Cleaning out Your Classification Closet

Posted by The Tradewin Team

4/18/14 3:55 PM

081116-auto2.pngWhen was the last time your company did an in-depth review of the Harmonized Tariff Classifications assigned to the parts you import into the US? Go ahead and take a minute to think about it, I’ll wait…

I’m going to take a stab in the dark and say that you are guessing the last review was done sometime before the advent of the iPod, but after the Reagan Administration.  Don’t worry, you’re not alone. I cannot tell you how many companies I deal with that find themselves in the same position. Unfortunately for them, more often than not they are only brought to ask this question of themselves because CBP has asked it of them in the form of an audit. If you take one thing away from this blog, DO NOT wait until CBP has asked you this question.

Don’t get me wrong, I understand why you would want to avoid this question. Dependent upon on how many skus you import each year, this can be a monumental task. Take for example aircraft manufacturers. Do you have any idea how many components go into making an airplane? You could be looking at more than a million skus to review for classification! Or, maybe you only have a thousand. Either way, the next logical question is, where in the world do you begin? How do you go about reviewing the classifications on 1,000, 10,000 or even a million different skus?!?

When you approach a classification review project, you typically will want to do it in steps. Trying to take on an entire database for review can be like trying to take a sip of water from a fire hydrant. There are three methodologies I recommend to my clients when asked this question.

Method 1 – Pareto Analysis

A simple approach that takes the position that 20% of a client's products line represent 80% of the normal import volume.  Tradewin works in conjunction with our client to identify the most active 20%, validate that current classifications are accurate, and use those findings to chart a course regarding the balance of the products.  Our validation process can help to target problem compliance areas that should be addressed.

Method 2 – Risk Analysis

This three step approach methodically and systematically prioritizes classification review based upon the levels of risk that our client is facing due to incorrect or inconsistent HTS classification.  Products with outstanding purchase orders or with current inventory in its possession present the greatest immediate risk and will be made the first priority. Preliminary steps to this process will take the form of data collection and an analysis of current inventory levels. The success of our program relies on a targeted, systematic approach to mitigate a client's most immediate risk first and improve the integrity of your product classification database, reducing the costs of non-compliance.

Prioritization Steps

Priority A     Skus with outstanding purchase orders
Priority B     Skus with on hand inventory
Priority C     Skus that were imported or exported within the last 5 years where there is no on hand inventory or outstanding purchase orders.

Method 3  Statistical Sampling

Using statistical sampling software that Customs has used in its Focused Assessment Methodology, Tradewin selects a randomized sample of our client’s universe of products and validates the current HS classifications.  This randomized statistical sampling is constructed in such a way that we can be 96% sure that the error rate in the selected sample is representative of the error rate in the overall universe of the product classifications.  We use the findings to chart a course for any additional review that may be necessary with the hope that the error rate of the sample is less than 5% which would indicate that reasonable care was used in rendering HS classifications for the product line as a whole.

Once you have established how you are going to approach your classification review, you need to make sure you do it with an understanding of how classification works, and what tools are available, and necessary, to ensure compliance under the HTSUS. In upcoming blog posts, we will further discuss the principals of classification under the HTSUS. Until then, feel free to shoot me an email or give me a call. If you are in the process of, or contemplating a classification review, Tradewin can help.

 Download the free Classification Basics whitepaper

Written by The Tradewin Team

Since 1997, Tradewin has been providing expert import and export advice to clients all over the world. Combined, our skilled team of Customs brokers, lawyers, accountants and other professionals possess more than 400 years of experience. Together, we've helped thousands of clients save more than $50 million in duties, guiding them through the ever-changing and complex arena of international regulations as effortlessly as possible.