Determining the correct classification of goods is arguably paramount to any good trade compliance program. However, many companies misclassify their goods at an astonishing rate. While this may be good for business for trade compliance consultants like myself, it isn’t good when it comes time for our client’s Customs audits. Let’s dig into some best practices regarding classification and see if we can answer the age-old question, “What makes classification so dang hard?”
First, a little background – the correct classification of goods using the Harmonized Tariff Code is important because it is this code that determines duty rates, free trade agreement applicability, and whether goods are subject to quotas, embargoes, and special duty rates like section 301 or 232 duties. Since the Customs Modernization Act was passed in 1993, it is the importer’s responsibility to use reasonable care to classify their goods correctly. To help importers with this monumental task, CBP has said that they can “use the services of a Customs expert to assist them.” Companies like Braumiller Consulting Group are happy to help.
So, you know how we said earlier that it’s the importer’s responsibility to use reasonable care to classify their goods correctly? Remember that time that someone you know (I know you wouldn’t do this) told their broker, “Just go ahead and use the HTS code on the invoice that the vendor provided” and didn’t actually verify themselves that that code was correct? That’s not reasonable care. Reasonable care dictates that the importer must either determine the correct classification themselves or hire an outside firm who is an expert in customs requirements and procedures to help them. That last part is important too. There are lots of companies who will offer their classification services, but before you go with the cheapest option out there, remember that you really do get what you pay for, and importing with the incorrect classification can leave your company vulnerable to fines and penalties of an astronomical value.
Where do you even start when you’re trying to classify something? First, gather all of the information that you can about the item that you’re trying to classify. Is it a screw? What type of screw? What are its measurements? Is it a motor? What kind of motor? How does it function? Is it a chemical? What is the CAS number? Do you have a picture of the chemical structure? Remember how you asked a million questions as a kid? That’s an important skill to revitalize when you’re trying to classify.
Second, you HAVE to follow the General Rules of Interpretation. Many people seem to skip the first one which basically says that you must start by looking at the headings, section notes, and chapter notes. I’ve seen a lot of clients using chapter 90 as a catch-all lately. The title of chapter 90 is “Optical, photographic, cinematographic, measuring, checking, precision, medical or surgical instruments and apparatus; clocks and watches; musical instruments; parts and accessories thereof.” If your item does not fit into any of the categories listed in the title of the chapter, you are in the wrong chapter. This is true even if you find a subheading that might fit your item. If the heading doesn’t fit, you’re in the wrong chapter and need to start over.
In addition to the General Rules of Interpretation, or GRIs, section and chapter notes, you might find that the Customs Rulings will be very helpful to you. At rulings.cbp.gov you can find numerous past Customs Rulings that have been issued. While rulings issued to other companies are not legally binding on your company, if you happen to find a ruling that is for the exact same item that you’re importing, it would arguably not be a representation of reasonable care for you to choose to use a different classification for your item than the one that Customs determined was appropriate. Rulings on items that are not exactly the same as yours can still help to point you in the right direction. If you’re classifying a hydraulic pump, for example, a simple search for that term leads to many rulings pointing you to 8413. That can give you a good starting point to begin your classification if you’re just not sure where to begin.
Another great resource is the Explanatory Notes. Unfortunately, these notes are not available without a subscription of some sort, but these subscriptions are widely available and not always costly. The Explanatory Notes give you more detail on the terms used in the Harmonized Tariff Schedule. Using our earlier example, the hydraulic pump, the Harmonized Tariff Schedule will want you to determine whether the pump is a reciprocating positive displacement pump, a rotary positive displacement pump, a centrifugal pump, or some other type. The Explanatory Notes will help to define these terms for you as well as the subsequent terms like diaphragm pumps, oil-cushion pumps, etc. The Explanatory Notes usually also provide examples of items that fit into the heading that you’re viewing and items that do not fit into that heading, both of which can be very useful.
Overall, classification is an art. It’s not easy. Make sure that you keep documents that substantiate the classification that you’ve chosen. Keep those diagrams, spec sheets, pictures, YouTube videos, chemical structures, or whatever else helped you classify. When you get audited, Customs will want to see your backup. In the end, classification is not only a necessary evil but also a helpful tool. If you ever have a question about anything you’re trying to classify, please reach out. We’re happy to help!