VES-13-18-RR:IT:EC 113798 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. C31-0015282-7; ARCO SPIRIT, V-160; 19 U.S.C. 1466; Modifications; Vessel equipment

Dear Madam:

This is in response to your memorandum of December 23, 1996, which forwarded the application for relief submitted on behalf of ARCO Marine, Inc. ("applicant") with respect to the above-referenced vessel repair entry.

FACTS:

The evidence of record indicates the following. The ARCO SPIRIT ("vessel"), a U.S.-flag vessel owned and operated by the applicant, arrived at the port of Valdez, Alaska on July 29, 1996. The subject vessel repair entry was timely filed. The vessel underwent certain foreign shipyard work in Korea in June and July of 1996.

You request our determinations with respect to numerous items contained within the application.

ISSUE:

Whether the costs of the subject items 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.

We note initially that this entry is a "post-Texaco" entry, i.e., an entry filed after the appellate decision in Texaco Marine Services, Inc., and Texaco Refining and Marketing, Inc. v. United States, 44 F.3d 1539 (CAFC 1994), aff'g 815 F.Supp. 1484 (CIT 1993). 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).

The applicant makes certain claims with respect to the applicability of the Texaco decision. We have considered these claims in depth previously, including in Ruling 227063 dated October 31, 1996 which involved a vessel repair entry filed by ARCO Marine, Inc., the applicant in this matter. It is unnecessary for us to reiterate that consideration here. Our position is stated in the above excerpt from Memorandum 113350.

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. The identification of work constituting modifications vis-a-vis work constituting repairs has evolved from judicial and administrative precedent. In considering whether an operation has resulted in a nondutiable modification, the following factors have been considered:

1. Whether there is a permanent incorporation into the hull or superstructure of a vessel, either in a structural sense or as demonstrated by means of attachment so as to be indicative of a permanent incorporation. See United States v. Admiral Oriental Line, 18 C.C.P.A. 137 (1930). However, we note that a permanent incorporation or attachment does not necessarily involve a modification; it may involve a dutiable repair.

2. Whether in all likelihood an item would remain aboard a vessel during an extended lay-up.

3. Whether an item 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 provides an improvement or enhancement in operation or efficiency of the vessel.

Items Specifically Identified in Your Memorandum

ABS Survey. We find that the following survey items are nondutiable: drydocking survey, tailshaft survey, annual hull, machinery, and load line survey, annual IGS survey, special hull survey, special machinery survey, special IGS survey, boiler survey, and gauging review. We find that the following items are dutiable: "repairs/modifications", administrative surcharge, S.A.F. (overtime), and expenses. The latter three items are dutiable in the absence of evidence that they pertain solely to nondutiable items.

U.S. Coast Guard Overseas Vessel Inspection. The invoice reflects that this item is for the inspector's travel services relative to a U.S. Coast Guard inspection. There is no indication that the inspection related to repairs. We find that this item is nondutiable.

Sludge Removal by Mi Sung Corporation Ltd. The invoice reflects that most of this cost is for "sludge mucking" and "sludge disposal." The applicant states; "The sludge removal ... was necessary for drydocking for the A.B.S. and U.S.C.G. surveys and inspections." We find that this cost appears to be a drydock cost or general cost which would relate to both dutiable and nondutiable items. Accordingly, it should be prorated between dutiable and nondutiable items. The proration concept was put forth in Ruling 113474 dated October 24, 1995, and has been reiterated in numerous rulings, including Ruling 227063 dated October 31, 1996.

Item 002 C. 3. Potable Water. This item is included (although separately itemized) with items such as shore power, garbage removal and other drydock costs or general service costs. It should be prorated in the same manner as those other costs because it is a drydock cost or general service cost.

Item 326. IGS Fan Steam Exhaust Isolation Valve. The invoice reflects the modification of an exhaust line and the installation of a flanged gate valve. The applicant states that "[t]he permanent installation of gate valve in the exhaust line allows for maintenance of the individual exhaust valves for the inert gas fan turbines." We find that this item is a nondutiable modification.

Items 410 and 411. Pad Eye Installation for Handling Medical Stretcher (410) and for Lower Pump Room (411). The applicant states that these items were new installations. It states that "[t]he purpose of the pad eye [410] was to facilitate rigging of medical stretcher fro [sic] machinery space" and that item 411 was performed "to enable the ship's staff to remove heavy objects from pump room to main deck and to facilitate the removal of valves from ballast piping systems when required." We find that these items are nondutiable modifications.

Item 452. Bow Fairleads Relocation. The applicant states that the "relocation of the mooring line fairlead is to facilitate the handling of new style mooring lines installed on the vessel during subject yard period." We find that this item is a nondutiable modification.

Item 507. Unlicensed State Room New Heaters Installation (14). The applicant states: "The purpose of this item was to install electric heaters in the unlicensed crew rooms. The rooms were previously heated by steam coil as part of the ventilation system. It was determined that the previous method was inadequate to meet the needs when the vessel is in North Pacific waters." We find that this item is a nondutiable modification.

Item 604. Galley Exhaust Ducting. The invoice states: "Scrape all loose debris and grease from ductwork. Clean filter screens and re-install." We find this to be a maintenance item which is dutiable under 19 U.S.C. 1466.

Item 708. Bilge Keels Modification. The invoice reflects the following: "Renewed B/keel plate & pad plate." and "Crack repairs". The applicant states that this work "is necessary to prevent the initiation of fractures in the hull plating." We find that this item is a dutiable repair. The invoice reflects repairs and renewal. The applicant's statement reflects preventive maintenance which is dutiable under 19 U.S.C. 1466.

Item 902. Cargo Tank Gauging Modification. The invoice states: "The intent of this item is to add a second Metritape sensor to be used for the High [sic] level alarm install [sic] in the same deck mounting head and stilling pipe of the existing gauging system." The applicant states: "The purpose of this item is to install an independent high level alarm system for the existing cargo control system. This enhancement is necessary because the vessel was also required to install a vapor recovery system (see item 903). Installation of subject equipment meets the requirements outlined in 33CFR [sic] 155.480." We find that this item is a nondutiable modification.

Item 903. Vapor Recovery System New Installation. The applicant states: "The purpose of this item is to modify the Inert Gas System piping to accommodate the addition of a vapor recovery system. The installation is a result of requirements adopted by the Alyeska Pipeline Co. to comply with; [sic] section 183. paragraph F' (Tank Vessel Standards) of the Clean Air Act. Prior to June 1997, vessels loading cargoes in the Port of Valdez Alaska are required to have an approved vapor recovery system." We find that this item is a nondutiable modification.

Item 905. Stern Towing Modification. The invoice states: "Furnish labor and materials to modify the stern of vessel by strengthening the deck, underdeck and transom internal structure in order to install one stern towing system capable to stand for a minimum of one (1) million pound towing force." The applicant states: "This specification was written for the purpose of installing a stern towing system to comply with IMO Resolution A 535 (13) and SOLAS Regulation V/15-1." We find that this item is a nondutiable modification.

Item 907. Bottom Longitudinals Modification. The invoice states: "The intent of this modification is to eliminated [sic] the cut out in the bottom long'.s in way of bottom plate and bottom long'.s master butt welded joints." The applicant states: "The purpose of this item is to modify the existing bottom longitudinals in the cargo spaces. Through the use of "Finite Element Analysis" it has been determined that the structural detail of the longitudinals at the oil-tight and swash bulkheads will initiate fractures in the hull plating. The existing structural details consisting of two (2) drain holes within close proximity of the bulkhead forms a discontinuity in the structure. This discontinuity will initiate fractures." We find that this item is a nondutiable modification.

Item 908. Radar Installation. The invoice states: "remove existing radar system and install new upgraded system." The applicant states: "The purpose of the new radar installation is to upgrade the navigation equipment on the bridge. The new radar system has the ability to provide electronic charting in addition to enhanced collision avoidance technology. The older radars although still operating could not be modified or upgraded to provide the same level of technology as the new system."

We find that this item is dutiable under 19 U.S.C. 1466 as vessel equipment. This finding is based on the following authorities.

In Otte v. United States, 7 Ct. Cust. Appls. 166, T.D. 36489 (1916), the court stated:

That the Congress intended to distinguish between equipment and the vessel itself is apparent from a reading of the two subsections above quoted. The line of distinction between equipment and the vessel is somewhat difficult to mark.

The question was considered by the Board of Naval Construction, and their report in part reads as follows:

Equipment, used in a general sense, may be defined as any portable thing that is used for, or provided in, preparing a vessel whose hull is already finished for service. It is the furniture of whatsoever nature which is put into a finished ship in equipping her. The Queen's Regulations and Admiralty Instructions give the following definition: "Equipment, in relation to a ship, includes the furnishing a ship with any tackle, apparel, furniture, provisions, arms, munitions, or stores, or any other thing that is used in or about a ship for the purpose of fitting or adapting her for the sea or for naval service."

In estimating the displacement of a ship naval constructors use the term "hull and fittings" in contradistinction to "equipment," the fittings of the hull being understood to be any permanent thing attached to the hull which would remain on board were the vessel to be laid up for a long period.

Adopting these definitions, the board is of the opinion that the term "equipment" would not include donkey engines, pumps, windlasses, steam steerers, and other machinery but that it would include anchors, chain cables, boats, life-saving apparatus, nautical instruments, signal lights, and similar articles.

In Ruling 105414 dated May 24, 1982, we stated:

It should be noted that the fact that a change or addition of equipment is made to conform with a new design scheme, or for the purpose of complying with the requirements of statute or code, is not a relevant consideration. Therefore, any change accomplished solely for these reasons, and which does not constitute a permanent addition to the hull and fittings of the vessel, would be dutiable under section 1466.

Any new areas to the vessel, that is, bulkheads, permanent ballast, decks, staterooms, bars, storerooms. etc., are considered to be qualifying additions to the hull and fittings. Likewise, the extension of existing services into new areas would also be free of duty. This would include piping, air conditioning, ventilation, electrical service, glazing, etc., as well as final finishing for the new areas (such as painting).

On the other hand, among the dutiable operations would be providing furniture for any of the areas (new and old); providing new electronic navigation equipment; providing new lifesaving apparatus ... providing computer apparatus... [Emphasis supplied.]

In Memorandum 105807 dated December 28, 1982, we stated:

The characterization of an article as vessel equipment, as opposed to fittings or hull/structural parts, is manifestly difficult in cases where the article has many of the attributes of both classes cited in the leading cases. For example, because a vessel pitches and rolls when at sea all radio gear is securely fastened, yet is classified as equipment even when such articles are usually too large to be considered (in ordinary parlance) "portable". [Emphasis supplied.] Item 909. Hull Stress Monitor. The applicant states: "The purpose of this item is to install equpment [sic] to monitor the stresses encountered in different sea states. With this information coupled with weather data, the Master is better informed on the performance of the vessel. With this information the Master can adjust the speed or course of the vessel to reduce the stresses on the vessel itself."

We find that this item is dutiable under 19 U.S.C. 1466 as vessel equipment. The authorities cited with respect to item 908, above, are equally applicable here.

Item 910. Tank Cleaning Reservoir. The invoice states: "Provide area to store and recircularing [sic] water for C.O.W. tank cleaning system while providing area for sludge accumulation." The applicant states: "The purpose of this item is to section-off a portion of No. 7 center cargo tank for the collection of sludge and oil residue during tank cleaning operations. The modification includes inserting the center vertical keel (CVK) and the sawash bulkhead to provide an oil tight envelope. Additionally, heating coils and piping connections were added. While in operation this segregated section of the tank will enhance to [sic] oil recovery process while reducing the volume of wash-water required to be sent ashore for processing." We find that this item is a nondutiable modification.

Item 911. GMDSS Installation. The applicant describes this item as "Global Marine Distress Safety System" and states: "The purpose of this specification is to install new communication equipment to comply with IMO Assembly Resolution A.283 (VIII) and 1974 SOLAS Convention amendments concerning radio communications for the GMDSS. The new installation provides enhanced search and rescue data for shoreside rescue authorities as well as to other vessels within the immediate area of the distressed ship."

We find that this item is dutiable under 19 U.S.C. 1466 as vessel equipment. The authorities cited with respect to item 908, above, are equally applicable here.

You also requested our review of certain other items which were not specifically described in your forwarding memorandum, but were marked on the spreadsheet.

Item 109 A.1 - A.16. Tailshaft Inspection and Stern Tube After Seal Renewal - Stern Bearing Wear Down Reading. The invoice reflects that this item relates to an ABS Tailshaft Survey and USCG Tailshaft Inspection. We find that it is nondutiable. The staging which accompanies this item is also nondutiable.

Item 201 A.1 - A.6. Fire Side Cleaning for ABS/USCG Boiler Survey. We find that this item is nondutiable. The staging which accompanies this item is also nondutiable.

Item 205 A.1 - A.2. Boiler Mountings Inspection - Open Valves for USCG 4-year Inspection. The invoice reflects that this item relates to an ABS Boiler Survey and a USCG Boiler Four Year Mounting Inspection. We find that this item is nondutiable. The staging which accompanies this item is also nondutiable.

Item 427. IGS Deck Isolation & Mast Riser Valve: Remote Operator Installation. The invoice reflects the installation of tubing and cable. The applicant has not provided evidence which would support a claim that this item is nondutiable. We find that this item is dutiable.

Item 439. IGS Scrubber Modification. The applicant has not provided evidence which would support a claim that this item is nondutiable. We find that this item is dutiable.

Item 448. Stern Transom Modification. The applicant has not provided evidence which would support a claim that this item is nondutiable. We find that this item is dutiable.

Item 449. Bridge Window Washing System. The applicant has not provided evidence which would support a claim that this item is nondutiable. We find that this item is dutiable.

Item 602 A. Inspection (USCG Biennial Inspection). The invoice reflects that this item involves a U.S. Coast Guard biennial inspection. We find that this item is nondutiable. As the spreadsheet indicates, the "Additional Work" (item 602 B) is dutiable.

Item 603. Lifeboat Weight Test. The invoice reflects that this item relates to a U.S. Coast Guard biennial survey. We find that this item is nondutiable.

HOLDING:

As detailed above, the application is granted in part and denied in part.

Sincerely,

Chief,
Entry and Carrier Rulings Branch