Why Is Customs Classification Important - A Cautionary Tale

Why Is Customs Classification Important - A Cautionary Tale

For those who don’t know what ‘classification of goods’ at Customs is, it is the declaration, in precise detail, of the exact nature of an import. It is a process that uses a sophisticated system referred to as the ‘Harmonized Commodity Description and Coding System” or the HS Code.

The HS Code is a vast document with countless instances of precedent and corner cases. In fact, it is so large it has a second set of rules applied to it just for navigating and applying its depths - the General Rules of Interpretation (GRI). These sets of rules, taken together, make the whole thing just large enough to be open to the occasional interpretation - a fact that will become incredibly relevant as we explore this week’s subject.

But why is the classification of goods important? Not only does it help identify and apply accurate duties, but improperly classifying your imports can have significant financial consequences in certain circumstances.

Fortunately, Customs can be surprisingly forgiving - especially when it comes to genuine errors. Mistakes on how to properly classify your imports are common for fresh and practiced importers alike, and learning from those mistakes is part of the process. However egregious or criminally habitual practices are treated differently - which is worth keeping in mind as we proceed. 

Of course, if you are nervous about classification, the best way to deal with that is by washing your hands of the whole affair and leaving it with the experts at PCB. Our team has decades of practical import experience with the credentials to match. We can help correctly classify your imports, and we can even get you a binding ruling to make your classification legally protected. That means your imports are much more likely to cross Customs headache-free. 

 But this post isn’t about what you should do; it is about what you should not do.

A Profiteering Prologue

It is fair to say that classification is among the most contentious of all the declarations one must make when importing, with the classic example being a coffee maker that also makes tea. The classification of a ‘coffee maker’ instead of an ‘all-purpose beverage maker’ can be a significant difference to a business’s bottom line. 

CITT Case Study: Why A Multi-Purpose Brewing Machine Is Simply A Coffee Maker

It might be tempting for someone brand new to international trade to view the bureaucratic process of Customs as being relatively low stakes. For a first-time or personal importer, the difference of a few extra dollars at the border might feel like it’s just necessary paperwork or a slightly larger toll booth. It isn’t until you start importing thousands or millions of coffee makers/beverage makers that you realize exactly how much money you’re spending importing at a large scale.

For most importers, this realization will lead you to begin exploring new options. Maybe you have a conversation with a PCB Trade Advisor and explore tariff relief options, change your product to be more import-friendly, or seek new ways to take advantage of international agreements, but if you are an unscrupulous importer, there are less savory options “available.” None of them are viable, and they all end up costing you more than you save, but they are there.

An ill-intentioned importer might find it a particularly alluring prospect to plead ignorance, bend the rules, and see how much you can get away with by asking for forgiveness rather than permission. 

With that in mind - let’s talk about a recent case.

Misclassification and Malfeasance: A Mini Case Study

In the spirit of self-improvement and avoiding further reputational damage from long past events, we are not going to say the name of the company, and what it imports has been changed. However, it should be noted that this is a real case from not that long ago. 

Company XYZ imports and sells wooden barstools. The year is somewhere in the 2010s, and at that time, Company XYZ was a successful business that imports its goods from China. At some point, Company XYZ realizes that the cost of importing on a large scale from China is more than they initially prepared for, and they begin to explore all of their other options.

Choosing the role of ‘unscrupulous importer’ as described above, Company XYZ decided to get creative with their classification. The barstools with varnish - their product - cost much more to import than barstools without varnish. So, they proceed with a concerted and known effort to avoid paying duties on their imports over the course of years by taking advantage of the false classification of goods. They declare their barstools do not have varnish in the hopes that it will never be checked, or when it is they can just play it off as ignorance. 

Over the course of four years, Company XYZ misclassified thousands of imports for over 30 different kinds of barstools, functionally defrauding the US government out of millions of dollars. 

Now, given the benefit of the doubt, there is a case to be made that this is all just a misunderstanding. Perhaps the left hand didn’t know what the right was doing; after all, it’s a confusing process, and Company XYZ is just trying to get by in this ridiculous world - how could anyone know if they were doing this intentionally and not mistakenly misclassifying their imports? 

That would be a good point, except, of course, for the absolute parade of people and organizations who informed them of their error, including their Customs broker, the Customs and Border Protection agency itself, and even an independent consultant they hired to examine their imports.

This retainer is particularly egregious as they would review all of Company XYZ’s imported products, over 100 in total, and provide the correct codes for each - revealing a significant cost, not only going forward but in neglected payment in the past. Why hire a retainer to provide Company XYZ with a quick lesson on what Custom duty classification is all about? It’s hard not to think of it as one more in a long line of crimes, so let’s instead reside with the hope that it was a genuine belief by someone in the company that these were simple mistakes. 

Company XYZ would proceed to do nothing with this information and would continue its illegal practices for the next nine months when, at last, they were hit with criminal charges at a federal court. In addition to accepting responsibility for their myriad of illegal dealings, Company XYZ opted for a settlement in the millions, bringing the matter, hopefully, to a close.

This company and its associated case study is a masterclass in what not to do, and the takeaway might seem simple - avoid committing crimes. Still, there are more lessons to extract here - most importantly, classification is one of the most watched and considered elements of declaration at Customs. If this cautionary tale has caused you a bit of anxiety on your next import, don’t worry. This company ignored a litany of alarm bells and warnings before arriving in criminal court, and you and your business will receive the same clemency. However, the hope is that this will indicate to you how important this process is and that there are many personnel taking it very seriously on both sides of the border.

Also, it’s worth mentioning that while one can’t deny the dangerous thrill of partaking in some of these illegal ‘cost-saving’ opportunities, there are better and infinitely more legitimate routes you can take to save money at the border - booking a call with our Trade Advisory Services, for example. With our help, you can find ways to accurately classify your goods, leverage unexplored opportunities, or even get a top-to-bottom review of your imports with an eye toward new or missed cost-saving opportunities. Who knows? If Company XYZ had called us, they might have saved a few million in legal fees and restitution.

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About Author
Breanna Leininger

Breanna has been in the industry since 2004 and has dealt with clearances and compliance concerns for a multitude of commodities for all ports of entry and all modes of transportation. She has a Bachelors in Communications, Bachelors in Political Science & Government, is a Licensed Customs Broker as well as Certified Customs Specialist. Breanna has been asked to be the speaker in a variety of events including the BC Agriculture Show, Doing Business in the US seminar and has been a contributor to Small Business BC publications. She was recently nominated for the NCBFAA Government Affairs Conference Emerging Leaders and Mentors by the NBCBA. She participates in the Northern Border Customs Brokers Association and the NCBFAA annual conferences in Washington, DC. Breanna has a deep passion for politics, global affairs, and how communication shapes policy and international business relationships. She feels very fortunate to work in an industry that allows her to take part in how policy impacts the global economy and domestic businesses of all shapes and sizes.

While we strive for accuracy in all our communications, as the Importer of Record it is incumbent upon your company to ensure that you are aware of the requirements under the new regulations so that you maintain compliance as always.
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