The correct classification of incoming goods is a legal
responsibility. In this QAD Precision Report, we look at the
importance of classification compliance.
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,
Commodity Codes Explained
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
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.
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 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 duties. 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 remain compliant with global
trade laws, including the correct commodity codes and import documentation.
QAD Precision Import Management includes an automated Classification
Worksheet and GRI Wizard to assist with 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.
LET’S KEEP IN TOUCH
If you would like to subscribe to the QAD Precision Report, or would
like to receive notifications about QAD Precision events, webinars and
news, please click here.
About QAD Precision – Trusted Global Trade and Transportation Execution
QAD Precision, a division of QAD Inc., provides industry-leading global
trade compliance, and multi carrier transportation
execution solutions from a single, integrated platform. An
ISO-certified company, QAD Precision assists companies to streamline
and transportation operations, optimize deliveries, and increase
logistics ROI. QAD Precision’s scalable and extensible solution easily
integrates with existing ERP and WMS solutions. Industry leaders in
every region of the world rely on QAD Precision’s global support
centers to leverage thousands of carrier services and manage millions
of global trade and shipping transactions every day. For more
information about QAD Precision, visit www.qadprecision.com.