May, 2019
Vessel Repairs: Another Dutiable Category
Mark K. Neville, Jr.
One of the features of the trade and customs laws, and one that we have not addressed in awhile, is the multi-faceted nature of the regime. Quite simply, these laws go way beyond governing the importation of articles.
In fact, almost all disciplines touch and/or are touched by the customs laws. For example, restrictions on indentured child or convict labor1 are an obvious human rights policy issue that is embedded in the trade laws. Environmental protections also show up in a number of trade law contexts, including a number of free trade agreements (FTAs) concluded by the US.2 Protection of intellectual property rights is the aim of a number of trade statutes, evidenced by the seizure of counterfeit goods3 and the exclusion of imported goods which violate patent rights.4 And the intersection between customs valuation in related party transactions and transfer pricing is so well-known that no citation is needed.
There are a score of other examples of this phenomenon, where customs professionals rub shoulders with advisors and activists who are generally concerned with those other areas of interest but are not focused upon customs law questions.
But all of these examples are of other subject matter areas invoked when imported goods are presented for entry. One point of intersection arises not when goods are presented but rather when the vessel carrying the goods arrives at a US port. As for transportation, we should know that the US does not levy duty on the costs of international transportation or insurance5 and, as a general matter, we tend to overlook the transportation of the goods when looking at the customs and trade laws. 6 And unless one is representing the shipping company,7 or the vessel is the article of commerce that is being imported, 8 or the vessel is a foreign-registered pleasure craft for which a cruising license is sought,9 it is safe to say that most customs professionals will not give any thought to the vessel itself.
But here is the point of this discussion—in one circumstance the customs laws do concern themselves with a US-flagged vessel arriving at a US port and do look to collect duties on the vessel itself. There’s no surprise here because the title has already given it away. Duty is owed on vessel repairs performed on US-registered vessels in foreign shipyards in most cases.
The “but for” test is a judicially derived interpretation in this connection.12 As a result, if certain tangential expenses are incurred and they would not have been incurred “but for” the repairs then those other expenses will be included in the dutiable expense category even if they might be ancillary and not directly connected to the repair procedure.
What if some costs are connected to the repair but others are not? Apportionment is allowed in those circumstances. Thus, if a ship were dry-docked in a foreign port for inspections, before the necessity of any repairs were either undertaken or even indicated as necessary, the argument might be that such dry-docking expenses are not dutiable. In fact, that argument was made and the final word from the appellate court is that CBP can apportion such costs between dutiable and nondutiable elements.13
The Court of Appeals for the Federal Circuit has upheld the proration of certain expenses by CBP, stating in pertinent part:
With respect to maintenance operations, Customs considers work performed to restore a part to good condition following deterioration or decay to be maintenance operations within the meaning of the term “repair” as used in the vessel repair statute. As for “maintenance painting” that is a dutiable operation within the meaning of the vessel repair statute.21 The process of chipping, scaling, cleaning, and wire brushing to remove rust and corrosion that results in the restoration of a deteriorated item in preparation for painting has also been held to be dutiable maintenance.22
Let’s state the obvious—by imposing a 50% duty on the value of the foreign equipment purchases or repairs the rationale for this provision is to protect US shipyards and marine equipment manufacturers.
And so it is that the most important exception is for those circumstances: duty may be remitted if good and sufficient evidence is furnished establishing that the vessel was compelled by stress of weather or other casualty to be put into a foreign port to make repairs to secure the safety and seaworthiness of the vessel to enable her to reach her port of destination.24
CBP has explained that the term "casualty" as it is used in the statute, has been interpreted as something which, like stress of weather, comes with unexpected force or violence, such as fire, explosion, or collision. Consequently, a casualty, in the vessel repair context, arises from a similar identifiable event. Absent evidence of such an event, and here it is important to know that CBP is skeptical of any causation that is not a fire, explosion or collision, CBP considers the repair to have been necessitated by normal wear and tear.25 CBP has also noted that only minimal repairs will be remitted--the remission is restricted to the cost of the minimal repairs necessary to secure the safety and seaworthiness of the vessel to enable her to reach her port of destination. Repair costs beyond that minimal amount are not subject to remission.26 CBP has further explained that remission of duties for casualty has a three-part test. it is necessary that in order to qualify for duty remission, the party seeking relief
must show both the occurrence of a casualty, and that repair was necessary for safety and seaworthiness and an inability to reach the port of destination without obtaining foreign repairs.27 The general tenor of CBP’s administrative position in these matters is quite conservative. But the regulations do allow for a bit of lenience in the case of the “One Round Voyage” rule whereby remissions will be granted for repairs on a vessel that had undergone repairs in the US before the voyage only to see the repaired machinery or equipment fail during the first six months of that voyage.28
Among the other exclusions are those provided for when the vessel has been away from the US for extended periods. The vessel repair statute provides that when a vessel covered by the vessel repair statute:
Included among the exemptions are those arising from work done on the high seas by the crew of the vessel:
...................................................................................................................
In fact, almost all disciplines touch and/or are touched by the customs laws. For example, restrictions on indentured child or convict labor1 are an obvious human rights policy issue that is embedded in the trade laws. Environmental protections also show up in a number of trade law contexts, including a number of free trade agreements (FTAs) concluded by the US.2 Protection of intellectual property rights is the aim of a number of trade statutes, evidenced by the seizure of counterfeit goods3 and the exclusion of imported goods which violate patent rights.4 And the intersection between customs valuation in related party transactions and transfer pricing is so well-known that no citation is needed.
There are a score of other examples of this phenomenon, where customs professionals rub shoulders with advisors and activists who are generally concerned with those other areas of interest but are not focused upon customs law questions.
But all of these examples are of other subject matter areas invoked when imported goods are presented for entry. One point of intersection arises not when goods are presented but rather when the vessel carrying the goods arrives at a US port. As for transportation, we should know that the US does not levy duty on the costs of international transportation or insurance5 and, as a general matter, we tend to overlook the transportation of the goods when looking at the customs and trade laws. 6 And unless one is representing the shipping company,7 or the vessel is the article of commerce that is being imported, 8 or the vessel is a foreign-registered pleasure craft for which a cruising license is sought,9 it is safe to say that most customs professionals will not give any thought to the vessel itself.
But here is the point of this discussion—in one circumstance the customs laws do concern themselves with a US-flagged vessel arriving at a US port and do look to collect duties on the vessel itself. There’s no surprise here because the title has already given it away. Duty is owed on vessel repairs performed on US-registered vessels in foreign shipyards in most cases.
Vessel Repair
Under 19 USC 1466(a), the equipments [sic], 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 certain vessels are liable to entry and the payment of a 50% ad valorem duty on the costs thereof in such foreign country upon the first arrival of the vessel in any port of the United States. Failure to report the foreign purchases or repairs or a false statement made in connection with such a report renders the vessel subject to seizure and forfeiture.Dutiable Expenses
There has been litigation about the meaning of the term “expenses of repairs” because it is only expenses falling within that category which are dutiable. The trade courts have consistently held that the term “repairs” should be given its plain and ordinary meaning, another application of a longstanding tariff classification precept.10 Simply put, the accepted meaning assigned to repairs is that of “putting something that has sustained damage back into working condition.”11The “but for” test is a judicially derived interpretation in this connection.12 As a result, if certain tangential expenses are incurred and they would not have been incurred “but for” the repairs then those other expenses will be included in the dutiable expense category even if they might be ancillary and not directly connected to the repair procedure.
What if some costs are connected to the repair but others are not? Apportionment is allowed in those circumstances. Thus, if a ship were dry-docked in a foreign port for inspections, before the necessity of any repairs were either undertaken or even indicated as necessary, the argument might be that such dry-docking expenses are not dutiable. In fact, that argument was made and the final word from the appellate court is that CBP can apportion such costs between dutiable and nondutiable elements.13
The Court of Appeals for the Federal Circuit has upheld the proration of certain expenses by CBP, stating in pertinent part:
… apportionment is consistent with section 1466(a) and the “but for” test. In the context of dual-purpose expenses, it is rational to impose the duty on only that portion of the expense that is fairly attributable to the dutiable repairs. Indeed, to impose the 50% ad valorem duty on the entire costs of dry-docking in this case would exceed the mandate of the statute. The logical appeal of apportionment has been recognized in other areas of the law….…
[The] long-standing practice of apportioning the cost of various expenses between dutiable repairs and non-dutiable inspections and modifications comports with both the statute and common sense.
Value Added Tax
The amount for “expenses of repairs” can include the cost of a "value added tax." The VAT is dutiable if it is levied on a dutiable item. It is not dutiable if it is levied on a nondutiable item.14Modifications
There is another important distinction to be made, that between dutiable repairs and nondutiable modifications. CBP has noted in its application of the vessel repair statute 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-à-vis work constituting repairs has evolved from judicial and administrative precedent.15 CBP has enunciated the following working definition:Duty-free treatment pursuant to a modification claim is accorded when permanent additions enhance the operating efficiency of a vessel and, in cases such as this which do not involve a first time installation, replace a structure that was in good working order.16
The trial court in Horizon Lines defined “modification” in terms of “work addressing a systematic problematic feature”17 and disregarded the “good working order” criterion.18 The appellate court found this to be error but, perhaps out of an abundance of caution, refrained from making this a dispositive factorThe Court of International Trade erred, however, in concluding that the condition of the replaced part is irrelevant to a determination of whether such a replacement constitutes a repair. 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. It is unnecessary for us to decide in this case whether re-placement of a defective part with an upgraded, different part constitutes a repair or modification.
In considering whether an operation has resulted in a nondutiable modification, CBP will consider the following factors:- 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.
- Whether in all likelihood an item would remain aboard a vessel during an extended lay-up.
- Whether an item constitutes a new design feature and does not merely replace a part, fitting, or structure that is performing a similar function.
- Whether an item provides an improvement or enhancement in operation or efficiency of the vessel.19
Cleaning and Maintenance
Another distinction could be seemingly important. What if the foreign work is not a repair as such but is a part of routine maintenance or cleaning? Is there a valid distinction here? CBP has consistently held that the cost of cleaning is not dutiable unless it is performed as part of, in preparation for, or in conjunction with dutiable repairs or is an integral part of the overall maintenance of the vessel.20With respect to maintenance operations, Customs considers work performed to restore a part to good condition following deterioration or decay to be maintenance operations within the meaning of the term “repair” as used in the vessel repair statute. As for “maintenance painting” that is a dutiable operation within the meaning of the vessel repair statute.21 The process of chipping, scaling, cleaning, and wire brushing to remove rust and corrosion that results in the restoration of a deteriorated item in preparation for painting has also been held to be dutiable maintenance.22
Replacement Parts
What if a duty-free inspection results in the necessity to replace a part, such as seal or a gasket? Would the cost of the replacement be dutiable? CBP has observed that the courts and its own administrative practice is to view these as nondutiable.23Let’s state the obvious—by imposing a 50% duty on the value of the foreign equipment purchases or repairs the rationale for this provision is to protect US shipyards and marine equipment manufacturers.
Exclusions and exemptions
As might be expected Congress provided for certain exclusions and exemptions. After all, ships sailing on the sea might be expected to face extreme weather conditions or other hazards that can punish the vessel. It would be unrealistic if the law did not allow for certain exceptions, as in the case of weather-related damage or other casualty requiring that the ship put into a foreign port for repairs.And so it is that the most important exception is for those circumstances: duty may be remitted if good and sufficient evidence is furnished establishing that the vessel was compelled by stress of weather or other casualty to be put into a foreign port to make repairs to secure the safety and seaworthiness of the vessel to enable her to reach her port of destination.24
CBP has explained that the term "casualty" as it is used in the statute, has been interpreted as something which, like stress of weather, comes with unexpected force or violence, such as fire, explosion, or collision. Consequently, a casualty, in the vessel repair context, arises from a similar identifiable event. Absent evidence of such an event, and here it is important to know that CBP is skeptical of any causation that is not a fire, explosion or collision, CBP considers the repair to have been necessitated by normal wear and tear.25 CBP has also noted that only minimal repairs will be remitted--the remission is restricted to the cost of the minimal repairs necessary to secure the safety and seaworthiness of the vessel to enable her to reach her port of destination. Repair costs beyond that minimal amount are not subject to remission.26 CBP has further explained that remission of duties for casualty has a three-part test. it is necessary that in order to qualify for duty remission, the party seeking relief
must show both the occurrence of a casualty, and that repair was necessary for safety and seaworthiness and an inability to reach the port of destination without obtaining foreign repairs.27 The general tenor of CBP’s administrative position in these matters is quite conservative. But the regulations do allow for a bit of lenience in the case of the “One Round Voyage” rule whereby remissions will be granted for repairs on a vessel that had undergone repairs in the US before the voyage only to see the repaired machinery or equipment fail during the first six months of that voyage.28
Among the other exclusions are those provided for when the vessel has been away from the US for extended periods. The vessel repair statute provides that when a vessel covered by the vessel repair statute:
...arrives in a port of the United States two years or more after its last departure from a port in the United States, the duties imposed by [section 1466] shall apply only with respect to... [purchases and repairs] made during the first six months after the last departure of such vessel from a port of the United States.29
As CBP has explained,30 the intent of the “six month rule” is that duty is to be collected on repairs to vessels which may have been taken abroad for the purpose of obtaining foreign repairs, thus the six-month limitation on dutiability during periods of extended absence from the United States.Included among the exemptions are those arising from work done on the high seas by the crew of the vessel:
(4) the cost of equipment, repair parts, and materials that are installed on a
vessel documented under the laws of the United States and engaged in the
foreign or coasting trade, if the installation is done by members of the regular
crew of such vessel while the vessel is on the high seas.
Declaration and entry shall not be required with respect to the installation,
equipment, parts, and materials described in paragraph (4).31
Conclusion
Based on the foregoing we should be mindful of this long-standing regime by which duties of 50% may be imposed on foreign repairs made to US-flag vessels. In such cases, it is no surprise that customs lawyers and admiralty lawyers can find a lot to talk about....................................................................................................................
1. 19 USC § 1307.
2. example, Chapters 20 of the US/Korea FTA, 18 of the US/Colombia FTA and 17 of the US/Panama FTA.
3. 19 USC § 1526.
4. 19 USC § 1337. To be clear, this Section is by no means limited to the protection of patent and other intellectual property (IP) rights.
5. In this respect, the US and Canada are two exceptions to the general rule where those costs comprise part of the customs value. Art. 8.2 of the Customs Valuation Agreement (formally the “Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade 1994”) allows individual countries to decide whether or not such costs are dutiable.
6. To be sure, the role of transportation costs as a nondutiable charge (NDC) will arise as a matter of customs value when it is included within certain INCOTERM sales terms such as a CIF or DDP sale. In such cases the transport costs must be backed out to get to the FOB level that is at the heart of the Price Actually Paid or Payable (PAPP) which is central to the customs valuation statute. 19 USC § 1401a.
7. For example the Jones Act prohibits foreign-flagged vessels from carrying cargo between two US ports. Title 46 USC § 55102 (“a vessel may not provide any part of the transportation of merchandise by water, or by land and water, between points in the United States to which the coastwise laws apply, either directly or via a foreign port” unless the vessel was built in and documented under the laws of the United States and owned by persons who are citizens of the United States) and 19 CFR. §§ 4.80, 4.80b.
8. Ships, boats and floating structures are the subject of Chapter 89 of the Harmonized Tariff Schedule of the United States (HTSUS).
9. See 19 CFR § 4.94.
10. See Horizon Lines, LLC v. United States, 626 F.3d 1354 (Fed. Cir. 2010, aff’g 659. F. Supp. 2d 1285 (CIT 2009), and cases cited therein.
11. Id.
12. Texaco Marine Services v. United States, 44 F.3d 1539 (Fed. Cir. 1994).
13. SL Service, Inc. v. United States, 357 F.3d 1358, 1362, 1363 (Fed. Cir. 2004), rev’g 244 F. Supp. 2d 1359 (CIT 2002), cert. den. 2004. See ruling no. 116431 (7/7/05).
14. Ruling nos. 112037 (3/14/95) and 113992 (7/2/97) (in the absence of documentary evidence that the VAT was not paid, it is dutiable).
15. Ruling no. 116431 and authorities cited therein.
16. Ruling no. 115763 (9/30/02).
17. Horizon Lines, 659 F. Supp 2d at 1289.
18. Id. at 1289-90.
19. Ruling no. 112833 (3/14/95)
20. Ruling no. 114993 (4/7/00).
21. Ruling no. 115763 (9/30/02) (citing E.E. Kelly & Co. v. United States, 55 Treas. Dec. 596, T.D. 43322 (CCPA 1929)) (“tin-free painting” is a dutiable repair operation).
22. Ruling no. 114993 (citing to States Steamship Co. v. United States, 60 Treas. Dec. 30, T.D. 45001 (Cust. Ct. 1931)).
23. Ruling no. 111185 (2/21/91) (citing to American Viking Corp.v. United States, C.D. 1830 (1956), and Customs Ruling Letter 104952, December 17, 1980) (the replacement of parts or materials which are necessarily destroyed during the course of an inspection where no repairs resulted, may be replaced without duty consequence under section 1466).
24. 19 USC § 1466 (d) (1), 19 CFR § 4.14 (h) (2) (i).
25. Ruling no. 112665 (5/26/93) citing to Dollar Steamship Lines, Inc. v. United States, 5 Cust. Ct. 23, 29, C.D. 362 (1940).
26. Ruling no. 115485 (10/31/11).
27. Ruling no. 115485. See also ruling no. 113807 (10/13/98) (remission available after engine room fire disabled ship).
28. 19 CFR § 4.14 (h) (2) (i). See ruling no. H258000(1/20/15). The rule was originally set forth in Customs Bureau Letter CR 212.6 PH (Jan. 21, 1971), abstracted as Treasury Decision (T.D.) 71-83(38).
29. 19 USC § 1466 (e), 19 CFR § 4.14 (3).
30. Ruling no. 111298 (3/4/91). See ruling no. 116308 (9/27/04) and previous rulings cited therein for application of the rule to vessels that had been re-registered under the US flag subsequent to original foreign registry
31. 19 USC § 1466 (h). See ruling no. W116460 (4/10/06).
2. example, Chapters 20 of the US/Korea FTA, 18 of the US/Colombia FTA and 17 of the US/Panama FTA.
3. 19 USC § 1526.
4. 19 USC § 1337. To be clear, this Section is by no means limited to the protection of patent and other intellectual property (IP) rights.
5. In this respect, the US and Canada are two exceptions to the general rule where those costs comprise part of the customs value. Art. 8.2 of the Customs Valuation Agreement (formally the “Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade 1994”) allows individual countries to decide whether or not such costs are dutiable.
6. To be sure, the role of transportation costs as a nondutiable charge (NDC) will arise as a matter of customs value when it is included within certain INCOTERM sales terms such as a CIF or DDP sale. In such cases the transport costs must be backed out to get to the FOB level that is at the heart of the Price Actually Paid or Payable (PAPP) which is central to the customs valuation statute. 19 USC § 1401a.
7. For example the Jones Act prohibits foreign-flagged vessels from carrying cargo between two US ports. Title 46 USC § 55102 (“a vessel may not provide any part of the transportation of merchandise by water, or by land and water, between points in the United States to which the coastwise laws apply, either directly or via a foreign port” unless the vessel was built in and documented under the laws of the United States and owned by persons who are citizens of the United States) and 19 CFR. §§ 4.80, 4.80b.
8. Ships, boats and floating structures are the subject of Chapter 89 of the Harmonized Tariff Schedule of the United States (HTSUS).
9. See 19 CFR § 4.94.
10. See Horizon Lines, LLC v. United States, 626 F.3d 1354 (Fed. Cir. 2010, aff’g 659. F. Supp. 2d 1285 (CIT 2009), and cases cited therein.
11. Id.
12. Texaco Marine Services v. United States, 44 F.3d 1539 (Fed. Cir. 1994).
13. SL Service, Inc. v. United States, 357 F.3d 1358, 1362, 1363 (Fed. Cir. 2004), rev’g 244 F. Supp. 2d 1359 (CIT 2002), cert. den. 2004. See ruling no. 116431 (7/7/05).
14. Ruling nos. 112037 (3/14/95) and 113992 (7/2/97) (in the absence of documentary evidence that the VAT was not paid, it is dutiable).
15. Ruling no. 116431 and authorities cited therein.
16. Ruling no. 115763 (9/30/02).
17. Horizon Lines, 659 F. Supp 2d at 1289.
18. Id. at 1289-90.
19. Ruling no. 112833 (3/14/95)
20. Ruling no. 114993 (4/7/00).
21. Ruling no. 115763 (9/30/02) (citing E.E. Kelly & Co. v. United States, 55 Treas. Dec. 596, T.D. 43322 (CCPA 1929)) (“tin-free painting” is a dutiable repair operation).
22. Ruling no. 114993 (citing to States Steamship Co. v. United States, 60 Treas. Dec. 30, T.D. 45001 (Cust. Ct. 1931)).
23. Ruling no. 111185 (2/21/91) (citing to American Viking Corp.v. United States, C.D. 1830 (1956), and Customs Ruling Letter 104952, December 17, 1980) (the replacement of parts or materials which are necessarily destroyed during the course of an inspection where no repairs resulted, may be replaced without duty consequence under section 1466).
24. 19 USC § 1466 (d) (1), 19 CFR § 4.14 (h) (2) (i).
25. Ruling no. 112665 (5/26/93) citing to Dollar Steamship Lines, Inc. v. United States, 5 Cust. Ct. 23, 29, C.D. 362 (1940).
26. Ruling no. 115485 (10/31/11).
27. Ruling no. 115485. See also ruling no. 113807 (10/13/98) (remission available after engine room fire disabled ship).
28. 19 CFR § 4.14 (h) (2) (i). See ruling no. H258000(1/20/15). The rule was originally set forth in Customs Bureau Letter CR 212.6 PH (Jan. 21, 1971), abstracted as Treasury Decision (T.D.) 71-83(38).
29. 19 USC § 1466 (e), 19 CFR § 4.14 (3).
30. Ruling no. 111298 (3/4/91). See ruling no. 116308 (9/27/04) and previous rulings cited therein for application of the rule to vessels that had been re-registered under the US flag subsequent to original foreign registry
31. 19 USC § 1466 (h). See ruling no. W116460 (4/10/06).
Mark K. Neville, Jr., LL.M. (International Legal Studies), NYU, is a long-time member of the Board of Advisors. He is Principal of International Trade Counsellors and may be reached at mkneville@itctradelaw.com. He has served as an adjunct professor at The University of California, Berkeley’s Haas School of Business and NYU’s Stern School. He is The Journal’s Customs & Trade correspondent.