VES-13-18-RR:IT:EC 227095 GEV
Chief, Liquidation Branch
U.S. Customs Service
Post Office Box 2450
San Francisco, California 94126
RE: Protest No. 3001-96-100406; Vessel Repair Entry No. 110-6461660-7;
SEA-LAND VOYAGER; V-228; 19 U.S.C. 1466
Dear Sir:
This is in response to your memorandum dated July 2, 1996,
forwarding the above-referenced protest with supporting
documentation for our review. Our ruling is set forth below.
FACTS:
The SEA-LAND VOYAGER is a U.S.-flag vessel operated by Sea-Land Service, Inc. ("Sea-Land") which incurred costs for foreign
work performed during February and March of 1995. Subsequent to
the completion of the work the vessel arrived in the United
States at Tacoma, Washington, on March 26, 1995. A vessel repair
entry was timely filed.
The operator, in seeking relief from the duty provisions of
the vessel repair statute (19 U.S.C. 1466), filed a short cover
letter forwarding various invoices and worksheets which reflect
proposed dispositions, but no specific plea for relief from duty
was filed. Consequently, although the aforementioned letter
denominated itself as an Application for Relief, it was deemed by
Customs not to rise to that level and denied in its entirety
(Headquarters ruling letter 113587, dated February 9, 1996). The
entry was forwarded for liquidation which occurred on March 15,
1996. A protest, dated June 10, 1996, was timely filed. The
protestant seeks relief for a myriad of foreign costs covered by
the subject entry.
ISSUE:
Whether evidence is presented sufficient to grant the
protest regarding the dutiability of certain foreign costs under
19 U.S.C. 1466.
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LAW AND ANALYSIS:
Title 19, United States Code, 1466 (19 U.S.C. 1466),
provides in pertinent part for the payment of an ad valorem duty
of 50 percent of the cost of "...equipments, or any part thereof,
including boats, purchased for, or the repair parts or materials
to be used, or the expenses of repairs made in a foreign country
upon a vessel documented under the laws of the United
States..."
At the outset we note that upon reviewing the 15-page
worksheet prepared by Sea-Land which was submitted with their
protest and annotated to reflect their claims, it is readily
apparent that many of the foreign costs covered by the subject
vessel repair entry are conceded to be dutiable. Consequently,
this ruling will address only those items denoted as "Free" by
the Protestant on the worksheet.
The vast majority of the protestant's claims pertain to
costs for transportation, rigging, staging and other such costs
(e.g., "standby") which were incurred in conjunction with costs
the Protestant denoted as "Dutiable" on the worksheets. In this
regard we refer to Texaco Marine Services, Inc., and Texaco
Refining and Marketing, Inc. v. United States, 815 F.Supp. 1484
(1993), where the issue before the U.S. Court of International
Trade (CIT) was whether costs for post-repair cleaning and
protective coverings incurred pursuant to dutiable repairs
constituted "expenses of repairs" as that term is used in 19
U.S.C. 1466. In holding that the costs at issue were dutiable
as "expenses of repairs" the court adopted the "but for" test
proffered by Customs; that is, these costs were an integral part
of the dutiable repair process and would not have been necessary
"but for" the dutiable repairs.
On appeal, the CAFC issued a watershed decision which not
only affirmed the opinion of the CIT regarding the specific
expenses at issue, but also provided clear guidance with respect
to the interpretation of 19 U.S.C. 1466, hence, Customs
administration of that statute. In upholding the "but for" test
adopted by the CIT, the CAFC stated:
"...the language expenses of repairs' is broad and
unqualified.
As such, we interpret expenses of repairs' as covering
all
expenses (not specifically excepted in the statute)
which,
but for dutiable repair work, would not have been
incurred.
Conversely, expenses of repairs' does not cover
expenses
that would have been incurred even without the
occurrence
of dutiable repair work. As will be more clearly
illustrated
below...the but for' interpretation accords with what
is
commonly understood to be an expense of repair."
44 F.3d 1539, 1544.
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In reaching the above determination, the CAFC steadfastly
rejected the non-binding judicial authority relied upon by the
plaintiff/appellant. Specifically, the court addressed the
following: Mount Washington Tanker Co. v. United States, 505
F.Supp. 209 (CIT 1980) which held that transportation
compensation for members of a foreign repair crew performing
dutiable repairs was not dutiable as an expense of repairs;
American Viking Corp. v. United States, 150 F.Supp. 746 (Cust.Ct.
1956) which held that the expense of providing lighting needed to
perform a dutiable repair was not dutiable as an expense of the
repair; and International Navigation Co. v. United States, 148
F.Supp. 448 (Cust.Ct. 1957) which held that transportation
expenses for a foreign repair crew to travel to and from an
anchored vessel being repaired was not dutiable as expenses of
repairs. With regard to these three cases, the CAFC stated,
"Seemingly, these expenses too would have been viewed as coming
within the [vessel repair] statute if the court had used a "but
for" approach." 44 F.3d 1539, 1547. The CAFC concluded, "Thus
Mount Washington Tanker, like American Viking and International
Navigation, was incorrectly decided." Id.
In addition to the above judicial authority, the CAFC
discussed at length the case of United States v. George Hall Coal
Co., 142 F. 1039 (1939), heavily relied upon by the plaintiff/
appellant, which held dry-docking expenses were not an expense of
repair and therefore were not dutiable. Although this decision
seemingly supported the position that the expenses at issue were
dutiable, the CAFC examined the rationale provided in a December
31, 1903, unpublished decision of the Department of Treasury
Board of General Appraisers (Board) upon which the court's
decision was based. It noted that, "...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, "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.
Recognizing that the decision of the CAFC was not only
dispositive of the expenses at issue, but also instructive as to
Customs administration of the vessel repair statute with respect
to the interpretation of the term "expenses of repairs" contained
therein, the Assistant Commissioner, Office of Regulations and
Rulings, issued a memorandum to the Regional Director, Commercial
Operations, New Orleans (file no. 113308) dated January 18, 1995,
published in the Customs Bulletin on February 8, 1995 (Customs
Bulletin and Decisions, vol. 29, no. 6, at p. 59) In that
memorandum, copies of which were disseminated to two other
Customs field offices charged with the liquidation of vessel
repair entries, it was stated that pursuant to the
decision of the CAFC, a myriad of foreign repair expenses
previously accorded duty-free treatment would, under certain
circumstances, no longer receive such treatment. The memorandum
further provided that any such affected costs contained in vessel
repair entries not finally liquidated as of the date of the CAFC
decision (December 29, 1994) should be liquidated as dutiable
"expenses of repairs" provided they pass the "but for" test
discussed above.
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Subsequent to the publication of the above memorandum, on
February 22, 1995, various representatives of U.S.-flag vessel
owners/operators, including the Protestant, met with the
Assistant Commissioner, Office of Regulations and Rulings. It
was the collective opinion of the vessel owners/operators that
the memorandum be rescinded, contending, inter alia, that it was
violative of 19 U.S.C. 1625(c)(1) and 19 CFR Part 177. Upon
further review of this matter, the Assistant Commissioner, Office
of Regulations and Rulings, again issued a memorandum to the
Regional Director, Commercial Operations Division, New Orleans
(file no. 113350), dated March 3, 1995, published in the Customs
Bulletin on April 5, 1995 (see Customs Bulletin and Decisions,
vol. 29, no. 14, at p. 24) clarifying the January 18 memorandum
with respect to Customs implementation of the CAFC decision. It
provided that all vessel repair entries filed with Customs on or
after the date of that decision 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). With respect to vessel repair entries filed prior to
December 29, 1994, all costs for post-repair cleaning and
protective coverings incurred pursuant to dutiable repairs are
dutiable. It further provided that in view of the fact that
carriers have relied on Customs rulings (some of which were based
on court cases which the CAFC in Texaco held were incorrectly
decided), and retroactive application would cause both the
Government and the carriers a major administrative burden,
Customs will not apply Texaco retroactively except as to the two
issues directly decided by the court. All other costs contained
within such entries are to be accorded that treatment previously
accorded them by Customs prior to the decision of the CAFC in the
Texaco case.
Parenthetically, we note that the CAFC decision was
published in its entirety in the Customs Bulletin on March 8,
1995 (See Customs Bulletin and Decisions, vol. 29, no. 10, at p.
19).
Accordingly, upon reviewing those costs claimed to be
nondutiable but which were conceded by the protestant to have
been incurred in conjunction with dutiable repairs, we find the
costs for transportation, rigging, staging and "standby" listed
under the following item numbers to be dutiable pursuant to
Texaco: 1; 11.a; 11.b; 11.c; 11.d; 15a & b; 24; 30; 31; 32; 33;
35; 36; 37; 38B2.1.4; and 38E (appearing on pp. 8 - 15 of the
worksheets). Furthermore, in view of the dutiable tank repairs
covered by Item No. 38E3.2.26, we find the tank cleaning costs in
Item Nos. 38B3.H-1, 38B3.H-2 and 38B3.H-6 to also be dutiable
pursuant to Texaco.
The transportation cost covered by Item No. 22.1b is
dutiable in view of the fact that the ABS invoice fails to
discern whether it is attributed to dutiable or nondutiable ABS
surveys contained within the entry. In addition, the cost of
gas-freeing in Item 38B2.2.4b is subject to proration pursuant to
C.I.E.s 1188/60 and 429/61.
The following Item Nos. cover alleged nondutiable
survey/inspection work reflected on Jurong Shipyard Ltd. job no.
21-7154 (VG 6745) and include other costs incurred in conjunction
therewith: 38D4.2.16, 38D.M-25, 38D.M-26 and 38D.E01. In regard
to the dutiability of
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inspection/survey costs, we note that C.S.D. 79-277 stated that,
"[i]f the survey was undertaken to meet the specific requirements
of a governmental entity, classification society, insurance
carrier, etc., the cost is not dutiable even if dutiable repairs
were effected as a result of the survey."
With increasing frequency, this ruling has been utilized by
vessel owners seeking relief not only from charges appearing on
an American Bureau of Shipping (ABS) or U.S. Coast Guard invoice
(the actual cost of the inspection) but also as a rationale for
granting non-dutiability to a host of inspection-related charges
appearing on a shipyard invoice. In light of this continuing
trend, we offer the following clarification.
C.S.D. 79-277 discussed the dutiability of certain charges
incurred while the vessel underwent biennial U.S. Coast Guard and
ABS surveys. That case involved the following charges:
ITEM 29
(a) Crane open for inspection
(b) Crane removed and taken to shop. Crane
hob and hydraulic unit dismantled and
cleaned
(c) Hydraulic unit checked for defects, OK.
Sundry jointings of a vessel's spare renewed.
(d) Parts for job repaired or renewed.
(e) Parts reassembled, taken back aboard ship
and installed and tested.
In conjunction with the items listed above, we held that a
survey undertaken to meet the specific requirements of a
governmental entity, classification society, or insurance carrier
is not dutiable even when dutiable repairs are effected as a
result of a survey. We also held that where an inspection or
survey is conducted merely to ascertain the extent of damages
sustained or whether repairs are deemed necessary, the costs are
dutiable as part of the repairs which are accomplished (emphasis
added).
It is important to note that only the cost of opening the
crane was exempted from duty by reason of the specific
requirements of the U.S. Coast Guard and the ABS. The
dismantling and cleaning of the crane hob and hydraulic unit was
held dutiable as a necessary prelude to repairs. Moreover, the
testing of the hydraulic unit for defects was also found dutiable
as a survey conducted to ascertain whether repairs were
necessary. Although the invoice indicated that the hydraulic
unit was "OK," certain related parts and jointings were either
repaired or renewed. Therefore, the cost of the testing was
dutiable.
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We emphasize that the holding exempts from duty only the
cost of a required scheduled inspection by a qualifying entity
(such as the U.S. Coast Guard or the ABS). In the liquidation
process, Customs should go beyond the mere labels of "continuous"
or "ongoing" before deciding whether a part of an ongoing
maintenance and repair program labeled "continuous" or "ongoing"
is dutiable.
Moreover, we note that C.S.D. 79-277 does not exempt repair
work done by a shipyard in preparation of a required survey from
duty. Nor does it exempt from duty the cost of any testing by
the shipyard to check the effectiveness of repairs found to be
necessary by reason of the required survey.
With respect to the four items in question, the Jurong
Shipyard Ltd. documentation is itself uncontroverted evidence
that the costs in question are dutiable shipyard work (i.e.,
adjustments/calibrations held to be dutiable pursuant to
Headquarters ruling letter 110841, dated May 29, 1990) rather
than the actual cost of required scheduled inspections by any of
the aforementioned qualifying entities. Consequently, those four
items are dutiable in their entirety.
We note the existence of certain general/port services
contained within the subject entry (Item Nos. 5, 10, 38.A1 and
38A2 ). In regard to the latter (Item No. 38A2), such costs are
directly related to dutiable repairs and therefore are dutiable
pursuant to Texaco. With respect to the former (Item Nos. 5, 10
and 38.A1), since they are related to both dutiable and non-dutiable work, it is our position that such costs should be
prorated between the dutiable and non-dutiable costs contained
within this entry. (Headquarters ruling letters 226729, dated
June 7, 1996)
The protestant also claims relief for several items alleged
to be modifications. In regard to these claims, we note that in
its application of the vessel repair statute, Customs has held
that modifications to the hull and fittings of a vessel are not
subject to vessel repair duties. Over the course of years, the
identification of modification processes has evolved from
judicial and administrative precedent. In considering whether an
operation has resulted in a modification which 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 et al., T.D. 44359 (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. This element
should not be given undue weight in view of the fact that vessel
components must be welded or otherwise "permanently attached" to
the ship as a result of constant pitching and rolling. In
addition, some items, the cost of which is clearly dutiable,
interact with other vessel components resulting in the need,
possibly for that purpose alone, for a fixed and stable
juxtaposition of vessel parts. It follows that a "permanent
attachment" takes place that does not necessarily involve a
modification to the hull and fittings.
2. Whether in all likelihood, an item under consideration would
remain aboard a vessel during an extended lay up.
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3. Whether, if not a first time installation, an item under
consideration replaces a current part, fitting or structure which
is not in good working order.
4. Whether an item under consideration provides an improvement
or enhancement in operation or efficiency of the vessel.
Very often when considering whether an addition to the hull
and fittings took place for the purpose of 19 U.S.C. 1466, we
have considered the question from the standpoint of whether the
work involved the purchase of "equipment" for the vessel. It is
not possible to compile a complete list of items that might be
aboard a ship that constitute its "equipment". An unavoidable
problem in that regard stems from the fact that vessels differ as
to their services. What is required equipment on a large
passenger vessel might not be required on a fish processing
vessel or offshore rig.
"Dutiable equipment" has been defined to include:
...portable articles necessary or appropriate
for the navigation, operation, or maintenance
of a vessel, but not permanently incorporated
in or permanently attached to its hull or
propelling machinery, and not constituting
consumable supplies. Admiral Oriental,
supra., (quoting T.D. 34150, (1914))
By defining what articles are considered to be equipment,
the Court attempted to formulate criteria to distinguish non-dutiable items which are part of the hull and fittings of a
vessel from dutiable equipment, as defined above. These items
might be considered to include:
...those appliances which are permanently
attached to the vessel, and which would
remain on board were the vessel to be laid
up for a long period... Admiral Oriental,
supra., (quoting 27 Op. Atty. Gen. 228).
A more contemporary working definition might be that which
is used under certain circumstances by the Coast Guard; it
includes a system, accessory, component or appurtenance of a
vessel. This would include navigational, radio, safety and,
ordinarily, propulsion machinery.
Upon reviewing the documentation submitted with respect to
the proposed modifications, we are in accord with such claims
with the exception of Item Nos. 8F.Mod1 and 38F.H-7 on page 15 of
the worksheet and the attendant survey referenced in Item No. 4
on page 1 of the worksheet. The work covered by this
documentation was done because of fractures found in the face
plates. Accordingly, this constitutes dutiable repairs rather
than a nondutiable modification.
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Item No. 8 covers parts which the vendor's invoice specifies
are for six Sea-Land vessels. The SEA-LAND VOYAGER is not among
the six listed on the invoice. Additional attachments to the
invoice reference a seventh Sea-Land vessel, but again not the
SEA-LAND VOYAGER. Accordingly, the aforementioned documentation
fails to substantiate the protestant's claim for relief under
this item pursuant to T.D. 75-257 and therefore these parts are
dutiable.
In regard to the pro rata tax alleged to be nondutiable in
Item Nos. 11.a, 11.b, 11.c and 11.d, there is no basis for such a
finding. Counsel cites to Headquarters ruling 113294, dated
January 3, 1995, for the proposition that any costs which are not
connected with foreign shipyard repair operations and are part of
the normal costs of supplying and operating a vessel are not
dutiable. A pro rata tax on dutiable foreign parts does not fall
within the duty-free costs addressed in that ruling.
Furthermore, Customs has long-held that foreign government taxes
(e.g., goods and services taxes (GST) which this pro rata tax is
characterized as on the invoices) to be dutiable under the vessel
repair statute. (T.D. 55005(3) and Headquarters ruling 110425,
dated November 30, 1989) Accordingly, the pro rata tax included
under these items is dutiable. In regard to remainder of the
costs indicated as "Free" on the worksheets, we are in accord
with the protestant's nondutiable claims.
HOLDING:
Following a thorough review of the evidence submitted as
well as an analysis of the law and applicable precedents, we have
determined that for the reasons stated in the Law and Analysis
portion of this ruling, the protest under consideration is
granted in part and denied in part.
In accordance with 3A(11)(b) of Customs Directive 099
3550-065, dated August 4, 1993, Subject: Revised Protest
Directive, this decision should be mailed by your office no later
than 60 days from the date of this letter. Any reliquidation of
the entry in accordance with this
decision must be accomplished prior to mailing the decision.
Sixty days from the date of the
decision the Office of Regulations and Rulings will take steps to
make the decision available to customs personnel via the Customs
Ruling Module in ACS and the public via the Diskette Subscription
Service, Freedom of Information Act and other public access
channels.
Sincerely,
Jerry Laderberg
Acting Chief
Entry and Carrier Rulings Branch