Page 21: of Maritime Reporter Magazine (November 2001)

Ship Repair & Conversion

CIT Takes Issue With Customs' Duty Calculation in Dry-Docking Case

By Thomas Z. Cheplo,

Dyer Ellis & Joseph

The vessel repair statute (Section 466 of the Tariff

Act of 1930, 19 U.S.C. § 1466) requires the payment of a 50 percent ad valorem duty on the cost of foreign equipment purchased for, or expenses of repairs made to, U.S.-flag vessels in a foreign country. The purpose of the vessel repair statute is to protect U.S. shipyards and to discourage vessel operators from taking their vessels abroad for the purpose of obtaining less expen- sive foreign repairs. The U.S. Court of International

Trade determined that "section 1466 expresses the leg- islative policy designed to provide maximum protec- tion to American shipyards." Mount Washington

Tanker Co. v. United States, 505 F. Supp. 209. 214 (1980), affd, 665 F.2d340 (C.C.P.A. 1981). In the court's view: "It cannot be questioned that the protec- tion of the domestic shipbuilding and repair industries was of paramount importance in the enactment of this legislation."

The U.S. Customs Service interprets and applies the vessel repair statute through letter rulings, but its inter- pretations of the statute have not been without contro- versy. One frequently contested issue concerns the manner in which Customs determines duties in con- nection with dry-docking expenses. Such expenses, or portions thereof, are not necessarily related to dutiable repairs that might be performed simultaneously with non-dutiable inspections and/or modifications for the convenience of the vessel owner. The leading case in this area is Texaco Marine Services, Inc. v. United

States, 44 F.3d 1539 (Fed. Cir. 1994), in which the

Federal Circuit determined that the cost of dry-docking and any costs related to dry-docking are dutiable repairs, provided that such costs would not have been incurred "but for" the dutiable repairs. Application of the "but-for" test is relatively simple in situations where the dry-docking is undertaken to per- form either dutiable repairs or non-dutiable inspections and/or modifications, but becomes complicated where both dutiable and non- dutiable work is performed during the dry- docking (so called "mixed purpose" dry-dock- ings).

In a recent ruling, the Court of International

Trade found the pro-rata apportionment used by the United States Customs Service in its application of the Texaco "but for" test to be "arbitrary, capricious, and in violation of the classification designated by Texaco." Ameri- can Ship Management, LLC v. United States,

Consolidated Court No. 99-03-00151, slip op. 01-105 (Ct. Int'l Trade, decided Aug. 17, 2001). The court denied American Ship Man- agement's motion, and Customs' cross-motion, for summary judgment, stating that triable issues of material fact remain regarding the determination of dutiable expenses related to the dry-docking.

The American Ship Management case involves two vessels that were put into dry- dock to comply with mandatory United States

Coast Guard and American Bureau of Shipping inspection and modification requirements.

While in dry-dock, the vessels underwent dutiable repairs in addition to the non-dutiable inspections and modifications. To calculate the total value of dutiable dry-docking expenses, the

Customs Service used a pro-rata apportionment for- mula whereby it divided the cost of dutiable repairs by the sum of the total cost of dutiable repairs and the

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