Nearly every product possesses a six-digit code, which serves to inform customs authorities about the nature of the item. This six-digit descriptor comes from the Harmonized Commodity Description and Coding System — or Harmonized System (HS), for short. The HS is an internationally recognized tariff nomenclature system developed and maintained by the World Customs Organization (WCO).
HS codes are known as subheadings. More than 200 countries around the world use the HS. In addition, HS subheadings cover around 98 percent of international merchandise trade.
If importers and exporters use the HS correctly, then the first six digits of the HS of any particular item will be the same in all countries that are WCO members.
In addition to the 6-digit HS subheading, a country can add further numbers for more granular tracking of imports and exports to suit its reporting and tariff needs. For example, TARIC, the integrated Tariff of the European Union, and the US’s Harmonized Tariff Schedule (HTS) both use a 10-digit system.
As a result, a vital step for import management and meeting your global trade compliance objectives is to apply the correct commodity code to your goods. Customs authorities around the world use commodity codes to:
- Determine what products are being imported into a particular country
- Decide if these goods are eligible for entry
- Calculate the amount of duties, if any apply
Get the classification wrong, and a world of headaches await, including disrupted supply chains, delayed shipments and fines.
The Long Arm of Authorities
Different customs authorities have, unsurprisingly, different oversight procedures for importers. In the US, for example, Customs and Border Protection (CBP) could issue an importer with a CBP Form 28. This is a “Request for Information”.
After this, CBP may issue Form 29 — a “Notice of Action” for an importer alleged to have committed a violation, such as an incorrect goods classification. CBP may also issue a Pre-Penalty Notice. This notice may allege that the importer has committed a violation, such as gross negligence or fraud. Along with the Pre-Penalty Notice, you may receive a demand to pay penalties and additional duties.
When the CBP issues these forms, it may decide to charge the importer with a fraud penalty in violation of 19 U.S.C. 1592. The penalties can be steep. Authorities can fine importers up to the total invoiced value of all the affected shipments.
If, for example, a shipment of car seats was incorrectly declared to CBP, and that shipment was worth $125,000, the fine would be $125,000. Now imagine if this company had a history of incorrectly declaring their imports of car seats in the same manner going back five years. The monetary penalties can quickly stack up. Customs authorities in the US can also collect these penalties from officers, board members and shareholders of the company — even if the company is no longer operating.
Fraud vs Negligence
Import fraud can take a number of forms, but the vast majority of penalties are imposed because of violations in the following three areas:
- Improper classification, particularly to avoid duties or get around admissibility criteria
- Inaccurate valuation, by greatly undervaluing the goods to avoid paying taxes and duties
- Incorrectly stating the country of origin in order to qualify goods under a free trade agreement for which these goods do not qualify
It is possible to underestimate the value of goods, or incorrectly state the country of origin by accident rather than design. One thing is certain – humans make mistakes! And an incorrect commodity code is even more open to human error.
If your organization is found in violation and required to pay penalties, customs authorities will keep a close eye on you moving forward. Your company is likely to be subject to more frequent inspections. In addition, you may face longer processing times getting your shipments through customs.
Compliance is Not Optional
Correct classification is a legal responsibility. Having said that, classification is no easy task. Choosing the correct commodity code depends on a number of factors, including:
- A full and complete description of the goods
- All of the component materials used to manufacture the good
- The principal use of the goods
It is not uncommon for importers to be unsure of the correct classification. For example, a pen made from mahogany and gold. Is the pen a gold pen, or a mahogany pen? What if it comes as part of a set with a pencil, note paper and ink?
In order to determine the correct commodity code, the importer must go through the General Rules of Interpretation (GRI). The GRI is the set of rules that govern the interpretation of the 6-digit HS. The GRI includes rules for ‘sets’ and ‘essential character’ to help importers select the correct commodity code.
Simplifying Classification
It is possible to simplify classification by using import management software. A comprehensive solution will help you determine the correct classification by documenting an imported good’s key attributes.
Equally important functionality is a “GRI Wizard.” This guides you through the complex GRI, to ensure the accurate selection of the commodity code.
The resulting codes can be automatically saved to a product classification database. All details, notes, and documents should be archived.
In the event that you experience a customs audit, these records demonstrate to the authorities that you have best-in-class processes and meet the expectation of “reasonable care” when classifying your goods.
