VES-13-18-CO:R:IT:C 111170 LLB

Deputy Assistant Regional Commissioner
Commercial Operations Division
ATTN: Regional Vessel Repair Liquidation Unit
New Orleans, Louisiana 70130

RE: Vessel repair; Application for relief; Modifications; Negotiated shipyard discount; Shipyard overhead charges Boiler access; Entry No. C20-0012279-9; Vessel S/S CLEVELAND, V-5

Dear Madam:

Reference is made to your memorandum of July 9, 1990, which forwarded for our review the Application for relief from vessel repair duties filed by Sealift, Inc., in regard to the above- captioned vessel repair entry.


In March of 1990, the vessel S/S CLEVELAND was taken to Greece in order to undergo extensive repairs, modifications, and inspections. The total cost of the operations was nearly $345,000.00. The opinion of Headquarters is sought regarding five items/matters, as follows:

1. Entered item number 40, the addition of access plates in the ship's boilers.

2. Entered item number 48, the replacement of "mild steel" bolts on the anchor windlass brake with bolts made of stainless steel.

3. Entered item number 81, the cleaning and coating of a forward deep tank in order to make it suitable for the carriage of foodstuffs rather than general and liquid cargoes.

4. Shipyard overhead expenses for office salaries, rent, insurance, etc., calculated in the amount of 10 percent of the total shipyard costs.

5. A negotiated shipyard discount, known as a "reduction", showing $64,126.00 having been deducted from the cost.


Whether the items presented for review in this matter constitute duty-free operations by virtue of being either modifications to the hull and fittings of the vessel, or expenses generally related to drydocking which are considered duty-free under judicial precedent.


Title 19, United States Code, section 1466, 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.

In its application of the vessel repair statute (19 U.S.C. 1466), Customs has held that modifications/alterations/additions to the hull and fittings of a vessel are not subject to vessel repair duties. A leading case in the interpretation and application of section 1466 is United States v. Admiral Oriental Line et al., T.D. 44359 (1930), wherein the Court considered the issue of whether steel swimming tanks installed on a U.S.-flag vessel in a foreign port constituted equipment or repairs within the meaning of section 1466. In holding that the installation of these tanks did not constitute either equipment or repairs and therefore was not dutiable, the Court in Admiral Oriental cited earlier court decisions which define equipment, promulgations by the Board of Naval Construction, and regulations of the Treasury Department, as well as opinions of the Attorney General.

Accordingly, for purposes of section 1466, dutiable equipment has been defined as:

...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 authority cited above formulated criteria which distinguish those items deemed to be modifications/alterations/additions to the hull and fittings and therefore not dutiable under section 1466. These items include:

...those applications 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).

In regard to those three items which are claimed to be modifications rather than repairs, we find as follows:

1. In the matter of the addition of the inspection access plates in the boilers, we find that the cutting out of welded-in- place "handholes" and the installation of bolted-in access doors is a modification to the vessel which does not address a wasted or deteriorated area. This item is considered duty-free.

2. In the matter of the replacement of "mild steel" bolts on the anchor windlass brake, we have no information regarding the condition of the bolts at the time of their replacement. Even if an up-grade in the durability of the bolts is insured by their replacement, duty would still be owing if the bolts had to be replaced in any case because they were defective or wasted in any way.

3. In the matter of the cleaning and coating of the forward deep tank in order to prepare it for a different class of cargo, we find that Customs has specifically ruled on such an operation in the past. In a published ruling (C.I.E. 196/60, issued on March 2, 1960), Customs held that the cleaning and whitewashing of a cargo storage area in order to protect a future cargo from residue left by a previous one was not a repair within the meaning of the vessel repair statute. We find the present circumstances to be indistinguishable.

In regard to the overhead and shipyard discount elements of this case, we find as follows:

4. In the matter of overhead charges, we note that the specific categories of charges mentioned are office salaries, rent, and insurance. We do not know exactly what is contemplated by the term "rent" in this case. The only specific exception to the payment of vessel repair duties which includes a "rental" element involves the rental of tools used in shipyard operations. To the extent that other rentals are involved, we hold them to be dutiable. Salary and insurance items may be considered together.

In a published Treasury Decision of long standing (T.D. 55005(3), December 21, 1959), it was determined that:

Taxes paid on emoluments received by third parties for services rendered...and premiums paid on workmen's compensation insurance, are not charges or fees within the contemplation of the decision of the Customs Court, International Navigation Company v. United States, 38 USCR 5, CD 1836, and are therefore subject to duty as components of the cost of repairs under [section 1466].

"Emoluments" as used in the cited decision include all wages paid to third parties as part of the contract for foreign shipyard services. The language concerning insurance is self-explanatory. In light of this decision, the salary and insurance components of this vessel repair entry are subject to duty under the statute.

5. In the matter of negotiated discounts or reductions in the payable amount, the Customs Service, in a published ruling (C.I.E. 227/63), held that the actual expenses borne by the vessel operator should be taken into consideration when duty is assessed under the vessel repair statute, and that discounts should be allowed in liquidating vessel repair entries. Accordingly, that portion of the discounted amount which is attributable to dutiable repairs should be deducted from the cost of those repairs.


After a thorough consideration of the facts as presented, and following an analysis of the law and applicable judicial and administrative precedents, we have determined to allow the application in part and to deny it in part, as specified above.


B. James Fritz
Carrier Rulings Branch