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The Florida Bar – International Law Section has just published its Winter 2018 edition of International Law Quarterly, focusing on international aspects of maritime, admiralty, and transportation law and features two (2) articles by Chalos & Co – International Law Firm.

Michelle Otero Valdés and Megen M. Gold co-authored Rough Waters Ahead . . . Navigating Maritime Liens and Arrests – Why the Advice of Maritime Counsel Remains Crucial Prior to Arresting a Ship. This article highlights complex U.S. legal issues regarding maritime liens and offers insight into the necessity of retaining the advice of competent counsel to avoid wrongfully arresting a vessel and the extensive litigation that may follow.

In addition, George M. Chalos and Patrick W. Carrington co-authored Maritime Arbitration – A Preferred Alternative Dispute Resolution Mechanism. This article highlights the fascinating history of arbitration in the United States and discusses its benefits in cases involving specialized industries including maritime actions and other commodity trading disputes.

For more information on these specific articles, please do not hesitate to call on us at info@chaloslaw.com.

For more information concerning the Florida Bar – International Law Section, and to view an archive of past editions of International Law Quarterly including the Winter 2018 Edition, please visit their website here.

Several lawsuits have been filed across the United States following the U.S. Supreme Court’s January 22, 2018 decision in National Association of Manufacturers v. Department of Defense, 583 U.S. ___ (2018). The U.S. Supreme Court held that challenges to the Waters of the United States Rule (“WOTUS Rule” or “Clean Water Rule”) must be brought in federal district court. An in-depth analysis of the Supreme Court decision can be viewed here.

The WOTUS Rule is a 2015 regulation published by the U.S. Environmental Protection Agency (“EPA”) and the U.S. Army Corps of Engineers (“USACE”) to clarify which waters are protected by the Clean Water Act. It was published in response to concerns about lack of clarity over the scope of the Clean Water Act. In October of 2015, the U.S. Court of Appeals for the Sixth Circuit issued a nationwide stay on the implementation of the WOTUS Rule. The U.S. Supreme Court’s decision that the U.S. Courts of Appeals lacked jurisdiction over legal challenges to the WOTUS Rule resulted in the imminent lifting of the Sixth Circuit’s nationwide stay that has blocked the implementation of the Rule.

On February 6, 2018 the EPA and USACE finalized a rule adding an applicability date to the 2015 WOTUS Rule. This “applicability date” rule delays the application of the WOTUS Rule for two (2) years, or until February 6, 2020. The EPA and USACE are currently working through the process of repealing and replacing the WOTUS Rule, pursuant to an Executive Order issued by President Trump on February 28, 2017. The delay in applicability date would ensure the WOTUS Rule will not take effect while that process is ongoing.

On the same date the EPA issued the “applicability date” rule, several states filed suit against E. Scott Pruitt, as Administrator of the EPA; the EPA; Ryan Fisher, as acting Assistant Secretary of the Army for Civil Works; and the USACE (the “Agencies”), challenging the EPA’s “applicability date” rule and seeking the WOTUS Rule take immediate effect. The suit was brought by twelve (12) Attorneys General from the states of New York, California, Connecticut, Maryland, New Jersey, Oregon, Rhode Island, Vermont, and Washington, the Commonwealth of Massachusetts, and the District of Columbia (the “States”). The States, led by New York Attorney General Eric Schniederman, claim the Agencies violated required legal processes and ignored legal obligations to protect water supplies when they delayed the WOTUS Rule. The States claim “[t]he agencies have suspended the Clean Water Rule without consideration of the extensive scientific record that supported it or the environmental and public health consequences of doing so. . . . The agencies have undertaken this redefinition with inadequate public notice and opportunity for comment, insufficient record support, and outside their statutory authority, illegally suspending a rule that became effective more than two years ago.”

In response, on February 7, 2018 a coalition of agricultural and business groups, led by the American Farm Bureau Federation (“AFBF”), filed a request in the U.S. District Court for the Southern District of Texas for a nationwide preliminary injunction prohibiting the Agencies from enforcing, implementing, applying, or otherwise giving effect to the WOTUS Rule. The AFBF believe that were the WOTUS Rule to take effect, dry ditches, drains, and even low spots on farm fields will be considered “Waters of the United States” under the Rule. Notably, these areas are often completely free of water. The WOTUS Rule would give the government power over vast swaths of dry land.  This, they claim, would create legal risks for farmers, ranchers, property owners, and business. AFBF and the other plaintiffs claim that the EPA’s repeal and replace process will be subjected to legal challenges, and that a nationwide preliminary injunction keeping the WOTUS Rule from going into effect is imperative. These continued legal challenges create uncertainty for private land owners, who could face heavy civil and criminal penalties due to the continued jurisdictional issues around the WOTUS Rule.

These two (2) lawsuits have been filed in separate federal district courts within weeks of the U.S. Supreme Court’s decision. Additionally, several environmental organizations have filed suit against the Agencies in the U.S. District Court for the District of South Carolina, claiming the Agencies violated the Administrative Procedure Act. Other states, including Alabama, Florida, Georgia, Indiana, Kansas, Kentucky, South Carolina, Utah, West Virginia, and Wisconsin have asked the U.S. Court of Appeals for the Eleventh Circuit to send their challenge of the WOTUS Rule back to district court so that they may request an injunction. It is likely that more suits will be filed, creating even more uncertainty around the future of the WOTUS Rule.

For more information about these lawsuits, or the WOTUS Rule, please do not hesitate to call on us at info@chaloslaw.com.

On January 22, 2018, the United States Supreme Court decided National Association of Manufacturers v. Department of Defense, 583 U.S. ___ (2018), determining whether challenges to the Waters of the United States Rule (“WOTUS Rule” also known as the Clean Water Rule) should be heard in federal district court or in the United States courts of appeals. The U.S. Supreme Court, in a 9-0 opinion, held that challenges must be brought before the federal district court.

The Clean Water Act prohibits the “discharge of any pollutant by any person,” except in express circumstances. 33 U.S.C. § 1311(a). A “discharge of a pollutant” includes “any addition of any pollutant to navigable waters,” and the term “navigable waters,” means “the waters of the United States.” 33 U.S.C. §§ 1362(12), 1362(7). In 2015, the Environmental Protection Agency (“EPA”) and the Army Corps of Engineers (“Corps”) proffered a definition of the term “waters of the United States” through an agency regulation, the WOTUS Rule. The WOTUS Rule establishes the geographic reach of the federal government’s regulatory authority under the Clean Water Act. When the WOTUS Rule was issued, over one hundred (100) parties across the United States sued to challenge it.

Generally, a party must file a challenge to a final EPA action in federal district court. However, a provision of the Clean Water Act enumerates seven (7) categories of EPA actions for which review lies directly in the federal courts of appeals. 33 U.S.C. § 1369(b)(1). Several parties, including Petitioner, National Association of Manufacturers (“NAM”), challenged the WOTUS Rule in federal district court. Many parties also filed petitions for review in various federal courts of appeals to preserve the challenge should the federal district court actions be dismissed for lack of jurisdiction. The circuit court actions were consolidated within the Court of Appeals for the Sixth Circuit. Several parties, including NAM, moved in the circuit court to dismiss for lack of jurisdiction. The government opposed those motions, arguing that the challenges must be brought first in the appellate courts because the WOTUS Rule fell within two (2) of the enumerated categories of the Clean Water Act requiring review by the federal courts of appeals.

The government argued that WOTUS fell within subparagraph (E) and (F) of § 1369(b)(1). Subparagraph (E) grants courts of appeals exclusive jurisdiction to review any EPA action “in approving or promulgating any effluent limitation or other limitation . . . .” 33 U.S.C. § 1369(b)(1)(E). The U.S. Supreme Court held that the WOTUS Rule does not fall within that provision because it does not establish an “effluent limitation,” and imposes no such restriction on quantities, rates, or concentrations of pollutants discharged into navigable waters, instead it announces a regulatory definition for a statutory term. The U.S. Supreme Court also discounted the government’s argument that the WOTUS Rule’s “practical effect” is to make the Clean Water Act’s limitations applicable to the waters covered by the WOTUS Rule as the “practical effects” test is not grounded in the statute. The Court held that subparagraph (F) also does not apply, as it grants courts of appeals exclusive and original jurisdiction to review any EPA action “in issuing or denying any permit under section 1342.” 33 U.S.C. § 1369(b)(1)(F). The WOTUS Rule neither issues nor denies permits issued under § 1342.

The U.S. Supreme Court did acknowledge some of the government’s policy arguments; however the Court found no textual support for the argument in the statute’s plain language. Ultimately, the government’s arguments were grounded in judicial and administrative convenience and not based on the clear and unambiguous reading of the statutory text. The Court held that the presumption favoring courts of appeals review of administrative actions does not apply, as the scope of subparagraphs (E) and (F) are clearly set forth in the statute.

In October of 2015, the Sixth Circuit had issued a nationwide stay on implementation of the WOTUS Rule. That stay must now dissolve as the Sixth Circuit no longer has jurisdiction. The WOTUS Rule will now go into effect in those areas where it is not stayed by a federal district court. This is especially of note as the Trump Administration is strongly opposed to the WOTUS Rule. In February 2017, the President issued an Executive Order directing the agencies to propose a rule rescinding or revising the WOTUS Rule. The agencies responded by issuing a proposed rule rescinding the WOTUS Rule, and issued a second proposed rule establishing a new effective date for the WOTUS Rule. Now it will be up to the district courts to decide whether to issue a stay, or to let the WOTUS Rule take effect.

To read the full opinion of the United States Supreme Court, please click here.

For more information about the Court’s decision, please do not hesitate to call on us at info@chaloslaw.com.

On November 20, 2017, the New York State Court of Appeals issued Carlson v. American International Group, Inc., 2017 N.Y. Slip Op. 08163 (N.Y. Nov. 20, 2017), greatly expanding the scope N.Y. Insurance Law § 3420. The Court of Appeals, the highest court in New York State, held that section 3420 applies to out-of-state insurers issuing policies anywhere in the country for risks in New York if the insured has a substantial business presence in New York.

On July 7, 2004, a delivery van owned by MVP Delivery and Logistics, Inc. (“MVP”), collided head-on with another vehicle, killing the other vehicle’s driver. MVP and DHL Worldwide Express, Inc. (“DHL”) were parties to a cartage agreement, whereby MVP used its fleet of trucks to perform DHL’s package delivery services in upstate New York. The deceased’s husband, Michael Carlson, individually and on behalf of his deceased wife’s estate, brought a lawsuit pursuant to Insurance Law § 3420(b) to collect on certain insurance policies issued to DHL by National Union Fire Insurance Co. (“National Union”), and American Alternative Insurance Co. (“AAIC”). Section 3420(b) provides that “an action may be maintained . . . against the insurer upon any policy or contract of liability insurance . . . to recover the amount of a judgment against the insured or his personal representative.”

Section 3420(a) mandates specified provisions, including timely disclaimers in personal injury actions, be included in certain insurance policies and contracts “issued or delivered in this state.” Section 3420(b) then provides a direct cause of action against the insurer “upon any policy or contract of liability insurance that is governed by such paragraph.” In order to recover, a plaintiff must first establish that the policy sued upon was “issued or delivered” in New York. This is a threshold requirement, if a party cannot satisfy it the court will dismiss for lack of capacity to sue. In Carlson, the insurance policy was issued by AAIC from New Jersey, and delivered to the insured in Washington and then in Florida. AAIC moved to dismiss the action because its policy was not “issued or delivered” in New York. The Court of Appeals held that “issued or delivered” applies not only to policies issued to a New York company, but to any policy, wherever issued, if the insured has a substantial business presence and creates risks in New York.

This is a game-changer for out-of-state insurers. If an out-of-state insurer issues a policy to a company that has a presence in New York, New York’s strict requirements will apply to that policy and insurer. Judge Garcia (joined by Chief Judge DiFiore and Judge Stein), in his dissent, aptly notes, “the majority misinterprets section 3420(a) in a manner that enacts sweeping change across the Insurance Law, generating substantial implications, both known and unknown.”

Every insurer will now need to determine whether their insured has a substantial presence in New York, and creates risk in New York. Under this interpretation of the Insurance Law, an automobile insurer located anywhere in the country may be required to comply with New York insurance statutes on the chance that the insured vehicle may be driven into New York. This may be an extreme example, but as Judge Garcia points out in his dissent, what if the driver owns property in New York, or works in New York, or vacations regularly in New York? These may be evidence of a substantial business presence.

It will be some time before the full effect of this decision is realized, but it certainly places additional burdens on the out-of-state insurer with insureds who may have a presence in New York.

To read the full opinion of the New York State Court of Appeals, please click here.

For more information about the Court’s decision, please do not hesitate to call on us at info@chaloslaw.com.

On November 7, 2017, the United States Court of Appeals for the First Circuit issued Portland Pilots, Inc., et al. v. NOVA STAR M/V, No. 16-2467, 2017 U.S. App. LEXIS 22248 (1st Cir. Nov. 7, 2017), affirming the District Court of the District of Maine’s judgment limiting the reach of a maritime lien in a case involving the supply of necessaries to a vessel.  In 2014, Nova Star Cruise Line (“NSCL”) as charterer of the M/V NOVA STAR, entered into a five-year contract with Maine Uniform Rental d/b/a Pratt Abbott Uniform & Linen (“Pratt Abbott”) to rent linens and other related items for the ship’s ferry and hotel services. In anticipation of the performance requirements under the contract, Pratt Abbott purchased large quantities of inventory, including specialty linens and products just for the NOVA STAR. Under the agreement, Pratt Abbott was regularly supplying the vessel with fresh clean linens and removing and laundering soiled linens.  At all times, Pratt Abbott maintained ownership over the linens. In 2015, NSCL terminated its ferry service after only two (2) seasons.  Pratt Abbott immediately filed an action in the District of Maine seeking to enforce a maritime lien against the vessel to recover past due invoices and the replacement value of the advanced inventory that was stored in its warehouse.

Pratt Abbott argued it was entitled to a maritime lien because it had purchased necessaries specifically for the M/V Nova Star which had been used on the vessel during its time as a hotel ferry. The District Court limited Pratt Abbott’s recovery to $16,187.50, i.e. the value of the rental services previously performed.  The Court found there was no dispute that the rental items and services provided pursuant to the agreement enabled the ship to serve as a hotel and were necessary to keep the business afloat.  Hence these rental services met the requirements of the maritime lien act.  The Court rejected the claim for the replacement cost of the stored inventory totaling $178.023.02, as it did not meet the maritime lien act requirement of a necessary that was ‘delivered’ to the vessel.  In affirming the District Court decision, the First Circuit confirmed that necessaries must be physically delivered or constructively dispatched to the vessel by distributing supplies to the owner or authorized agents of the vessel.  The First Circuit held that the inventory had not been delivered to the vessel, because even though they had been onboard at one point or another as part of the rental services agreement, under the contract, Pratt Abbott continued to own the items.  The Court held “any previous movement of the items to and from the vessel was simply the rental and cleaning services for which the parties contracted, and not a delivery sufficient to establish a maritime lien for the replacement cost of the items.”

To read the full opinion of the First Circuit, please click here.

For more information about the Court’s decision, please do not hesitate to call on us at info@chaloslaw.com.

On November 7, 2017, the United States Court of Appeals for the Fifth Circuit affirmed a decision in favor of the U.S. government seeking reimbursement for $20 million in spill response costs from the party responsible for the spill. In reaching the decision, the Court found that the plain language of the Oil Pollution Act of 1990 (“OPA 90”) does not provide for a third-party defense for liability when the responsible party has ‘any contractual relationship’ with that party, even if the third party commits acts that were not contemplated in the contract.

The case involved a collision between a barge under tow and an ocean-going tanker. At the time of the collision, the tugboat was owned by American Commercial Lines (“ACL”) and was being operated by DRD Towing (“DRD”). Pursuant to the parties’ contract, DRD had all responsibility to crew the tugboat in question. At the time of the incident, the responsible tug, the M/V MEL OLIVER, was being impermissibly operated by a steersman without proper licensing. Immediately after the collision, the steersman was found slumped over the steering sticks and non-responsive. There was no dispute that the collision was the fault of the tug. As a result of the collision, 300,000 gallons of oil was spilled into the Mississippi River. ACL, owner of the tugboat, spent approximately $70 million in removal costs and damages, while the U.S. government incurred approximately $20 million to remedy the spill. The District Court for the Eastern District of Louisiana awarded $20 million in damages to the U.S. government and ACL appealed.

ACL sought to avail itself of a complete defense under the “third-party defense” of section 2704(c)(1) of OPA 90, or in the alternative, limit its liability proportionate to the tonnage of the tug pursuant to section 2703(a). The Fifth Circuit rejected ACL’s appeal arguments as inconsistent with both the ordinary meaning and the purpose of OPA 90. ACL argued that DRD was a third-party whose acts or omissions caused the incident and that those actions were not taken ‘in connection with’ the contractual relationship between the parties as DRD had failed to comply with all laws and regulations. The Court held that the plain language of OPA 90 refers to “any” contractual relationship with the responsible party, broadly encompassing all acts logically connected and pursuant to that relationship. In reaching the decision, the Court adopted a “but for” test: the third-party defense should not be available where a spill is caused by third-party acts or omissions that would not have occurred but for the contractual relationship between the third party and the responsible party. In the alternative, ACL asserted that the specific acts or omissions that caused the spill must have been authorized by the contract in order to fall within an exception from limited liability. The Fifth Circuit stated that the “pursuant to” language of the limitation on liability section of OPA 90 is satisfied if the person who commits gross negligence, willful misconduct, or applicable regulatory violation does so in the course of carrying out the terms of the contractual relationship.

To read the full opinion of the Fifth Circuit, please click here.

For more information about the Court’s decision, please do not hesitate to call on us at info@chaloslaw.com.

On September 15, 2017, the United States Court of Appeals for the First Circuit affirmed in part and reversed in part a decision from the District of Massachusetts in Ironshore Specialty Insurance Co. v. United States of America, 2017 U.S. App. LEXIS 17928 (1st Cir. Sept. 15, 2017). The First Circuit interpreted the definition of “public vessel” under the Oil Pollution Act of 1990 (“OPA”) to include a vessel owned by the United States, but operated by an independent contractor, as long as the private contractor is under the “operational control” of the United States. The First Circuit also held that OPA does not affect the general admiralty and maritime law outside the context of OPA. Specifically, OPA does not preempt a party’s ability to sue for negligence under the general maritime law when a public vessel is the origin of an oil spill.

The FISHER is a transport vessel which is primarily used to carry military vehicles and containerized cargo for the Department of Defense. It is owned by Military Sealift Command, a division of the United States Navy. Military Sealift Command entered into a contract with American Overseas Marine Company, LLC (“AMSEA”), where AMSEA agreed to crew, maintain, and make routine repairs to the FISHER. While the FISHER was in a graving dock, a spill occurred and over 11,000 gallons of diesel fuel poured out of the vessel. The owner of the graving dock incurred costs of nearly $3,000,000 to clean up the spill, an amount which was reimbursed by Ironshore Specialty Insurance Co. (“Ironshore”), the pollution policy insurer. Ironshore brought a complaint against the United States and AMSEA seeking, inter alia, cleanup costs and damages under OPA, and damages sounding in general admiralty and maritime law as a result of AMSEA’s and the United States’ negligence. The district court dismissed Ironshore’s OPA and negligence claims.

The Oil Pollution Act of 1990 explicitly states that the statute does not apply to discharge from public vessels. The statute defines a public vessel as “a vessel owned or bareboat chartered and operated by the United States . . . .” 33 U.S.C. § 2701(29) (emphasis added). AMSEA and the United States asserted that the FISHER was exempt from OPA because it was owned and operated by the United States at the time of the spill, and was therefore a public vessel. Ironshore argued that, while the United States was the owner of the FISHER, AMSEA was the sole operator. Ironshore argued that the vessel was operated by AMSEA crew, not by government employees. The First Circuit attempted to explain away this fact, as well as the conjunctive “and” present in OPA’s statute, by holding that if a vessel, functioning in a public capacity is owned by the United States but operated by a private contractor, the vessel is a “public vessel” as long as the private contractor is acting under the “operational control of the United States.” The Court held that AMSEA was acting under the operational control of the United States based on the contract between AMSEA and the United States stipulating that the vessel would operate under the “ultimate operational control of one of five military commands.” The Court, in reaching this decision, considered the contract between AMSEA and the United States, despite it being extrinsic evidence and not referenced in the pleadings. Ultimately, the First Circuit affirmed the District Court’s decision to dismiss Ironshore’s OPA claims against the United States and AMSEA.

Ironshore also brought negligence claims against the United States and AMSEA under general maritime and admiralty law. The district court dismissed the negligence claims on the basis that OPA “supplants and preempts all such claims.” However, the First Circuit held that “any preexisting admiralty and maritime law that applied to public vessels before OPA’s passage survives its enactment.” On this basis, the First Circuit held that OPA does not bar a negligence claim under the general maritime law when a public vessel is the origin of an oil spill. Accordingly, the First Circuit reversed the district court’s dismissal of Ironshore’s negligence claims against the United States. The Court further held that AMSEA were agents of the United States, and thus the negligence claims against AMSEA cannot stand under the Suits in Admiralty Act, which states that if a remedy is provided, “it shall be exclusive of any other action arising out of the same subject matter against the . . . agent of the United States . . . whose act or omission gave rise to the claim.” 46 U.S.C. § 30904. The First Circuit affirmed the dismissal of all claims against AMSEA.

To read the full opinion of the First Circuit, please click here.

For more information about the Court’s decision, please do not hesitate to call on us at info@chaloslaw.com.

Chalos & Co – Houston is fully operational and is opening its doors to all in need following the devastation of Hurricane Harvey. As per the firm’s founder, George M. Chalos: “We are very fortunate to be back and hitting on all cylinders in our Houston office, despite the huge damages many of our team, friends, and loved ones have sustained.  In this time of need, we are opening our doors to anyone who needs it.  We have electricity, internet, telephone, a shower, a fully operational kitchen and plenty of space to work. Everyone is welcomed; no questions asked.”
The Chalos & Co – Houston office is located at 7210 Tickner Street, Houston TX 77055.  Please contact either George M. Chalos (gmc@chaloslaw.com), Briton Sparkman(bsparkman@chaloslaw.com) or Emily Zellers (ezellers@chaloslaw.com) with any questions you may have.

In 2004, the IMO hosted the International Conference on Ballast Water Management to address the problems associated with the introduction of non-native species into aquatic ecosystems when transported in the ballast water of oceangoing vessels.  The members adopted the International Convention for the Control and Management of Ships’ Ballast Water and Sediments. Before entering into force, the Convention required the ratification of thirty states, representing at least 35% of the world merchant shipping tonnage.  Twelve months after achieving ratification, the Convention becomes effective. Finland ratified the Convention on September 8, 2016, which brought the number of ratifying states to 52, with a combined merchant tonnage of 35.14%.  Accordingly, the Convention is to enter into force on September 8, 2017, and is expected to have a significant impact on vessels in international trade, requiring them to meet agreed minimum standards concerning biological and sediment materials contained in their ballast water.

Under the Convention, all ships trading internationally will be required to implement a Ballast Water Management Plan to meet the compliance requirements including the recently-approved IMO G9 Guidelines. Vessels over 400 gross tons must carry a ballast water record book that details the time, date and location of the filling and discharge of each tank, including the treatment applied to the ballast water.  According to a rather involved and frequently-changing timetable of implementation, vessels will be required to comply with the D1 or D2 standards.  Given the ongoing uncertainty with ballast water treatment issues, it is important and prudent for owners to develop contingency measures in their Ballast Water Management Plans to account for these uncertainties and to anticipate the differing infrastructure, equipment, and requirements at the various ports at which their vessels may call.

The D1 standard governs ballast water exchange: replacing the ballast water taken in from the last port with new sea water before arrival at the subsequent port.  The exchange must occur at least 200 nautical miles offshore and at a depth of 200 meters.  The D1 standard poses obvious difficulties for those vessels that travel within a limited geographical region and thus are rarely positioned a sufficient distance from shore and in waters of the requisite depth.

The more stringent D2 standard requires the installation and operation of an approved ballast water treatment system. The system must ensure that only negligible levels of viable biological materials remain in the vessel’s ballast water after treatment. New-build ships will be required to install and comply with the D2 standard from the Convention’s entry into force on September 8, 2017.  The implementation deadline for vessels currently in service, however, has recently been extended once again.  Existing ships will have to comply with the Convention’s D-2 standard by their next International Oil Pollution Prevention Certificate renewal (occurring every five years) following September 8, 2019.  This new extension will potentially push the compliance deadline for some existing vessels (depending on when the vessel must renew her IOPP certificate) until September 8, 2024.

For more information about these important changes in ballast water treatment requirements under the IMO Convention as well as the U.S. Coast Guard rules, and how to best navigate these upcoming compliance requirements, please do not hesitate to contact the authors George M. Chalos (e-mail: gmc@chaloslaw.com); George Gaitas (e-mail: georgegaitas@chaloslaw.com); or Sean D. Kennedy (e-mail: sdk@chaloslaw.com).

By:      CHALOS & Co, P.C. – International Law Firm
Briton P. Sparkman, Esq. & George M. Chalos, Esq.,

As Senator Russell Long, former chairman of the U.S. Senate Finance Committee, famously remarked, everyone’s concept of tax reform is “Don’t tax you, don’t tax me, tax that fellow behind the tree!”  And so it came to pass, when the U.S. Congress passed the Tax Reform Act of 1986, foreign ship owners, charterers and operators, by definition no part of any Representatives’ or Senators’ voting constituency, turned out to be the “fellow behind the tree.”

U.S. law requires that for each taxable year transportation income from transportation that begins or ends in the United States  is taxed at the rate of 4% on ½ of the freight or other income of voyages that include loading or discharging cargo in the U.S.A. (26 USC § 887 in conjunction with 26 USC § 863(c)(2) and (c)(3)).  Transportation income includes any income derived from, or in connection with the use (or hiring or leasing for use) of a vessel or aircraft, or the performance of services directly related to the use of a vessel or aircraft. This includes income from the participation in a bareboat charter, a time charter, a voyage charter and a revenue  pool.  Charter hire, freight, demurrage, etc.  are also subject to the tax.  When a vessel is chartered-out everyone along the line starting with the vessel owner, down to a bareboat charterer, the disponent owner, the voyage charterer, are responsible for payments of the tax on their  own respective earnings of  U.S. Source Gross Transportation Income.  It doesn’t matter how many intermediary sub-charterers are interposed between the registered owner and the last charterer down the chain.  Each must pay the tax on its own earnings.  The tax is payable annually together with the filing of the taxpayer’s annual tax return.

Notwithstanding, income derived by a corporation organized in a foreign country from the international operation of a ship is exempt from the tax if such foreign country grants an equivalent exemption to corporations organized in the United States. 26 U.S.C. § 883(a)(1).  The exemption may be based on domestic law of the foreign country, an exchange of diplomatic notes, or a tax treaty and on such a basis the exemption is widely available.   However, it is imperative in order to claim the exemption, for the company concerned to file an annual corporate tax return for the year the income was earned, and show that it is qualified for the exemption.  Accordingly, to either pay the tax or claim the exemption, it is necessary for the taxpayer who has earned U.S. Source Gross Transportation Income during the tax year to file the required tax return.  Foreign companies based overseas have until June 15 of each year to file for income earned in the previous year.  That deadline can be extended to December 15 with the filing of an application for an automatic extension by June 15.  Failure to file a tax return for any given year for which a company has earned U.S. Source Gross Transportation Income could result in exposure to payment of a fine of up to $ 10,000 and penalties.  Thus there are very good reasons for charterers who earn income from the U.S. trade to file each year to claim the exemption or pay the tax, and to file amended tax returns for years missed to bring themselves into compliance.

For more information about U.S. Source Gross Transportation Income and how it may apply to specific facts and circumstances, please do not hesitate to contact the authors George M. Chalos (gmc@chaloslaw.com) or Briton P. Sparkman (bsparkman@chaloslaw.com).