VES-3-02-OT:RR:BSTC:CCR H326395 DMK
Sharon Steele Doyle
Givens & Johnston
950 Echo Lane, Suite 360
Houston, TX 77024
RE: 19 U.S.C. § 1466; Vessel Repair; Installation of Liquified Natural Gas fuel system; M/V DANIEL K INOUYE, M/V KIAMANA HILA; Matson Navigation Company.
Dear Ms. Doyle;
This letter is in response to your June 30, 2022, ruling request submitted on behalf of your client, Matson Navigation Company (“Matson”), regarding whether the proposed work described below would constitute modifications for the purposes of 19 U.S.C. § 1466 (the “Vessel Repair Statute”). Our determination is set forth below.
FACTS
The following facts are from your ruling request and supporting information dated June 30, 2022. Your client proposes to modify two United States-flagged vessels, the M/V DANIEL K INOUYE and M/V KIAMANA HILA (collectively, the “Vessels”), to add a Liquified Natural Gas (“LNG”) fuel burning capability to the Vessels’ propulsion systems. In order to comply with the upcoming Energy Existing Ship Index (“EEXI”) and Carbon Intensity Indicator (“CII”) regulations of the International Convention for the Prevention of Pollution from Ships (MARPOL) without having to reduce the Vessels’ operating speed, as well as to meet Matson’s corporate environmental and social governance goals, your client desires to install new LNG processing systems and related items.
The proposed modifications consist of installing and/or constructing the following:
A new LNG processing system and piping;
LNG bunkering manifolds;
A new control and automation system for the LNG fuel gas system;
Three IMO Type C LNG storage tanks in the designated tank space;
A structure over the top of the LNG tanks to accommodate the tank connection space and allow containers to be loaded above the LNG machinery space;
Fuel gas preparation room; and
Electrical system components room.
You also contemplate that some structural modifications are anticipated below the LNG tank room to ensure the existing structure correctly aligns with and properly supports the LNG tanks. You have provided technical documents for the contemplated design features and installation requirements and have indicated that the modifications do not replace any item in need of repair, or otherwise merely replace a malfunctioning or damaged system.
You indicated that the Vessels were delivered with an “LNG Ready” notation, meaning that the main and auxiliary engines were designed and tested to operate on gas and liquid fuel, and that space and weight were reserved in the Vessels’ original design to accommodate future installation of LNG Fuel Gas Supply Systems and LNG tanks. As such, the contemplated modifications to the Vessels are filling space which was already set aside for their potential eventual installation.
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, 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 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. 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 considered modifications. See e.g., HQ 114093 (Sept. 12, 1997); HQ H143219 (Feb. 22, 2011); and HQ 116627 (Mar.16, 2006).
The Federal Circuit in Horizon Lines clarified the difference between “repairs” and “modifications”, saying “the term ‘repairs’ describes work putting something that has sustained damage back into working condition whereas the term ‘modifications’ describes work addressing a problematic feature.” The Horizon Lines court provided the yardstick to be used in the differentiation between repairs and modifications, when it said:
The plain meaning of “repair” describes putting something that has sustained damage back into working condition. It requires “restoration after decay, waste, injury, or partial destruction”—all of which indicates that the part being repaired was damaged— which necessitated the repair. Thus, the prior condition of a part that is removed or replaced during work on a vessel is relevant to whether that work constitutes a repair. We do not conclude, however, that the prior condition is always dispositive of whether work constitutes a repair or modification. We note that there would be no need to repair a part that is in working order.
Accordingly, we are required to make a detailed factual determination of whether proposed modifications constitute repairs, based upon the prior condition of any part that is removed or replaced during work on a vessel.
Considering the first factor, whether there is a permanent incorporation into the hull or superstructure, the nature of the work to be done is such that it would constitute a permanent incorporation into the Vessels. The Vessels were designed to accommodate an LNG fuel system and the expected work involves installing that system and necessary related auxiliary systems. This work is intended to ensure the Vessels comply with the upcoming MARPOL EEXI and CII regulations and to meet Matson’s corporate environmental and social governance goals. There is no indication that these regulations and goals are intended to be short term, or that the LNG system is intended to be removed after a limited period of use. The LNG tanks and LNG system components will be permanently welded to the ship’s existing structure. The LNG component skids will be installed in dedicated spaces on permanent foundations using bolting and epoxy chocking. Fuel piping will be primarily welded with bolting used on a limited number of joints for maintenance access. The LNG tanks will be permanently installed on new foundations which will be welded to the existing structure and will be enclosed by a new structure that is permanently welded to existing structure.
Regarding the second factor, whether, in all likelihood, an item would remain aboard a vessel during an extended lay-up, the nature of the contemplated work is such that it indicates that the contemplated items would remain aboard a vessel during an extended lay-up. The new materials to be installed will be permanently incorporated and thoroughly integrated into the Vessels’ structures. They will not be capable of being removed from the Vessels without significant labor and possible structural damage. For this reason, the new materials to be installed during the modification would remain in place during an extended layup period.
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. While the Vessels at issue here were designed as “LNG Ready”, the work is not replacing a currently-existing LNG fuel system or other part of the vessel’s current fuel system. Rather, the Vessels were built with the space and capability of eventually adding an LNG fuel system, and the contemplated work is the work of adding that very system. The vessel will retain its existing diesel/low sulfur fuel oil system, which will not be modified as part of the proposed modifications. Some existing low sulfur fuel oil tank capacity will be removed from the ship and converted to cargo space, but all tank boundaries being removed are in good condition and fully fit for the current use. The existing engines will have components added which supplement the current components, allowing the engines to burn gas fuel in addition to liquid fuel. We are of the opinion that this sufficiently meets requirements to be considered a new design feature.
Last, whether an item provides an improvement or enhancement in operation or efficiency of the vessel, the proposed work is intended to comply with upcoming environmental regulations and goals while maintaining the Vessels’ speeds. Such an outcome would result in enhancement in operation or efficiency of the Vessels, indicating that the proposed work would qualify as a modification rather than as a repair.
CBP has examined similar work in the past. In HQ H258063 (Nov. 24, 2014), we examined the dutiability of engine exhaust cleaning systems to lessen the vessels’ environmental impact and comply with new air pollution standards under MARPOL Annex VI. We determined that such additions would qualify as nondutiable modifications. In HQ H246545 (Dec. 9, 2013), we determined that a plan to remove vessels’ extant steam power plants and replace them with diesel power plants constituted a nondutiable modification.
Based upon the information provided by Matson and after consideration of each of the four factors, we are of the opinion that the proposed work would meet the above-discussed criteria for vessel modifications. Accordingly, the proposed work to the subject Vessels, as described above and in the supporting documentation would meet the criteria for a modification under 19 U.S.C. § 1466.
HOLDING
The proposed shipyard work described above constitutes non-dutiable modifications to the vessel propulsion systems of the M/V DANIEL K INOUYE and M/V KIAMANA HILA.
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,
W. Richmond Beevers
Chief, Cargo Security, Carriers and Restricted Merchandise Branch
Office of Trade; Regulations and Rulings
U.S. Customs and Border Protection