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Proper Tariff Classification: Do Your Homework to Avoid Costly Penalties, Increases, or Delays

In today’s ambiguous trade environment brought about by the Trump Administration’s trade war with China and the increased tariffs on steel and aluminum with Canada, Mexico, and the European Union, it is important for U.S. Importers and Exporters to ensure that the correct tariff classifications are assigned to their products in order to reduce costs.  Also, customs agencies are enhancing their systems and processes by adding multiple controls to avoid fraudulent activities and to protect the nation’s interests, adding yet another layer to the various filings that importers and exporters are required to submit.  Cost savings may be realized by applying relevant exemptions, taking advantage of applicable export benefits, and being compliant with the various customs regulations.

Instituting a well thought out approach to product classification is key to maximizing savings and avoiding costly disruptions to the flow of your supply chain.  Under the Customs Modernization Act of 1993, two concepts were introduced that very much pertain to you as the importer:  “informed compliance” and “shared responsibility”.  CBP’s Informed Compliance Publication, located at https://www.cbp.gov/sites/default/files/assets/documents/2018-Mar/icprescare2017revision.pdf, explains these concepts.

Product Classification 101

The Harmonized System (HS) is an internationally accepted 6-digit system used to uniformly classify products traded worldwide.  The HS was developed in 1988 and continues to be maintained by the World Customs Organization (WCO).  It encompasses roughly 5,000 commodity groups and is used by more than 200 countries as a basis for their Customs tariffs as well as for the compilation of international trade statistics.  Over 98% of the merchandise traded internationally is classified under the HS.  This 6-digit number is split into three groups of two digits, referred to as the HS Code List.  The first two digits categorize the product, the second two define the product further, and the last two specify the product in greater detail.

While the HS Code is used internationally, the Harmonized Tariff Code Schedule (HTS) is a 10-digit classification system specifically used for importing a product into the U.SHTS codes (also known as HTS numbers) are comprised of the first six digits from the International HS code plus an additional four digits which capture specific data about products crossing the border into the U.S.

How does the HTS Code Affect Custom Duties?

HTS codes have several roles in the life of a transaction.  HTS codes are primarily used to identify the materials used in the production of a product, its primary purpose, and the product’s end-use in order to determine all applicable duties and taxes.  HTS Codes can also be helpful in determining if a product will be subject to further licenses, permits, or any other special designations which fall under free trade agreements.

Why is it Important to Classify a Product Properly?

Failure to correctly classify your products can lead to lengthy disruptions to the flow of your supply chain and can negatively impact your profit margins due to:

  • Over- or under-paid Customs duties
  • Under-claimed duty drawbacks or export incentives
  • Steep non-compliance penalties
  • Lengthy border delays
  • Seizure of goods by Customs officials
  • Loss of Import and Export privileges

All importers are advised to perform their due diligence to ascertain the correct classification prior to importing a product.  This can be done 1) by the importer if they have staff knowledgeable in the classification process, 2) through the use of professionals such as Licensed Customs Brokers, Customs Attorneys, Customs consultants, or 3) through a Binding Ruling Request to CBP.  A fairly new option open to importers is to discuss the product with one of the CBP’s CEE (Centers for Excellence and Expertise).  The CEE’s are industry specific and can be found by visiting the CBP website at https://www.cbp.gov/trade/centers-excellence-and-expertise-information/cee-directory.  The latter can only provide an advisory classification, but it will give you a good idea of where you should be.

Ensuring Proper Classification of Your Product

Differences in category definitions may appear to be minor, but can produce remarkably different tariff requirements.  To ensure your product is properly classified:

  1. Identify the fundamental purpose of the product

Identify the main use of your product in order to determine which chapter your goods should fall under.  If the product has several uses, determine the most important use or the use that provides the most value to your customers,

  1. Refer to the notes section of the identified chapter

Read through the notes section of the chapter you have identified to see if your product (or a suitable description of the product) is noted as either included in or excluded from this chapter.  If the item is excluded, search for a more relevant chapter and repeat this step until you find the most applicable chapter.

  1. Locate the subheading that describes the most common specifications of your product

Choose a subheading that contains the most applicable descriptions or aspects of your product.  Focus on functional descriptions and measurable characteristics (height, weight, watts, voltage, etc.) to obtain the most accurate classification.

  1. Review the end-use descriptions

Review the end-use descriptions for the code you have selected to ensure your product qualifies under the subheading.  Accurately categorize your product under a tariff that meets the intended end-use of the product in order to take advantage of reduced duty rates.

  1. Choose the last code in the tariff list

If more than one code can apply to your product and it is impossible to determine the most applicable code, choose the code that appears last in the tariff list.

  1. Review Schedule B (for Exports only)

To get the appropriate duty rate for products being exported to another country, you will need to ensure that there is a classification number assigned to your consignment that is used by the receiving country.  Review Schedule B classifications to ensure that you aren’t missing out on preferential tariff rates under a free trade agreement and that your export documents are completed properly.

ALWAYS choose the HS code first and then check for any applicable duty rates and / or requirements.  Once you have the valid HS code for your imported product, your Customs Broker should be able to assist you in determining whether any duty rates, restrictions, or reporting requirements apply.

The country of origin / manufacture can play a huge role in your duty rate, but not all agencies will flag the HS code for partner agency requirements.  Also, there are many FTA (Free Trade Agreements) in place that can reduce the tariff, and in today’s world there are additional duties to be aware of as well.  Therefore, it is important to note that it is the importer’s “shared responsibility” to determine if the product is regulated by another PGA (Partner Government Agency).

Helpful Tools

Mining through thousands of commodities can be a downright painful endeavor.  Even the U.S. Customs Border Protection (CBP) admits that determining a product’s correct classification can be baffling.  To assist in finding the most applicable HTS Code, utilize the help from one of the following methods:

  • Review the HTS General Rules of Interpretations which accompany each HTS chapter
  • Use an online tariff lookup tools, such as the U.S. International Trade Commission’s online database (DataWeb) and the U.S. Census Bureau’s Schedule B Lookup
  • File for an Advanced Ruling from the U.S. Customs and Border Protection
  • Partner with a qualified Customs Broker or Logistics Services provider, such as OCEANAIR, who will manage the process on your behalf and ensure that all recordkeeping and compliance mandates are fully satisfied.

Correcting a Mistake in a Tariff Classification Filing

If you realize that you have made a mistake in reporting information to the CBP, you may want to voluntarily disclose the information.  By proactively disclosing the information in a timely manner, it is possible to significantly reduce the amount of penalties which would have been imposed had the CBP discovered the mistake and launched an official investigation.  Remember, it is the Importer’s responsibility to assign HTS codes to all goods being imported into the U.S.  This citation can be found in 19 USC §1484.

The most common methods for correcting a CBP filing are to file a Prior Disclosure or a Post Summary Correction (PSC).

We recommend that you do not initiate a Prior Disclosure without first speaking with a Customs Attorney.  If you do not have a Customs Attorney, please contact our Compliance team, and we will recommend the choices available to you.

PSC’s are filed when an error is found on an individual entry transaction and is done so by the Entry Filer, normally your Customs Broker.