Determining the correct rate of duty when shipping internationally is a frequent challenge for small to medium-sized businesses. You want to make sure your shipment faces minimal disruption when it comes to customs clearance. At the same time, you don't want to pay more than required for shipping your product across borders.
The Harmonized System (HS) code is integral to this process. Organized into 97 chapters, HS codes comprise a global index used to describe every good being imported or exported. And while the HS index may seem complicated at first, becoming familiar with its workings will help you avoid the likelihood of disruptions or delays in your product journey.
Let’s take a closer look at what HS codes are and how they are used to describe goods and calculate duties for international shipments.
The purpose of HS codes is to provide a universal system for classifying products that enter or cross international borders. HS codes allow cross-border authorities to have a shared understanding of what is being imported and exported, irrespective of languages spoken and variations in local duties. Each HS code consists of a four-digit heading or more specific six-digit subheading, as well as a corresponding product description, and is grouped with similar codes in a dedicated chapter of the HS. The World Customs Organization (WCO) is responsible for creating new codes and amending existing codes within the HS, which the WCO updates every 5 years.
"Any component or anything you have in your house, or have ever purchased, is classified based on the HS description," says John Hernandez, senior manager of UPS's Trade and Compliance Innovation group. “From brake pads and household lamps to anchovies and bay leaves, there is an HS code that covers each product.”
For example, take your morning cup of coffee. Coffee lives under 'Chapter 09' of the HS, together with tea, mate and spices. Its heading within Chapter 09 is '0901,' which covers coffee imports whether or not roasted or decaffeinated. One digit off, and you have heading ‘0902’, which describes tea, whether or not flavored.
Add two more digits – '21' – to the '0901' coffee formula, and custom officials and brokers can further determine the coffee shipment to be roasted and “not decaffeinated.” Therefore, if coffee is roasted and caffeinated at importation, it’s given HS code is 0901.21.
What this ultimately means is whichever customs body you are dealing with around the world, 0901.21 is the universal code for roasted, not decaffeinated coffee. Something to consider when you’re sipping your morning cup of joe.
It doesn’t stop there. Many countries add further subheading levels to the base four-digit and six-digit HS codes. These additional subheading levels assist countries in administering duties on specific products and in tracking international trade. Individual countries may also call their systems by different names, although all systems following the WCO use the four-digit and six-digit HS codes as their base.
In the case of the United States, the system is called the Harmonized Tariff Schedule of the United States (HTSUS). HTSUS codes extend to ten digits, with the final four digits used to implement duty rates and track statistical measures such as GDP. These are the codes used by importers bringing products into the United States. For example, the ‘0901.21’ coffee code has a further breakout to, amongst other subheadings, the complete HTSUS code 0901.21.0035 which stands for coffee, roasted, not decaffeinated, in retail containers weighing 2 kg or less, certified organic. As you can, see the last four digits ‘0035’ added the ‘In retail containers weighing 2 kg or less, certified organic’ description for additional classification. The general rate of duty for 0901.21.0035 is free.
HTSUS codes are searchable via an engine maintained by the U.S. International Trade Commission, which is responsible for implementing updates to the schedule. Additionally, U.S. Customs and Border Protection (CBP) maintains a database with over 200,000 decisions offering guidance on how specific products are classified under the HTSUS. In one somewhat recent decision, for example, CBP clarified that HTSUS heading 0901 applies to coffee supplemented with performance-enhancing additives.
Other countries have their own coding conventions different from the HTSUS codes used when importing into the United States. For instance, both Brazil and China use eight digits. In Brazil, the system consists of what are referred to as NCM (‘Nomenclatura Comum do Mercosul’) codes, or the Mercosul Common Nomenclature. These 8-digit codes are governed by the Brazilian government to identify the flow of goods entering Brazil.
One question many shippers ask is: Which country's tariff schedule should I use? For example, if I am shipping from the United States into Brazil, should I use the HTSUS or the NCM?
As a rule of thumb, use codes that are specific to the country to which you are importing goods. If you are importing goods from the United States into Brazil, you should use the NCM. If you are shipping in the other direction, you should use the HTSUS.
Generally, for exports from the United States valued at greater than 2,500 USD, the United States also requires export classification under what is called the Schedule B. Schedule B codes, managed separately by the U.S. Census Bureau, typically follow the same numbering as HTSUS codes, although the last four digits of the ten-digit string can differ.
For instance, in the case of roasted, not decaffeinated coffee, the six-digit Schedule B code is the same as the six-digit HTSUS code of 0901.21. However, the HTSUS and Schedule B diverge at the 8-digit and 10-digit subheading levels. While the HTSUS code for roasted, not decaffeinated, certified organic coffee is 0901.21.0035, the Schedule B code for the same product is 0901.21.0010.
The Census Bureau uses Schedule B information on goods leaving the United States to track overall export volumes. Its Schedule B search engine is a helpful, well-established resource for classifying exports.
Who is responsible for determining the correct HS code? "Under the law, it is up to the importer, who is often the purchaser, to take responsibility to make sure that the correct classification is applied to that shipment," Hernandez explains.
But that does not mean the exporter is off the hook. "While it is not a required field, it is a best practice to have at least the 6-digit HS code on your commercial invoice," he advises. As a rule, the shipper should always include as much accurate information as possible in the commercial invoice to maximize the chances the shipment will go through customs with minimum delay. U.S. customs law requires that invoices include “a detailed description of the merchandise, including the name by which each item is known, the grade or quality, and the marks, numbers, and symbols under which sold by the seller or manufacturer to the trade in the country of exportation, together with the marks and numbers of the packages in which the merchandise is packed.”
When it comes to international e-commerce, it is often more practical if the role of determining the HS code falls on the exporting e-commerce seller/manufacturer. "With e-commerce transactions, the importer is often also the end consumer and is generally not best placed to be determining the appropriate HS code," Hernandez states. “In these cases, the e-commerce exporter will want to determine what the correct HS code is. This is in order to give their customer an estimated landed cost, which may require payment of duties upon receipt.”
Figuring out the correct HS tariff number classification for your shipment is not always easy, but it’s important to get it right. Misclassification of your shipment can lead to overpayment of duties, or to underpayment resulting in costly penalties.
It can also lead to delays at your port of entry, which may increase your landed costs and place strain on your customer relationship. "Whenever there is a question or a concern with a shipment, Customs has the authority to hold that shipment," Hernandez warns. "That can have a ripple effect that brings a lot of pain to that e-commerce shipper, importer or consignee."
Enlisting the services of a customs broker can help you understand the regulatory environment impacting your business. UPS trade advisory experts can help you navigate the complexity of international shipments while mitigating potential issues on a global level. "We can take your part number, SKU number, or UPC number and assist you in getting the appropriate classification, depending on the origin and the destination."
"The ideal way to find your Harmonized System code is to work with an expert broker to consult with you and help to make sure all your products are classified correctly," Hernandez concludes.
HS codes are a central part of international shipping, but they shouldn’t be a headache. Enlist the help of an expert to help reduce the hassle of HS code compliance. Visit our international shipping page to get started with your shipment today.
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