“What are the consequences of incorrect tariff classification?” is a common question we get. This post highlights the various negative consequences that may follow if goods are misclassified, including potential overpayment or underpayment of duties, admissibility issues, delays in cargo release, and the triggering of CBP’s attention.
Watch the video below to gain a comprehensive understanding of the consequences of improper tariff classification and the measures you can take to ensure compliance and avoid unnecessary risks.
0:00 About Todd Owen
1:02 The Fundamentals of U.S. Customs
2:21 Negative Ramifications of Improper Classification
4:49 Penalties for Improper Classification
About Todd Owen
Well, hello everyone. My name is Todd Owen and I’m a Board Advisor to Quickcode and I also spent 30 years with U.S. Customs and Border Protection and various senior leadership officials. I worked in Cleveland, Ohio as an Import Specialist at the start of my career and I ended my career as the Executive Assistant Commissioner for the Office of Field Operations in Washington, DC where I was responsible for all of the activities at the 328th Ports of Entry. 31,250 officers and Trade Specialists work at these Ports of Entry, performing the counter-terrorism mission, a narcotics interdiction mission, trade enforcement, the admissibility of travelers coming into the country and everything in between. So, I’ve got quite a bit of experience. I retired about two years ago and I’ve been doing some private consulting and I’m very pleased to be working with Quickcode right now as a Board Advisor on their efforts.
The Fundamentals of U.S. Customs
I was asked to speak a little bit about the implications of Tariff Classification and the duty rates. And I think it’s helpful if I start with reminding everyone the fundamental aspect of what U.S. Customs and Border Protection does. And U.S. Customs goes back to its original creation on July 31st of 1789, where they were established by the first continental congress to collect duties for the fledgling Nation. Very important role that Customs has performed since 1789 and continues today. In fact, last year, in fiscal year 2022, U.S. Customs and Border Protection collected over $112 billion in duties that goes to fund the government. And of course these duties, and taxes, and fees all come from imported goods. The fundamental aspect of importing is determining the proper tariff classification so that not only the proper duty can be assessed, but that proper admissibility determinations can be made. Whether or not a certain requirement applies, whether or not another government agency has a stake in what’s being imported; all of these factors come from the proper tariff classification at the very beginning. So, it is absolutely critical that the tariff classification be accurate from the start.
Negative Ramifications of Improper Classification
When the tariff classification is inaccurate, there are all sorts of negative ramifications that can follow. First off, at the 10-digit tariff classification, the duty rate is assigned. So, if the wrong tariff classification is used, you could be paying too little duty or you could be paying too much duty. And I’ve seen many companies that have made mistakes, so they have unnecessarily paid more duties than they’ve needed to. At the 10-digit tariff classification level, are when certain admissibility requirements also attach. So, if you’ve misclassified your goods, you may assume you’re not subject to an EPA or a fish and wildlife restriction. Only to come to find out later that your goods are inadmissible. If you’ve made those tariff classification errors and you’re not certain on the proper duty rate or on the admissibility, that may also affect the bottom line. The profit margin that you’ve assigned for this particular product. If you’ve set your baseline cost at a certain understanding of what the duty rate would be, only to find out you used the wrong, the improper classification and you’ve underestimated duty, you now can have a very negative effect on the profit margin for that product or the entire product line. There are clearly revenue implications for using the improper pair of classification. If your goods are improperly classified, it may also result in delays into releasing the cargo, while your cargo sits on the docks. As many of you know you’re incurring demerge cost. The fee that the terminal operator or the carrier is charging you to hold your cargo while the paperwork is being processed. Those fees range thousands of dollars a day, so if you’ve used the improper classification and it has led to a delay in the release of your cargo, there are all of these additional costs that you may now be subject to. If you’ve used the improper classification, you may trigger the attention of CBP, particularly in the regulatory audit group or with the import specialists. They will take a closer look, not only at the instant importation, but they may go back as well as five years to look at everything that you brought in. That is the period of time that the law allows. And if they determine that these classification errors have been made intentionally or with negligence, the law allows for three sets of penalties to attach.
Penalties for Improper Classification
A penalty for negligence, which is two times the loss of revenue. A penalty for gross negligence, which is four times the loss of revenue. And a penalty for fraud, which is the domestic value of the cargo itself. So, that clearly is the greatest penalty that CBP has in its toolbox under 19 USC 1592. These are errors that you want to avoid. You definitely don’t want to come on CBP’s radar. In my consulting work, I’m often approached by companies that will say, can you help me out? CBP is picking on me. And the first thing I tell them is that CBP is not picking on you. CBP has tremendous workload, they have limited resources. If you are on their radar you did something to put yourself on their radar, and once on their radar, it can be very difficult to get off. It’s very unfortunate when I see companies that because they haven’t applied the proper tariff classification from the start, that they are now on CBP’s radar. CBP is asking more questions about all of their importations. They’re inspecting more of their cargo. They are incurring more cost to the importers on the docks, all because of a self-inflicted error on the part of the importer. So, there are significant ramifications for using the wrong tariff classification from the start from the financial, to the delay of cargo, all the way up to significant penalty and fraud actions, if in fact this was done intentionally. So, I will close just by urging all of the companies involved to use their proper due diligence. Apply the proper rules, apply the proper resources, and correctly determine the classification at the start of your importations.