VES-13-18-RR:IT:EC 114686 GEV
Chief, Residual Liquidation and Protest Branch
U.S. Customs Service
6 World Trade Center
New York, New York 10048-0945
RE: Vessel Repair Entry No. C46-0017034-3; COLORADO; V-2; General Services;
Surveys; Paint; Modification; 19 U.S.C. § 1466
Dear Sir:
This is in response to your memorandum dated April 16, 1999, which forwards for our consideration an application for relief from the assessment of vessel repair duties pursuant to 19 U.S.C. § 1466. Our findings in this matter are set forth below.
FACTS:
The COLORADO is a U.S.-flag vessel owned by Colorado Trading Company and operated by Sabine Transportation Company of Cedar Rapids, Iowa. Subsequent to the completion of foreign shipyard work, the vessel arrived at New York, N.Y., on June 12, 1998. A vessel repair entry was filed on June 22, 1998.
Pursuant to an authorized extension of time, an application for relief with supporting documentation was submitted. The applicant seeks relief for numerous costs contained within the subject entry.
ISSUES:
Whether the costs for which the applicant seeks relief are dutiable 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..."
The Customs Regulations promulgated pursuant to 19 U.S.C. § 1466 are set forth in title 19, Code of Federal Regulations, § 4.14 (19 CFR § 4.14). With respect to the filing of a vessel repair entry, § 4.14(b)(2) provides, in pertinent part, that an "entry shall be filed with the appropriate Customs officer at the port of first arrival within five working days after arrival." (Emphasis added) Our review of the record indicates that the entry in this case was filed beyond the allotted period of time (i.e., the CF 226 reflects a vessel arrival date of June 12, 1998, and an entry date of June 22, 1998). Consequently, the failure to make a timely entry as required necessitates the referral of this matter to the Fines, Penalties & Forfeitures Officer in the Port of New York for appropriate penalty action (see 19 CFR § 4.14(g)(1)).
Items 1A (certified marine chemist), 1B (handling of lines and gangway), 1C (compressed air, water service, electricity, garbage removal, drinking water, phone service, and crane service), 2 (drydocking expenses), and 6 (air blowers for gas free certificate) are alleged to be nondutiable costs incurred pursuant to required inspections and surveys of the American Bureau of Shipping (ABS) and U.S. Coast Guard (USCG). We disagree. The costs in question are general services and the evidence submitted is insufficient to show that they were attributed solely to nondutiable work. In view of the fact that the subject entry contains both dutiable and nondutiable costs, the general services at issue are to be prorated pursuant to Customs ruling letter 113474 and memorandum 113350 both of which addressed Customs implementation of the decision of the U.S. Court of Appeals for the Federal Circuit in Texaco Marine Services, Inc., and Texaco Refining and Marketing, Inc. v. United States, 44 F.3d 1539 (CAFC 1994).
Items 7, 15A, 15B, 15 E, and 35 all cover shipyard costs that are also alleged to be nondutiable pursuant to required inspections of the ABS. In support of this position, the applicant cites C.S.D. 79-277. In regard to the dutiability of 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 nondutiability to a host of inspection-related charges appearing on a shipyard invoice. Our position with respect to this ruling is as follows.
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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.
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.
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With respect to Items 7, 15A, 15B, 15E, and 35, notwithstanding the applicant’s claim, we note that all of these items cover shipyard work done pursuant to dutiable repairs. Accordingly, these costs are dutiable.
Items 9, 10, 12, 14, 16, 22, and the entered cost of $840.00 listed under Item 33, all pertain to shipyard work done pursuant to inspections/surveys that is wholly unrelated to dutiable repair work. Accordingly, the costs of these items are nondutiable.
Items 17 and 18 cover the installation of an Emergency Towing System which is alleged by the applicant to be a nondutiable modification. In its application of the vessel repair statute, Customs 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. (See Otte v. United States, 7 Ct. Cust. Appls. 166, T.D. 36489 (1916); United States v. Admiral Oriental Line et al., 18 C.C.P.A. 137, T.D. 44359 (1930); and Customs Bulletin and Decisions, Vol. 31, Number 40, published October 1, 1997.) The factors discussed within the aforementioned authority 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 of whether certain work may be a modification of a vessel which is nondutiable under 19 U.S.C. § 1466.
Upon reviewing the application in light of the above-referenced authorities, we note that the record is deficient with respect to the applicability of the factors discussed therein (i.e., whether this constituted a first time installation and if so, whether it replaced a current part, fitting or structure which is not in good working order). Consequently, Items 17 and 18 are dutiable.
Item 42 covers the cost of repatriation to the United States and the return to Varna, Bulgaria, of those crew members not attending the vessel during the work in question. This cost is nondutiable.
Item 43 covers the cost of crew wages for those crew members attending the vessel while it was at the shipyard. These crew members served as watchstanders and did not engage in actual repair work. The cost of this item is nondutiable. (see T.D. 39443)
Item 44 covers the vessel’s Port Disbursement Account which includes costs such as port charges (e.g., wharfage, pilotage, towage, etc.), cargo expenses (e.g., forwarding, overload, stevedoring, etc.), owners expenses (e.g., car rental, repair copy machine, hotel tickets, etc.), and miscellaneous expenses (e.g., postage, faxes, copying, etc.). With respect to these general services, we note that except for the repatriation expenses and the cost of the bus for the repatriation of the crew both of which are listed under the owner’s expenses and are nondutiable (see discussion regarding Item 42, above), the evidence submitted is insufficient to support the claim that such costs were attributed solely to nondutiable work. Furthermore, since the subject entry contains both dutiable and nondutiable costs, the general services at issue (with the
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exception of the aforementioned repatriation costs) are to be prorated pursuant to Customs ruling letter 113474 and memorandum 113350 both of which addressed Customs implementation of the decision of the U.S. Court of Appeals for the Federal Circuit in Texaco Marine Services, Inc., and Texaco Refining and Marketing, Inc. v. United States, 44 F.3d 1539 (CAFC 1994).
Item 45 covers the cost of paint delivered to the shipyard. With respect to this paint, the applicant seeks duty at the rate of 25% pursuant to subsection 3209.10.00, HTSUS. However, it should be noted that relief pursuant to the aforementioned tariff provision is available only pursuant to a formal consumption entry, not a vessel repair entry. Relief for paint is available under 19 U.S.C. § 1466(h)(2) which provides as follows:
The duty imposed by subsection (a) of this section shall not apply to-
(2) the cost of spare repair parts or materials (other than nets or nettings)
which the owner or master of the vessel certifies are intended for use
aboard a cargo vessel, documented under the laws of the United States
and engaged in the foreign or coasting trade, for installation or use on
such vessel, as needed, in the United States, at sea, or in a foreign
country, but only if duty is paid under appropriate commodity clas-
sifications 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, or
19 U.S.C. § 1466(h)(2) contemplates entry of the pertinent part or material, and the payment of duty under the appropriate commodity classification of the HTSUS, prior to the use of the pertinent part or material in the foreign shipyard. We note that while § 1466(h)(2) applies by its terms only to foreign-made imported parts or materials, there was ample reason to extend its effect to U.S.-made parts or materials as well. To fail to do so would act to discourage the use of U.S.-made parts or materials in effecting foreign repairs since continued linkage of remission provisions of subsection 1466(d)(2) with the assessment provisions of subsection (a) of § 1466 would obligate operators to pay duty on such materials unless they were installed by crew or resident labor. Consequently, Customs so extended the duty-free treatment of subsection (h) to U.S.-manufactured parts or materials (See, e.g., Customs ruling letter 110980, dated April 16, 1991). If an article is claimed to be of U.S. manufacture, there must be proof of its origin in the form of a bill of sale or domestic invoice. If an article is claimed to have been previously entered for consumption, duty paid by the vessel operator, there must be proof of this fact in the form of a reference to the consumption entry number for that previous importation, as well as to the U.S. port of importation. If imported articles are purchased from third parties in the United States, a domestic bill of sale to the vessel owner must be presented.
In this regard, we note that the applicant has submitted documentation sufficient to prove that the paint covered by Item 45 was manufactured in the United States. Accordingly, Item 45 is nondutiable.
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Items 46 (washers and bolts), 47 (packing), 48 (washers), and 49 (emergency towing system) cover parts and materials purchased in the United States and transported on the subject vessel to the shipyard. The applicant has submitted documentation sufficient for relief to be granted pursuant to § 1466(h)(2). Accordingly, Items 46, 47, 48, and 49 are nondutiable.
Item 51 covers survey costs of the American Bureau of Shipping (ABS). Notwithstanding the applicant’s submission of a copy of an ABS survey report (Exhibit 3 of the Schedule of Documents and Exhibits in Support of Request for Remission) and a copy of an ABS invoice (Exhibit 11 of the Schedule of Documents and Exhibits Submitted with Final Entry), upon reviewing the record we are unable to ascertain whether these costs were incurred pursuant to a required scheduled inspection by the ABS. Consequently, the costs covered by Item 51 are dutiable.
Item 52 covers the cost of the attendance of the port captain. It is claimed that the port captain did not engage in repair work but merely provided supervision on behalf of the owner during the inspection of the vessel by the ABS. Notwithstanding the applicant’s claims with regard to this cost, the invoice in question does not support the granting of relief since it merely states “drydock attendance” without any further description of the port captain’s activities during the period of time in question. In view of the insufficiency of the documentation in question, Item 52 is dutiable.
HOLDING:
The costs contained within the subject entry for which the applicant seeks relief are dutiable in part under 19 U.S.C. § 1466 as discussed in the Law and Analysis portion of this ruling.
Sincerely,
Jerry Laderberg
Chief
Entry Procedures and Carriers Branch