L. 103-382, effective on January 1, 1995, amended the vessel repair statute by reenacting 19 U.S.C. 1466 (h)(1) and (2) which no longer existed as of January 1, 1993. The law also added for the first time a subsection (h)(3) which provides as follows:
(3) the cost of spare parts necessarily installed before the first entry into the United States, but only if duty is paid under appropriate commodity classifications of the Harmonized Tariff Schedule of the United States upon first entry into the United States of each such spare part purchased in, or imported from, a foreign country.
The scope of the amendments is narrow. It is useful to bear in mind that the limiting language of (h)(2) refers only to "spare repair parts or materials" and that (h)(3) refers only to "spare parts", whereas subsection (a) of the statute assesses duty on a broad range of costs including "equipments, or any part thereof, including boats,...or the repair parts or materials to be used, or the expenses of repairs..." (emphasis added). It is clear that the Congress has recognized a distinction between these categories of purchases, and has extended vessel repair duty limitations under subsection (h)(2) and (3) only to certain qualifying parts and materials.
With respect to subsection (h)(2), the law is administered in a like manner to that employed for the provision that expired for all entries made on or after January 1, 1993. This means that in order to receive the benefit of treatment under the subsection it is required that foreign-made parts and materials first be imported into the United States and entered for consumption. Those parts and materials may then be sent abroad without future duty liability under the vessel repair statute. The major difference between the former and present administration of the provision is in the recognition of its limitation to parts and materials only. Formerly, the benefits of (h)(2) were extended to all expenditures except the "expenses of repairs" (foreign labor costs), including vessel equipment. The recognition of the need to so limit the reach of (h)(2) came with the enactment of the new (h)(3). Customs now recognizes the intent of the Congress to limit the scope of the subsection (h) provisions since the new (h)(3) is even more restrictive than (h)(2), in that it extends only to the cost of "spare parts" and does not include the cost of "materials" as is provided under (h)(2).
Subsection (h)(3) is administered by maintaining the requirement that a vessel repair entry (Customs Form 226) must be filed upon first arrival in the United States of vessels covered by the repair statute. Since issuance of instructions by Customs Headquarters on May 31, 1995, in instances in which a vessel operator claims certain foreign parts expenditures to be within the terms of subsection (h)(3), it has been required that continuation sheets normally submitted with entries for consumption (Customs Form 7501-A) must be completed and attached to the vessel repair entry form. The continuation sheets must provide all required information necessary to assign the proper duty rate as listed in the Harmonized Tariff. The vessel repair entry number is the sole number assigned to the entry, and such an entry with continuation sheets attached is considered to be a vessel repair entry. For entries which followed the January 1, 1995, effective date of the statutory amendments, but which preceded the issuance of Headquarters guidance, the form of entry was guided by local Customs practice, and most commonly saw a vessel repair entry accompanied by an entry for consumption.
In order to ensure proper enforcement of the amended statute, it is necessary that the key terms be defined. In defining parts, materials, and equipment, it is most beneficial to do so in general descriptive terms rather than in the form of specific lists of items which fit into categories. In compiling lists it is inevitable that items will be inadvertently omitted, which result may lead to improper or inconsistent application of the law. These critical definitions were included in the May 31, 1995, issuance by Customs Headquarters.
For purposes of 19 U.S.C. 1466 the term materials is determined to mean something which is consumed in the course of its use, and/ or loses its identity as a distinct entity when incorporated into the larger whole. Some examples of materials as defined are seen in such items as a container of paint which is applied to vessel surfaces, and sheets of steel which are incorporated into the hull and superstructure of a vessel.
A part under section 1466 is determined to be something which does not lose its essential character or its identity as a distinct entity but which, like materials, is incorporated into a larger whole. It would be possible to disassemble an apparatus and still be able to readily identify a part. The term part does not mean part of a vessel, which practically speaking would encompass all elements necessary for a vessel to operate in its designed trade. Examples of parts as defined are seen in such items as piston rings and pre-formed gaskets, as opposed to gaskets which are cut at the work site from gasket material.
The term equipment as used in the vessel repair statute is determined to mean something which constitutes an operating entity unto itself. Equipment retains at least the potential for portability. Equipment may be affixed to a vessel in a non-permanent fashion, such as by means of bolts or other temporary methods, which is a feature distinguishing it from being considered an integrated portion of the hull and superstructure of a vessel. Examples of equipment as defined are seen in such items as winches and generators.
Taking all of the foregoing elements relating to section 1466 (h) into consideration, we have examined the evidence presented with this entry relative to claims for relief under (h)(2) and (h)(3). Such claims are made regarding 9 items (numbers 21, 22, 28, 30, 31, 37, 40, 43, and 44, as detailed in the Facts portion of this ruling), and we find no support in the application for granting relief from vessel repair duty as to any of them. As to those claims made pursuant to subsection (h)(3) of the statute (item numbers 28, 30, 31, 37, 40, and 44), we find the items in question to be materials as previously defined, rather than parts which are the sole focus of this provision.
With regard to the remaining three items claimed generally under subsection (h) of the statute (numbers 28, 29, and 43), we are not provided with information sufficient to determine whether they might be equipment, which does not qualify for consideration under either (h)(2) or (h)(3), or whether they may have been previously imported or were purchased and installed directly while the vessel was outside of the United States. This latter consideration could be determinative of their status if the items are found to be materials rather than parts. In light of these findings, we have determined that none of these 9 items under consideration qualify for treatment under 19 U.S.C. 1466 (h).
Of the remaining 13 items under consideration, 10 of them (numbers 13, 18, 19, 20, 23, 26, 33, 36, 41, and 42, as detailed in the Facts portion of this ruling), address operations involving the overhaul of areas of the vessel, unspecified engine and propeller work, the exchange of new elements for old, or the provision of protective coverings. These elements indicate that dutiable repair and related work has transpired in regard to the enumerated items, and nothing is presented in the file which would refute this finding. Under the vessel repair statute, foreign shipyard operations are dutiable, subject to proof that an exception to that result is justified based upon statutory provisions, judicial interpretation, or administrative precedent. In the absence of evidence to this effect, we have determined these 10 items to be dutiable under section 1466 (a).
Two of the remaining three items (numbers 24 and 25, as detailed in the Facts portion of this ruling), concern expenditures for the provision of labor to remove a fish fillet plant and fish roe machine from the vessel. An examination of the evidence does not reveal that these articles were repaired, reinstalled, or replaced. As such, we do not find any basis for assessing duty under the statute. The expenditures for these two items are, therefore, not subject to duty.
The sole remaining item (number 14, as detailed in the Facts portion of this ruling), concerns charges for placing the vessel in dry dock. The cost of such operations had been considered by Customs to be free of duty under the vessel repair statute based upon long-standing judicial precedent. The United States Court of Appeals for the Federal Circuit (CAFC) in Texaco Marine Services, Inc. and Texaco Refining and Marketing, Inc. v. United States, 44 F.3d (1994), had occasion to reconsider that judicial precedent, the case of United States v. George Hall Coal Co., 142 F. 1039 (1906), which held dry-docking expenses were not an expense of repair and therefore were not dutiable. Although the decision in George Hall, supra., seemingly supported a general finding that the expenses of dry-docking are not dutiable, the CAFC examined the rationale behind that case, found in a December 31, 1903, unpublished decision of the Department of Treasury Board of General Appraisers (Board). The CAFC noted that, in the particular case then under consideration, “...the Board held the dry-docking expense was not subject to the vessel repair duty because the Board found that the expense would have been incurred irrespective of whether or not dutiable repairs were performed.” 44 F.3d 1539, 1546 The CAFC went on to state that, “George Hall Coal simply stands for the proposition that expenses that would have been incurred irrespective of whether or not dutiable repairs are performed are not dutiable as an expense of repairs.” Id. It therefore concluded, “...George Hall Coal is entirely consistent with the ‘but for’ interpretation of the statute.” Id.
A “but for” test was utilized by the court in the Texaco, supra., which test bases dutiability under the vessel repair statute upon findings that but for dutiable repair operations, an associated expense would not have been incurred. To be sure, in a great many vessel repair cases which include dry dock expenses there is at least some non-dutiable element which could justify placing a vessel in dry dock. We understand from the decision of the CAFC in Texaco, supra., that dock charges are non-dutiable if the underlying reason for dry-docking is not subject to duty, and that such charges are dutiable if dutiable operations underlie the docking. Proper implementation of the decision of the court requires that we consider the duty consequences in circumstances in which a mixed justification for dry-docking is present.
Customs has experience in duty determinations in another area involving a mixed-purpose vessel repair expense. Under the rationale provided by a long-standing published ruling (C.I.E. 1188/60) the cost of obtaining a gas-free certification, a necessary precursor to the initiation of any hot work (welding) which may be necessary, constitutes an expense which is associated with shipyard operations. Since the expense is incurred without respect to whether the hot work to follow might constitute dutiable repair work, or is in connection with duty-free modification work, it is the practice of Customs in liquidating such expenses to apportion the gas-freeing charges between the cost of items which are remissible and those which are subject to duty. We are guided by the determination of the court in Texaco, supra., to apply the same formula to mixed-purpose dry-dock expenses. Accordingly, the cost associated with item 14 should be apportioned to reflect the dutiable and non-dutiable foreign costs in this entry.
Finally, the applicant contends that the CAFC decision in Texaco., supra., should not be applicable to the subject vessel repair entry and by doing so Customs has violated 19 U.S.C. § 1315(d). Title 19, United States Code, § 1315(d) provides, in pertinent part, as follows:
No administrative ruling resulting in the imposition of a higher rate
of duty or charge than the Secretary of the Treasury shall find to
have been applicable to imported merchandise under an established
and uniform practice shall be effective with respect to articles entered
for consumption or withdrawn from warehouse for consumption
prior to the expiration of thirty days after the date of publication in
the Federal Register of notice of such ruling... (emphasis added)
The applicable Customs Regulations governing this matter are found at 19 CFR Part 177 (entitled “Administrative Rulings”). With respect to the applicability of 19 CFR Part 177, we note that neither of the two Headquarters memoranda published in the Custom Bulletin are “rulings” within the meaning of that part. Pursuant to § 177.1(d)(1), Customs Regulations, a “ruling” is defined as a “...written statement issued by the Headquarters Office or the appropriate office of Customs as provided in this part that interprets and applies the provisions of the Customs and related laws to a specific set of facts.” (Emphasis added) Neither memorandum applied 19 U.S.C. § 1466 or 19 CFR § 4.14 (the applicable Customs regulations promulgated pursuant to
§ 1466) to a specific set of facts (i.e., no single vessel repair entry containing foreign expenses was discussed). Rather, they provided notice to the public that Customs will administer 19 U.S.C. § 1466 in accordance with the explicit guidelines set by the CAFC in interpreting the term “expenses of repairs” within the meaning of the statute as determined by the “but for” test. Such guidelines, prior to the date of that decision, were non-existent. Accordingly, 19 U.S.C.
§ 1315(d) is inapplicable in these circumstances.
HOLDINGS:
1. Following a thorough examination of the facts in this case as well as an analysis of the law and applicable precedents, we have determined that the Application for Relief submitted in this matter should be allowed in part and denied in part as concerns the individual expenses considered, as detailed in the Law and Analysis portion of this ruling.
2. For the reasons set forth in the Law and Analysis portion of this ruling it has been determined that the Customs implementation of the CAFC decision in Texaco Marine Services, Inc., and Texaco Refining and Marketing, Inc. v. United States, 44 F.3d 1539 (1994), set forth in Headquarters memorandum 113308, as amended by Headquarters memorandum 113350, is not violative of 19 U.S.C. § 1315(d).
Sincerely,
William G. Rosoff
Chief
Entry and Carrier Rulings Branch