VES-13-18-RR:IT:EC 113658 LLB
Chief, Liquidation Section
U. S. Customs Service
P. O. Box 2450
San Francisco, California 94126
RE: Vessel Repair; Application for relief; Vessel LAWRENCE H. GIANELLA, Voyage 128; Entry No. 808-0515135-6; Port of arrival, San Francisco, California; United States-made: United States-purchased; 19 U.S.C. 1466
Dear Sir:
This letter is in response to your memorandum dated September 12, 1995, which forwarded for our review an application for relief from duties relating to the above referenced vessel repair entry. Our ruling follows.
FACTS:
The vessel LAWRENCE H. GIANELLA, a United States flag vessel, arrived at the port of San Francisco, California, on April 24, 1995. A vessel repair entry was timely filed according to Customs records. According to the vessel repair entry and other documents in the file, the vessel underwent certain work while in the United Kingdom, Spain, Italy, and the United Arab Emirates. Although the entry under consideration was filed in 1995, the vessel is reported to have departed the United States on December 7, 1990, and to have remained continuously outside of this country. The reported repairs took place between December 19, 1990, and June 7, 1991, the six-month anniversary of the vessel’s departure from the United States.
There are 120 reported expense items on the vessel repair entry, with the pleas for relief from the assessment of duty regarding the majority of them being classifiable under any one of several general categories. Relief is sought on statutory and administrative bases which include claims of United States manufacture or production of parts, previous importation and payment of duty on parts, completion of required survey and inspection work, and charges for transportation and freight. In addition, there are five items for which no relief is claimed and which will not be considered in this ruling. These include exhibit items 25, 81, 107, and 110-111.
ISSUE:
Whether the expenses as reported on the vessel repair entry under consideration qualify for relief from assessment of duty as claimed.
LAW AND ANALYSIS:
Title 19, United States Code, section 1466(a), provides in pertinent part for payment of duty in the amount of 50 percent ad valorem on the cost of foreign repairs to vessels documented under the laws of the United States to engage in the foreign or coastwise trade, or vessels intended to be employed in such trade.
The vessel repair statute provides in subsection (e) (19 U.S.C. 1466(e)), that when a vessel covered by the vessel repair statute:
...arrives in a port of the United States two years or more after its last departure from a port in the United States, the duties imposed by [section 1466] shall apply only with respect to... [purchases and repairs] made during the first six months after the last departure of such vessel from a port of the United States.
Thus, the law provides that when it is established that a vessel otherwise subject to the provisions of subsection (a) of the vessel repair statute has been continuously outside of the United States for at least two years, liability for duty under the statute will apply only to those repair operations taking place during the first six months of that extended absence. Since the named vessel has been away from this country for the requisite period, the provisions of subsection (e) will apply.
Subsection (d)(2) of 19 U.S.C. 1466 provides that duty is to be remitted or refunded if the owner or master of a vessel provides evidence regarding vessel-related expenditures showing that:
...such equipments or parts thereof or repair parts or materials, were manufactured or produced in the United States, and the labor necessary to install such equipments or to make such repairs was performed by residents of the United States, or by members of the regular crew of such vessel....
The Customs regulation which implements this subsection, 19 CFR 4.14(c)(3), specifies the same elements and, in addition, requires that the qualifying items must be purchased by the vessel owner in the United States.
The statutory and regulatory requirements concerning the use of United States-manufactured items in foreign vessel repair operations have been the subject of administrative interpretations. Prominent among these is Treasury Decision 75-257 (T.D. 75-257), which holds as follows:
The cost of labor used in a foreign shipyard to install materials of United States origin, even though the materials were purchased by the vessel owner in the United States, is also subject to duty under 19 U.S.C. 1466. However, the cost of materials of United States origin which are purchased by the vessel owner in the United States is not subject to duty under 19 U.S.C. 1466, when installed on the vessel in a foreign country. (Emphasis added)
Thus, while it might be presumed from reading the statute alone that both the presence of qualified parts and qualified labor is required in order to invoke the benefits of subsection (d)(2), the terms of T.D. 75-257 establish that the cost of qualified parts may be considered for refund or remission even in the absence of the domestic labor element.
In this case, claims are made under the terms of T.D. 75-257 with regard to exhibit items 1-2, 8-9, 13-14, 17, 20, 26, 30, 32-34, 36, 38, 40, 45, 48, 52-58, 63-67, 69, 71, 74-75, 78-79, 84, 93, 95-96, 98-101, 106, 109, 112, and 114-115. We find that as to each of these items, evidence in the form of statements from domestic manufacturers attesting to their production in the United States has been provided for our consideration. In light of this fact, we find that the invoiced cost of the articles under consideration, as listed above, is remissible under the vessel repair statute.
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, the relevant one of which provides as follows:
(h) The duty imposed by subsection (a) of this section shall not apply to--
(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 a 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 amendment was made applicable 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 had expired and 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 presently 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 limited application 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 only 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.
In the present matter, claims for relief under the provisions of subsection (h)(2) are made with respect to exhibit items 3-7, 10-12, 15, 18-19, 22, 27-29, 35, 37, 41-44, 46-47, 49-51, 59-62, 68, 70, 72-73, 76-77, 83, 85-92, 94, 97, 102-105, and 113. Those items claimed under the terms of subsection (h)(3) include 16, 23-24, and 39. We have reviewed the supporting invoices for the items listed above and find that they represent the purchase of qualifying parts and materials as required under the appropriate subsection of the statute, either (h)(2) or (h)(3). Accordingly, the segregated cost of the articles themselves as shown on the invoices is refundable under the vessel repair statute.
With respect to the dutiability of testing, inspections, and surveys, Customs has held pursuant to C.S.D. 79-277 that where periodic surveys are undertaken to meet the specific requirements of a classification society, insurance carrier, etc., the cost of the survey is not dutiable even when dutiable repairs are effected as a result of survey findings. This result is to be distinguished from a survey whose source is carrier-initiated maintenance and repair, scheduled or otherwise.
In such cases, in order to gain remission of duty on the cost of the permissible survey it is necessary to completely segregate the cost of any attendant repairs and other expenses from the actual cost attributable to the survey itself. This is part of a long-standing practice in which Customs has held that when costs of various items are not segregated or separately shown, but rather are lumped together, duty will be assessed on the entire cost even though certain items may be non-dutiable (see C.I.E. 565/55, C.I.E. 1325/58 and C.D. 1836). In the matter presently under consideration, issues involving claimed required survey, inspection and testing expenses are raised with respect to exhibit items 80, 82, and 116-120. Following a review of the evidence supplied, we find that the cost of the surveys and inspections under consideration is not subject to duty under the vessel repair statute.
Transportation expenses have in the past been considered free from vessel repair duty pursuant to Treasury Decision 39443, 43 Treas. Dec. 99 (1923). This Treasury Decision is one in a line extending from the court decision in United States v. George Hall Coal Company, 134 Fed. 1003, T.D. 26038 (1903). That case, among others, was thoroughly discredited by the opinion issued by the Court of Appeals for the Federal Circuit in the case of Texaco Marine Services, Inc. and Texaco Refining and Marketing, Inc. v. United States, 44 F.3d 1539 (1994), decided December 29, 1994. Customs has, however, determined that the decision rendered in Texaco, supra., will only be applied from the decision date forward for all issues except for repair-related cleaning and protective coverings. Since the entry under consideration dates from after December 29, 1994, any claim for duty-free treatment of transportation charges would be disallowed under the Texaco rationale if those charges were associated with dutiable operations. This result is due to the so-called “but for” test articulated by the Court in that case. The question to be posed is essentially, would the expense being appealed have been incurred “but for” the execution of an associated dutiable operation. In the present matter the parts and materials being transported are not subject to duty, therefore the charges for their transportation are not dutiable In this case, claims for duty-free treatment of transportation and freight charges are made specifically in connection with exhibit items 21, 31, and 108. In addition, there are segregated charges for freight and transportation appearing on nearly all of the invoices under consideration in this case. Under the rationale explained above, none of these charges would be subject to duty under the vessel repair statute.
HOLDING:
Following a thorough review of the evidence presented as well as analysis of the law and relevant judicial and administrative precedents, we have determined that this Application for Relief should be granted as specified in the Law and Analysis portion of this ruling.
Sincerely,
Acting Chief
Entry and Carrier Rulings Branch