Chapter 2: Incorrect Tariff Classification Codes

Chapter 2: Incorrect Tariff Classification Codes

When Canada’s Auditor General released a 2017 report detailing the government’s efficiency at collecting customs duties, it revealed that roughly 20 percent of shipments arrive in Canada with the wrong tariff classification code assigned.  As a result, the Canadian government misses out on approximately $21 million CAD annually.  

Misclassified shipments have the dual effect of not only causing shippers to pay incorrect amounts of duty, but they also prevent customs agents from knowing exactly what is being brought into the country.

But what exactly is a tariff classification code, and why are so many shipments arriving at the border with the wrong code assigned?

What is a tariff classification code?

Both the United States and Canada – along with more than 200 other countries – base product classifications on the World Customs Organization’s “Harmonized System,” which is a standardized listing of tariff codes for more than 200,000 commodities, with a corresponding six-digit code number for each.  

The purpose of the international Harmonized System is to establish uniformity among nations, so that a product originating in one country will carry the same identifying code as the same product manufactured in a different country.  Without the HS, worldwide commerce would be a mishmash of disconnected codes and identifiers.  

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 the Customs Tariff.

Reasons for Misclassified Shipments

Identifying the right code though, can be extremely difficult.  In the United States, the International Trade Commission (ITC) cites as an example, the complexity of finding the correct code for kitchen paring knives.  “Consider the classification of a kitchen paring knife with a ceramic blade.  Either a word search or casual browsing through the Tariff Schedule might lead to heading 8211 (“Knives with cutting blades, serrated or not…”)  However, Chapter 82 Note 1 excludes articles with a blade of ceramic from Chapter 82. The proper classification is in Chapter 69 as an article in ceramics.”

There may also be circumstances in which a product may seem to fall within multiple categories.  Screws for example, could fall under heading 7318, “screws, bolts, nuts,” but also under “parts and accessories of motor vehicles,” which is heading 8708.  A general rule of thumb is to choose the heading that is most specific, that according to the ITC, describes a product’s “essential character.”  

Tariff classifications can also be open to interpretation, which can result in a shipment being misclassified.  Importers looking to minimize tariff obligations sometimes have a difference of opinion with border agents, with regard to a product’s tariff code assignment.  When that happens, a business can challenge CBSA and seek a legally binding advance ruling, which will eliminate any doubt about a shipment’s tariff classification.

Consequences of Incorrect Tariff Code Classifications

Regardless of the reason, misclassified shipments can have multiple adverse consequences including:

• Overpayment of duties
• Missed opportunity to take advantage of free trade agreement benefits
• Missed “heads up” that an import may be subject to anti-dumping or countervailing duties
• Potential “red flag” alert to customs agents about deeper problems with entry filings, which could lead to an audit
• Unexpected customs clearance delays.

Proper tariff classification identification is an important part of the import process, with significant consequences for getting it wrong.  But finding the correct code is no easy task.

As the U.S. Customs and Border Protection warns on its website: “Be aware that the HTS can be very complicated.  If you self-classify an item and the classification is incorrect, the mistake can be costly.”   

Businesses do not have to take on this confusing responsibility alone.  A qualified customs broker or logistics provider can manage the process and ensure that all recordkeeping and compliance mandates are satisfied.  But, it is essential to partner with a third party that truly understands the process and has the necessary experience.