Unintended Opportunities Arising from Sub Chapter M

By Dean Shoultz

The convergence of the United States Coast Guard Sub Chapter M impending Final Rule with Internal Revenue Services Inland Waterways Excise Tax audit practices might have a more profound, far reaching impact than industry observers have as yet considered.  

Taxpaying tow and barge operators may come out on top despite the greater regulatory burden if they take full advantage of this federal rulemaking interplay.

Supporting the Heartland

Stretching from Pennsylvania in the Northeast, to Texas in the Deep South, and Minnesota in the heartland, these waterways support key American industries such as: mining, agriculture, timber, petroleum and chemicals, cement, metal and paper.

The product value transported between states on inland waterways exceeds $100 billion annually. The 70,000 person waterways workforce underpins various industries of more than 800,000 workers. States lying along the inland waterways contribute 54 percent of the national population, 49 percent of GDP, 50 percent of Federal tax revenue, 56 percent of heavy manufacturing jobs and 61 percent of agricultural jobs.  

Countless millions of payroll taxes are generated for federal and state governments as a result of the inland waterways industry. The Inland Waterways Trust Fund has accrued in excess of $1.6 billion from fuel tax revenue since 1986 and is a catalyst for major construction and rehabilitation projects on the inland waterways.

Sub Chapter M

Sub Chapter M is the result of the Coast Guard and Maritime Transportation Act of 2004 (CGMTA 2004) in which Congress authorized the Secretary of Homeland Security to create regulations for towing vessel safety management systems and hours of service for towing vessel personnel. 

Over the course of six years, the Towing Safety Advisory Committee (TSAC), a Federal Advisory committee to the United States Coast Guard, conducted numerous public meetings which culminated in four reports submitted to the Coast Guard for review and revision. 

The Coast Guard published the Sub Chapter M Notice of Proposed Rulemaking (NPRM) in August 2011 and held four public hearings nationwide for public comment. Publication of the Sub Chapter M Final Rule is anticipated in 2016.

Objective Evidence

Objective evidence is best defined as documented statements of fact, other information or records, quantitative and qualitative, related to the quality of an item or activity, based on observations, measurements or verifiable tests.     

The 2011 NPRM publication set forth the Coast Guard’s intent to adopt “objective evidence” as a safety requirement through “…detailed processes, procedures, record keeping and auditing…” documented in “logbooks, non-conformity reports, and/or other reports of audits.”  

The Internal Revenue Service applies accounting’s objective evidence standard when conducting audits of towing operators for compliance with the Inland Waterways Excise Tax as reported on IRS Form 720. A typical IRS Information Document Request to an inland towing operator will include the vessel log, fuel purchases, maintenance records, machinery tech manuals, and fuel operating reports.

Workboat Logs

Federal law details what entries must be made by watch officers in the vessel’s official logbook. TSAC, in a 2008 report to the Coast Guard, reinforced existing record keeping requirements for inland towing operators and expanded upon the increased recordkeeping burden Sub Chapter M rules will likely have from a watch officer perspective.  

Although Federal law does not require log entries related to geographic position, waterway conditions or commercial activities, it does require the logging of pre-departure testing of steering and propulsion, safety items and drills, crew and marine casualties. Log entries must be timely and are presumed accurate thus binding the vessel owner to those entries. Negating the binding effect in litigation is held to a rigorous test. The maintenance of a proper and accurate log cannot be overemphasized, as the consequences for poor onboard record keeping can be legally and financially catastrophic to a marine operator.

Unintended Opportunities

Appreciating the increased onboard record keeping burden Sub Chapter M posed, the Coast Guard provided for the automation of the onboard record keeping processes through definition of a towing vessel record, or workboat eLog, in Part A Section 136.110 of the NPRM. This definition allows any onboard record keeping or documentation of events required by Sub Chapter M to be “a book, notebook or electronic record.”  Thus, according to the NPRM, inland towing operators have the advantage of adopting workboat eLogs as a primary recordkeeping tool.  

While the presence of an onboard workboat eLog offers considerable advantage to watch officers and onboard auditors, it is only through the integration of the eLog with a shoreside marine enterprise solution that its benefits can be fully realized. The ability to “push” onboard data shoreside for interrogation by various marine enterprise solution modules offers an unlimited variety of analytical models for decision makers to consider.

The two distinct audit report functions of safety and accounting (IRS) are easily achievable within the framework of a mature, interfaced onboard/shoreside recordkeeping solution. Of course, affordability, scalability, ease of user interface, system stability and system configurability play an irreversible role in the success of a mature marine enterprise solution.  

The presence of Key Performance Indicator data pushed by eLogs to the marine enterprise solution and applied to an industry best practices regime can improve asset utilization, workforce performance and customer satisfaction.

The unintended opportunities facing inland waterway operators by opting into the Sub Chapter M onboard electronic recordkeeping options in lieu of manual record keeping are hard to contest. These options are greatly enhanced if the marine operator also elects to interface office accounting, safety and personnel functions with the vessel as part of a shoreside marine enterprise solution.

Adopting a software architecture & infrastructure where the marine operator can satisfy the reporting requirements of a multitude of federal agencies through a single electronic reporting system which also provides critical commercial data to the carrier, clients, vendors and other interested third parties offers immeasurable value.

Dean Shoultz is Chief Technology Officer at Marine CFO in Louisiana, U.S.