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HQ 115975

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July 16, 2004

VES-13-18 RR:IT:EC 115975 CK

CATEGORY: CARRIER

Chief, Vessel Repair Unit
U.S. Customs and Border Protection
423 Canal Street, Room 303
New Orleans, Louisiana 70130-2341

RE: Application for further review; Protest No. 2002-02-100997; Vessel Repair Entry Number C20-0058533-4; PACIFIC BALLAD; 19 U.S.C. §1466

Dear Sir:

This is in response to your memorandum of April 21, 2003 that forwarded the protest submitted by counsel on behalf of Pacific Island Resources, Inc. (PIR) with respect to the above-referenced vessel repair entry. Our review is limited to those costs specified in your memorandum.

FACTS:

The PACIFIC BALLAD was purchased by its current owners in early 2001. At the time of the purchase, the vessel, then known as the OCEAN BALLAD, was designed for catching Alaskan King Crabs and storing them in live wells and was used for that purpose. The vessel was moved to New Zealand where it was modified and re-configured to fish for, process, and blast-freeze squid. The work on the vessel was performed in two New Zealand shipyards. Conversion of the “crab boat” into the “squid jigger” required extensive modifications to the vessel’s structure, hull, and fittings.

The PACIFIC BALLAD arrived in Barbers Point, HI on August 26, 2001, and entry number C20-0058533-4 was subsequently filed. An application for relief from duties was not filed for this entry, and it was liquidated on June 28, 2002 with a number of items determined to be dutiable. The Port of New Orleans received the subject protest on September 27, 2002, which while on the 91st day, was deemed timely as the office was officially closed on September 26, 2002, due to severe weather. The protest seeks relief from a number of items the port declared dutiable.

ISSUE:

Whether the protest can be granted for those items held dutiable under 19 U.S.C. §1466.

LAW AND ANALYSIS:

Title 19, United States Code, § 1466 (19 U.S.C. § 1466), provides in pertinent part for the payment of an ad valorem duty of 50 percent of the 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 upon a vessel documented under the laws of the United States”

In its application of the vessel repair statute, U.S. Customs and Border Protection (CBP) has held 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. (See Otte v. United States, 7 Ct. Cust. Appls. 166, T.D. 36489 (1916); United States v. Admiral Oriental Line et al., 18 C.C.P.A. 137, T.D. 44359 (1930); and Customs Bulletin and Decisions, Vol. 31, Number 40, published October 1, 1997.) The factors discussed within the aforementioned authority are not by themselves necessarily determinative, nor are they the only factors which may be relevant in a given case. However, in a given case, these factors may be illustrative, illuminating, or relevant with respect to the issue of whether certain work may be a modification of a vessel which is non-dutiable under 19 U.S.C. § 1466.

In considering whether an operation has resulted in a modification that is not subject to duty, the following elements may be considered.

Whether there is a permanent incorporation into the hull or superstructure of a vessel (See United States v. Admiral Oriental Line et al., supra, either in a structural sense or as demonstrated by the means of attachment so as to be indicative of the intent to be permanently incorporated. This element should not be given undue weight in view of the fact that vessel components must be welded or otherwise "permanently attached" to the ship as a result of constant pitching and rolling. In addition, some items, the costs of which are clearly dutiable, interact with other vessel components resulting in the need, possibly for that purpose alone, for a fixed and stable juxtaposition of vessel parts.

2. Whether in all likelihood, an item under consideration would remain aboard a vessel during an extended lay-up.

3. Whether, if not a first time installation, an item under consideration replaces a current part, fitting or structure that is not in good working order.

4. Whether an item under consideration provides an improvement or enhancement in operation or efficiency of the vessel.

Item 126 is the first invoice at issue. That invoice is from York Refrigeration and Air Conditioning (“York”) for “Pacific Ballad Provisions Refrigeration.” Protestant claims the invoice is for a non-dutiable modification. The VRU found that while numerous invoices from York were part of the non-dutiable modifications, this invoice was separate and apart from the conversion of the “livewells” to “blast freezers” and was dutiable as a repair. No additional information was supplied from the protestant regarding the invoice describing the work. Therefore, based on this lack of information, we find the invoice is not part of the non-dutiable modifications.

Also at issue are phone line costs from Item 132 and general services found in Items 134-138. The protestant argues these are modification costs, while the VRU states they should be prorated as they are “dual-use expenses,” which were incurred pursuant to non-dutiable modifications and dutiable repair work.

In Texaco Marine Services, 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 CBP; 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 in Texaco, but also provided clear guidance with respect to the interpretation of 19 U.S.C. §1466, and thus the CBP 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 (HQ 113350), dated March 3, 1995. This memorandum was published in the CBP 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 CBP 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.

In regard to the costs at issue, it appears from the vessel repair entry and invoices under consideration that these phone lines and other general services costs were incurred in conjunction with both dutiable and non-dutiable modification work. These charges are therefore to be prorated pursuant to our position set forth in HQ 113474, dated October 24, 1995; and HQ memorandum 113350, dated March 3, 1995. Regarding this CBP position, the CAFC in SL Service, Inc. v. United States, Slip Op. 03-1174 (February 4, 2004) reh’g en banc denied (April 12, 2004) recently upheld CBP’s proration of “dual-purpose expenses.”

The CAFC in SL Service reversed the CIT (244 F. Supp. 2d 1359 (2002)) by holding that dry-docking that is required by both dutiable and non-dutiable work is an “expense of repair,” and therefore CBP’s use of apportionment is permissible. The court stated the Texaco “but for” test which was for single-purpose expenses is inapplicable in cases, such as those in SL Service, and in the present case, where phone lines and other associated costs and services were incurred because of both dutiable and non-dutiable expenses.

Regarding the use of apportionment, the court stated that as it had been used by CBP for some time, it was entitled to deference, and this “long-standing practice of apportioning the cost of various expenses between dutiable repair and non-dutiable inspections and modifications comports with both the statute and common sense.” Id. The CAFC stated specifically,

[A]pportionment 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.

Id.

Thus, the phone line costs from Item 132 and general services found in Items 134-138 should be prorated between the dutiable repairs and non-dutiable modifications as per the court’s holding in SL Service.

Item 168 consists of an invoice for repairs to the freshwater pump. In the absence of any evidence as to why this repair would be non-dutiable it is a dutiable repair pursuant to 19 U.S.C. §1466(a).

Items 28, 33,and 53 are receipts for gasoline and/or diesel from various Mobile gas stations. Protestant argues these receipts are for consumables, and the VRU states they are general expenses that should be prorated. The receipts appear to be for fuel for vehicles used while the modifications and repairs were performed on the vessel. As such these costs are general expenses that should be prorated between the dutiable repairs and non-dutiable modifications as per the court’s holding in SL Service.

Item 32 is listed as “stationary supplies for fax machine.” Included is a Panasonic twin pack and a plug to US socket. Protestant argues that HQ 115536, dated January 31, 2002 states such stationary items are non-dutiable consumables. However, HQ 115526 holds that stationary items are dutiable equipment. The fax machine supplies are stationary and therefore constitute dutiable equipment.

Items 200 and 201 are numerous invoices from Legend Nautilus for both equipment and consumables. Protestant agrees that the equipment is dutiable and no duty was charged on the $1198.82 from invoice 9460 as non-dutiable consumables. Therefore, no amounts from Items 200 and 201 are in contention in this protest.

Protestant states that Items 39, 54, 75-77, 84-85, 93 and 105 are either general expenses or expenses that would not have been incurred “but for” the modifications. The costs mostly consist of telephone charges for both a landline and mobile line phones. Since protestant agrees the expenses are general expenses, and were incurred during the period non-dutiable modification work and dutiable repair work were being performed, these charges should be prorated as per the court’s holding in SL Service.

Items 186, 192, 193, and the line items from the invoices of Items 78, 87, and 96 that are for the services of the “Fishing Master” appear to be crew expenses and salaries. These charges are non-dutiable. However, Items 1, 40, 55, 66 and portions of the invoices in Items 78, 87, and 96 (other than the “fishing master”) are salary and expenses for consultants, agents, and engineers. These are general expenses that were incurred for both the non-dutiable modifications and for the dutiable repairs. These charges should be prorated as per the court’s holding in SL Service.

Item 216 is for rubbish removal. In HQ 115442, dated January 16, 2002, we held that trash removal was a general expense that is subject to proration. Therefore, these charges should be prorated as per the court’s holding in SL Service.

HOLDING:

The protest should be granted in part and denied in part pursuant to the Law and Analysis portion of this ruling.

In accordance with the Protest/Petition Processing Handbook (CIS HB, January 2002, pp. 18 and 21), you are to mail this decision, together with the Customs Form 19, to the protestant no later than 60 days from the date of this letter. Any reliquidation of the entry in accordance with the decision must be accomplished prior to mailing of the decision. Sixty days from the date of the decision the Office of Regulations and Rulings will make the decision available to CBP personnel, and to the public on the CBP Home Page on the World Wide Web at www.cbp.gov, by means of the Freedom of Information Act, and other methods of public distribution.

Sincerely,

Glen Vereb
Chief

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