Friday, December 10, 2010
On the Horizon
The Court of Appeals for the Federal Circuit has decided the appeal in Horizon Lines v. United States. Interestingly, the CAFC affirmed the Court of International Trade but found that the lower court had committed harmless error in its legal analysis.
Since you follow these things, you probably remember that this case involved duties assessed by the United States for ship repairs undertaken outside the U.S. Horizon Lines challenged the duty assessment on the grounds that the work performed on the ship was not a dutiable repair but was actually a non-dutiable modification. I know this kind of semantic distinction makes non-lawyers crazy, but there it is. That is how the law is written and that is what Customs and the Court must apply.
The modification in question was an improvement to the container guide system used to place containers in appropriate locations in the cargo hold. The change improved the speed and ease of loading the ship and improved safety during the loading operation.
The CIT found no evidence that the container guides were in need of repair. Consequently, the CIT held the work to be a non-dutiable modification. Although noting that the container guides were in good working order prior to the modification, the CIT held that fact to be irrelevant.
On appeal, the United States argued that the CIT took too narrow a view of "repair" as meaning restoring a feature to good working condition after sustaining damage. Rather, the government suggests that repairs include systematic improvements to the operation of a vessel.
The Federal Circuit agreed with the CIT's more narrow definition of "repair" in this context. Further, the Court held that the condition of the modified parts is relevant to determining whether the modification is a repair. If the part is in good working order, there would be no need for a repair. This is where the CIT got the analysis wrong, but the error was not important to the ultimate decision.
Thus, when faced with deciding whether to undertake some ship modification, carriers should note that if the work is done to "mend" or "restore" a system after it has been damaged or decayed, that expense is likely to be dutiable (unless another exception applies).