19 U.S.C. § 1466; Vessel Repair; Installation of Liquified Natural Gas fuel system; [ ].

HQ H335007 April 29, 2024 OT:RR:BSTC:CCR H335007 AFM CATEGORY: Carriers Sharon Steele Doyle Givens & Johnston 950 Echo Lane Suite 360 Houston, TX 77024 RE: 19 U.S.C. § 1466; Vessel Repair; Installation of Liquified Natural Gas fuel system; [ ]. Dear Ms. Doyle: This letter is in response to your October 5, 2023, ruling request submitted on behalf of your client, [ ], regarding whether the proposed work described below would constitute modifications for the purposes of 19 U.S.C. § 1466 (the “Vessel Repair Statute”). Our determination follows. FACTS The following facts are from your ruling request dated October 5, 2023, and subsequently provided supporting information. Your client proposes to modify a United States-flagged, coastwise-qualified vessel, the [ ] (the “Vessel”) to add a Liquified Natural Gas (“LNG”) fuel burning capability to the Vessel’s propulsion system. In order to comply with the upcoming International Maritime Organization (IMO) MARPOL Energy Existing Ship Index (“EEXI”) and Carbon Intensity Indicator (“CII”) regulations of the International Convention for the Prevention of Pollution from Ships (MARPOL) without having to reduce the Vessel’s operating speed, as well as to meet [ ] corporate environmental and social goals, your client desires to install new LNG processing systems and related items. The Vessel will not be used as an LNG transportation vessel or to bring fuel to the general public. The proposed modifications, which began in August 2023 in [ ] and are projected to conclude in mid-August 2024, consist of the following: Installation of two LNG bunkering manifolds to take LNG onboard; Installation of two IMO Type C LNG storage tanks, installed in the space formerly occupied by cargo hold #5 just forward of the Vessel’s accommodations block; Installation of a processing system to convert fuel from LNG to gaseous methane and deliver it to the equipment onboard that uses methane as fuel: the main engine, the boiler, and two generators; Installation of new control and automation, fire detection, and fire suppression systems for the LNG and gaseous methane fuel system, including integration with the existing ship’s systems; Construction of a new structure above the LNG storage tanks to accommodate the LNG tank connection space, fuel gas preparation room, electrical panel room, nitrogen generator room, auxiliary machinery space, and related spaces; Replacement of the ship’s main engine with one capable of burning gaseous methane, Heavy Fuel Oil (HFO), or Marine Diesel Oil (MDO) as a fuel; Replacement of the ship’s existing pitch propeller and shafting with a controllable pitch propeller and tail shaft matching the new main engine’s speed/power characteristics; Replacement of two of the ship’s four Ship Service Diesel Generators (SSDG) with generators capable of burning gaseous methane or MDO as a fuel and fitted with Selective Catalytic Reduction (SCR) emissions control technology; Replacement of the ship’s fuel oil and HFO, MDO, and lube oil separators to match the requirements of the new main engine and new SSDGs; Replacement of the burner and controls of the ship’s steam boiler to allow it to burn gaseous methane or MDO as a fuel and assist with management of boil-off gas; Installation of a new energy saving device (Becker Mewis Duct Twisted) upstream of the Vessel’s propeller on the exterior hull to improve water flow into the propeller, reducing the ship propulsion power requirement, assisting in reducing fuel consumption, and implementing the new International Maritime Organization (IMO) emission requirements; Installation of ventilation fans and ducts in ship’s cargo hold #3 to allow refrigerated containers to be installed below deck, as cargo hold #5, originally intended for this purpose, is being converted to hold the LNG storage tanks. Prior to the LNG fuel modification project, cargo hold #3 did not have sufficient ventilation systems to permit carriage of refrigerated containers. Therefore, containers could not be carried below deck; Modification of the Vessel’s fuel tank capacity to comply with the EEXI regulations, reducing the HFO from 3,456.1 metric tons to 1,280.9 metric tons, and increasing the MDO capacity from 355.3 metric tons to 921.8 metric tons; Installation of the necessary structural steel, piping, and wiring to ensure safe operation of all the items stated above. The LNG tanks and LNG system components will be permanently welded to the ship’s existing structure. The LNG/gaseous methane component skids will be installed in new dedicated spaces on permanent foundations using bolting and epoxy chocking. New piping will be installed on new pipe supports that are permanently welded to ship structure. Piping passing through steel bulkheads will be permanently welded to the bulkheads. New LNG tanks will be permanently installed on new tank foundations which will be welded to the existing structure and will be enclosed by a new structure that is permanently welded to the existing structure. The Vessel plans to return to the United States shortly after the proposed modifications are completed. ISSUE Whether the work described above constitutes dutiable foreign repairs or modifications to the Vessel under 19 U.S.C. § 1466? LAW AND ANALYSIS Title 19, United States Code, section 1466(a) provides for the payment of duty at a rate of fifty percent ad valorem on the cost of foreign repairs to and equipment for vessels documented under the laws of the United States to engage in foreign or coastwise trade, or vessels intended to be employed in such trade. In its administration of the vessel repair statute, CBP has held that modifications, alterations, or additions to the hull of a vessel are not subject to vessel repair duties. See HQ 111747 (Feb. 19, 1992) and HQ 113127 (June 14, 1994). The identification of work constituting modifications vis-à-vis work constituting repairs has evolved from judicial and administrative precedent. In considering whether an operation has resulted in a modification, several factors have been considered. These factors are not by themselves necessarily determinative, nor are they the only factors which may be relevant in a given case. However, these factors may be illustrative, illuminating, or relevant with respect to the issue as to whether certain work may be a modification of a vessel under 19 U.S.C. § 1466. The factors are: 1. Whether there is a permanent incorporation into the hull or superstructure of a vessel, either in a structural sense or as demonstrated by means of attachment so as to be indicative of a permanent incorporation. See United States v. Admiral Oriental Line, citing Otte v. United States, and 27 Op. Atty Gen. 228. However, we note that a permanent incorporation or attachment may not necessarily involve a modification; it may involve a dutiable repair or dutiable equipment. 2. Whether in all likelihood an item would remain aboard a vessel during an extended lay-up. 3. Whether an item constitutes a new design feature and does not merely replace a part, fitting, or structure that is performing a similar function. 4. Whether an item provides an improvement or enhancement in operation or efficiency of the vessel. Additionally, we note that to qualify as a modification, rather than a repair, the documentation of record must reflect that the element which was replaced, if any, was in good and full working order at the time the work was performed. CBP has consistently ruled that newly designed systems and components permanently installed on a vessel, which would remain on board the vessel during extended layup, do not replace an item in need of repair, and will improve the operation or efficiency of the vessel are considered modifications. The Federal Circuit in Horizon Lines clarified the difference between “repairs” and “modifications”, saying “the term ‘repairs’ describes work putting something that has sustained damage back into working condition whereas the term ‘modifications’ describes work addressing a problematic feature.” The Horizon Lines court provided the yardstick to be used in the differentiation between repairs and modifications, when it said: The plain meaning of “repair” describes putting something that has sustained damage back into working condition. It requires “restoration after decay, waste, injury, or partial destruction”—all of which indicates that the part being repaired was damaged— which necessitated the repair. Thus, the prior condition of a part that is removed or replaced during work on a vessel is relevant to whether that work constitutes a repair. We do not conclude, however, that the prior condition is always dispositive of whether work constitutes a repair or modification. We note that there would be no need to repair a part that is in working order. Accordingly, we are required to make a detailed factual determination of whether proposed modifications constitute repairs, based upon the prior condition of any part that is removed or replaced during work on a vessel. Considering the first factor, whether there is a permanent incorporation into the hull or superstructure, the nature of the work to be done is such that it would constitute a permanent incorporation into the Vessel. The proposed work involves installing an LNG fuel system and necessary related auxiliary systems. This work is intended to ensure the Vessel complies with the upcoming MARPOL EEXI and CII regulations and to meet [ ] corporate environmental and social goals. There is no indication that these regulations and goals are intended to be short term, or that the LNG system is intended to be removed after a limited period of use. As mentioned above in the FACTS section, the LNG tanks and LNG system components will be permanently welded to the ship’s existing structure. The LNG/gaseous methane component skids will be installed in new dedicated spaces on permanent foundations using bolting and epoxy chocking. New piping will be installed on new pipe supports that are permanently welded to ship structure. Piping passing through steel bulkheads will be permanently welded to the bulkheads. New LNG tanks will be permanently installed on new tank foundations which will be welded to the existing structure and will be enclosed by a new structure that is permanently welded to the existing structure. New structure and components added as part of the LNG retrofit cannot be easily removed from the ship. Any such removals would require a large amount of cutting and removal of substantial steel structure. Regarding the second factor, whether, in all likelihood, an item would remain aboard a vessel during an extended lay-up, the nature of the contemplated work is such that it indicates that the contemplated items would remain aboard the Vessel during an extended lay-up. The new materials to be installed will be permanently incorporated and thoroughly integrated into the Vessel’s structure. They will not be capable of being removed from the Vessel without significant labor and possible structural damage. For this reason, the new materials to be installed during the modification would remain in place during an extended layup period. For the third factor of our analysis, whether an item constitutes a new design feature and is not merely replacing a part, fitting, or structure that is performing a similar function, the nature of the proposed work indicates that a modification is contemplated. The new main engine and LNG fuel system will allow the Vessel to use LNG as bunker fuel for the first time in its career. The installation of the LNG bunkering manifolds will allow the Vessel to take LNG onboard. Similarly, the installation of storage tanks, a processing system, new control and automation, fire detection, fire suppression systems, and integration with the ship’s existing systems, and necessary structural steel, piping, and wiring to ensure safe operation of the scope items, as well as the replacement of the main engine, fixed pitch propeller, two SSDGs with generators, and burner and controls of the ship’s steam boiler will allow the Vessel to store LNG, convert LNG to gaseous methane, and burn gaseous methane as a fuel. The new LNG tanks and gaseous methane fuel system are being added to the existing fuel systems and will not replace the existing HFO and MDO fuel systems. The HFO, MDO, and lube oil separators of the Vessel are currently in good working order and functioning as designed but will be replaced to match the requirements of the new main engine and new SSDGs. Some existing HFO tank capacity will be removed from the ship and some MDO capacity will be added to comply with the EEXI regulations. Installation of a new energy saving device (Becker Mewis Duct Twisted) as described above will assist in reducing fuel consumption and will implement the new IMO emission requirements. We are of the opinion that all of these items sufficiently meet requirements to be considered new design features. Last, whether an item provides an improvement or enhancement in operation or efficiency of the vessel, the proposed work is intended to comply with upcoming environmental regulations and goals while maintaining the Vessel’s speed. Such an outcome would result in enhancement in operation or efficiency of the Vessel, indicating that the proposed work would qualify as a modification rather than as a repair. CBP has examined similar work in the past. In HQ H258063 (Nov. 24, 2014), we examined the dutiability of engine exhaust cleaning systems to lessen the vessels’ environmental impact and comply with new air pollution standards under MARPOL Annex VI. We determined that such additions would qualify as nondutiable modifications. In HQ H246545 (Dec. 9, 2013), we determined that a plan to remove vessels’ extant steam power plants and replace them with diesel power plants constituted a nondutiable modification. Based upon the information provided by [ ] and after consideration of each of the four factors, we are of the opinion that the proposed work would meet the above-discussed criteria for vessel modifications. Accordingly, the proposed work to the subject Vessel, as described above and in the supporting documentation would meet the criteria for a modification under 19 U.S.C. § 1466. This finding is specifically limited to the work described herein and does not extend to any other undescribed work that may be performed. HOLDING The proposed shipyard work as described above constitutes non-dutiable modifications to the propulsion system of the [ ]. We emphasize that this ruling is merely advisory in nature and does not eliminate the requirement to declare work performed abroad at the vessel’s first United States port of arrival, nor does it eliminate the requirement to file a vessel repair entry showing this work. See 19 C.F.R. §§ 4.14(d) and (e). Furthermore, any final determination on this matter is contingent on CBP’s review of the evidence submitted pursuant to 19 C.F.R. § 4.14(i). Please note that 19 C.F.R. § 177.9(b)(1) provides that “[e]ach ruling letter is issued on the assumption that all of the information furnished in connection with the ruling request and incorporated in the ruling letter, either directly, by reference, or by implication, is accurate and complete in every material respect. The application of a ruling letter by a Customs Service field office to the transaction to which it is purported to relate is subject to the verification of the facts incorporated in the ruling letter, a comparison of the transaction described therein to the actual transaction, and the satisfaction of any conditions on which the ruling was based.” If the facts at hand vary from the facts stipulated to herein, this decision shall not be binding on CBP as provided for in 19 C.F.R. § 177.2(b)(1), (2) and (4), and § 177.9(b)(1). Sincerely, W. Richmond Beevers Chief, Cargo Security, Carriers and Restricted Merchandise Branch Office of Trade; Regulations and Rulings U.S. Customs and Border Protection