We are often asked by importers to assist in classifying their products under the Harmonized Tariff Schedule of the U.S. (“HTS” or “HTSUS”). While seeking assistance from expert counsel is a best practice, under the CBP Modernization Act, an importer of record (“IOR”) is the sole party responsible for determining the correct classification of imported goods (and thereby paying the correct amount of customs duties). An IOR must use reasonable care in classifying its product at the time of entry. Should an importer misclassify their products and not pay the appropriate duties to CBP at the time of importation; the importer is exposing itself to potential CBP penalties under 19 U.S.C. 1592. The process of classifying goods can be a tedious process and may require time and research to arrive at the correct HTSUS number for any one product.
This blog expands our prior blog, Crash Course in the Harmonized Tariff Schedule of the United States, and provides additional detail on the classification process and tips for importers to use when deciding on a classification its customs broker will declare to CBP. Importers are encouraged to attend the webinar How to Build and Maintain an Effective Import Compliance Plan on October 6, 2021 (and on-demand) for best practices on how to build and maintain an import compliance plan by addressing common risks associated with the import process – including product classification.
Experts use the HTS, in conjunction with explanatory notes, general notes, general rules of interpretation, and Customs Binding Rulings to help determine the correct HTS. Correct classification is one of many “reasonable care” requirements an importer of record must comply with. Penalties for non-compliance can be severe. 19 U.S.C. 1592 is the statute CBP utilizes when issuing penalties, based upon whether CBP believes an importer was negligent, grossly negligent or fraudulent when using an incorrect HTS.
The importer should understand the structure of the HTSUS, including chapters, headings, subheadings, and the General Rules of Interpretation for classifying products within the HTSUS.
What is the HTSUS and Structure?
The HTSUS is issued annually by the International Trade Commission (ITC). It is comprised of a 10-digit import classification system that is specific to the United States. This 10-digit code encompasses the World Customs Organization’s (WCO) six-digit uniform classification system shared among more than 200 countries.
An HTSUS is formatted to list the first 6-digits set forth by the WCO, also known as a heading and subheading and the last four digits assigned by the ITC that are specific to the U.S.
To showcase the HTS structure, we’ll use the example of purebred, live, female horses. When viewing an HTS, the first column contains the heading and subheadings which contains the first 8 digits of the HTSUS number.
- The first two digits represent the chapter number.
- In our example of purebred, live, female horses, our chapter would be “01” which covers “Live Animals”.
- The first four digits represent the heading.
- In our example of purebred, live, female horses, our heading would be “0101”.
- The first six digits represent the international subheading ALL countries that have adopted the Harmonized Tariff system have the same HTS to the first 6 digits.
- In our example of purebred, live, female horses, our subheading would be “0101.21.00”.
The second column titled Stat. Suffix will complete the U.S. 10-digit HTS number
- In our example of purebred, live, female horses, our complete 10 digit HTSUS would be “0101.21.0020”.
“units of quantity”
|Consists of the description of the articles contained in the headings and subheadings.||Contains the units of quantity required to be reported when filing the entry summary.||Contains the duty rate applied to all WCO countries||Special sub-column contains duty rates for special tariff treatment programs such as GSP and USMCA.||Column 2 duty rates are the highest duty rates imposed on products imported from specifically designated countries as Found in GN 3(b)|
“General” rates apply to most products. “Special” rates apply to countries that have special trade programs with the U.S. (and receive free, or lower rates than the general duty rates), such as the USMCA. If a product is eligible for special treatment under more than one program, the lowest rate of duty provided by any one program will be used for calculation of duty. Higher “Column 2” rates apply to imports from countries not eligible for either general or special rates.
How to classify a product under the HTSUS:
Classification is a series of steps used to assign a numerical code to identify your goods. In the U.S., goods are classified upon import according to the HTSUS and Explanatory Notes (“EN”), as established by the Customs Cooperation Council in Brussels. The HTSUS is divided into 22 sections, with commodities arranged largely according to usage and economic activity. Within these sections are 99 chapters arranged according to levels of processing, with primary commodities (foodstuffs, animals) classified in the earlier chapters and more technically complex products (automobiles, machinery) classified later.
General Rules of Interpretation (GRI)
Product classifications must be supported by a GRI. The GRI are legal and binding rules used to determine classification. The GRI consists of 6 international rules that apply to all nations participating in the Harmonized System. GRI’s 1-4 must be applied in sequential order, while GRI 5 and 6 are used based on the circumstances. The following chart defines each GRI:
|GRI 1||GRI 1 states classification will be determined according to:
This means if a heading specifically describes a product, the product is classified there and you do not have to evaluate the remaining GRIs since GRI 1-4 must be applied in sequential order.
|GRI 2||GRI 2 applies to incomplete/unfinished goods and is split into parts: a and b.
GRI 2a states that any reference in a heading to an article shall be taken to include a reference to that article incomplete or unfinished, provided that, as entered, the incomplete or unfinished article has the essential character of the complete or finished article. It shall also include a reference to that article complete or finished (or falling to be classified as complete or finished by virtue of this rule), entered unassembled or disassembled.
o Incomplete or unfinished goods
o Unassembled or disassembled products
|GRI 2b states that any reference in a heading to a material or substance will be taken to include a reference to mixtures or combinations of that material or substance with other material or substances.
But if the article is made up of different materials and could possibly fall under two or more headings, the article must be classified by GRI 3s principles.
|GRI 3||GRI 3 applies when a good can be classified in multiple headings and is classified as if the good consisted of the material or component which gives them their essential character (the nature of the material or component, its bulk, quality, weight or value, or by the role of a constituent material in relation to the use of the goods)
GRI 3 is split into three parts, a, b, and c:
GRI 3a states that the heading which provides the most specific description will be preferred to headings providing a more general description. A product can fall under two or more headings, with one heading giving a more definitive description of the item.
|GRI 3b states that Mixtures, composite goods consisting of different materials or made up of different components, and goods put up in sets for retail sale, which cannot be classified by reference to 3(a), shall be classified as if they consisted of the material or component which gives them their essential character (Nature of the material or component Bulk, Quality, Weight, Value Role of the material or component in relation to the other goods). Following provides relevant definitions:
|GRI 3c states that when goods cannot be classified by reference to 3a or 3b, they will be classified under the heading which occurs last in numerical order among those classifications which equally merit consideration.|
|GRI 4||GRI 4 is used only if all other preceding GRIs have been exhausted. The rules states that goods which cannot be classified in accordance with the above rules will be classified under the heading appropriate to the goods to which they are akin.
*This rule is usually used for new products, as it allows the brokers and importers to compare common factors between a heading and new product for which there is not yet a heading.
|GR 5||GRI 5 is split into parts a and b.
GRI 5a states that:
If the essential character of the good is the case or container, then the classification of the case or container will be independent of the item.
|GRI 5b states that:
|GRI 6||GRI 6 states after the proper heading is found, GRI 1-5 applies to the subheadings.
GRI 6 means that you have to compare apples to apples and oranges to oranges, but not apples to oranges
Other references that should be reviewed when classifying a product:
Section and Chapter Notes
- Section notes apply to all chapters within the section.
- Chapter notes apply to all headings in the chapter.
- They notes list of items included/excluded from the chapters, definitions terms.
General Notes/ Statistical Notes
- General Notes provide instruction on duty rates, special programs, and other information necessary for proper classification and calculation of duty. The HTSUS contains 35 General Notes. Since the HTSUS is subject to change from year to year, the number of General Notes and Statistical Notes may increase.
Explanatory Notes Publications
- Explanatory Notes Publications (EN) offer a little more detail to Section and Chapter Notes.
Classification Check list
- Obtain as much information about the product subject to classification.
- Refer to brochures, catalogs, product datasheets, or other reference books such as encyclopedias to understand the product well.
- Identify potential chapters in HTSUS using Chapter Titles.
- Compare the headings within the applicable sections of the HTS. Read Chapter and Section Notes to ensure the product is not kicked out of the HTS.
- Consult the GRI’s in the correct order
- Read the Explanatory Notes for the relevant headings.
- Check CBP CROSS Rulings for classification of similar transactions goods.
- Consult Internal and/or external experts such as trade lawyers or engineers.
- Request a CBP Binding Ruling.
- Consult CBP Informed Compliance Publications
How to Build and Maintain an Effective Import Compliance Plan
Do you know if your company is meeting import regulations and obligations? Obtaining counsel who is an expert in import compliance is the first step. Are your employees/staff trained in all importing issues? Our one-hour webinar will discuss elements of an effective import compliance. Discuss common risks associated with import process and the importance of training. Also discuss how updating the plan regularly. Register today to hear from the following experts:
- President and Founder of Diaz Trade Law, Jennifer (Jen) Diaz is a Chambers ranked, Board Certified International Attorney specializing in customs and international trade;
- Trade Advisor at Diaz Trade Law, Donald Woods has worked in the express delivery, freight forwarding, and logistics industries for 34 years in both imports and exports. He retired from UPS after 34 years of service as the VP, Customs & Trade Compliance for the Customs Brokerage business unit; and
- Associate Attorney of Diaz Trade Law, Denise Calle assists U.S. and foreign manufacturers, distributors, and importers, with a range of import compliance, regulatory compliance, and enforcement matters involving U.S. Customs.
In this webinar you will learn:
– How to Build and Effective Import Compliance Plan
– Common Risks Associated with Import Process
– How to Maintain an Effective Import Compliance Plan
– Elements of an Effective Import Compliance Plan
Who should attend:
– Customs Brokers
– Regulatory Affairs Professionals
– In-house Legal Counsel
– Product Development Managers
– Others Interested in Importing
This webinar is eligible for continuing education credit from the NCBFAA Educational Institute. Space is limited, registration required! Access instructions will be provided after your registration is complete. Don’t just take our word for how awesome Diaz Trade Law webinars are. Click here to see what our past attendees had to say. Be sure to join us on October 6, 2021! To register, click here.
Be cautious in your classification methodology and who in your company is responsible for appropriately classifying your products. Penalties for non-compliance can be severe. Contact Diaz Trade Law at firstname.lastname@example.org to assist in classifying your products or to review your current classifications.