Harmonized Classification: Is Your Company Exercising Reasonable Care?

John Goodrich | July 11, 2004 | Import Basics
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Harmonized Classification: Is Your Company Exercising Reasonable Care?More than 30 years have passed since the passage of the Customs Modernization Act. Within that legislation was language stating that an importer of record must utilize reasonable care when making entry, providing Customs with such documentation or data as is necessary that will allow Customs to determine if merchandise can be released from Customs custody and to sufficiently allow Customs to accurately collect duty and statistics.

More simply stated: It is the importer’s responsibility to file customs entries with accurate classifications, values and estimated duties.

How well is your company doing when it comes to reporting accurate harmonized classification codes to Customs?

10 Indicators Your Classification Process Is Not Meeting Reasonable Care Standards

With all apologies to a late-night talk show icon, you know your company’s classification program is at risk if:

  1. You think the word CROSS is something you do to your heart,
  2. Your broker assigns the Harmonized Tariff System (HTS) codes to your customs entries without your instruction,
  3. You do not have a post-entry audit process for your import program,
  4. You think a binding ruling refers to a totalitarian government,
  5. You pick your classifications with the assistance of a dartboard,
  6. You use the numbers your predecessor used,
  7. You select your classification based on lowest duty rate,
  8. You don’t have access to the HTS code,
  9. You do not have a comprehensive list of all of your part numbers and their corresponding classifications,
  10. You think harmonizing is what they do in the church choir.

As an importer, you are ultimately accountable for the accuracy of the harmonized codes you—or your agent—submit to the government.

Ok, so I struck a nerve, and you have some work to do to bring your classification process up to standard. Following are some suggestions you might consider implementing at your company.

From the IBT library—
Doing Your Duty: Product Classification According to the
Harmonized Tariff Schedule of the United States

Go Back to School

Classifying products according to the harmonized system is an acquired skill. As an importing company, you must have someone on staff that has developed the ability to accurately classify merchandise. If you do not have that skill within your company, you will need to develop it. Without a knowledge base, you will not be able to sufficiently review the work of your employees or your third-party customs brokerage firm(s).

Space does not allow us to review the entire classification process within this article. Classification according to the HTS involves much more than looking up your commodity in the index and picking a number. If you or your staff are not aware of the General Rules of Interpretation (GRI) that govern how HTS numbers are selected, it is time to sign up for a class.

Local trade organizations often offer good classes. On a national level, International Business Training (IBT) offer good day-long introductory courses.

Get Help!

I do not intend to imply that it is unacceptable to rely on a third party to assist you with your classification work. On the contrary, Customs and Border Protection (CBP) encourages importers to use the assistance of third-party experts (brokers, attorneys and consultants) to assist importers in developing robust compliance programs. Third-party experts can provide you a fresh perspective on your compliance programs while helping you quickly achieve your compliance objectives.

Not all assistance comes at a price. CBP offers a wealth of classification assistance to the commercial importer on its website. Some of the highlights of the site include:

Free Access to the HTS

Links to the HTS are available online at the CBP website. From this page you can find a quick link to the Harmonized Tariff Schedule. The link actually takes you to the U.S. International Trade Commission site, which is responsible for maintaining the tariff.

Binding Ruling Instructions

Importers may request formal, written classification assistance from CBP by requesting a binding ruling. Instructions for obtaining such a ruling are detailed on the CBP website. Rulings can be requested in a written letter or electronically via the eRulings Template. Please note: When you receive classifications from CBP in this manner, you are bound by their decision whether or not you agree with the ruling and until such time as the ruling is altered. Use this tool judiciously.

Online Binding Ruling History

Binding rulings are public record. CBP has made these rulings available through their Customs Rulings Online Search System (CROSS). To date, CBP has published over 114,000 rulings. Although these rulings are only binding on the importer who requested them, you can certainly use them to inform your classification decisions. The CROSS system is a unique way in which an importer can gain insight into CBP’s classification methods.

Develop a Master Classification List

You do have a master list of all of your product codes and HTS numbers don’t you? Don’t wait another day! If you are going to consistently classify your products from one shipment to the next, you must document your classifications and your classification process.

The easiest way to do this is in a spreadsheet. Here is an example of column headings you might want to use:

  1. Part Number, SKU or Style Number
  2. Product Description
  3. HTS Classification Number
  4. Country of Origin
  5. Duty Rate
  6. Duty Preference Program (GSP, NAFTA etc.)
  7. Statistical Reporting Quantity 1
  8. Statistical Reporting Quantity 2
  9. General Rule of Interpretation used to determine classification
  10. Binding Ruling Number
  11. Person Responsible for the classification determination
  12. Date of Classification

Some of you may wish to include additional data elements or to associate this list with the parts master file within your ERP or mainframe systems.

In addition, you will also need to develop and document a policy and process detailing how you maintain your master files. Developing a procedure for documenting those instances when you believe you will need to alter your original classification is particularly important.

Share the List with the Broker and Your Supplier

As the importer, you are accountable for the classifications your broker applies to the customs entry documentation. Don’t leave this process to chance. Share your master classification list with your broker and provide them updates on a regular basis.

Your brokers will thank you as you simplify the entry process for them. Many brokers will be able to import your list into their electronic system to use as a lookup table.

Don’t stop with your broker. Include your classifications on your purchase orders and require your vendors to reprint the numbers on their commercial invoices.

The more you communicate your classification expectations, the more accurate your entry classifications will become.

Establish Standard Operating Procedures

You have now documented your classifications and shared them with your broker. You aren’t done yet.

Have you discussed with your broker what you want them to do if one of your products arrives and isn’t on the list? What is your broker supposed to do if they disagree with your classification?

Again, do not leave this communication to chance. Agree upon, document and implement a written standard operating procedure with your broker. Some importers insist that the broker never classify any products without first receiving an email from the importer.

Other importers allow the broker more leeway to make a decision as long as the broker informs the importer in writing of their classification decision.

Whatever your policy, document it!

Trust Yet Verify

By now you would think there would be no classification errors on the actual customs entry right? Wrong! Despite all of your hard work to improve the pre-entry classification process, mistakes still happen.

Even though you did not make the mistake, your company is still responsible for it. You will need to develop a post-entry classification audit process. This entails comparing the actual classification reported on the entry summary (CBP form 7501) with your master classification list. If you discover errors, you will need to instruct your broker to amend the entry

And If There are Still Classification Mistakes?

CBP defines reasonable care by the existence of adequate and documented business policies and procedural controls. If you have policies and procedures for:

  • Training and developing staff,
  • Working with third-party experts,
  • Discerning your proper HTS classification,
  • Communicating the classifications to brokers, 
  • Auditing the work of your brokers,

…then more than likely you are exercising reasonable care relative to classification. Should CBP uncover a few classification errors within an audit, then it is highly likely they are the result of random human error, not the failure of your business processes.

However, should CBP discover classification errors within your import program and observe that your company does not have adequate and documented business controls in place, that leaves your company open to more severe enforcement action. But that’s another article for another time.

This post was originally published in July 2004 and has been updated to include current information, links and formatting.

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