Congress Voids Certain Ad Valorem Duties on Ship Repairs

By Jeanne M. Grasso and Charles T. Blocksidge

Trade and Technical Corrections Act of 2004 (the Act), signed into law on December 3, 2004, contains a provision that reverses a final rule, issued by the Bureau of Customs and Border Protection (CBP) in 2001 (Final Rule; 66 Fed. Reg. 16392 (March 26, 2001)), that subjected repairs made to U.S.-flag vessels while on the high seas to declaration, entry, and duty requirements. Simply put, the Act expands the list of items that are exempt from the 50 percent ad valorem duty requirement contained in the Vessel Repair Statute (19 U.S.C. § 1466) and, as a result, could possibly save owners and operators of U.S.-flag vessels large sums of money. The Vessel Repair Statute requires the payment of a 50 percent ad volorem duty on the cost of equipment, materials, and parts purchased for, or the expenses of repairs made to, a U.S.-flag vessel in a foreign country. The purpose of the Vessel Repair Statute is to protect U.S. shipyards from foreign competition by discouraging vessel owners/operators from taking their vessels abroad for the purpose of obtaining less expensive foreign repairs. Generally, the owner, operator, or master of a U.S. flag vessel must, upon the vessel's first arrival in a U.S. port, declare all equipment, parts, or materials purchased for, and all repairs made to, the vessel outside the United States and, within ten calendar days after arrival, file a formal entry of such equipment, materials, parts, and expenses of repairs. Following the submission of the entry, vessel owners/operators may submit an application for relief for certain items that, based on statutory interpretations and regulatory exemptions, they believe should be non-dutiable or, in the alternative, subject to a lower duty rate.

Changing Tide The Vessel Repair Statute has undergone change multiple times since its inception in 1866, but several significant events throughout the 1990s, attributable to both statutory amendment and judicial interpretation, motivated CBP to revise the regulations that implement the Vessel Repair Statute's mandate. In 1999, CBP published a proposed rule implementing such changes and requested the public's input. Following an extended comment period, CBP published its Final Rule in 2001. In part, the Final Rule was a manifestation of Customs' interpretation of the decision in Mount Washington Tanker Co. v. United States, 505 F. Supp. 209, 214 (1980), aff'd 665 F.2d 340 (C.C.P.A. 1981), as well as an effort to streamline the process for seeking relief from vessel repair duties. Consequently, this Final Rule made parts, materials, and equipment utilized in repairs performed by crewmembers while a vessel was "on the high seas" dutiable under the Vessel Repair Statute (despite the fact that the Vessel Repair Statute used the language "in a foreign country," rather than "on the high seas"), while clarifying that the compensation paid to crewmembers for such repairs was not dutiable. The Mount Washington Tanker Company case involved a U.S.-flag vessel that engaged in transporting oil between various Pacific ports. During the course of its operations, the vessel needed repairs to overhaul its main generator. The vessel owner hired Swedish citizens and flew them to the vessel to make onboard repairs. During most of the time these individuals were onboard, the ship was transiting the high seas. Following the completion of the repairs, the Swedish citizens disembarked and were flown home. Upon the return of the T/S Mount Washington to the port of Honolulu, CBP assessed duties on the repairs made to the main generator. In appealing this decision, the Plaintiffs contended that repairs made on the high seas did not meet the requirements in §1466(a) because they were performed on the high seas and thus outside of sovereign territory, i.e., not inside the territorial sea of a foreign country. At the center of this controversy was the term "foreign country." The Plaintiffs argued that the term was ambiguous and that generally the "high seas" would not be considered a foreign country. The court disagreed and stated that the term "foreign country" had not been treated uniformly by all courts and therefore the term could be given a different meaning based on the legislative purpose of the underlying statute. In this case, the court reasoned that if the high seas were not considered a foreign country, then the legislative purpose of protecting U.S. shipyards would be frustrated. When reviewing challenged agency decisions, courts determine whether the agency's action was arbitrary, capricious, or an abuse of discretion. Here, the court held that CBP's decision to assess duties on these repairs did not violate this standard. Consequently, until December 2004, equipment, repair parts, and materials either installed or used by the vessel's crew on the high seas were subject to the ad valorem duty. Righting a Wrong. Congress reversed CBP's Final Rule promulgated in 2001 by adding a new provision to Section 1466(h) of the Vessel Repair Statute that exempts from vessel repair duties equipment, repair parts, and materials that are installed on the high seas by the vessel's regular crewmembers. The new exemption specifically excludes from vessel repair duties the cost of equipment, repair parts, and materials that are installed on a U.S.-flag vessel engaged in the foreign or coastwise trade if the installation is performed by members of the regular crew while the vessel is on the high seas. In addition, declaration and entry are not required with respect to such equipment, repair parts, and materials. 19 U.S.C. § 1466(h)(4). There remain issues, however, that may still provide some confusion when operating within this new law. These issues include just what constitutes the "high seas" and how CBP will deal with the fact that the Final Rule is reversed retroactive to April 25, 2001. First, according to several CBP Rulings, the "high seas" are those waters outside the territorial waters of the United States, but not inside the waters of any foreign country, i.e., that country's territorial sea. Customs Ruling HQ 110260 (September 22, 1989). This would thus seem to preclude from the exemption repairs made by the vessel's regular crewmembers in a foreign port or in another country's territorial sea, which, in practicality, does not make sense - the exemption should not be dependent on where the vessel physically is, but rather on who performs the work. In addition, CBP officials have informally stated that a vessel may be considered to be on the "high seas" when it is underway. This latter interpretation would also lead to peculiar results and such a definition is not supported by the traditional definition of "underway." For example, under a traditional definition, a vessel is considered to be underway when it is not anchored, moored, made fast to a pier, or aground. This is merely a commentary on the state of the vessel and not in reference to its geographical location. Thus, a vessel could be underway while only yards from foreign soil and not underway while anchored or even aground outside the territorial sea of a foreign country. Given that the likely intent of the new legislation is that equipment, materials, and parts installed by the vessel's crew would qualify for the exemption, CBP should clarify this issue to ensure consistent entries are submitted. While the new law is retroactive to April 25, 2001, the effective date of the Final Rule, CBP has stated informally that it is taking the position that the legislation does not give CBP the authority to review and refund duties assessed on entries that have already been liquidated. Thus, CBP intends to apply the new law retroactively only to those entries that have not yet been liquidated or are within the applicable protest period. As a result, U.S.-flag vessel owners and operators should review whether they have applications for relief or protests pending with CBP that may qualify for retroactive treatment. For entries that have not been liquidated or that are still in the protest period, the vessel owners and operators should submit a letter to CBP stating their intention to supplement their entry and/or application for relief. The supplemented information should be in the form of a letter certifying that the items would not have been declared or entered had the recently implemented section 1466(h)(4) been in place when the application for relief was originally submitted. Finally, vessel owners and operators should take this new exemption into consideration when scheduling new installations and repairs because, to the extent repairs can be conducted by the vessel's crewmembers while on the high seas, these repairs and the associated equipment, materials, and parts should not be dutiable.