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HQ 112048


March 3, 1992

VES-4-03/12-02 CO:R:IT:C 112048 MLR

CATEGORY: CARRIER

Pascale Montels
Loelia Campanile
PID 9 rue Saint Florentin
75008 Paris
France

RE: French-Flag Sailboat; Charter

Dear Mme. Montels:

This is in reference to your letter dated December 12, 1991, concerning the charter of a foreign-flag vessel.

FACTS:

The SOVEREIGN and SOVEREIGN TOO are foreign-built sailboats documented under the French flag. One or both of the sailboats are intended to be chartered in Newport, Rhode Island, during the summer of 1992. The SFA Bank is listed as the owner. We infer that each vessel will carry paying passengers and will be guided by a four-person crew.

ISSUES:

I. Whether the charter of a foreign-built, French-documented vessel, intended to be brought into the United States for charter to a U.S. resident in Newport, Rhode Island, during the summer of 1992, is subject to duty under the provisions of the Harmonized Tariff Schedules.

II. Whether the subject vessel may be chartered to U.S. residents without violating the coastwise trade laws.

III. Whether the subject vessel may be issued a cruising license.

LAW AND ANALYSIS:

I. Under the Harmonized Tariff Schedule of the United States (HTSUS, copy enclosed), items 8903.91.00, 8903.92.00, or 8903.99.20, yachts and other vessels for pleasure or sport, rowboats and canoes, sailboats with or without auxiliary motor, motorboats, and outboard motorboats, are dutiable at the rate of 1.5 percent ad valorem. A sailboat owned by a U.S. resident or brought into the United States for sale or charter to a resident thereof, would be subject to this duty provision of the HTSUS. Additional U.S. Note 1 to Chapter 89, HTSUS (which contains these items), provides that a vessel, used in international trade or commerce or brought into the customs territory of the United States by nonresidents thereof for their own use in pleasure cruising, shall be admitted without formal customs consumption entry or the payment of duty.

II. Generally, the coastwise laws (e.g., 46 U.S.C. app. 289 and 883, and 46 U.S.C. 12106 and 12110) prohibit the transportation of merchandise or passengers between points in the United States embraced within the coastwise laws in any vessel other than a vessel built in and documented under the laws of the United States, and owned by persons who are citizens of the United States.

The passenger coastwise law, title 46 United States Code Appendix, section 289 (46 U.S.C. app. 289), provides that:

No foreign vessel shall transport passengers between ports or places in the United States either directly or by way of a foreign port, under penalty of $200 for each passenger so transported and landed.

For purposes of the coastwise laws, a vessel "passenger" is defined as "... any person carried on a vessel who is not connected with the operation of such vessel, her navigation, ownership, or business." 19 CFR 4.50(b). However, we have ruled that bona fide guests (i.e., those persons who have not paid for or contributed to the expense of the trip) of the owner or bareboat charterer of a yacht or pleasure vessel are not "passengers" for purposes of section 289.

A point in United States territorial waters is considered a point in the United States embraced within the coastwise laws but a point beyond those waters, even if it is within the United States Exclusive Economic Zone (EEZ), is not considered to be such a point, with certain exceptions inapplicable to this context (e.g., the Outer Continental Shelf Lands Act of 1958, as amended; 43 U.S.C. 1333; and the amendments to 46 U.S.C. app. 883 regarding the transportation of valueless or dredged material effected by Public Law 100-329).

The territorial waters of the United States consist of the belt, 3 nautical miles wide, adjacent to the coast of the United States and seaward of the territorial sea baseline. At the date of this letter, the recent Presidential Proclamation (dated December 27, 1988), proclaiming a 12 nautical mile territorial sea, has extended the jurisdiction of the United States only for international purposes and has not extended or changed existing federal and state laws.

It is Customs position that the transportation of passengers from a United States point to a foreign point and back to the same point is not coastwise trade but that the transportation of passengers to a different United States point is coastwise trade (see enclosed copy of 19 CFR 4.80a, particularly paragraph (a)(2), defining "nearby foreign port," and paragraph (b)(2) of that section). Transportation of passengers from a United States point to a foreign port other than a "nearby foreign port" {i.e., a "distant foreign port," see 19 CFR 4.80a(a)(3)} and then to a different United States point is not coastwise trade. 19 CFR

In its administration of 46 U.S.C. app. 289, the Customs Service has ruled that the carriage of passengers entirely within territorial waters, even though the passengers disembark at their point of embarkation and the vessel touches no other coastwise point, is considered coastwise trade subject to the coastwise laws. However, the transportation of passengers to the high seas (i.e., beyond U.S. territorial waters) and back to the point of embarkation, assuming the passengers do not go ashore, even temporarily, at another United States point, often called a "voyage to nowhere," is not considered coastwise trade. It should be noted that the carriage of fishing parties for hire, even if the vessel proceeds beyond territorial waters and returns to the point of the passenger's embarkation, is considered coastwise trade.

With regard to the charter of a yacht or pleasure vessel, when a non-coastwise qualified vessel is chartered under a bona fide bareboat charter, the charterer is treated as the owner of the vessel for the period of the charter, and, because the owners are not considered "passengers" for purposes of the coastwise laws, the charterer is not proscribed by the coastwise laws from using the vessel during the charter for his pleasure purposes only. A vessel chartered under a charter arrangement other than a bareboat charter (e.g., a time or "captained" charter) to transport the charterer and/or his guest between coastwise points or solely in territorial waters (see discussion above on the carriage of passengers entirely in territorial waters or to the high seas or foreign waters) would be considered coastwise trade and therefore subject to penalties under the coastwise laws. A vessel chartered under a bareboat charter would also be subject to penalties if the bareboat charterer used it in the coastwise trade (e.g., to transport paying passengers between coastwise points or entirely within territorial waters).

In our review of charter arrangements to determine whether or not they are bareboat charters we have generally held that:

The nature of a particular charter arrangement is a question of fact to be determined from the circumstances of each case. Under a bareboat charter or demise charter the owner relinquishes complete management and control of the vessel to the charterer. On the other hand, if the owner retains a degree of management and control, however slight, the charter is a time or voyage charter, and the vessel is deemed to be engaged in trade. The crux of the matter is whether complete management and control have been wholly surrendered by the owner to the charterer so that for the period of the charter the charterer is in effect the owner. Although a charter agreement on its face may appear to be a bareboat or demise charter, the manner in which its covenants are carried out and the intention of the respective parties to relinquish or to assume complete management and control are also factors to be considered.

Generally, we have held that a charter arrangement in which the captain and crew are selected by the owner or his agent, by its very nature, results in an implication that the owner may not have relinquished complete management and control of the vessel to the charterer. However, the mere fact that a crew is furnished to the charterer would not render the agreement a time charter provided the charterer had full authority to hire, discharge, or replace the crew. Customs Ruling 108278, dated April 2, 1988. Further, we have ruled that even when a charter is described as a bareboat one, the actual circumstances of the charter agreement control in the determination of whether it is a bareboat charter for purposes of the coastwise laws. C.S.D. 83- 11. Although it would appear that your proposal is more in the nature of a time or voyage charter as opposed to a bareboat charter for pleasure use alone, until such time as a copy of the charter agreement is submitted for our review, we are unable to determine whether it is a bareboat charter for purposes of the coastwise laws. In any event, even if the charter arrangement is considered a bareboat or demise charter, if the guests carried on the vessel are considered "passengers," the transportation will be prohibited by the coastwise laws.

III. You should also be familiar with the Customs provisions regarding entry and clearance. The master of any foreign vessel arriving in a United States port, whether from a foreign port or another United States port, is required to immediately report its arrival (see 19 U.S.C. 1433 and 19 CFR 4.2) and to make vessel entry (see 19 U.S.C. 1435 and 19 CFR 4.3). Such vessels are also required to clear when bound for a foreign port (see 46 U.S.C. app. 91 and 19 CFR 4.60), and must have a permit to proceed from one United States port to another (see 46 U.S.C. app. 313 and 19 CFR 4.87).

Title 46, United States Code Appendix, section 104 (46 U.S.C. app. 104), authorizes the issuance of cruising licenses to pleasure vessels of countries which extend reciprocal privileges to United States pleasure vessels. The determining factor as to whether a vessel is eligible for a cruising license is the documentation of the vessel and not the residency of the owner. France is on the list of countries appearing in 19 CFR 4.94(b), whose yachts may be issued cruising licenses. Section 4.94 of the Customs Regulations, concerns the issuance of cruising licenses which exempt foreign yachts from formal entry and clearance procedures. The license is granted subject to the condition that the vessel will not engage in trade or violate the laws of the United States in any respect. 19 CFR 4.94(c).

Subsequent to the receipt of the cruising license, yachts may arrive in and depart from the United States and cruise in specified waters of the United States without entering and clearing, without filing manifests and obtaining or delivering permits to proceed, and without the payment of entrance and clearance fees, or fees for receiving manifests and granting permits to proceed, duty on tonnage, tonnage tax, or light money. However, a cruising license does not exempt a vessel from the requirement to report to Customs its arrival at the first United States port of arrival from a foreign port or place immediately upon such arrival. 19 U.S.C. 1433; 19 CFR 4.2.

Cruising licenses, as their name implies, are intended for the use of foreign vessels on relatively brief cruises in the United States. A cruising license may be issued for a period not to exceed one year. 19 CFR 4.94(c). Because it appears that your vessel will not be used solely for pleasure purposes, in that you will be transporting paying "passengers," the vessel may not be issued a cruising license. We emphasize that although cruising licenses exempt yachts having them from the above described requirements while cruising in the United States, they are not required as a condition precedent to cruising in the United States or its waters. A foreign yacht or pleasure boat may be kept in the United States under its foreign registry; however, the owner or master of the vessel must enter, obtain a permit to proceed to other United States ports, and clear when going foreign.

HOLDING:

I. Since the subject sailboat will be brought into the United States by a nonresident for other than pleasure purposes alone, it would be dutiable.

II. The subject sailboat may be chartered to paying passengers, so long as the proposed itinerary does not involve the carriage of passengers: (1) entirely within territorial waters, even if the vessel returned the passengers to the point of embarkation without touching at any other coastwise point; or (2) between points in the United States. The vessel may be used to transport passengers from a point in the United States, to the high seas beyond territorial waters and back to the same point, assuming that the vessel touched at no other coastwise point during the transportation. The vessel may also carry passengers between points in the United States if the vessel first touched at a distant foreign port.

III. The subject vessel may not be issued a cruising license, unless it is chartered under a bona fide bareboat charter and the vessel does not engage in trade or violate the laws of the United States.

To the extent that this ruling conflicts with prior Customs decisions, they are hereby revoked. Further this letter addresses only those federal requirements that are administered by the United States Customs Service. Questions with regard to vessel documentation and vessel safety requirements are within the jurisdiction of the United States Coast Guard. The address is:

Mr. Thomas Willis
Chief, Vessel Documentation
U.S. Coast Guard (GMVI-6/13)
2100 Second St., S.W. (Room 1312)
Washington, D.C. 20593-0001

Tax questions should be referred to:

Internal Revenue Service
Office of the Assistant Commissioner (International) 950 L'Enfant Plaza
Washington, D.C. 20024

While we are unaware of any other federal or state agency requirements that might pertain to the undertaking you describe, it is possible that such requirements exist.

Sincerely,

B. James Fritz

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