If you work in a field that is even slightly related to import or export, you have heard terms like harmonized code, tariff number and HS code, more than once. Harmonized Code is a common term in global trade language; it is one of the most important elements to bring standardization to international trade. Most of the time even though as an importer/exporter you may depend on 3rd party service providers expertise to find the correct HS number or code, do you know for sure whether or not they are classifying your cargo accurately? Importers and exporters may experience serious issues due to misclassification of their shipments. Before explaining the importance of this subject, let’s see how the harmonized code works and what it really is. The Harmonized code was created and administered by World Customs Organization (WCO) based in Brussels. Harmonized Commodity Description and Coding System (also known as HS Codes) are codes to report the import or export goods to government, customs or related agencies. Basically every cargo and commodity can be described and coded with numbers, and that code is recognized as the same commodity an all countries that accept the HS system. Today more than 280 countries are using this system for international trade.
Basically an HS Code is a numerical code that shows what was shipped across country borders. The first 6 digits of the HS are used universally. Each country may then add to the original 6 to suit its own tariff and statistical needs, creating 8, 10, and sometimes 12 digit national codes. The U.S. Harmonized Tariff Schedule, like Harmonized System tariff schedules generally, classifies a good (assigns it a ten-digit tariff classification number) based on such things as its name, use, and/or the material used in its construction. Chapters are divided into a varying number of headings, and headings are divided into a varying number of subheadings. There are over 17,000 unique ten-digit HTS classification code numbers and over 5,000 heading and subheadings.
The system has been set up and has many rules to follow for correct classification. First of all its complex structure and over 2000 pages of classification rules make the correct classification very difficult. Another reason that causes the misclassification is the description of the products are very different than their daily names. For example for correct classification of an electric toothbrush you or your broker must choose the following description: “Electro-mechanical domestic appliances, with self-contained electric motor, other than vacuum cleaners of heading 85.08. Other.”
Did you know that some government studies show that at least 30%-50% of customs entries are misclassified? Here’s why it is really is important that your cargo is classified correctly. With HS code declared to Customs, importers pay the duty on their cargo and if cargo is misclassified, importers may end up paying a much higher amount of duty and taxes. That will only cause the increase of import cost. If the duty paid is less due to misclassification, again as an importer of record you may have to pay high penalties. Even though as an importer or exporter you may think you hired a third party expert to find the correct HS code and complete the filing; still the importer of record is solely responsible for the accuracy of the HS codes declared to customs.
Another important result of misclassification is that shipments may end up having more Customs exams and holds, that also could cause high exam charges and delays on the shipments. For exports some countries may require HS Code submission to related government agencies before the cargo sailing. Wrong or misclassified HS Code submission may lead to future investigations of your company.
It is clear that not all importers and exporters are experts on classification of cargo they are shipping, however it is possible to prevent paying unnecessary duty charges and penalties. First of all make sure to provide all the necessary paperwork your broker would need for classification. Have your suppliers prepare their commercial documents in detail. This will eliminate any confusion on the classification of the cargo. Lastly, you can work with more than one company for classification. If you would see different HS code numbers for the same cargo you catch the mistake before it is too late, and can avoid future mistakes.