It’s All About Compliance

Part 2 – Import Classification 

By Susan Kohn Ross

This Alert is one in an occasional series of articles providing tips about various topics which come up routinely with import and export transactions. These articles/tips are published with the intention to provide suggestions to aid international traders in their on-going efforts to get their declarations right the first time, and are based on situations we commonly see arising. Whether it is reasonable care on the import side or not self-blinding on the export side, compliance is a key for many different reasons, including protecting your bottom line.

Part 1 of this series addressed how to value goods correctly, and can be read here. This edition provides import classification tips.

Under U.S. law, imported goods are classified for duty assessment and statistical reporting using the Harmonized Commodity Description and Coding System. This compilation of 97 Chapters and approximately 5,000 product descriptions, known in the U.S. as the Harmonized Tariff Schedule of the United States (HTSUS), provides a single modern structure for product classification and is used by more than 200 countries as a basis for their customs tariff and collection of international trade statistics. The first six digits and their corresponding product descriptions are enacted by the countries World Trade Organization member countries. The remaining digits in any tariff number (which total 10 in the U.S.) and their corresponding duty rates are set individually by each country. The HTSUS in the U.S. has 99 chapters, with the two unique ones intended to cover product specific provisions, such as American goods returned, products assembled abroad, special rules imposed on given products (for example, temporary quotas), and so on.

Tariff classification of goods under the HTSUS is governed by the General Rules of Interpretation (GRIs) which are analyzed in order until one applies. In so doing, don’t forget to also check the additional U.S. rules of interpretation.

Classifying goods correctly is important not only for duty purposes, but also to determine whether the goods are subject to quotas, restraints, embargoes or other restrictions, and whether they are eligible for preferential duty rates or reductions. Incorrect classifications can lead to higher duty costs than necessary, unpleasant unplanned additional duty bills, lost sales/non-competitive pricing, liquidated damages, loss of business and even sizable penalties imposed for sufficiently egregious misdeclarations. Although the importer is responsible for correctly declaring product classification, customs brokers (and even freight forwarders when they stray into this area) are at risk if they are not careful about the documentation they prepare on behalf of their customers.

Against that background, here are some tips for setting up a viable classification system.

  1. Review the product itself, and maybe even its specifications and other details, to verify the product description includes all the information reasonably needed for proper classification and then, and only then, classify the product;
  2. Periodically review products for any design or component changes which affect classification and update descriptions on invoices and tariff classifications accordingly;
  3. Prepare written classification procedures for internal and service provider use; for example, do you have your customs broker classify your goods or must they use your pre-determined classifications?
  4. Include researching the on-line CBP ruling database (CROSS), and also court cases when appropriate, to identify prior rulings and court determinations dealing with your product and any similar ones;
  5. Consider requesting a classification ruling from CBP any time how to classify your product is not clear;
  6. Provide written instructions or a classification database to your customs broker and update it in a timely manner when changes are made to existing products and/or new items are added to your product line;
  7. Regularly review transactions to identify errors and if any are discovered, take immediate corrective action; decide if the error must be disclosed to the government and, in doing so, seek legal advice before making a final decision.

If you have a topic on which you are interested in receiving tips, please let us know.

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