Friday, November 05, 2010

When is Painting Repair?

Those of you who know me , also know that I spent (and unfortunately continue to spend) a lot of time of a single issue involving the tariff treatment is painting as an operation incidental to assembly under HTSUS item 9802.00.80. So, paint-related issues always catch my eye.

Horizon Lines, LLC v. United States is a paint case of a different color. The issue here has to do with whether painting a U.S.-flag ship in a foreign port constitutes repair for purposes of assessing the 50%  duties applicable to repairs. While in China, the Horizon Lines Crusader was painted above and below the water line. Below the water line, the painting was done in conformity with an international convention relating to the removal or sealing of environmentally destructive antifouling agents. Having had the occasion to apply copper-based antifouling paint to a a relatively tiny hull, I can tell you this is somewhat nasty stuff. Customs and Border Protection applied duty to all of this activity on the grounds that it constituted repair.

For an operation performed on a ship to be considered a dutiable repair, it has to involve (1) the purchase of equipment or parts, (2) the acquisition of repair parts or materials, or (3) "expenses of repair." "Repair" is understood in this context to mean the restoration of the ship to good condition after decay or other injury.

According to the Court of International Trade, paint applied to a ship's hull is not equipment. But, painting to restore the vessel to good condition may be a repair and, therefore, dutiable. However, there was much disagreement as to whether the application of antifouling paint was a non-repair modification or the repair of a decayed antifoulding system. As a result, the Court found that there were material issues of fact in dispute. That means that the anticlimactic ending to this post is that the defendant's motion for summary judgment as to work performed below the waterline was denied. For work above the waterline, the defendant's motion for summary judgment was granted (which means the U.S. won).

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