VES-13-18-RR:IT:EC 226873 GOB
Port Director of Customs
Attn.: Vessel Repair Liquidation Unit, Room 415
P.O. Box 2450
San Francisco, CA 94126
RE: Vessel Repair Entry No. C31-0015281-9; 19 U.S.C. 1466;
ARCO CALIFORNIA, V-315; Petition; Texaco Marine
Services v. U.S.; 19 U.S.C. 1315(d), 1625(c); Drydocking
charges; Proration; Sea trials
Dear Sir:
This is in response to your memorandum dated March 25, 1996,
which forwarded the petition submitted by ARCO Marine, Inc.
("petitioner") with respect to the above-referenced vessel repair
entry.
FACTS:
The ARCO CALIFORNIA ("the vessel") is a U.S.-flag vessel
owned and operated by the applicant. Certain foreign shipyard
work was performed on the vessel in 1995. The vessel arrived at
the port of Valdez, Alaska on June 26, 1995. The subject entry
was subsequently filed in a timely fashion.
ISSUE:
Whether the subject costs are dutiable pursuant to 19 U.S.C.
1466.
LAW AND ANALYSIS:
19 U.S.C. 1466 provides for the payment of duty at a rate 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 be employed
in such trade.
Petitioner's Claims with respect to 19 U.S.C. 1315(d) and 19
U.S.C. 1625(c)
In its petition, the petitioner raises the issues as to
whether Customs violated 19 U.S.C. 1315(d) and 19 U.S.C. 1625(c).
We have dealt with these issues previously.
In Texaco Marine Services, Inc. and Texaco Refining and
Marketing, Inc. v. United States, 815 F.Supp. 1484 (CIT 1993), 44
F.3d. 1539, 1544 (CAFC 1994), the Court of Appeals for the
Federal Circuit stated in pertinent part:
Texaco urges us to reject the Court of International Trade's
"but for" approach and to interpret "expenses of repairs" so
as to exclude those expenses (e.g., expenses for clean-up
and protective covering work) not incurred for work directly
involved in the actual making of repairs. Such a reading
has no basis in the plain language of the statute, however.
Aside from the inapplicable statutory exceptions, the
language "expenses of repairs" is broad and unqualified. As
such, we interpret "expenses of repairs" as covering all
expenses (not specifically exempted in the statute) which,
but for dutiable repair work, would not have been incurred.
(Emphasis supplied.)
The subject vessel repair entry was filed after the CAFC
decision in Texaco. In Memorandum 113350 dated March 3, 1995,
published in the Customs Bulletin and Decisions on April 5, 1995
(Vol. 29, No. 14, p. 24), we stated in pertinent part:
All vessel repair entries filed with Customs on or after the
date of that decision [the CAFC decision in Texaco, December
29, 1994] are to be liquidated in accordance with the full
weight and effect of the decision (i.e., costs of post-repair cleaning and protective coverings incurred pursuant
to dutiable repairs are dutiable and all other foreign
expenses contained within such entries are subject to the
"but for" test).
Memorandum 113350 was preceded by Memorandum 113308 dated
January 18, 1995. Memoranda 113350 and 113308 were both
published in the Customs Bulletin.
In Ruling 113474 dated October 24, 1995, we stated:
... 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 Customs 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.
In Ruling 113500 dated October 24, 1995, we stated:
Specifically, the applicant contends that the publication in
the Customs Bulletin of memorandum 113308, subsequently
clarified by memorandum 113350, without the solicitation of
public comments, constitutes a violation of 19 U.S.C.
1625(c).
...
... the aforementioned memoranda did not modify or revoke
any prior interpretive ruling or decision or have the effect
of modifying the treatment Customs previously accorded
certain foreign expenses under 19 U.S.C. 1466. Rather,
the memoranda, in conjunction with the publication of the
CAFC decision in the Customs Bulletin, merely provided
notice to the public that the impetus behind any change in
Customs interpretation of the term "expenses of repairs"
within the meaning of the vessel repair statute is the CAFC
itself, not Customs.
...
With respect to the applicability of 19 CFR Part 177, we
note that neither of the two Headquarters memoranda
published in the Customs 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.
Further in regard to the applicability of 19 CFR Part 177,
it is noteworthy that since neither memorandum was a
"ruling" as defined in 19 CFR 177.1(d), the mere fact that
they were published in the Customs Bulletin does not, as the
protestant suggests, render either a "published ruling"
within the meaning of 19 CFR 177.1(d). Furthermore, in
view of the fact that 19 CFR 177.1(d) also defines a
"ruling letter" as "a ruling issued in response to a written
request therefor and set forth in a letter addressed to the
person making the request or his designee", neither
memoranda, which were issued at the behest of the Assistant
Commissioner, Office of Regulations and Rulings to the
Regional Director, Commercial Operations Division, New
Orleans, constituted a "ruling letter" for purposes of 19
CFR Part 177. The delayed effective date provisions of 19
CFR 177.9(d)(3), applicable to a "ruling letter" are
therefore of no consequence.
Accordingly, the provisions of 19 U.S.C. 1625 and 19 CFR
Part 177 are inapplicable to the subject application.
Based on the above authorities, we find that the
petitioner's claims with respect to 19 U.S.C. 1315(d) and 1625(c)
are without merit.
Proration Issue
In your forwarding memorandum, you ask for our review with
respect to the following items which you have prorated in
accordance with Ruling 113474 dated October 24, 1995: tank
pumping, drydocking, liability insurance, fuel, cranage,
temporary lighting, lay berthing, material handling,
transportation, pump ballasting, fire watch, staging,
ventilation, lighting, and inspection costs for ventilation and
lighting.
In Ruling 113474, we stated in pertinent part:
A "but for" test was utilized by the court in the Texaco
[case], 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 hotwork (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.
The vessel repair entry at issue here was filed after the
CAFC decision in Texaco. As stated supra, in Memorandum 113350
dated March 3, 1995, we stated in pertinent part:
All vessel repair entries filed with Customs on or after the
date of that decision [the CAFC decision in Texaco, December
29, 1994] are to be liquidated in accordance with the full
weight and effect of the decision (i.e., costs of post-repair cleaning and protective coverings incurred pursuant
to dutiable repairs are dutiable and all other foreign
expenses contained within such entries are subject to the
"but for" test).
In accordance with Ruling 113474 and Memorandum 113350, and
as your forwarding memorandum states, the drydocking charges
should be prorated between the dutiable and nondutiable costs
associated with the drydocking. The method of prorating was
described in Ruling 113474, supra: the drydocking costs "should
be apportioned to reflect the dutiable and non-dutiable foreign
costs in this entry." For example, if, aside from the subject
"drydocking costs," as described supra, fifty percent of the
costs of that particular drydocking were dutiable and fifty
percent were
nondutiable, then fifty percent of the subject "drydocking
costs," as described supra, would be dutiable and fifty percent
would be nondutiable.
With the exception of liability insurance, all of the costs
listed in the first paragraph of this section (Proration Issue)
of this ruling are "drydock costs" within the meaning of that
term as used in Ruling 113474 such that they are to be prorated
as described supra.
The liability insurance is an overhead cost. In Ruling
113122 dated March 20, 1996, we stated as follows with respect to
overhead:
We note that our rulings with respect to entries filed on
and after the date of the C.A.F.C. decision in Texaco,
December 29, 1994, will follow the analysis of Ruling 112900
dated November 4, 1993, where we stated as follows:
As we stated in Ruling 112861, supra, it is Customs
position that overhead relating to repair work is
dutiable as part of the cost of the repair, i.e., the
total cost or expense of the repair is dutiable. In
contrast, overhead relating to a nondutiable item such
as a modification is nondutiable, i.e., the total cost
or expense of a nondutiable item is nondutiable. While
Customs does not wish to see overhead broken-out or
segregated as a separate item, our position on the
dutiability of overhead, as stated supra, holds whether
or not overhead is a separate item.
...
...It is Customs position that the total cost or
expense of a foreign repair is dutiable. That total
cost includes overhead attributable to the repair.
Overhead is part of the shipyard's cost of doing
business. In many cases in various businesses,
overhead expense incurred by the vendor is recouped by
including a provision for it in other costs, such as
the labor cost.
HOLDING: [of Ruling 112900]
The protest is granted only with respect to any
overhead which is related to nondutiable items; that
overhead must be included in the cost or expense of the
nondutiable items or clearly reflected as related to
such nondutiable items on the pertinent invoices. The
protest is denied with respect to all other overhead.
[end of excerpt from Ruling 112900.]
Inclusion of 19 U.S.C. 1466(h)(3) Duties in Proration Calculation
The petitioner claims that the costs with respect to duties
assessed pursuant to 19 U.S.C. 1466(h)(3) should not be included
in the proration calculation, as described supra.
19 U.S.C. 1466(h)(3) provides:
The duty imposed by subsection (a) of this section shall not
apply to -
* * * * *
(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.
We disagree with the petitioner's claim. Duty assessed
under 19 U.S.C. 1466(h)(3) is vessel repair duty (i.e., 19 U.S.C.
1466 duty), albeit assessed at a rate of duty different from the
fifty percent rate of 19 U.S.C. 1466(a). As such, the dutiable
amount with respect to duty assessed under 19 U.S.C. 1466(h)(3)
is to be included in the dutiable component for the purpose of
the proration calculation which is described supra on pages four
through six of this ruling.
Sea Trials
The petitioner claims that the sea trials (item 010, invoice
page 018) "... are not subject to duty, or, are subject to
complete remission. At the very least, the cost of the sea
trials should be subject to proration."
The invoice states, in part: "When work are completed [sic]
and vessel is ready to sail, furnish shipyard services of two (2)
machinists, two (2) pipe fitters, and one (1) electrician to go
to sea for approximately a four (4) trial run."
In Ruling 113187 dated September 13, 1994, we stated in
pertinent part: "It has long been Customs position that sea
trials are dutiable if done as a result of dutiable repairs. (See
Customs rulings 107106, 107847, 108858 and 110197.)"
A sea trial is the type of item that is dutiable as an item
incident to a repair. For example, after repairs are effected, a
sea trial will be performed to determine if the vessel is
operating properly. The petitioner has not provided evidence to
support its claim that the sea trial is nondutiable or to
establish that the sea trials were not performed incident to
repairs. Accordingly, this item is dutiable.
HOLDING:
The Holdings of this ruling are as stated supra.
Sincerely,
Chief,
Entry and Carrier Rulings Branch