Foreign-Flagged Yachts, Cruising Licenses, and Offers to Sell or Charter

Aug 29, 2016 BY DAVID R. MAASS, Alley, Maass, Rogers & Lindsay, P.A.

Several U.S. Customs and Border Protection (CBP) offices in Florida recently have taken the position that foreign-flagged yachts that are offered for sale or charter are ineligible for a cruising license regardless of the yachts’ duty status. Customs reasons that any offer to sell or charter a yacht, even an offer that does not trigger liability for duty, amounts to engaging in “trade” and that vessels engaged in trade are ineligible for a cruising license. This article briefly explains the legal background to the current controversy about cruising license eligibility.

Under federal law, a foreign-flagged vessel “used only for pleasure” is eligible for a cruising license, which enables the vessel to cruise freely in U.S. waters, provided the vessel’s flag state recognizes similar privileges for U.S.-documented vessels cruising in the flag state’s waters [46 U.S.C. § 60504 (2012)]. A federal regulation, 19 C.F.R. § 4.94 (2016), in addition to listing compliant flag states, provides that a cruising license will be issued to a foreign-flagged vessel “subject to the condition that the vessel shall not engage in trade or violate the laws of the United States in any respect.” The regulation does not say what it means to “engage in trade.”

In 1983, Customs added a warning regarding dutiability to the text of the cruising license, which is prescribed by regulation [48 Fed. Reg. 48,653 (Oct. 20, 1983)]. The warning advises owners that offering a foreign-flagged yacht for sale or charter generally triggers liability for duty. At the time, Customs explained that it was adding the warning to alert owners of foreign-flagged yachts to existing law regarding dutiability. Customs did not suggest that the warning was meant to expand the requirements for issuing a cruising license, which have nothing to do with a yacht’s duty status. Customs also acknowledged that the warning would not apply to all foreign-flagged yachts, some of which are not dutiable because they are already duty-paid or were U.S.-built and never exported.

Against this background, Customs recently has taken the position that the warning means that a foreign-flagged yacht offered for sale or charter is ineligible for a cruising license, even if the yacht is non-dutiable. Customs apparently reasons that the language regarding offers to sell or charter relates to the prohibition on engaging in trade: a foreign-flagged yacht is engaged in trade, and therefore ineligible for a cruising license, if offered for sale or charter. However, as explained above, the language about offers to sell or charter was added only to alert owners to existing law regarding dutiability, not to expand the requirements for issuing a cruising license, which are unrelated to dutiability.

Moreover, although the relevant regulation does not specify what it means to “engage in trade,” the interpretation of related statutes strongly suggests that the term does not include offers to sell or charter. For example, federal law provides that a U.S.-documented vessel that carries only a recreational endorsement, much like a foreign-flagged yacht with a cruising license, “may be operated only for pleasure” [46 U.S.C. § 12114(b)]. This restriction means that a vessel with a recreational endorsement may not transport passengers or merchandise; however, it has never been interpreted to prohibit such a vessel from being sold, chartered under a bona fide bareboat charter, or offered for sale or charter, provided the end use is for pleasure. Under the vessel documentation statutes, a vessel is “engaged in trade” when it is used to transport passengers or merchandise, not when it is merely offered for sale or charter. There is no reason why a foreign-flagged yacht operating under a cruising license should be treated differently when the two statutes use almost exactly the same language to describe the pleasure-use restriction.

In short, it appears that Customs has plucked the warning that appears on cruising licenses from its original context and used that language to fashion a new requirement for issuing a license. Even if the new policy were based on a reasonable interpretation of the statute, such significant changes in policy are usually made only after a process involving public notice and an opportunity for comment by industry stakeholders. FYBA and other industry groups are currently working with Customs to reverse this new interpretation and ensure that non-dutiable, foreign-flagged yachts can obtain cruising licenses regardless of any offer to sell or charter those yachts.