Classification Codes—How They Work and Why You Need to Get Them Right the First Time
Importers, there is no way around it. Every single product you bring into the United States must be assigned a classification code—and you need to get them right the first time.
The Harmonized Commodity Description and Coding System, called Harmonized System or HS for short, is the internationally recognized classification system for all globally traded products. Since coming into effect in 1988, the HS system has been adopted by more than 200 countries.
And for importers into the US, HS is the law. In 1993, Congress passed the Customs Modernization Act in 1993, which holds the importer of record legally responsible for the proper classification of all goods imported into the US.
However, there is a twist. Specifically, the US uses Harmonized Tariff Schedule (HTS) codes to classify imports into the country. HTS codes are 10-digit based on the HS codes and administered by the U.S. International Trade Commission. The first 6 digits of the HTS code are the HS code, and the remaining 4 digits pertain to US tariff laws/duties.
Read on to learn:
Why HS codes can lead you down the wrong path
What's at stake if you get the code wrong
How to avoid mistakes in the first place
Simple but Not Easy
HTS lookup tables can be a great help to importers. But if you are bringing in a new product—even one very similar to ones you are already importing—you just might find yourself on the wrong side of the law.
The HTS system simplified a confusing array of differing standards, but properly classifying goods is not always intuitive. This is because the common name we use to describe an object is not always the same as the term HTS uses.
Here is classic example. You are importing two kinds of bookshelves—one that stands upright on its own base and one that you must affix to a wall. Both bookshelves, right? Not according to the HTS. The one with its own base is categorized as furniture. The one that you have to attach? That's a wood product (assuming it is made of wood).
There are countless other examples. Santa and Christmas trees can be classified under Christmas articles, but Snowman cannot. They are seasonal items. And men’s and women’s shirts have different classifications, believe it or not—and it comes down to which side of the shirt has buttons.
Now, a new generation of trade agreements like USMCA are making the job even more complex, since you may also have to consider the product but also the source of certain raw materials used to manufacture them.
For more information, check out the WCO website.
The Cost of Getting It Wrong
Even an innocent error can be costly when it comes to HTS codes. If your goods are inspected and found to be miscategorized, you will risk fees and fines for the mistake. But the challenge doesn't end there.
Even after customs releases goods, an error can come back to bite you. That's because, in order to remain compliant and in good standing with the CBP, importers of record must correct any misclassified entries going back the previous five years.
What does that mean for your business if you make a mistake? There are essentially three options, none of them great.
No new duties, but hassle and expense. Even if customs does not issue a penalty for a misclassified item (which they might), you'll have to audit up to five years of documents and re-file with the CBP, which involves time and expense and will likely require the services of a customs expert.
Non-refundable overpayments. If you paid higher duties that you should have, the cost of the mistake is on you. CBP issues no refunds for misclassifications.
New duty payments. If the correct classification entails higher duties, you are responsible for paying them, and the CBP may levy fines and penalties for underpayment as well.
How to Get It Right
In most cases, importers look to customs brokers to classify their products. If the broker does not fully understand the exact details of a product, they will often send a list of potential classifications and ask you to confirm.
However, it is still up to you to make the right decision, because it is you who will have to deal with the consequences of a mistake. Basically, there are two ways to minimize mistakes:
Become an expert yourself. This means not just mastering the use of the HS lookup system, but also the Explanatory Notes (EN) of the Harmonized System, published by the WCO.
Hire an expert. If you're a midsize importer, you and/or your staff may not have the bandwidth to take on such a challenge. To save time and money and concentrate your resources on what you do best, look instead for a broker who specializes in the kinds of products you are importing.
If you need help classifying your goods for import into the US, contact us.