It’s a fact of life in international trade, many shipments,
on a daily basis, arrive at ports in the U.S. with the wrong tariff
classification code assigned to the product. No big deal? Not
quite, and I can tell you this, from the legal side of our 2
companies, (Braumiller Law & Braumiller Consulting) we end up
putting out a lot of fires for clients when Customs comes knocking
as a result of having discovered this after the entry is filed. In
our experience, decades in the making, many of our classification
audits revealed that companies can sometimes have as high as 80%
incorrect classification on a product, or products, and may have
had this problem for years. We also have come across this scenario
more than a few times where it involved thousands of product
classifications that were incorrect. Not good, and CBP is quite
unsympathetic when a great deal of time has passed; it looks like
neglect in terms of compliance. It’s the sort of thing that
will put even a mid-size company into bankruptcy given the
penalties that accumulate via CBP.
Once CBP is involved, and the official notice of an
investigation or penalties reach the designated importer of
record’s inbox, is usually when all of the finger pointing
starts, as one tries to nail down just where, why, and how the
classification was incorrect prior to shipment.
So, who is responsible for the most part in this extremely
critical area of documentation in cross-border trade? There is an
individual, but in their defense, it can be complicated. The United
States, as well as more than 200 other countries, base
classifications on the World Customs Organization’s
“Harmonized System,” which is a standardized listing of
more than
200,000 commodities, with a corresponding six-digit code
number for each. Mind boggling you would think, but there is a
very specific method to the madness. The United States uses
the Harmonized System as the basis for its “Harmonized Tariff
Schedule” (HTS). HTS codes are 10-digits, with the first
six digit coming from the HS, followed by four digits unique to the
United States. Canada maintains its own 10-digit based
system, known as Customs Tariff, and other countries have their
own.
Yes, as mentioned, it’s complicated, so without further
digression, who is responsible? Ultimately, the importer of
record. Straight from the CBP
website: The importer of record is responsible
for using reasonable care to enter, classify and determine the
value of imported merchandise and to provide any other information
necessary to enable CBP to properly assess duties, collect accurate
statistics, and determine whether other applicable legal
requirements, if any, have been met. CBP is then responsible for
fixing the final classification and value of the merchandise. An
importer of record’s failure to exercise reasonable care may
delay release of the merchandise and, in some cases, may result in
the imposition of penalties. It’s not easy sometimes
to avoid the misclassification pitfalls, as the process of
manufacturing, and subsequently identifying the correct code of the
final product (inclusive of all elements sourced and used in
production) can be a rather daunting task, and extremely difficult
at times given the complexity of the product.
Let’s take steel brackets as an example used on
lawnmowers. A simple word search would most likely lead you
to 8302 “Base metal mountings, fittings and similar
articles suitable for furniture, doors, staircases, windows,
blinds, coachwork, saddlery, trunks, chests, caskets or the like;
base metal hat racks, hat-pegs, brackets and
similar fixtures; castors with mountings of base metal; automatic
door closers of base metal; and base metal parts
thereof“; however, there are many other factors you need
to take into consideration. How is this item used? Is
it required for the function of the lawnmower? How is
the bracket used? Depending on the response to those
questions, it may preclude you from using this heading. It would
likely be a part of the lawnmower or even an article of steel under
7326. In order for items to be covered under heading 8302, it
must be suitable for use on an article that is deemed sufficiently
similar to the exemplars listed in the heading.
Another reason can be of course attributed to the all too often,
I was multi-tasking, wasn’t sure, didn’t care, or
didn’t want to pay the money to consult an expert, or just
plain human error. The most common excuse we hear is that we
relied on our customs broker to provide classifications with the
corresponding misconception of that’s where their
responsibilities end. The truth of the matter is, the
importer of record is still responsible for the classification
declared.
Regardless of the reason, misclassified products can have a
multitude of consequences including:
- Overpayment/Underpayment of duties.
- Failure to utilize free trade agreements or used in error.
- Lack of awareness that product is subject to anti-dumping,
countervailing, and/or Section 232/301 duties. - Absence of declarations to other governmental agencies.
- Red Flags to CBP contributing to audit referrals.
Also, worth noting, if /when we get back to submitting exclusion
requests for the Section 301 tariffs with China, an improper
classification could cost you the opportunity to take advantage of
a granted exclusion, because a win (granted exclusion request per
the Commerce Department) for one product classification in
Washington D.C., is a win for all with that same code.
Now, finger pointing and responsibility aside, if and when that
mistake in classification happens, “what now? There is a
way out, but it means one must be very forthcoming to the CBP. Key
operative word “forthcoming” to Customs translates to
what is called a “Prior Disclosure.” This action is taken
from the legal side of the house, and we (Braumiller Law Group)
write several per month. This is where we get into mitigating
circumstances to alleviate some, if not all, but mostly just some,
of the penalty that Customs will inflict for the error. They have
been cracking down on misclassified products, as there are several
bad actors among cross-border trade entities whose intention is to
purposely use an incorrect classification because it would entitle
them to perhaps an FTA benefit through the USMCA or create a means
to get around an import tariff from a particular country like
China. Again, straight from CBP: The
prior disclosure provision contained in 19 U.S.C. § 1592
provides reduced penalties to a person
who notifies CBP of the circumstances of a violation of the customs
laws and regulations, before CBP or U.S. Immigration and Customs
Enforcement (ICE)/Homeland Security Investigations (HSI) discovers
the possible violation and notifies the party of the discovery of
the possible violation.
In the end, it’s all about due diligence, and those finite
checks and balances in the supply chain that can keep a fire from
starting in the first place. Quite often the consulting side of the
house (Braumiller Consulting) will perform an audit within a
company’s supply chain, pulling samples, and meticulously go
through the classifications based on the product specs. It’s
just another way to be sure, as sometimes, even from the
classification end (CBP) the rules and regulations may change, and
it behooves one to stay vigilant. Stay tuned, stay focused, and
above all, stay compliant.
Note: The new 2022 Harmonized System (HS) nomenclature has been
accepted by all parties at the Harmonized System Convention. The HS
nomenclature is used as a basis for the classification of goods
around the globe. Every six months, the HS Committee of the World
Customs Organization (WCO) meets to discuss potential changes in
the HS. For more information, here is my colleague’s recent
article on the topic: https://www.braumillerlaw.com/2022-harmonized-system-nomenclature-any-significant-changes/
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