Carnival Cruise Lines, Inc. v. United States

Slip Op. 02 - 78

UNITED STATES COURT OF INTERNATIONAL TRADE

____________________________________

:

CARNIVAL CRUISE LINES, INC., :

HAL ANTILLEN, N.V., :

HAL SHIPPING LTD., and :

WIND SURF LIMITED, :

: Before: MUSGRAVE, JUDGE

Plaintiffs, :

: Consol. Court No. 93-10-00691

v. :

:

THE UNITED STATES, :

:

Defendant. :

____________________________________:

[On remand, the Court considered Plaintiffs’ arguments (1) that the Harbor Maintenance Tax

(“HMT”) should not be imposed on passenger cruises that begin and end at ports which are exempt

from the HMT, but which make layover stops at ports covered by the HMT, and (2) that the “value”

on which the HMT is assessed should only be the actual cost of transportation. Defendant argued

that the Court of Appeals for the Federal Circuit decided in Princess Cruises, Inc. v. United States,

201 F.3d 1352 (Fed. Cir. 2000), that layover stops alone give rise to HMT liability and that this

Court is bound to follow that decision. Defendant also argued that the Court should defer to

Customs’ rulings on the proper calculation of the “value”of the cruise on which the HMT is assessed.

Held: (1) Based on the Federal Circuit’s decision in Princess, Plaintiffs are liable for payment of the

HMT on passengers who disembark the ship at layover ports covered by the HMT, but only after the

issuance of HQ 112511 (Jan. 27, 1993), which resolved the ambiguity in the statute and regulation

on this issue; (2) Customs’ method of calculating the “value” of the cruise fare for HMT assessment

purposes is correct except for the inclusion of “port taxes,” charges for “U.S. Customs and U.S.

Immigration and Naturalization services,” and the inclusion of charges for airfare and certain land-

based services and commissions prior to 1993, which are inconsistent with the HMT statute.

Plaintiff’s motion for partial summary judgment is granted in part, and Defendant’s motion for

summary judgment is granted in part.]

Dated: July 31, 2002

Paul, Weiss, Rifkind, Warton & Garrison (Robert E. Montgomery, Jr. and Robert P. Parker)

for Plaintiffs.

Consol. Court No. 93-10-00691 Page 2

Robert D. McCallum, Jr., Assistant Attorney General, David M. Cohen, Director,

Commercial Litigation Branch, Civil Division, U.S. Department of Justice (Lara Levinson and

Michael Duclos), and Richard McManus, Office of Chief Counsel, United States Customs Service,

of counsel, for Defendant.

OPINION

In this action, plaintiffs Carnival Cruise Lines, Inc., HAL Antillen, N.V., HAL Shipping,

Ltd., and Wind Surf Limited (collectively “Carnival”) contest the assessment and collection of the

Harbor Maintenance Tax (“HMT”)1 on passenger cruise ships by defendant the United States

Customs Service (“Customs”). This matter began in 1992 when Customs audited the HMT paid by

HAL Antillen for the period from April 1, 1987 through December 31, 1991 and assessed

$322,311.00 for alleged underpayments. According to an August 20, 1992 letter from the Regional

Director of Customs’ Regulatory Audit Division the underpayments resulted from HAL Antillen’s

failure to pay the HMT for cruises that made only layover stops at ports subject to the HMT and its

deduction of travel agents’ commissions from the “value” of the cruise fare on which the HMT was

based. After receiving formal notification of the audit results on April 6, 1993, HAL Antillen filed

a timely protest. On October 6, 1993 it requested accelerated disposition its protest pursuant to 19

C.F.R § 174.22(a). After receiving no decision for 30 days, the protest was deemed denied pursuant

to 19 C.F.R § 174.22(d) on November 5, 1993.

Carnival commenced this action in October 1993 and an appeal from the denial of HAL

1

The HMT is a tax on port use calculated at a rate of 0.125 percent of the value of the

commercial cargo. It was enacted pursuant to the Water Resources Development Act of 1986, Pub.

L. No. 99-662, Title XIV, § 1402, 100 Stat. 4266 (1986), and is codified at 26 U.S.C. § 4461-62.

Consol. Court No. 93-10-00691 Page 3

Antillen’s protest was added by an amended complaint. Subsequently, Carnival moved for partial

summary judgment on the issues of (1) whether the HMT should be assessed on cruises that begin

and end at ports that are exempt from the tax, but make layover stops at ports subject to it, and (2)

whether the “value” of the cruise on which the HMT is assessed should include anything more than

the actual cost for transportation. Following the Supreme Court’s decision in United States Shoe

Corp. v. United States, 523 U.S. 360 (1998), aff’g 114 F.3d 1564 (Fed. Cir. 1997), aff’g 19 CIT

1284, 907 F. Supp. 408 (1995), holding the HMT unconstitutional as applied to exports, Carnival

amended its complaint a second time adding a constitutional challenge. This Court held that the

HMT was unconstitutional as applied to passenger cruises; therefore it did not reach the other issues

raised by Carnival. See Carnival Cruise Lines, Inc. v. The United States, 22 CIT 486, 8 F. Supp. 2d

877 (1998). The Court of Appeals for the Federal Circuit reversed this Court’s holding on the

constitutional issue and remanded this action for consideration of the remaining legal issues. See

Carnival Cruise Lines, Inc. v. United States, 200 F.3d 1361, 1369 (Fed. Cir. 2000).

For the reasons which follow, the Court holds that the Federal Circuit’s decision in Princess

Cruises, Inc. v. United States, 201 F.3d 1352 (Fed. Cir. 2000), is controlling on the issue of whether

cruise lines are liable for the HMT when a vessel makes a layover stop at a port subject to the HMT.

Nevertheless, since the Federal Circuit found that the law was ambiguous with respect to layover

stops prior to the issuance of HQ 112511 (Jan. 27, 1993), the Court holds that cruise lines are not

liable for the HMT on cruises which made only layover stops at HMT covered ports prior to January

27, 1993. The Court also holds that Customs should not have included “port taxes” and charges for

“U.S. Customs and U.S. Immigration and Naturalization services” in the cruise “value”on which the

Consol. Court No. 93-10-00691 Page 4

HMT is assessed, but was otherwise correct in assessing the HMT on the price paid for the cruise,

exclusive of land-based services and commissions. Therefore, Carnival’s motion for partial

summary judgment is granted in part and Customs motion for summary judgment is granted in part.

I. Jurisdiction and Standard of Review

Pursuant to 28 U.S.C. § 1581(i) the Court has jurisdiction over Carnival’s claim for

restitution of the amount of HMT that it allegedly overpaid, and pursuant to 28 U.S.C. § 1581(a) the

Court has jurisdiction over the counts in Carnival’s First Amended Complaint appealing the denial

of HAL Antillen’s protest. Summary judgment is appropriate if “the pleadings, depositions,

answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there

is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a

matter of law.” CIT Rule 56(c); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247 (1986).

II. Assessment of Harbor Maintenance Taxes for Layover Stops

The HMT is “a tax on any port use,” 26 U.S.C. § 4461(a), and “port use” is defined as “the

loading of commercial cargo on, or . . . the unloading of commercial cargo from a commercial vessel

at a port,” 26 U.S.C. § 4462(a)(1). “The term ‘commercial cargo’ means any cargo transported on

a commercial vessel, including passengers transported for compensation or hire.” 26 U.S.C. §

4462(a)(3)(A). Ports in Alaska, Hawaii, and possessions of the United States are exempt from the

tax. 26 U.S.C. § 4462(b). Although the statute itself does not explain how the HMT is to be

assessed on passengers, 19 C.F.R. § 24.24(e)(4) states that “when a passenger boards or disembarks

Consol. Court No. 93-10-00691 Page 5

a commercial vessel at a port within the definition of this section, the operator of that vessel is liable

for the payment of the port use fee.” In HQ 112511 Customs addressed for the first time the issue

of whether a passenger who “temporarily goes ashore and subsequently gets back on the vessel [at

a layover stop] is considered to have ‘disembarked’ or ‘boarded’ at that port for purposes of 19

C.F.R. § 24.24(e)(4) so as to incur liability on behalf of the vessel operator for the payment of a port

use fee.” Customs concluded that cruise operators are liable for the HMT on passengers who leave

the vessel at these interim stops and that there is a rebuttable presumption that every passenger does

so.

Subsequently, this issue came before the Federal Circuit in an action brought by Princess

Cruises. The Federal Circuit held that both 26 U.S.C. § 4461-62 and 19 C.F.R. § 24.24(e)(4) were

ambiguous with regard to layover stops by cruise ships and gave Chevron deference2 to Customs’

interpretation of the regulation. See Princess Cruises, Inc. v. United States, 201 F.3d 1352, 1359

(Fed. Cir. 2000). The Federal Circuit concluded that:

In light of the clear intent of Congress to impose a fee on all

port use as revealed in the legislative history, the Customs

interpretation including stopovers and layovers in the port use

covered by the HMT is not unreasonable. The HMT is intended to

charge those using the ports for the expense of maintaining the ports.

It is not apparent to us that the use of the port to discharge passengers

for shopping and sight-seeing in a port and then reboard those same

passengers is any less of a use or has any less impact on the port than

boarding or discharging passengers at the beginning or end of a

cruise.

2

Under the Supreme Court’s decision in Chevron U.S.A., Inc. v. Natural Resources Defense

Council, 467 U.S. 837 (1984), if a “statute is silent or ambiguous with respect to the specific issue,

the question for the court is whether the agency’s answer is based on a permissible construction of

the statute.” Id. at 843. “A court may not substitute its own construction of a statutory provision for

a reasonable interpretation made by the administrator of an agency.” Id. at 844.

Consol. Court No. 93-10-00691 Page 6

Id. at 1360.

In the present action, Carnival challenges Customs’ assessment of the HMT for layover stops

on grounds that it is inconsistent with the language of the act, the legislative history, and Customs’

procedures. See Pl.s’ Mot. for Partial Summ. J. at 13-25. Customs asserts that Princess is

dispositive of this issue. See Def.’s Mem. in Supp. of its Cross-Mot. for Summ. J. and in Opp’n to

Pl.s’ Renewed Mot. for Partial Summ. J. at 12-13. Nevertheless, Carnival argues that Princess is

no longer valid following the decisions in United States v. Mead Corp., 533 U.S. 218 (2001), aff’g,

185 F.3d 1304 (Fed. Cir. 1999),3 because the Customs ruling at issue was not adopted pursuant to

the Administrative Procedure Act. See Mem. of Points and Authorities in Support of Pl.s’ Renewed

Mot. for Partial Summ. J. at 17 n.14. Therefore, Carnival concludes that the Court should consider

its substantive legal arguments. Pl.s’ Supplemental Mem. in Supp. of their Renewed Mot. for

Summ. J. and in Opp’n to Def.’s Cross-Mot. for Summ. J. at 3-4.

The Court agrees with Customs that Princess is still valid precedent. Unlike the ruling in

Mead, the ruling at issue in Princess did not interpret a statute, but interpreted a regulation that

interpreted a statute. In Auer v. Robbins, 519 U.S. 452 (1997), the Supreme Court held that an

agency’s interpretation of its own regulation is controlling unless it is “plainly erroneous or

inconsistent with the regulation.” 519 U.S. at 461 (citation omitted). See also Bowles v. Seminole

3

In Mead the Supreme Court held that “administrative implementation of a particular

statutory provision qualifies for Chevron deference when it appears that Congress delegated authority

to the agency generally to make rules carrying the force of law, and that the agency interpretation

claiming deference was promulgated in the exercise of that authority.” 533 U.S. at 226-27.

“[R]elatively formal administrative procedure tending to foster . . . fairness and deliberation” is one

of the primary indicators that an administrative action is intended to carry the force of law. Id. at

230.

Consol. Court No. 93-10-00691 Page 7

Rock & Sand Co., 325 U.S. 410, 414 (1945); Barnhart v. Walton, __ U.S.__, 122 S. Ct. 1265, 1269

(2002). Therefore, based on the Federal Circuit’s decision in Princess, the Court holds that Carnival

is liable for payment of the HMT on passengers who disembark the ship at layover ports covered by

the HMT.

As a separate issue Carnival contends that Princess only upholds Customs’ assessment of

the HMT for layover stops from the time HQ 112511 was issued in 1993 and does not address the

legality of Customs’ retroactive application of that ruling. Carnival argues that prior to Customs’

pronouncement in HQ 112511 that all passengers were, in the absence of contrary evidence,

presumed to “disembark” at layover ports, cruise line operators were not required to maintain records

of which passengers went ashore and which remained aboard ship and were unaware that they

needed to record such information. See Pl.s’ Mot. for Partial Summ. J. at 23. Carnival argues that

HQ 112511 announced a change of procedure for which there was no “fair notice” given and cites

a number of cases from the Federal Circuit and the United States Court of Appeals for the District

of Columbia Circuit including NEC Technologies v. United States, 54 F.3d 736 (Fed. Cir. 1995),

General Electric Co. v. EPA, 53 F.3d 1324 (D.C. Cir. 1995), Creswell Trading Co. v. United States,

15 F.3d 1054 (Fed. Cir. 1994), and Satellite Broadcasting Co. v. FCC, 824 F.2d 1 (D.C. Cir. 1987),

for the proposition that an administrative agency cannot penalize a party for non-compliance with

an administrative rule or impose a new evidentiary burden without first providing adequate notice.

See Mem. of Points and Authorities in Support of Pl.s’ Renewed Mot. for Partial Summ. J. at 11-15;

Pl.s’ Reply in Supp. of their Renewed Mot. for Summ. J. and Opp’n to Def.’s Cross-Mot. for Summ.

J. at 26-30. Customs responds to Carnival’s allegations stating:

Consol. Court No. 93-10-00691 Page 8

Customs plainly has not applied any ruling or regulation

“retroactively.” Carnival’s method of HMT payment and the audit

leading to the payments sought in this action are critical. Pursuant to

regulation, cruise lines are responsible for calculating HMT owed and

making quarterly HMT payments. 19 C.F.R. § 24.24(e)(3)(ii). Prior

to 1993, in making these payments, Carnival interpreted the HMT

statute in its favor to exclude layover stops, though the statute applies

to “any port use,” including “loading [and] unloading” of passengers.

26 U.S.C. § 4461 & 4462(a)(1).

In 1993, Customs audited the cruise lines, and exercised its

authority to collect underpayments discovered in the audit. See 19

U.S.C. § 1509(b); 19 C.F.R. § 24.24(h). Those underpayments

include charges for layover stops. Thus, Customs’ actions were not

a reversal of any earlier official position, but merely its reasoned

consideration of the issue presented.

Def.’s Reply to Pl.s’ Reply Mem. in Supp. of Its Mot. for Summ. J. and in Opp’n to Def.’s Cross-

Mot. for Summ. J. at 10-11.

The Court agrees that Carnival should not be held liable for HMT payments on cruises which

made only layover stops at HMT covered ports prior to the issuance of HQ 112511. The Court

concludes that general principles of tax law bear directly on this issue. In International Business

Machine Corp. v. United States, 201 F.3d 1367, 1371-72 (Fed. Cir. 2000), the Federal Circuit

determined that the HMT is an internal revenue tax. See also Citgo Petroleum Corp. v. United

States, 25 CIT __, 104 F. Supp. 2d 106, 107-08 (2000). The Supreme Court has held that:

In the interpretation of statutes levying taxes it is the

established rule not to extend their provisions, by implication, beyond

the clear import of the language used, or to enlarge their operations

so as to embrace matters not specifically pointed out. In case of

doubt they are construed most strongly against the government and in

favor of the citizen.

Consol. Court No. 93-10-00691 Page 9

Gould v. Gould, 245 U.S. 151, 153 (1917) (citations omitted).4 See also Union Pacific Corp. v. The

United States, 5 F.3d 523, 525 (Fed. Cir. 1993) (“[T]he Supreme Court counsels to construe any

reasonable doubts about the meaning of a tax statute in favor of the taxpayer.”). Customs position

on this matter, as stated above, is that the statute unambiguously imposes the HMT on “any port use”

involving “‘loading [and] unloading’ of passengers.” This notion is contrary to the Federal Circuit’s

findings in Princess that: (1) “the language of the statute is not clear and unambiguous about whether

the HMT is to be imposed on stopovers and layovers at HMT-covered ports;” (2) “[the] legislative

history provides some indication that Congress intended for the HMT to apply when a cruise ship

made a stopover or layover in an HMT-covered port, [but] it is not sufficient evidence to indicate

an ‘unambiguous intent;’” and (3) “the regulation itself is ambiguous.” 201 F.3d at 1359. Therefore,

based on the precedent of the Supreme Court and the holdings of the Federal Circuit, the Court

concludes that Carnival is not liable for the HMT assessed on layover stops prior to January 27,

1993, the date on which HQ 112511 was issued.

III. Calculation of the “Value” of the Cruise Fare

The statute imposing the HMT provides that “[t]he amount of the tax imposed . . . on any

port use shall be an amount equal to 0.125 percent of the value of the commercial cargo involved.”

26 U.S.C. § 4461(b). Elsewhere, the HMT statute defines the term “value” in the context of the

4

In Smiley v. Citibank (South Dakota), N.A., 517 U.S. 735 (1996), the Supreme Court stated

that “[w]here . . . a court is addressing transactions that occurred at a time when there was no clear

agency guidance, it would be absurd to ignore the agency’s current authoritative pronouncement of

what the statute means.” Id. at 744 n.3. Although Gould and Smiley appear to conflict, this Court

follows Gould in the present action since it deals specifically with the resolution of ambiguity in a

tax statute, which is the precise issue presented.

Consol. Court No. 93-10-00691 Page 10

transportation of passengers as “the actual charge paid for such service or the prevailing charge for

comparable service if no actual charge is paid.” 26 U.S.C. § 4462(a)(5)(B). Customs’ regulation,

19 C.F.R. § 24.24(e)(4)(i), essentially follows the language of the statute, stating that “[t]he fee is

to be based upon the value of the actual charge for transportation paid by the passenger or on the

prevailing charge for comparable service if no actual charge is paid.” In HQ 112511 (Jan. 27, 1993)

Customs addressed what it “consider[ed] ‘transportation costs’ for purposes of 19 C.F.R.

24.24(e)(4)” stating:

In calculating the value of the “actual charge for transportation paid

by the passenger” . . . it was Customs’ position that this should

include those expenditures which comprise the normal fare the cruise

line would charge a passenger for a particular trip, including any

travel agent’s commission and those transportation and lodging costs

included in the overall cruise package in bringing the passenger to

and from the port of embarkation, provided the passenger actually

availed himself of such transportation and lodging. ([HQ] 543896,

dated May 13, 1987). . . .

Upon further review of this matter, Customs remains of the

opinion that the “transportation costs” for passengers of cruise vessels

includes all “embarkation-to-disembarkation” costs as reflected on

passenger tickets, including commissions paid to travel agents, port

taxes, charges for pilotage, U.S. Customs and U.S. Immigration and

Naturalization services, wharfage, and “suite amenities” provided

they are contracted and paid for prior to the commencement of the

voyage (i.e., included in the cost of the ticket). However, after

numerous discussions with representatives of the cruise industry,

Customs is now of the opinion that the costs of land-based lodging

and connecting air transportation are not to be included in Customs’

calculation of the transportation costs under consideration regardless

of whether a passenger avails himself of such transportation and

lodging. Although this position represents a divergence from [HQ]

543896 cited above, Customs believes this revised position

constitutes an equitable resolution of this matter. . . .

In HQ 112844 (Oct. 28, 1993) Customs reaffirmed its conclusions in HQ 112511 except with regard

Consol. Court No. 93-10-00691 Page 11

to travel agents’ commissions, on which it concluded that:

[T]he inclusion of the entire amount of a travel agent’s commission

in the calculation of the aforementioned transportation costs without

regard to whether any portion of such commission is attributable to

the costs of land-based lodging and connecting air transportation is

inconsistent with our position that the transportation costs include all

“embarkation-to-disembarkation” costs. Accordingly, accurate

apportionment of travel agents’ commissions clearly distinguishing

that portion of the commissions attributable to land-based lodging and

connecting air transportation will result in the exclusion of any such

costs from Customs’ calculation of the “value of the actual charge for

transportation paid by the passenger” for purposes of [19 C.F.R. §]

24.24(e)(4).

Carnival argues that Customs’ interpretation is inconsistent with the statute, relevant caselaw,

and the Internal Revenue Service’s interpretations of similar taxes, and contends that charges for

services, amenities, and “pass through” charges should be excluded from the fare amount on which

the HMT is imposed. See Pl.s’ Mot. for Partial Summ. J. at 27-37. Customs, on the other hand,

argues that the Court must defer to its interpretation of the statute. See Def.’s Mem. in Supp. of its

Cross-Mot. for Summ. J. and in Opp’n to Pl.s’ Renewed Mot. for Partial Summ. J. at 4-8.

The Court concludes that when the disputed language is read in the context of the entire

statute, the intent of Congress is clear.5 One of the fundamental aspects of the HMT is that it is

assessed based on “value” rather than tonnage or simply as an equal assessment on all vessels using

a port. In the case of commercial cargo, a shipment of gold would be charged more HMT than a

shipment of lead. Therefore, when 26 U.S.C. § 4462(a)(5)(B) defines “value” in the context of the

transportation of passengers for hire as “the actual charge paid for such service” it follows that the

5

“Where the intent of Congress is clear, that is the end of the matter; for the court, as well

as the agency, must give effect to the unambiguously expressed intent of Congress.” Chevron, 467

U.S. 837, 842 (1984).

Consol. Court No. 93-10-00691 Page 12

phrase “such service” refers to the shipboard service that the passenger is buying. In the case of a

cruise, the passenger is buying services and amenities as well as transportation. Calculating the

HMT on basic transportation costs alone would essentially render the tax a flat fee assessed per

passenger.

It is also consistent with the statute to include the percentage of any travel agent commission

that is attributable to making shipboard arrangements as part of the overall shipboard service.

Nevertheless, it is inconsistent to include, as Customs has, port taxes and Customs and Immigration

and Naturalization Service charges in the cruise “value.” While these are passed along to the

passenger as part of the cruise fare, they are not part of the cruise service, but are additional charges

imposed by the relevant government agencies. Thus the Court concludes that the HMT for passenger

cruise ships is properly calculated based on the costs included in the cruise fare, excluding costs for

air transportation to the port of embarkation and land-based services, the percentage of travel agents’

commissions attributable to the air transportation and land-based services, port taxes, and Customs

and Immigration and Naturalization Service charges. Accordingly, Carnival is entitled to a refund

to the extent that it paid the HMT on amounts that should have been excluded from the cruise

“value.”

IV. Conclusion

For the forgoing reasons Carnival’s motion for partial summary judgment is granted in part

as to (1) the retroactive application of HQ 112511, regarding the assessment of the HMT for layover

stops, (2) the inclusion of “port taxes” and charges for “U.S. Customs and U.S. Immigration and

Consol. Court No. 93-10-00691 Page 13

Naturalization services,” and (3) the inclusion of charges for airfare and certain land-based services

and commissions prior to the issuance of HQ 112511 and HQ 112844. Customs’ motion for

summary judgment is granted as to all other issues presently before the Court. The parties shall

confer with each other (i) in an effort to reach a stipulation on the amount of a final judgment in this

matter and (ii) regarding such additional proceedings as may be necessary in this action, and shall

submit a status report to the Court on the results of their conference within 60 days.

________________________________________

R. KENTON MUSGRAVE, JUDGE

Dated: July 31, 2002

New York, New York