Sometimes, simple mistakes can have significant consequences, especially when it comes to export compliance. Proper product classification is crucial for adhering to export regulations, avoiding delays and preventing costly fines. Unfortunately, many exporters frequently make common errors in this area. (Often, they only discover our Product Classification Software after incurring a hefty fine!) In this article, I’ll explain the eight most common classification mistakes we see and provide practical tips to help you avoid them.
1. Misunderstanding the Differences Between HS, HTS, Schedule B and ECCN Codes
Many exporters confuse the various classification systems, leading to incorrect filings and compliance issues. Though the different systems are related, there are important differences to understand. Following is a brief explanation of the differences, along with several free resources we’ve created to help you master the differences.
- Harmonized System (HS) Codes: Also called HS numbers, this is a six-digit classification system used by customs authorities around the world to identify the duty and tax rates for specific types of products. Many countries, including the United States, add additional digits to the HS number to further distinguish products in certain categories. These additional digits are typically different in every country.
- Harmonized Tariff Schedule (HTS) Codes: The Harmonized Tariff Schedule of the United States is the 10-digit import classification system specific to the United States. HTS codes, also called HTS numbers, are administered by the U.S. International Trade Commission (ITC). Commodity duties are assessed based on this classification. An HTS code takes the same form as an HS code for the first six digits, then has four differing last digits. If you are a U.S. importer, this is the code you must use.
- Schedule B Codes: The Schedule B code is a 10-digit subset of HTS codes for U.S. exporters. Schedule B codes are used for statistical purposes by the U.S. government to monitor U.S. exports. Since the Schedule B codes are a subset of HTS codes, it’s usually quicker and easier for exporters to classify products under Schedule B than HTS.
- Export Control Classification Number (ECCN): This classification is for export control purposes. It’s used to determine export licensing requirements under the Export Administration Regulations (EAR).
2. Failing to Keep Up with Classification Changes
The HS system is administered by the World Customs Organization (WCO), and the WCO reviews HS codes every five years to account for new products that have entered the market and changes to existing products. The most recent update became effective on January 1, 2022. (Our article, HS Codes 2022: What Every Exporter Needs to Know, details the most recent set of changes.) Regularly review and update classification codes for your products to account for changes, or use Product Classification Software that keeps up with changes.
3. Overlooking Product Modifications and Variations
Using a single classification for all variations of a product, despite significant differences in features or functions, can lead to errors. Evaluate each product variation separately to determine if different classifications are warranted. Ensure that any modifications are considered in the classification process.
Consider a company that manufactures electronic devices such as laptops. They produce a standard model and a high-security model with enhanced encryption features. While the standard model might be classified under a general ECCN (Export Control Classification Number) for computers, the high-security model with advanced encryption could fall under a stricter ECCN due to its potential dual-use nature. Failing to differentiate between these models and using the same classification for both could lead to significant compliance issues and export violations.
4. Neglecting to Verify Supplier-Provided Classifications
Relying solely on supplier-provided classification codes without independent verification can get you in trouble! Always verify the accuracy of classification codes provided by suppliers. Conduct your own classification analysis because as the exporter, you’re ultimately responsible for using the correct classification.
5. Incorrectly Determining a Product’s Essential Character
Before attempting to classify your product, you must have its complete description and know the product’s function, composition and characteristics. This includes having documentation that describes its:
- Composition (metals, plastics, wood, etc.)
- Specifications (size, thickness, etc.)
- Performance specifications (capacity, flow rates, voltage, etc.)
- Product use and essential character
If a good seems to fall into more than one category because it is a mixture or composite, the General Rules of Interpretation (GRI) say classification should be based on a product’s essential character. Misclassifications can happen by focusing on secondary characteristics rather than the product’s essential character.
6. Assuming Your Product Is EAR99
EAR99 is a classification under the Export Administration Regulations (EAR) for items that are not listed on the Commerce Control List (CCL). It is often seen as the default or “easy” classification because it generally indicates that the item does not require an export license unless it’s going to an embargoed or sanctioned country or to a prohibited end-user or end-use.
Exporters may classify an item as EAR99 to simplify the export process, but this can lead to noncompliance if the item actually falls under a specific ECCN. Items that appear to be simple or low-tech may still have specific ECCNs because they may be dual-use, meaning they have both civilian and military applications. Thoroughly check the CCL to determine if your goods have an ECCN and require a license.
A deemed export occurs when technology, technical data or source code is released to a foreign national within the United States. This can happen through various means, including:
- Verbal exchanges, such as conversations or training sessions
- Electronic communications, including emails or shared databases
- Visual inspections of equipment or facilities
- Access to controlled software or technology on company networks
Companies must identify and classify all technology and technical data that could be subject to export controls in the same way that they would a physical good.
The Best Way to Avoid Classification Mistakes
The easiest choice is not always the right choice when it comes to product classification! By using these tips and resources, you can minimize the risk of classification errors. However, navigating export regulations can be complex. If you’d like additional support to ensure accurate classification and compliance, we’d love to show you how Shipping Solutions Export Documentation and Compliance Software can help. Or, click here to give our standalone Product Classification Software a try for free.
Like what you read? Join thousands of exporters and importers and subscribe to the International Trade Blog to get the latest news and tips for exporters and importers delivered to your inbox.