United States: Proposed Revisions To Jones Act Would Change Interpretation Of Vessel Equipment

United States Customs and Border Protection (CBP) proposed revising nearly 30 Jones Act rulings that date back to 1976 regarding its interpretation of what constitutes "vessel equipment." The Jones Act generally prohibits the transportation of merchandise between United States coastwise points on non-coastwise-qualified vessels. One exception is the carriage between coastwise points of vessel equipment on a foreign-flagged vessel, as vessel equipment is not considered "merchandise" under the law. Modifying CBP's interpretation of what constitutes "vessel equipment" could significantly affect offshore oil and gas operations, as well as other industries.

Background: The Jones Act and its Mandates on U.S. Coastwise Trade

The Jones Act, 46 U.S.C. §§ 55101 et seq., governs U.S. coastwise trade and regulates maritime commerce in U.S. waters and between U.S. ports. Section 55102(b) of this chapter provides that

A vessel may not provide any part of the transportation of merchandise by water, or by land and water, between points in the United States to which the coastwise laws apply, either directly or via a foreign port, unless the vessel –

(1) is wholly owned by citizens of the United States for purposes of engaging in the coastwise trade; and

(2) has been issued a certificate of documentation with a coastwise endorsement under chapter 121 or is exempt from documentation but would otherwise be eligible for such a certificate and endorsement.1

If merchandise is transported in violation of this statute, the government may seize the merchandise or collect a fine amounting to the greater of the value of the merchandise or the actual cost of the transportation from "any person transporting the merchandise or causing the merchandise to be transported."2

To be "coastwise qualified," a vessel must be built in the United States, documented under U.S. law (i.e., U.S. flagged), owned by U.S. citizens and in possession of a coastwise endorsement from the U.S. Coast Guard. A coastwise transportation of merchandise takes place when merchandise laden at a point embraced within the coastwise laws (a "coastwise point") is unladen at another coastwise point, regardless of the origin or ultimate destination of the merchandise. 19 C.F.R. § 4.80b(a).

The U.S. coastwise trade laws generally apply to points in the territorial sea, which consists of the belt, three nautical miles wide, seaward to the territorial baseline, and to points located in internal waters, landward of the territorial sea baseline, in cases where the baseline and the coastline differ.3 Pursuant to (1) Section 4(a) of the Outer Continental Shelf Lands Act of 1953, as amended, 43 U.S.C. § 1333(a)(1) (2006) (OCSLA),

[t]he Constitution and laws and civil and political jurisdiction of the United States are extended to the subsoil and seabed of the Outer Continental Shelf and to all artificial islands, and all installations and other devices permanently or temporarily attached to the seabed, which may be erected thereon for the purpose of exploring for, developing, or producing resources therefrom, or any such installation or other device (other than a ship or vessel) for the purpose of transporting such resources, to the same extent as if the Outer Continental Shelf were an area of exclusive Federal jurisdiction located within a State . . .

With respect to the transportation of merchandise between coastwise points, when read together, 46 U.S.C. § 55102 and 43 U.S.C. § 1333(a) prohibit any non-coastwise-qualified vessel from transporting merchandise between points embraced by the coastwise laws of the United States, which include any established coastwise point on the U.S. Outer Continental Shelf (OCS), either directly or by way of a foreign port. In addition, CBP has specifically ruled that the U.S. coastwise trade laws extend to mobile oil drilling rigs during the period that they are submerged onto or secured to the seabed of the OCS.4

Historical Interpretation of Vessel Equipment

The application of the Jones Act to certain transactions can be complicated, particularly in the offshore oil and gas industry. CBP allows interested parties to submit requests seeking a prospective interpretive ruling to determine whether a particular activity is in accordance with the customs laws and regulations.

CBP has continuously determined that the Jones Act's proscription of the carriage of "merchandise" does not apply to vessel equipment.5 In doing so, it has relied on a 1939 definition of "vessel equipment" as including "articles necessary and appropriate for the navigation, operation and maintenance of a vessel and for the comfort and safety of the persons on board."6 For instance, rope, sail, table linens, bedding, china, cutlery, bolts and nuts have all been considered "vessel equipment." Since then, CBP has interpreted this definition to mean that "vessel equipment" includes items essential to the mission of the vessel or used by the vessel in its course of business.

This interpretation created some controversy following a 2009 ruling that determined that a sub-sea assembly (sometimes called a "Christmas tree") was vessel equipment when transported by a construction vessel, when the purpose of that vessel was the installation of that equipment.7 Although CBP's decision was consistent with prior rulings, some industry participants, including the Offshore Marine Service Association (OMSA), argued that CBP had adopted an overly broad interpretation of "vessel equipment," which some argued would lead to a reduction in the hiring of American marine service companies.

As a result of this industry uproar, CBP withdrew the Christmas Tree Ruling8 and issued a public proposal to revoke or revise a number of rulings regarding transportation of vessel equipment. After receiving numerous responses from both sides of the debate, CBP apparently abandoned its efforts. That is, until Jan. 18, 2017, when it issued a notice that resumes this effort.

Proposed Modification of HQ 101925

CBP issued ruling HQ 101925 on Oct. 7, 1976, to Oceaneering International, a Texas marine construction company that proposed operation of a non-coastwise-qualified barge supporting diving operations in the construction, maintenance, repair and inspection of offshore oil and gas facilities. In that ruling, CBP discussed 10 proposed operations, determining whether the scenarios violated U.S. coastwise laws. CBP now proposes to modify the ruling with respect to six of those operations, based in part on amendments to the Jones Act and OCSLA, which would result in the revocation of several rulings as contrary to the guidance of the notice.9 The notice also revokes several rulings that cite to HQ 101925 as authority and that are inconsistent with the notice.10 CBP also proposed to modify five rulings because, although decided in accordance with the guidance, they cite to rulings that CBP proposes to revoke.11

CBP clarified that repair and installation work is not and has never been coastwise trade. The coastwise laws never prohibited installation or repair work by non-coastwise-qualified vessels, as long as that work was accomplished separate and apart from transportation of merchandise. Accordingly, repair and installation work performed by foreign vessels does not violate U.S. coastwise law. However, the transportation between two coastwise points of gear like pipe and repair materials, anodes, pipeline connectors, damaged pipe, wellhead equipment, valves and valve guards would violate the Jones Act if not undertaken by coastwise-qualified vessels.

As such, the following items will no longer be considered vessel equipment: multi-well templates; marine risers; oilfield equipment; structural components; and cement, chemicals or other materials. For instance, under current law, a foreign-flagged pipe-laying vessel may carry that pipe to the location where it will be laid, pay it out accordingly and repair it if necessary. Under CBP's proposed revocation guidance, the foreign vessel could still pay out the pipe and repair it, but could not transport that pipe from one coastwise point (a U.S. port) to another (the OCS). This is a substantial restriction on the law as it currently stands and would significantly impact the offshore oil and gas industry in several ways—some positively and others negatively.

Industry Response

Response to the notice has been divergent, much as it was in 2009.

Jones Act advocates have praised CBP's proposed revocation notice as restoring American jobs. Tom Allegretti, chairman of the American Maritime Partnership, commended CBP's "efforts to rightfully restore over 3,200 American jobs to the American economy and close loopholes that gave preference to foreign workers and foreign shipbuilding." Governmental representatives in coastal states also praise the proposed revocation, hopeful that the decision will bring more jobs to those areas. "The Jones Act is a pillar for America's maritime industry that serves to put this nation's workers and ingenuity ahead of foreign interests," said Rep. Duncan Hunter, R-Calif., chairman of the House Subcommittee on Coast Guard and Maritime Transportation. "This decision by CBP is in the spirit of recognizing and upholding the Jones Act. And by closing loopholes that existed to the detriment of American workers, CBP has taken an important step that underscores the extraordinary importance of the Jones Act and its role in strengthening our maritime industry. My hope is that this decision is the start of an even stronger transition in favor of the Jones Act across the entire federal government and I commend CBP for its leadership in taking this action." Sen. John Kennedy, R-La., applauded CBP, noting that the "decision will get Louisiana mariners back to work" in the offshore industry, which is "a lifeblood to Louisiana."

Others, though, worry that CBP may behaving hastily in revoking its long-standing treatment of certain items as vessel equipment. The International Marine Contractors Association (IMCA) is concerned that the proposals were made without consultation, noting that the decision would affect not only foreign vessels, but also U.S.-flagged vessels that are not coastwise qualified. Noting his understanding of the need to protect U.S. markets for supply vessels, IMCA Chief Executive Allen Leatt noted that the same rationale should not apply to the offshore deep-water construction market. "It is truly an international market, as no single domestic market can support the heavy instruments of these assets. Consequently, there is a real risk to damaging the whole Gulf of Mexico market as the unintended consequences do not seem to have been thought through." Offshore operators also expressed safety concerns, noting that the new interpretation would limit the ability of specialized foreign-flagged vessels to transport heavy or specialized equipment to the installation site. Rather, a coastwise-qualified vessel would have to perform the transportation aspect of the project, which would require an offshore vessel-to-vessel transfer—a hazardous practice, particularly in open water.

The comment period for this notice was extended to April 18, 2017. Parties involved in substantially similar transactions as those described above should notify CBP with any comments. Those operating in the offshore oil and gas industry should also brush up on the processes for requesting rulings and applying for waiver of Jones Act restrictions, and should take care to understand the exceptions to Jones Act applicability. Players should also anticipate increased enforcement activity with respect to transportation of "vessel equipment."

Footnotes

1 46 U.S.C. § 55103 similarly prohibits the transportation of passengers between coastwise points.

2 46 U.S.C. § 55102(c).

3 See, e.g., HQ 116520 (Nov. 3, 2005).

4 See, e.g., HQ 111365 (Oct. 26, 1990).

5 HQ 103995 (July 16, 1979); HQ 114298 (July 7, 1998); HQ 115938 (Apr. 1, 2003).

6 Treas. Dec. 49815(4) (Mar. 13, 1939).

7 HQ H046137 (Feb. 20, 2009), also called the "Christmas Tree Ruling."

8 HQ H055599 (Mar. 26, 2009).

9 HQ 105644 (June 7, 1982); HQ 110402 (Aug. 18, 1989); HQ 111889 (Feb. 11, 1992); HQ 112218 (July 22, 1992); HQ 113841 (Feb. 28, 1997); HQ 114305 (Mar. 31, 1998); HQ 114435 (Aug. 6, 1998); HQ 115333 (Apr. 27, 2001); HQ 115487 (Nov. 20, 2001); HQ 115938 (Apr. 1, 2003); HQ H004242 (Dec. 22, 2006).

10 HQ 108223 (Mar. 3, 1986); HQ 108442 (Aug. 13, 1986); HQ 1383 (Feb. 25, 1997); HQ 115185 (Nov. 20, 2000); HQ 115218 (Nov. 30, 2000); HQ 115311 (May 10, 2001); HQ 115522 (Dec. 3, 2001); HQ 115771 (Aug. 19, 2002).

11 HQ 111892 (Sept. 16, 1991); HQ 115381 (June 15, 2001); HQ 116078 (Feb. 11, 2004); HQ H029417 (June 5, 2008); HQ H032757 (July 28, 2008).

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