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HQ 115775

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November 1, 2002

VES-13-18 RR:IT:EC 115775 RSD

CATEGORY: CARRIER

Chief, Vessel Repair Unit
U.S. Customs Service
423 Canal Street
Room 306
New Orleans, Louisiana 70130

RE: Vessel Repair; Petition; KODIAK ISLAND; Vessel Repair Entry Number C190010908-8; recalculation; general expenses; “but for” test; Texaco Decision

Dear Sir:

This is in response to your memorandum dated August 2, 2002, forwarding for our consideration a petition for review of vessel repair duties assessed pursuant to 19 U.S.C. 1466 that is referenced above. The law firm, Burke & Mayer filed the petition requesting relief of vessel repair duties on behalf of Seacor Marine, Incorporated. Your office requests our review of a recalculation of vessel repair duties and general expenses.

FACTS:

The record indicates that the vessel, the KODIAK ISLAND, departed the United States on July 26, 1998. On November 5, 1998, the vessel experienced an engine failure. A replacement engine was shipped from the United States and installed aboard the vessel at the Carena Shipyard in Abidjan, Ivory Coast. The vessel arrived in the United States on August 27, 1999, in Pacagoula, Mississippi. The vessel entry was officially filed with Customs on October 13, 1999. A timely application for relief of the vessel repair duties was filed. On June 19, 2002, Customs denied the application for relief from vessel repair duties. On July 19, 2002, a petition for review of this decision was timely filed seeking relief from the imposition of vessel repair duties on garbage services and gangway, fresh water connection, fresh water consumption, electrical consumption, telephone services, and the unloading and destroying of waste oil. In addition, the petitioner claims that it is entitled to relief because certain costs associated with engine repairs were reported on two different documents submitted to Customs and were counted twice in determining the amount of duties owed.

ISSUES:

Whether the general expenses rendered in connection with an engine repair for which the petitioner seeks relief are dutiable.

Whether certain costs incurred in connection with an engine repair were incorrectly counted twice and as such should be recalculated.

LAW AND ANALYSIS:

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

In Texaco Marine Services, Inc., and Texaco Refining and Marketing, Inc. v. United States, 815 F.Supp. 1484 (1993), the U.S. Court of International Trade (CIT) considered whether costs for post-repair cleaning and protective coverings incurred pursuant to dutiable repairs constituted "expenses of repairs" as that term is used in 19 U.S.C. §1466. In holding that these costs were dutiable as "expenses of repairs" the court adopted the "but for" test proffered by Customs; that is, such operations were an integral part of the dutiable repair process and would not have been necessary "but for" the need to conduct dutiable repairs.

On appeal, the Court of Appeals for the Federal Circuit (CAFC) issued a watershed decision which not only affirmed the opinion of the CIT regarding the specific expenses at issue, but also provided clear guidance with respect to the interpretation of 19 U.S.C. §1466, and thus the Customs administration of that statute. In upholding the "but for" test adopted by the CIT the CAFC stated:

...the language ‘expenses of repairs’ is broad and unqualified.

As such, we interpret ‘expenses of repairs’ as covering all expenses (not specifically excepted in the statute) which, but for dutiable repair work, would not have been incurred.

Conversely, ‘expenses of repairs’ does not cover expenses that would have been incurred even without the occurrence of dutiable repair work. As will be more clearly illustrated below...the ‘but for’ interpretation accords with what is commonly understood to be an expense of repair. 44 F.3d 1539, 1544.

The Assistant Commissioner, Office of Regulations and Rulings, issued a second memorandum to the Regional Director, Commercial Operations Division, New Orleans (file no. 113350), dated March 3, 1995. This memorandum was published in the Customs Bulletin on April 5, 1995 (see Customs Bulletin and Decisions, vol. 29, no. 14, at p. 24). It provided that all vessel repair entries filed with Customs on or after the date of that decision were to be liquidated in accordance with the full weight and effect of the court decision (i.e., costs of post-repair cleaning and protective coverings incurred pursuant to dutiable repairs are dutiable and all other foreign expenses contained within such entries are subject to the "but for" test). Therefore, expenses that are associated with repair charges are dutiable in accordance with the "but for" approach used in Texaco. Without a showing that the charges in question are incident to a non-repair item, they are dutiable under the vessel repair statute.

With respect to general services costs, specified in item 93 listed on exhibit A, i.e. garbage services, technical coordinator, fresh water connection, fresh water consumption, electricity consumption, telephone services, unload and destroy oil, we note that these expense were incurred in connection with a dutiable repair of the engine. As such, these expenses would not have been incurred, “but for” the dutiable repairs that were performed on the vessel, and thus in accordance with the Texaco decision, these general expenses are considered fully dutiable.

In regard to the petitioner’s second claim, it is apparent that certain costs related to the engine repair listed on exhibit A, also appeared on another invoice, exhibit B. The appearance of the same costs on two different invoices caused Customs, in determining the amount of vessel repair duties that should be assessed under 19 U.S.C. 1466, mistakenly to count the same expenses related to the engine repair twice. Accordingly, we are satisfied that there was duplication in that expenses related to the engine repair were incorrectly counted twice by Customs in calculating the applicable dutiable expenses. Consequently, we concur that the petitioner is entitled to relief by having these costs recalculated to eliminate any duplication of the dutiable costs.

HOLDING:

The general expenses for which the petitioner seeks relief are fully dutiable. Because of the duplication in determining the dutiable costs of the engine repair, the dutiable cost should be recalculated.

Accordingly, the petition is granted in part and denied in part.

Sincerely,

Glen E. Vereb
Acting Chief
Entry Procedures and Carriers Branch

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