International trade can be complex for companies looking to expand procurement or distribution overseas. Importing and exporting requires a sound understanding of multiple interconnected processes, like shipping and warehousing to customs and tariffs. However, these complexities shouldn’t prevent you from taking the leap into international trade!
This guide covers an important and necessary part of the customs process - the Harmonized System (HS) and Harmonized Tariff Schedule (HTS). These systems provide a critical foundation for classifying imports and exports to comply with government regulations and duty rates. Here we’ll take a closer look at HTS codes, how they work, and how you can avoid common mistakes to stay in compliance.
The Harmonized System (HS) is a product classification system managed by the World Customs Organization (WCO). It is used by governments and customs agents globally to identify commodities that are crossing international borders. This standardized method of classification ensures continuity and consistency in global trade processes. From paper and plastics, to fresh produce and hazardous materials, the HS assigns a six-digit code that classifies commodities. Individual countries are able to implement their own additional classification codes for further specifications, which are called Harmonized Tariff Schedule (HTS) codes.
The United States uses a 10-digit HTS code to classify commodities – the first six digits are the universal HS classification number, and the additional four digits represent the Schedule B number, which is assigned by the U.S. Census Bureau’s Foreign Trade Division. All U.S. importers must use the correct HTS code for each commodity they are importing, as duties are calculated based on this classification.
Harmonized shipping codes are used to assign duties on imported and exported commodities and provide data on international trade. Here we dig deeper into the importance of HTS codes and how shippers and importers should approach them.
First and foremost, shippers must recognize that using harmonized code numbers are mandatory. The harmonized tariff schedule is used to collect appropriate taxes and duties, and ensures that products are not illegally entering or exiting a country. Failure to comply with HTS code guidelines can result in fines, penalties, or suspension of import and export abilities.
Additionally, international shipping classification codes ensure fair competition in the market, since they act as a standardization between all companies. The HTS system levels the playing field for smaller shippers by ensuring the same tariff and duty rates apply for a particular commodity, regardless of the company’s size or global influence. This is in contrast to material sourcing or transportation agreements, where large companies may obtain more favorable pricing from suppliers because they move a higher volume of goods.
Harmonized shipping codes are used to classify goods that are entering or leaving a country, and importers and exporters have a legal obligation to properly identify their goods to avoid problems when shipments reach their destination. HTS codes must be listed on required shipping documentation like certificates of origin, packing lists, commercial invoices, and shipping bills. The codes help customs officials determine the appropriate duty rates and taxes; they also help determine whether products are eligible for a preferential tariff based on internationally recognized trade agreements. Further, the information monitors international commerce and trade patterns.
The harmonized tariff schedule streamlines the customs clearance process by classifying products in an organized, standardized system. HTS codes typically consist of 8-to-10 digits, depending on the country. The first six digits of any HTS code are the universal HS classification number, while the remaining digits are subheadings used to designate a country’s specific duty rates.
Let’s take a closer look at the elements of a U.S. HTS code, using footballs as an example:
HTS Code: 9506.62.4040
The first two numbers in an HS/HTS classification code represent the categorical Chapter. There are currently 99 Chapters in the international HS code list, grouped into 21 general sections.
In our example, footballs are found under Section 20: Miscellaneous Manufactured Articles – Chapter 95: Toys, games, and sports requisites; parts and accessories thereof.
Chapters are further divided into headings, which help narrow down the commodities within the category. In our example, “toys, games, and sports equipment” can be subdivided into, “Articles and equipment for general physical exercise or other sports,” listed under heading “06.”
Subheading (HS Code): 9506.62
Headings are then divided into more specific commodity types, listed as subheadings. In our example, subheading 62 is used for the “Inflatables” category.
The combination of the Chapter, Heading, and Subheading classifications make up the universal six-digit HS code that is shared globally. For U.S.-specific classification and duty calculations, we must go a bit further.
U.S. Subheading/Rate Line: 9506.62.40
The eight-digit subheading, sometimes called a “rate line” is the first subheading unique to the U.S. and helps customs determine specific duties to be paid on the items. In this example, HS subheading for “Inflatables” is further divided into a “Footballs and soccer balls” category.
Statistical Suffix/Category: 9506.62.4040
The final ten-digit “statistical suffix” or “category” is a more detailed description of the item and is used for trade data collection. In our example, footballs and soccer balls are assigned the same amount for duties, but are listed as separate categories for trade data purposes.
Keep in mind that U.S. HTS codes are not recognized in other countries, as each country has their own harmonized tariff schedules that determine duties and taxes. While the six-digit HS classification number should remain the same, any additional digits may indicate a different commodity and ultimately lead to a shipment being rejected at the destination.
Importers bringing goods into the U.S. can use the free Schedule B search tool provided by the U.S. Census Bureau to look up HTS codes. This is the most commonly used method for classifying products due to its simplicity. The tool asks for a description of the commodity and provides several auto-fill suggestions to assist in narrowing down the correct chapter and Schedule B number.
For products that are more difficult to classify, shippers can reference the Customs Rulings Online Search System (CROSS) database. This system is provided by the U.S. Customs and Border Protection (CBP) and is a searchable database of legally binding rulings from other importer and exporter requests for Schedule B codes. This can help determine whether rulings on the same or similar products exist, and what the ruling was.
In the case that no clear Schedule B code can be determined, it is recommended to consult an expert commodity specialist.
International shipping classification codes for countries outside of the U.S. are usually available on government websites. The usefulness of search tools on these sites varies, but there are plenty of free online resources that can help identify correct international HTS codes for each country. Referencing the correct U.S. HTS code is critical for obtaining the correct corresponding international code so be diligent with commodity details.
Using incorrect HTS codes on imported and exported goods can be a costly and time-consuming error. Importers may overpay or underpay on duties, mistakenly utilize or fail to utilize free trade agreements, and ultimately draw attention from the U.S. Customs and Border Patrol (CBP). CBP audits are painfully slow and can result in steep penalties or suspension of import and export abilities, so it is crucial to correctly classify your products’ HTS codes.
Having a clear understanding of who provides HTS codes is essential to navigating the classification and customs process. It might seem like the manufacturer or supplier of a product should provide this information, but that is not always the case. The supplier relies on the export classification code from the country they are shipping from, but they are not obligated to provide country-specific HTS codes for destinations. It is the importer’s responsibility to know their product specifications and identify the correct HTS code when bringing shipments across the border
While the Harmonized Tariff Schedule is designed to classify products into clear, tidy categories, it can be incredibly nuanced and complex. Importers and shippers may struggle to find exact matches for their commodities and attempt to use a HTS code that appears to be the “best fit,” or one that has the lowest tariff rate, but both of these methods are risky and can create problems with the CBP.
Be patient when searching for HTS codes. Rely on the search tools available online, and when in doubt, reach out to a specialist for help. The extra time and effort on the front end can prevent headaches and unnecessary fines later on.
Harmonized shipping codes are not static as new products enter the market regularly and international trade agreements can change at any time. The World Customs Organization reviews and revises the Harmonized System every five years, with the last update in 2017. Meanwhile, the U.S. International Trade Commission (USITC) maintains the U.S. Harmonized Tariff Schedule, which is updated frequently to keep up with changing trade agreements and tariff rates. Importers are responsible for staying up to date on the latest regulations and changes to U.S. HTS codes, so make sure to check the USITC website periodically and confirm that your products are being classified appropriately.
FreightMango is a digital freight marketplace that simplifies the international shipping process by connecting shippers and importers to real-time capacity, and providing the knowledge and support to navigate complex processes effortlessly – from HTS codes to customs clearance and beyond. Contact FreightMango today to learn more about their groundbreaking digital solutions for international shipping and importing.