Foreign Repairs to American Vessels

DEPARTMENT OF THE TREASURY

Customs Service

19 CFR Parts 4 and 159

RIN 1515-AC30

Foreign Repairs to American Vessels

AGENCY: Customs Service, Department of the Treasury.

ACTION: Proposed rule.

-----------------------------------------------------------------------

SUMMARY: This document proposes to revise the Customs Regulations

regarding the declaration, entry, assessment of duty and processing of

petitions for relief from duty for vessels of the United States which

undergo foreign shipyard operations. It is intended that the Customs

Regulations regarding this subject accurately reflect the amended

underlying statutory authority, as well as legal and policy

determinations made as a result of judicial decisions and

administrative enforcement experience.

DATES: Comments must be received on or before June 21, 1999.

ADDRESSES: Written comments may be addressed to and inspected at the

Regulations Branch, U.S. Customs Service, 1300 Pennsylvania Avenue,

NW., 3rd Floor, Washington, DC 20229.

FOR FURTHER INFORMATION CONTACT: Operational aspects: Glenn Seale,

Supervisory Customs Liquidator, 504-670-2137. Legal aspects: Larry L.

Burton, Office of Regulations and Rulings, 202-927-1287.

SUPPLEMENTARY INFORMATION:

Background

The genesis of the modern vessel repair statute, 19 U.S.C. 1466, is

found in the Act of July 18, 1866, Chapter 24, section 23 (14 Stat.

183). A 50 percent ad valorem duty was imposed on the foreign cost of

repairs to United States vessels documented to engage in the foreign or

coastwise trade on the northern, northeastern, and northwestern

frontiers (practically speaking, Great Lakes, Atlantic, and Pacific

Coast trade with Canada). The statute also provided for remission or

refund of duties where it was established by sufficient evidence that

the vessel had been compelled to seek foreign repairs due to a weather-

related or other casualty. The statute was recodified in the Revised

Statutes of the United States in 1874 (R.S. 3114 and 3115), but was

left largely unamended until the Act of September 21, 1922, at which

time the area of consideration for dutiable repairs was expanded to

include repairs to all vessels documented under U.S. law to engage in

the foreign or coastwise trade, as well as those intended to be so

employed.

The statute has undergone amendment several times since 1922 and

has been the subject of considerable judicial interpretation over the

years as well. Recently, however, the statute has been amended in

significant ways and a court case with broad impact on the

administration of the law has also been decided.

On August 20, 1990, the President signed into law the Customs and

Trade Act of 1990 (Pub. L. 101-382), section 484E of which amended the

vessel repair statute by adding a new subsection (h). Subsection (h),

which by its terms expired on December 31, 1992, included two elements.

These concerned the exclusion from vessel repair duty of Lighter Aboard

Ship (LASH) barges, and of spare parts and materials for use in vessel

repairs abroad which had previously been imported and duty paid at the

appropriate rate under the Harmonized Tariff Schedule of the United

States (HTSUS). Two years after the expiration of that legislation the

Congress enacted section 112 of Pub. L. 103-465 which became effective

on January 1, 1995. That provision permanently reenacted the previously

expired 19 U.S.C. 1466(h) (1) and (2), as discussed above, and also

added a new subsection (h)(3) which, as administered by Customs,

provides that vessel repair duties will be assessed at the applicable

HTSUS rate for spare parts which are necessarily installed on vessels

overseas prior to those spare parts ever having been entered into the

United States for entry and consumption, such as is necessary under the

(h)(2) provision.

The most basic issue to be determined in applying the vessel repair

statute to a factual situation is, of course, whether a repair has

taken place within the meaning of 19 U.S.C. 1466(a). Courts have ruled

extensively on the ``repair'' cost issue and the result is a

continually narrowing field of dutiable repair. One early case (United

States v. George Hall Coal Co., 134 F. 1003 (1905)), was the first to

find any of various types of expenses associated with repairs to be

classifiable as not subject to the assessment of vessel repair duties.

The case established that the expense of drydocking a vessel

(regardless of the underlying need to drydock) is not an element of

dutiable value in foreign repair costs. Drydocking is a major, but not

isolated, expense in general ship repair operations. Many other

associated expenses and services are necessary adjuncts to drydocking

and are logically inseparable from the drydocking rule. These include

such items as drydock block arrangement, sea water supply (for

firefighting equipment), hose hook-up and disconnection charges, fire

watch services, the services of a crane for drydocking-related

operations, the provision of compressed air, cleaning of the drydock

following repairs, among numerous others. These necessary services are

costly, are supplied at nearly each drydocking, and had until recently

been considered to be classifiable as duty-free.

On December 29, 1994, the United States Court of Appeals for the

Federal Circuit decided the case of Texaco Marine Services, Inc., and

Texaco Refining and Marketing, Inc. v. United States, 44 F.3d 1539.

While this case was submitted on appeal regarding the dutiability of

specific foreign shipyard operations, the Court went much further by

considering the propriety of several long-standing court cases,

including the opinion in George Hall, supra. In so doing, a whole range

of charges are subjected to duty consideration which had been insulated

from such treatment since 1905.

The recent upheaval in terms of both statutory amendment and

judicial interpretation has resulted in the need to update the

regulatory provisions which implement the vessel repair statute. This

has led to the proposed revisions contained within this document, which

are presented in a more streamlined and simpler format, all in

conformance with the recent changes. Most significantly in this

connection, the proposed amendments

[[Page 19509]]

eliminate the Petition for Review process, currently the second of two

pre-protest appeals for relief from duty, and vest in the Vessel Repair

Units full authority to process and decide Applications for Relief

without restrictions as to the amount of potential duty refund or

remission.

Additionally, it is proposed that the Customs Regulations in part

159 be amended to recognize that vessel repair entries are not

considered to be subject to liquidation, and that any duties paid

pursuant to a vessel repair entry will henceforth be considered to be

charges or exactions within the meaning of subsection (a)(3) of section

514, Tariff Act of 1930, as amended (19 U.S.C. 1514), the statute under

which decisions of the Customs Service are protested. As such, duty

determinations on vessel repair entries will be protestable but will

not be subject to voluntary reliquidation or deemed liquidation

procedures. This distinction will serve to recognize elements which are

unique to the vessel repair entry process such as potential protracted

delays in supplying cost information due to difficulty in obtaining

proof of foreign expenses from shipyards in a timely fashion.

Comments

Before adopting this proposal, consideration will be given to any

written comments which are timely submitted to Customs. Comments

submitted will be available for public inspection in accordance with

the Freedom of Information Act (5 U.S.C. 552), Sec. 1.4, Treasury

Department Regulations (31 CFR 1.4), and Sec. 103.11(b), Customs

Regulations (19 CFR 103.11(b)), on regular business days between the

hours of 9 a.m. and 4:30 p.m. at the Regulations Branch, U.S. Customs

Service, 1300 Pennsylvania Avenue, NW., 3rd Floor, Washington, D.C.

Regulatory Flexibility Act and Executive Order 12866

The proposed amendments would revise the Customs Regulations

concerning the declaration, entry, assessment of duty and processing of

petitions for relief from duty, for subject vessels under the vessel

repair statute. The proposed amendments are intended to accurately

reflect the existing statutory authority, as well as legal and policy

determinations made in this regard as the result of judicial decisions

and administrative enforcement experience. As such, pursuant to the

provisions of the Regulatory Flexibility Act (5 U.S.C. 601 et seq.), it

is certified that, if adopted, the proposed amendments will not have a

significant economic impact on a substantial number of small entities.

Accordingly, they are not subject to the regulatory analysis or other

requirements of 5 U.S.C. 603 and 604. Nor does this document meet the

criteria for a ``significant regulatory action'' as specified in E.O.

12866.

Paperwork Reduction Act

The collection of information contained in this notice of proposed

rulemaking has previously been reviewed and approved by the Office of

Management and Budget (OMB) under OMB control number 1515-0082. This

rule does not propose any substantive changes to the existing approved

information collection.

An agency may not conduct or sponsor, and a person is not required

to respond to, a collection of information unless the collection of

information displays a valid control number.

Drafting Information. The principal author of this document was

Larry L. Burton, Office of Regulations and Rulings, U.S. Customs

Service. However, personnel from other offices participated in its

development.

List of Subjects

19 CFR Part 4

Customs duties and inspection, Declarations, Entry, Repairs,

Reporting and recordkeeping requirements, Vessels.

19 CFR Part 159

Customs duties and inspection, Entry procedures.

Proposed Amendments to the Regulations

It is proposed to amend parts 4 and 159, Customs Regulations (19

CFR parts 4 and 159), as set forth below.

PART 4--VESSELS IN FOREIGN AND DOMESTIC TRADES

1. The general authority citation for part 4, and the specific

authority citation for Sec. 4.14, would continue to read as follows:

Authority: 5 U.S.C. 301; 19 U.S.C. 66, 1431, 1433, 1434, 1624;

46 U.S.C. App. 3, 91;

* * * * *

Section 4.14 also issued under 19 U.S.C. 1466, 1498;

* * * * *

2. It is proposed to revise Sec. 4.14 to read as follows:

Sec. 4.14 Equipment purchases by, and repairs to, American vessels.

(a) General provisions and applicability. Under section 466, Tariff

Act of 1930, as amended (19 U.S.C. 1466), purchases for or repairs made

to certain vessels while they are outside the United States, including

repairs made while those vessels are on the high seas, are subject to

declaration, entry and payment of ad valorem duty. These requirements

are effective upon the first arrival of affected vessels in the United

States or Puerto Rico. The vessels subject to these requirements

include those documented under U.S. law for the foreign or coastwise

trades, as well as those which, although not documented under U.S. law,

exhibit an intent to engage in those trades under Customs

interpretations. Duty is based on actual foreign cost. This includes

the original foreign purchase price of articles which have been

imported into the United States and are later sent abroad for use. For

the purposes of this section, expenditures made in American Samoa, the

Guantanamo Bay Naval Station, Guam, Puerto Rico, or the U.S. Virgin

Islands are considered to have been made in the United States, and are

not subject to declaration, entry or duty. Under separate provisions of

law, the cost of labor performed, and of parts and materials produced

and purchased in Israel are not subject to duty under the vessel repair

statute. Additionally, expenditures made in Canada or in Mexico are no

longer subject to any vessel repair duties. Even in the absence of any

liability for duty, it is still required that all repairs and

purchases, including those made in Canada, Mexico, and Israel, be

declared and entered.

(b) Applicability to specific types of vessels.--(1) Fishing

vessels. As provided in Sec. 4.15, vessels documented under U.S. law

with a fishery endorsement are subject to vessel repair duties and must

file a declaration and entry, or their electronic equivalent, for

covered foreign expenditures upon their first post-expenditure arrival

in the United States. Undocumented American fishing vessels which are

repaired, or for which parts, nets or equipment are purchased outside

the U.S., must also file and pay duty.

(2) Government-owned or chartered vessels. Vessels normally subject

to the vessel repair statute because of documentation or intended use

are not excused from duty liability merely because they are either

owned or chartered by the U.S. Government.

(3) Vessels away continuously for two years or longer. Vessels

normally subject to the vessel repair statute, which remain

continuously outside the U.S. for two years or longer, are liable for

duty on any fish nets and netting purchased at any time during the

entire

[[Page 19510]]

absence. Other than for nets and netting, such vessels are liable for

duty only on those expenditures which are made during the first six

months of a continuous absence of two years or more from the United

States. The single exception to this rule applies to vessels designed

and used primarily for transporting passengers and merchandise which

specifically depart the United States in order to obtain repairs or to

purchase equipment. These vessels remain fully liable for duty

regardless of the duration of their absence from the United States.

Even though some costs may not be dutiable, all repairs, materials,

parts and equipment-related expenditures must be declared and entered.

(c) Estimated duty deposit and bond requirements. Generally, the

person authorized to submit a vessel repair declaration and entry must

either deposit or transmit estimated duties or file a bond on Customs

Form 301 at the first United States port of arrival before the vessel

will be permitted to depart from that port. A bond of sufficient value

to cover all potential duty on the foreign repairs and purchases which

must be submitted at the port of arrival shall be forwarded by Customs

at that port to the appropriate VRU port of entry, as defined in

paragraph (g) of this section. The amount of the bond is within the

discretion of Customs at the port of arrival since claims for reduction

in duty liability are subject to the consideration of evidence by

Customs. Customs officials at the port of arrival may consult the

appropriate VRU port of entry or the staff of the Entry Procedures and

Carriers Branch in Customs Headquarters in setting sufficient bond

amounts. These duty, deposit, and bond requirements do not apply to

vessels which are owned or chartered by the United States Government

and are actually being operated by employees of an agency of the

Government. If operated by a private party for a Federal agency under

terms whereby the agency remains liable under the contract for payment

of the duty, there must be a deposit or a bond filed in an amount

adequate to cover the estimated duty.

(d) Declaration required. When a vessel subject to this section

first arrives in the United States following a foreign voyage, the

owner, master, or authorized agent must submit a vessel repair

declaration on Customs Form 226, a dual-use form used both for

declaration and entry purposes, or must transmit its electronic

equivalent. The declaration must be ready for presentation in the event

that a Customs officer boards the vessel. If no foreign repair-related

expenses were incurred, that fact must be reported either on the

declaration form or by approved electronic means. The Customs port of

arrival receiving either a positive or negative vessel repair

declaration or electronic equivalent shall immediately forward it to

the appropriate VRU port of entry.

(e) Entry required. The owner, master, or authorized representative

of the owner of any vessel subject to this section for which a positive

declaration has been filed must submit a vessel repair entry on Customs

Form 226 or transmit its electronic equivalent. The entry must show all

foreign voyage expenditures for equipment, parts of equipment, repair

parts, materials and labor. The entry submission must indicate whether

it provides a complete or incomplete account of covered expenditures.

The entry must be presented or electronically transmitted by the vessel

operator to the appropriate VRU port of entry as identified in

paragraph (g) of this section, so that it is received within ten

calendar days after arrival of the vessel. Duty refund or remission

claims should be made generally as part of the initial submission, and

evidence must later be provided to support those claims. Failure to

submit full supporting evidence of cost within stated time limits,

including any extensions granted under this section, is considered to

be a failure to enter.

(f) Time limit for submitting evidence of cost. A complete vessel

repair entry must be supported by evidence showing the cost of each

item entered. If the entry is incomplete when submitted, evidence to

make it complete must be received by the appropriate VRU port of entry

within 90 calendar days from the date of vessel arrival. That evidence

must include either the final cost of repairs or, if the operator

submits acceptable evidence that final cost information is not yet

available, initial or interim cost estimates given prior to or after

the work was authorized by the operator. The proper VRU port of entry

may grant one 30-day extension of time to submit final cost evidence if

a satisfactory written explanation of the need for an extension is

received before the expiration of the original 90-day submission

period. All extensions will be issued in writing. Inadequate, vague, or

open-ended requests will not be granted. Questions as to whether an

extension should be granted may be referred to the Entry Procedures and

Carriers Branch in Customs Headquarters by the VRU ports of entry. Any

request for an extension beyond a 30-day grant issued by a VRU must be

submitted through that unit to the Entry Procedures and Carriers

Branch, Customs Headquarters. In the event that all cost evidence is

not furnished within the specified time limit, or is of doubtful

authenticity, the VRU may refer the matter to the Customs Office of

Investigations to begin procedures to obtain the needed evidence. That

office may also investigate the reason for a failure to file or for an

untimely submission. Unexplained or unjustified delays in providing

Customs with sufficient information to properly determine duty may

result in penalty action as specified in paragraph (j) of this section.

(g) Location and jurisdiction of vessel repair unit ports of entry.

Vessel Repair Units (VRUs) are considered to be the ports of entry for

vessel repair declarations and entries, and are located in New York,

New York; New Orleans, Louisiana; and San Francisco, California. The

New York unit processes vessel repair entries received from ports of

arrival on the Great Lakes and the Atlantic Coast of the United States,

north of, but not including, Norfolk, Virginia. The New Orleans unit

processes vessel repair entries received from ports of arrival on the

Atlantic Coast from Norfolk, Virginia, southward, and from all United

States ports of arrival on the Gulf of Mexico including ports in Puerto

Rico. The San Francisco unit processes vessel repair entries received

from all ports of entry on the Pacific Coast including those in Alaska

and Hawaii.

(h) Justifications for refund or remission of duty. Vessel repair

duties may be refunded or remitted. Refunds relate to claims made under

paragraph (a) of the vessel repair statute (19 U.S.C. 1466(a)), and

remissions relate to claims made under paragraphs (d), (e) and (h) of

the vessel repair statute (19 U.S.C. 1466(d), (e) and (h)).

(1) Refund of duty. Duty is refunded when it is determined that a

foreign shipyard operation or expenditure is not considered to be a

repair or purchase within the terms of the vessel repair statute, or as

determined under judicial or administrative interpretations.

(2) Remission of duty. Duty is remitted under paragraph (d) of the

vessel repair statute (19 U.S.C. 1466(d)) when it is determined that a

foreign shipyard operation or expenditure involves any of the

following:

(i) Stress of weather or other casualty. Duty will be remitted if

good and sufficient evidence supports a finding that the vessel, while

in the regular course of its voyage, was forced by stress of weather or

other casualty, while outside the United States, to purchase equipment

or make repairs

[[Page 19511]]

necessary to secure the safety and seaworthiness of the vessel in order

to enable it to reach its port of destination in the United States.

Only duty on the cost of the minimal repairs needed for safety and

seaworthiness is subject to remission. For the purposes of this

section, a ``casualty'' does not include any purchase or repair made

necessary by ordinary wear and tear, but does include the failure of a

part to function if it is proven that the specific part was repaired,

serviced, or replaced in the United States immediately before the start

of the voyage in question, and then failed within six months of that

date.

(ii) U.S. parts installed by regular crew or residents. Duty will

be remitted if equipment, parts of equipment, repair parts, or

materials used on a vessel were manufactured or produced domestically

and were purchased in the United States by the owner of the vessel. It

is also required under the statute that residents of the United States

or members of the regular crew of the vessel perform any necessary

labor in connection with such installation.

(iii) Dunnage. Duty will be remitted if any equipment, equipment

parts, materials, or labor were used for the purpose of providing

dunnage for the packing or shoring of cargo, for erecting temporary

bulkheads or other similar devices for the control of bulk cargo, or

for temporarily preparing tanks for carrying liquid cargoes.

(i) General procedures for seeking refund or remission.--(1)

Applications for relief. Vessel repair duty will not be refunded or

remitted unless an Application for Relief is filed with Customs; duty

will not be refunded or remitted based merely on a duty refund or

remission claim made at time of entry pursuant to paragraph (e) of this

section. An Application for Relief is not required to be presented in

any particular format, but if filed it must clearly present

justification for granting relief. An Application must also state that

all repair operations performed aboard a vessel during the one-year

period prior to the current submission have been declared and entered.

A valid Application is required to be supported by complete evidence as

detailed in this section. The deadline for receipt of an Application

and supporting evidence is 90 days from the date that the vessel first

arrived in the United States following foreign operations. Applications

must be addressed and submitted by the vessel operator to the

appropriate VRU port of entry and will be decided in that unit. The

VRUs may seek the advice of the Entry Procedures and Carriers Branch in

Customs Headquarters with regard to any specific item or issue which

has not been addressed by clear precedent. If no Application is filed

or if a submission which does not meet the minimal standards of an

Application for Relief is received, the duty amount will be determined

without regard to issues of refund or remission. Each Application for

Relief must include copies of:

(i) Itemized bills, receipts, and invoices for items shown in

paragraph (e) of this section. The cost of items for which refund or

remission is being sought must be segregated from the cost of the other

items listed in the vessel repair entry;

(ii) Photocopies of relevant parts of vessel logs, as well as of

any classification society reports which detail damage and remedies;

(iii) A certification by the senior officer with personal knowledge

of all relevant circumstances relating to casualty damage (time, place,

cause, and nature of damage);

(iv) A certification by the senior officer with personal knowledge

of all relevant circumstances relating to foreign repair expenditures

(time, place, and nature of purchases and work performed);

(v) A certification by the master that casualty-related

expenditures were the minimum necessary to ensure the safety and

seaworthiness of the vessel in reaching its United States port of

destination; and

(vi) Any permits or other documents filed with or issued by any

other United States Government Agency regarding the operation of the

vessel.

(2) Additional evidence. In addition, copies of any other evidence

and documents the applicant may wish to provide as evidentiary support

may be submitted. Elements of applications which are not supported by

required evidentiary elements will be considered fully dutiable. All

documents submitted must be certified by the master, owner, or

authorized corporate officer to be originals or copies of originals,

and if in a foreign language they must be accompanied by an English

translation, certified by the translator to be accurate. Upon receipt

of an Application for Relief by the VRU within the prescribed time

limits, a determination of duties owed will be made. After a decision

is made on an Application for Relief by a VRU, the Applicant will be

notified of the right to protest any perceived excessive charge or

exaction.

(3) Administrative protest. Following the determination of duty

owing on a vessel repair entry, a protest may be filed as the only and

final administrative appeal. The procedures and time limits applicable

to protests filed in connection with vessel repair entries are the same

as those provided in part 174 of this chapter.

(j) Penalties.--(1) Failure to report, enter, or pay duty. It is a

violation of the vessel repair statute if the owner or master of a

vessel subject to this section willfully or knowingly neglects or fails

to report, make entry, and pay duties as required; makes any false

statements regarding purchases or repairs described in this section

without reasonable cause to believe the truth of the statements; or

aids or procures any false statements regarding any material matter

without reasonable cause to believe the truth of the statement. If a

violation occurs, the vessel, its tackle, apparel, and furniture, or a

monetary amount up to their value as determined by Customs, is subject

to seizure and forfeiture and is recoverable from the owner (see

Sec. 162.72 of this chapter).

(2) False declaration. If any person required to file a vessel

repair declaration or entry under this section, knowingly and willfully

falsifies, conceals or covers up by any trick, scheme, or device a

material fact, or makes any materially false, fictitious or fraudulent

statement or representation, or makes or uses any false writing or

document knowing the same to contain any materially false, fictitious

or fraudulent statement, that person shall be subject to the criminal

penalties provided for in 18 U.S.C. 1001.

PART 159--LIQUIDATION OF DUTIES

1. The authority citation for part 159 is revised to read as

follows:

Authority: 19 U.S.C. 66, 1500, 1504, 1624. Subpart C also issued

under 31 U.S.C. 5151.

Sections 159.4, 159.5, and 159.21 also issued under 19 U.S.C.

1315;

Section 159.6 also issued under 19 U.S.C. 1321, 1505;

Section 159.7 also issued under 19 U.S.C. 1557;

Section 159.22 also issued under 19 U.S.C. 1507;

Section 159.44 also issued under 15 U.S.C. 73, 74;

Section 159.46 also issued under 19 U.S.C. 1304;

Section 159.55 also issued under 19 U.S.C. 1558;

Section 159.57 also issued under 19 U.S.C. 1516.

Sec. 159.11 [Amended]

2. It is proposed to amend Sec. 159.11(b) by removing the phrase,

``vessel repair entries or''.

[[Page 19512]]

Approved: March 12, 1999.

Raymond W. Kelly,

Commissioner of Customs.

John P. Simpson,

Deputy Assistant Secretary of the Treasury.

[FR Doc. 99-9946 Filed 4-20-99; 8:45 am]

BILLING CODE 4820-02-P