VES-3-18-OT-RR:BSTC:CCR H179355 WRB
Jonathan K. Waldron, Esquire
Blank Rome, LLP
Watergate
600 New Hampshire Avenue, N.W.
Washington, DC 20037
RE: 19 U.S.C. § 1466; Vessel Repair Entry VR3-0000108-4; Protest 2002-10-100115.
Dear Mr. Waldron:
This is in response to your letter of September 16, 2013, requesting an advisory ruling on behalf of your client, Horizon Lines, Inc., (hereinafter “Horizon”) to determine whether the proposed work described below will constitute modifications for the purposes of 19 U.S.C. § 1466 (the “Vessel Repair Statute”). Our advisory ruling is set forth below.
FACTS
You seek our advice with respect to proposed modifications of two United States-flag vessels, the S/S HORIZON SPIRIT and S/S HORIZON RELIANCE (hereinafter, the “Vessels”). Horizon proposes to carry out two modifications on the Vessels as follows: (1) repowering the propulsion systems on the Vessels to increase fuel efficiency and lessen environmental impact, and (2) converting the container stowage arrangement of cargo hold #4 to enhance the Vessels’ refrigerated container capacity.
Vessel Repowering
With regard to the proposed repowering of the vessels’ propulsion plants, this project will involve the complete removal of the vessels’ extant steam power plants and replacing them with diesel power plants specifically designed to support or be compatible with medium-speed diesel engines with the capability to burn liquified natural gas (“LNG”). This conversion will require the removal of the following propulsion plants and associated systems, including all affected auxiliary systems:
1. Main propulsion boilers, turbines and foundations;
2. Auxiliary electrical power generating equipment and foundations;
3. Main gearbox and foundation;
4. Intermediate shaft, tail shaft, stern tube, and fixed pitch propeller;
5. Direct distributed salt water cooling system;
6. Single fuel transfer and service system;
7. Lubrication oil handling and purification system;
8. Fresh water handling system;
9. Fresh water distiller;
10. Ballast and cargo hold bilge pumps and piping;
11. Compressed air system;
12. Electrical distribution panels;
13. Engine control and monitoring systems;
14. Ventilation system;
15. Exhaust gas system;
16. Engine room cranes and associated components;
17. Engine room wiring;
18. Engine room lighting; and,
19. Various decks and flats throughout the engine room
Your client argues that this re-powering project will result in improved design to achieve better fuel efficiency and reduced environmental impacts.
Horizon asserts that all of the above-listed systems and components proposed to be removed are currently fully-operational and in good repair. These items would be removed for the sole purpose of permitting the installation of the following new propulsion plant, systems, and compatible auxiliary systems:
Medium-speed diesel engines capable of burning fuel and LNG, and associated engine foundations,
2. One medium-speed diesel driven alternator and foundation,
3. Two alternators driven by the main diesel engines via power take-offs,
4. Main gearbox compatible with the medium-speed diesel engines and foundation,
5. Controllable pitch propeller system,
6. Indirect distributed fresh water cooling system,
7. Dual fuel handling system,
8. Lube oil purification and filtration system,
9. Fresh water handling module,
10. Fresh water distiller,
11. Ballast and cargo hold bilge pumps and piping
12. Compressed air system
13. Electrical distribution boards
14. Engine control and monitoring systems
15. Ventilation system
16. Exhaust gas system
17. Engine room cranes and associated components
18. LNG storage tanks in cargo hold #4
19. Isolating bulkhead to isolate the LNG storage tanks from cargo space
20. Ventilation system for LNG storage space
21. LNG bunkering system
22. Mast/tower to raise LNG blow-off piping
23. Engine room wiring
24. Engine room lighting
25. Flats and decks to support the revised engine room layout
Horizon is also considering the installation of a heavy fuel oil handling system for the vessels that would allow the medium-speed diesel engines to burn heavy fuel oil as well. The heavy fuel oil handling system would include installation of fuel oil supply, filtration, and heating equipment compatible with medium-speed diesel engines, as well as a waste heat economizer, oil fired auxiliary boiler, and, possibly, an exhaust gas scrubber.
Conversion of Cargo Hold #4
As part of the repowering work, Horizon proposes to convert the aft portion of Cargo Hold 4 on both vessels to provide LNG storage. The remaining forward portion of Cargo Hold 4 will be modified to allow stowage of refrigerated containers below deck. This change will increase the vessels’ overall refrigerated cargo capacity. This conversion will require the installation of platforms and inclined ladders to provide access to refrigeration machinery, ventilation fans with distribution ducting, refrigerated container power supply plugs, new lighting, and associated electrical cables.
ISSUE
Whether the work described above constitutes modifications to the subject vessels under 19 U.S.C. § 1466?
LAW AND ANALYSIS
Title 19, United States Code, section 1466(a) provides for the payment of duty at a rate of fifty percent ad valorem on the cost of foreign repairs to and equipment for 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. In its administration of the vessel repair statute, CBP has held that modifications, alterations, or additions to the hull of a vessel are not subject to vessel repair duties. See HQ 111425 (June 26, 1991); HQ 111747 (Feb. 19, 1992); and HQ 113127 (June 14, 1994). The identification of work constituting modifications vis-à-vis work constituting repairs has evolved from judicial and administrative precedent. In considering whether an operation has resulted in a modification, several factors have been considered. These factors are not by themselves necessarily determinative, nor are they the only factors which may be relevant in a given case. However, in a given case, these factors may be illustrative, illuminating, or relevant with respect to the issue as to whether certain work may be a modification of a vessel under 19 U.S.C. § 1466. The factors are:
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, citing Otte v. United States, and 27 Op. Atty Gen. 228. However, we note that a permanent incorporation or attachment may not necessarily involve a modification; it may involve a dutiable repair or dutiable equipment.
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.
Additionally, we note that in order to qualify as a modification, rather than a repair, the documentation of record must reflect that the element which was replaced, if any, was in good and full working order at the time the work was performed.
Vessel Repowering
Upon reviewing your letter of September 16, 2013, and the supporting documentation provided, we note that CBP has consistently ruled that newly designed systems and components permanently installed on a vessel, which would remain on board the vessel during extended layup, do not replace an item in need of repair, and will improve the operation or efficiency of the vessel are modifications. See e.g., HQ 114093 (Sept. 12, 1997); HQ H143219 (Feb. 22, 2011); and, HQ 116627 (Mar.16, 2006). We also note that your client states that the work is not contemplated to replace a current part, fitting or structure which is not in good working order.
Considering the first factor, whether there is a permanent incorporation into the hull or superstructure, the nature of the work to be done to the vessels’ hulls and fittings is such that it would constitute a permanent incorporation into the vessels. The repowering project would require the removal of the majority of the vessels’ engine room machinery and supporting systems, structurally reconfiguring the engineering spaces, and installing new machinery and supporting systems of a different type and design. The propulsion plant, systems, and related auxiliary systems proposed for installation during the conversion would be permanently incorporated into the vessels’ structures. The conversion would also involve structural changes to accommodate the new propulsion system design. Other conversion components would be integrated into the vessels’ structures via piping, ventilation, and electrical schemes.
Regarding the second factor, whether, in all likelihood, an item would remain aboard a vessel during an extended lay-up, the nature of the work to be done to the hulls and fittings is such that it indicates that the contemplated items would remain aboard a vessel during an extended lay-up. The new propulsion plant, systems, and related auxiliary systems proposed for installation during the conversion would be permanently incorporated into the vessels’ structures. None of the propulsion plant components or related compatible auxiliary systems proposed for installation during the conversion would be portable or capable of being removed from the vessels without significant effort and possible structural damage.
The third factor of our analysis, whether an item constitutes a new design feature and is not merely replacing a part, fitting, or structure that is performing a similar function, the nature of the proposed work indicates that a modification is contemplated. Although the removed systems would be replaced with new machinery with the same general purpose, propelling and supporting the operational needs of the vessels, the proposed new systems would be of a new and improved design to support or be compatible with medium-speed diesel engines. As described above, the extant steam power plant and supporting systems would be removed and a medium-speed diesel plant and supporting systems of new design would be installed. The medium-speed diesel engines will be capable of utilizing diesel fuel, LNG, and possibly also heavy fuel oil, features absent in the current propulsion machinery.
On the subject of whether an item provides an improvement or enhancement in operation or efficiency of the vessel, the proposed work would be carried out for the purpose of improving fuel and operational efficiency and would reduce the vessels’ environmental impact. It would improve the operation of the vessels by providing significantly improved fuel consumption and would permit burning diesel fuel, LNG, and possibly also heavy fuel oil by utilizing advanced treatment processes. This improved fuel efficiency would aid the continued operation of the vessels. The new design of the engines and range of fuel options would also reduce the vessels’ environmental impact.
Based upon the information provided by Horizon and after consideration each of the four factors, we are of the opinion that that the proposed work would meet the above-discussed criteria for vessel modifications.
Conversion of Cargo Hold #4
With regard to the proposed conversion of Cargo Hold 4, we are of the opinion that the same analysis obtains. In addition to providing for the carriage of LNG fuel for the proposed new propulsion plant, the proposed work would accommodate the carrying of refrigerated containers below deck for the first time. The work would require permanent removals of existing structures and permanent incorporations of new ones, which would perform different functions than the old.
In considering whether the proposed work would constitute vessel modifications under 19 U.S.C. § 1466, we also consider the four factors discussed above. In regard to the first factor, the proposed work, including the installation of reefer power distribution systems, and new reefer receptacles would constitute a permanent incorporation into the hull of the vessel. Secondly, the facts as provided by your client indicate that the work would be permanently incorporated into the hold of the vessel and remain aboard the vessel during an extended lay-up. The third factor to be considered in deciding whether or not an operation has resulted in a modification, an examination of whether the proposed work would replace a current part or structure that is not in good working order, would support a determination that the proposed work constitutes a modification. As Horizon asserts that the proposed work would install a new system for powering refrigerated containers and new fuel tankage, there is an inference that enhancement was the primary motivation behind the work rather than repairs necessitating the operation. Lastly, your clients assert that the proposed work would provide an improvement or enhancement in operation or efficiency of the vessel in terms of reduced fuel consumption, operating cost, and environmental impact, as well as improved refrigerated container carrying capacity. Therefore, we are of the opinion the proposed work in Cargo Hold No. 4 would be considered a modification.
Accordingly, the proposed work to the subject vessels the S/S HORIZON SPIRIT and S/S HORIZON RELIANCE as described above and in the supporting documentation would meet the criteria for a modification under 19 U.S.C. § 1466.
HOLDING
The proposed foreign shipyard work described above would appear to constitute a modification to the hull and fittings of the S/S HORIZON SPIRIT and S/S HORIZON RELIANCE.
We emphasize that this ruling is merely advisory in nature and does not eliminate the requirement to declare work performed abroad at the vessel’s first United States port of arrival, nor does it eliminate the requirement to file a vessel repair entry showing this work. See 19 C.F.R. §§ 4.14(d) and (e). Furthermore, any final determination on this matter is contingent on CBP’s review of the evidence submitted pursuant to 19 C.F.R. § 4.14(i).
Sincerely,
Lisa L. Burley
Chief
Cargo Security, Carriers and Restricted Merchandise Branch
Office of International Trade, Regulations and Rulings
U.S. Customs and Border Protection