WHY IS HTS CLASSIFICATION IMPORTANT?
The Harmonized Tariff Schedule of the United States (HTSUS) is the foundation of classification. Its roots go back to 1988, when it was adopted by the 200 or so member countries all around the world. Within the principles of the HS, the HTSUS classification determines the duty rate for goods imported, which impacts the profitability of the importer and determines potential restraints on the importing of particular goods. Restraints – such as embargos, anti-dumping and countervailing duties – occur due to quotas put into place by the country’s government to protect certain industries. Antidumping (AD) and countervailing (CVD) duty rates are dependent on the country where the product is manufactured.
The HTSUS Classification also supports the North American Free Trade Agreement (NAFTA) and many other Special Trade Programs designed to provide preferential duty rates to importers buying goods from countries deemed to be accepted trading partners.
Given what is dependent on the HTSUS Classification, it is of the utmost importance to get the classification correct – which can be quite the task given the tens of thousands of possibilities. However, proper classification is a requirement under Federal Law as well as the Customs Modernization Act, as part of the North America Free Trade Implementation Act of 1993.
THE COST OF MISCLASSIFICATION
Misclassification is not only a non-compliance concern but also comes with the risk of shipment delays, fines, penalties and a likelihood of more scrutiny by Customs and Border Protection (CBP). According to the World Customs Journal, it is the greatest cause of non-compliance.
For many countries, the duties that come from the correct classification represent a significant portion of tax revenue – making duty underpayments a lost profit opportunity. According to the World Customs Organization, one out of every three entry lines is misclassified, costing governments worldwide more than US$20 billion per year in duty underpayments (WCO, 2015).
As tough as it can be to obtain the correct classification, reasonable care must be shown in the process to obtain it. Ensuring proper classification is the first step of the whole importing process. If a mistake is made in classification, the mistake will follow throughout the entire import chain. In order to be released by CBP, commodities must be classified; an incorrect classification can delay the merchandise release and, in turn, delay its delivery to the final destination.
CONSEQUENCES OF MISCLASSIFICATION
If the commodity is misclassified, the importer may be paying the wrong duty and, as a result, calculating an inaccurate profit/loss statement. If the misclassification results in a higher duty, the importer is paying too much. However, if the duty assessed was too low, this can cause even bigger problems with the U.S. Government. A misclassification can raise red flags, and lead to CBP issuing a Request for Information form (CF28) or a Notice of Action form (CF29). When this occurs, the importer has to rework or reassess the classification, resulting in extra work. In some instances, the importer has to go back and research the company’s entire product database to see if other mistakes were made – causing rework, wasting time and adding costs.
If an importer makes too many misclassifications, CBP will assess large monetary penalties and/or open audits and investigations into the importer’s business. This has the potential hit profits and, in rare cases, can lead to the bankruptcy of the importer’s business.
CONTROL THE SITUATION
The only way to ensure that your business does not suffer the negative consequences of CBP fines and audits due to misclassifications is to ensure that your processes and databases are accurate and reliable, and that your employees are properly trained. Because this can be a cumbersome and complex undertaking, outsourcing this aspect of your business may be a viable solution as it will allow you to free up your team from the task of overseeing your product classification and product database so that they can focus on other important tasks. Additionally, outsourcing your product classification to an expert will: help you save more money by taking advantage of preferential duty rates through free trade agreements, apply the latest tools and technology to help manage your classification process, conduct a complete review of your current product classification and database to ensure you’re compliant in the event of an audit, carry out the necessary research for correct classification and legal precedents, and offer compliance expertise.
Livingston International understands the intricacies of trade. We can help you navigate the complexities of product classification, and save your business a lot of time and money. If you’d like to explore new possibilities for how your business handles classification processes and databases, contact us.
We’re here to help.