Import Management: The Importance of Correct Classification

The correct classification of incoming goods is a legal responsibility. In this QAD Precision Report, we look at the importance of correct classification.

Classifying goods using the correct commodity code is the first, and arguably, most important step in import management. These codes tell customs officials what is being imported, if the goods are admissible, and what taxes, if any, are due. Any importer who gets the classification wrong is violating import laws. As a result, the importer is vulnerable to delayed cycle times,  confiscated shipments, and fines.

Commodity Codes Explained

Supply chains are global. As goods cross the world, they travel with a six-digit code, known as a subheading. These six-digits are an almost universally recognized tariff nomenclature system. This is known as the Harmonized Commodity Description and Coding System — or Harmonized System (HS).

Almost every trading nation uses and recognizes the HS. Therefore, customs authorities around the world share a common language to track the inbound and outbound flow of goods. When used correctly, the six-digit HS code of a particular item will be the same in all WCO member countries.

Furthermore, as well as the six-digit HS subheading, WCO member countries can add further numbers to the commodity code. This allows customs authorities in those countries to track imports and exports according to its particular tariff needs. The US’s Harmonized Tariff Schedule (HTS) and TARIC, the integrated Tariff of the European Union, both use ten-digits.

The Importance of Accuracy

Foreign goods imported into a country may be subject to tariffs. Therefore, importers must classify their incoming goods according to the HS and the import country’s own tariff nomenclature. 

This is not an aspect of global trade management that can be treated without due diligence — correct classification is a matter of regulatory compliance. Get it wrong, and the importer can face serious consequences. The vast majority of penalties are as a result of a violation in one of the following three areas:

• The importer improperly classified goods, either by mistake, or to avoid duties, or to bypass admissibility criteria

• An importer submitted an inaccurate valuation and undervalued the goods to avoid paying taxes and duties

• The importer misrepresented the country of origin in order to illegally qualify goods for preferential duties under a free trade agreement

It is, of course, possible to purposely use an incorrect commodity code to gain a fraudulent advantage. However, classification is a complicated process, making it vulnerable to human error.

However, an importer who incorrectly classifies their goods will face penalties whether the mistake arose from fraud or negligence. Violators may also be subject to a longer customs clearance process, and more frequent inspections from customs authorities.

Compliance is a Legal Responsibility

Any import activity  must begin with correct classification. This is a legal responsibility. This is true, even if a third party, such as a customs broker, classifies goods for you. 

Ensuring that you have the correct code depends on a number of factors. Importers will need:

• A complete description of the good

• Complete details of the components or raw materials used to make the good

• The primary use of the good 

Take for example, a shaving razor made with a metal frame and a plastic grip. The importer could have difficulty deciding if it is a metal razor or a plastic one. 

The classification process also allows for sets. What if the razor comes as part of a set with shaving cream and aftershave? In such a case, it is possible that a different commodity code will apply.

In order to work through these questions, the importer must use the General Rules of Interpretation (GRI). The GRI is a set of rules that importers use to interpret the HS. The GRI includes rules for the ‘essential character’ of a good as well as rules for sets. 

How QAD Precision Can Help

By correctly classifying their goods, importers not only avoid penalties, they can save money too. It is not uncommon for importers to pay too much duty. This is because they do not take advantage of all the possible tariff provisions available. 

For example, a good may qualify for lower or zero tariffs under a free trade agreement. Furthermore, the primary purpose of a good can mean that a lower tariff rate will apply.

QAD Precision Import Management automates the import processes. The solution offers specialized tools to assist importers ensure compliance with global trade laws, including the correct commodity codes and import documentation.  

QAD Precision’s import management system includes an automated Classification Worksheet and GRI Wizard to ensure correct classification. All classification determinations are then added to the solution’s Global Product Item Master. This captures a good’s key attributes, as well as supporting documentation and decision criteria. Furthermore, the solution automatically generates admissibility flags as well as identifies preferential duty eligibility under a Free Trade Agreement.

The Global Product Item Master also allows for multiple import and export commodity codes to be assigned to goods, based on the importing or exporting country. As a result, companies with global import operations can use a consistent and uniform application of commodity codes. The proper codes are available for all documentation and customs reporting purposes, across the entire enterprise. 

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Further Reading

3 MINUTE EXPLAINER: UNDERSTANDING IMPORT MANAGEMENT 

LEVERAGING IMPORT CLASSIFICATION: 5 LESSONS LEARNED 

WHAT IS A FOREIGN-TRADE ZONE (FTZ)?