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HQ 115077

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August 24, 2000

VES-13-18-RR:IT:EC 115077 GEV

CATEGORY: CARRIER

Jeanne M. Grasso, Esq.
Dyer Ellis & Joseph
Watergate, Eleventh Floor
600 New Hampshire Ave., N.W.
Washington, D.C. 20037

RE: Vessel Repair; Six-Month Rule; 19 U.S.C. § 1466(e)

Dear Ms. Grasso:

This is in response to your letter of August 7, 2000, with attachments, on behalf of your client, Chesapeake Shipping, Inc., regarding the applicability of the vessel repair statute to three U.S.-flag tankers, the SEA ISLE CITY, the OCEAN CITY, and the CHESAPEAKE CITY (collectively, the “Vessels”), that have been continuously operated abroad, never having entered the United States. Your letter supplements that of Gerald E. Brooks, Chairman, President and Chief Executive Officer of Chesapeake Shipping, Inc., dated June 16, 2000, with whom we met on June 14, 2000.

FACTS:

The Vessels were built in Japan in 1981 and originally flagged under the Kuwaiti flag. They were subsequently documented under the U.S. flag in the interest of national defense in order to facilitate their protection in and around the Persian Gulf to ensure the continued flow of oil through the Strait of Hormuz. (See Attachment 2-Memorandum to the Secretary of Transportation from the Secretary of Defense, dated February 9, 1988) The effective dates of their U.S. documentation are as follows: SEA ISLE CITY-August 8, 1987; OCEAN CITY-August 8, 1987; and CHESAPEAKE CITY-August 28, 1987. (See Attachment 1-U.S. Coast Guard Certificates of Documentation) In conjunction with their reflagging under United

States law, a one-year national defense waiver of the manning and citizenship requirements set forth in 46 U.S.C. § 803, except for the masters and radio officers, was granted. (See Attachment 6-letter from the Commandant of the U.S. Coast Guard to the Secretary of Defense, dated February 9, 1988) The waiver was effective for each Vessel, “provided that such vessel does not call at a United States port.” (See Attachments 2 and 6)

The waiver’s prohibition against calling at a U.S. port is further reflected in U.S. Coast Guard Certificates of Inspection (COI) for each Vessel (dated August 17, 1988, August 8, 1987, and October 5, 1990, for the SEA ISLE CITY, OCEAN CITY, and CHESAPEAKE CITY, respectively), which include the statement “OPERATIONS IN U.S. WATERS PROHIBITED” (See Attachment 3). The Vessels’ recent COIs and marine inspection reports for the OCEAN CITY and CHESAPEAKE CITY show that the prohibition from operating in U.S. waters was only recently removed. (See Attachments 4 and 5)

Chesapeake Shipping, Inc., is pursuing options for the Vessels to trade in the United States while remaining U.S.-flag vessels, but desires to first assess its potential duty liability, if any, under the vessel repair statute.

ISSUE:

Whether the vessel repair statute imposes any potential for duty liability upon the subject Vessels which, although documented under the laws of the United States, have never been in the United States since their foreign construction.

LAW AND ANALYSIS:

Title 19, United States Code, § 1466(a), provides in pertinent part for payment of duty in the amount of 50 percent ad valorem on the cost of foreign repairs to vessels documented under the laws of the United States to engage in the foreign or coastwise trade, or vessels intended to be employed in such trade.

The vessel repair statute provides in subsection (e) (19 U.S.C. § 1466(e)), 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.

Since the Vessels would be arriving in the United States for the first time, they would not meet the statutory requirement of having previously departed from the United States. However, in prior Customs rulings regarding the applicability of the so-called “six-month rule” to newly-constructed, foreign-built vessels documented under the United States flag upon delivery that have not previously been in the United States, Customs held that the six-month rule nonetheless applied and that the six-month period began upon first entry of the vessels into service. (Customs ruling letters 111298, dated March 4, 1991, and 113319, dated March 27, 1995)

It is contended that the above-cited rulings are distinguishable from the case under consideration and that the Vessels should not be subject to vessel repair duties, not even for the first six months that they were U.S.-flagged prior to the inception of the aforementioned waiver. This contention is based on the following.

First, the Vessels were not built for the U.S. flag, but rather were reflagged in the United States several years after construction pursuant to an agreement between the U.S. Government and the Kuwaiti government to facilitate vital national defense interests in response to the perceived threat to shipping in the Persian Gulf in the late 1980s.

Second, the Vessels were granted a one-year national defense waiver of the manning provisions requiring U.S. citizens as crew on U.S.-flag vessels only if the Vessels made no U.S. port calls. Consequently, the Vessels would have violated U.S. law if they entered any U.S. port during the duration of the waiver.

Third, the Vessels were also prohibited from operating in U.S. waters because several systems on board the Vessels did not meet standards required by U.S. law, largely as a result of the Vessels being built for trade abroad and not the U.S. trade (See Attachment 5).

In response to the above contention, we offer the following.

First, while the circumstances surrounding the Vessels’ reflagging were not contemplated at the time of their construction, such
circumstances in and of themselves provide no basis for an exemption from the provisions of the vessel repair statute. Such an exemption is not provided for in the express language of 19 U.S.C. § 1466. In addition, it should be noted that the Customs Regulations promulgated pursuant to 19 U.S.C. § 1466 provide that U.S.-flag vessels endorsed with a registry or coastwise trade endorsement, even if owned or chartered by the United States Government, are subject to 19 U.S.C. § 1466. (See 19 CFR § 4.14(a)(2)(ii))

Second, the one-year national defense waiver was requested and granted specifically with regard to the manning and citizenship requirements contained in 46 U.S.C. § 8103. (See Attachments 2 and 6) It does not cover vessel repair duties incurred pursuant to 19 U.S.C. § 1466.

Third, any prohibition from operating in U.S. waters because certain systems on board the Vessels did not meet standards required by U.S. law due to their being built for trade abroad and not the U.S. trade also provides no basis for an exemption from the provisions of the vessel repair statute. As stated above with respect to the first point for our consideration, such an exemption is provided neither in the statutory language nor granted pursuant to the subject waiver. Further in this regard, it should be noted that Customs has long-held that foreign repairs are not exempt from duty under the vessel repair statute merely because they were done for the purpose of complying with U.S. law. (See Customs Service Decision (C.S.D.) 82-95, citing Customs ruling letters 103712 and 101470, holding dutiable foreign vessel repairs necessitated by U.S. Coast Guard requirements.)

Accordingly, the Vessels would be subject to the six-month duty cap imposed pursuant to 19 U.S.C. § 1466(e) upon their arrival in a port of the United States. We would consider the six–month period for duty purposes to have begun on the respective effective dates of the Vessels’ United States documentation.

HOLDING:

The vessel repair statute does potentially impose duty liability upon the subject Vessels which, although documented under the laws of the United States, have never been in the United States since their foreign construction.

Sincerely,

Larry L. Burton

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