Commodity Codes: Why They Matter, and the Consequences of Getting Them Wrong

Duty rates, paperwork requirements, sustainability measures – all of your customs obligations depend on your commodity code. This string of numbers is how customs authorities worldwide quickly identify your cargo, apply tax, and check for restrictions.

Despite its importance, our classification experts report that new clients regularly have 5-50% of their products misclassified. They unknowingly leave money on the table, expose themselves to an unexpected import duty bill or fines, or risk legal ramifications – a potentially fatal oversight hidden in their day-to-day operations. 

In this article, we explore what your commodity code can affect, the real risks of misclassification, and why goods classification is so easy to get wrong. 

Contents:

• What your commodity code affects
• The risks of using the wrong commodity code
• Why customs classification can be complicated
• How to safeguard yourself from risk
• How Customs Support Group can help you stay compliant
• Learn about commodity codes and classification for free

What Your Commodity Code Affects

Your customs classification is the most important data element in international trade, affecting everything inside your customs function.

Alongside your customs origin, your commodity code will dictate your:

• Import duty and VAT rates
• Import and export controls
• Required documents
• Customs licensing obligations

In short, your commodity code dictates both cost and compliance.

The Risks of Using the Wrong Commodity Code

An incorrect goods classification carries a range of consequences, which depend on your country, the goods in question, and the reason for the misclassification. You can also have immediate implications for a shipment in transit or wider consequences, depending on the manner of discovery.

Here are some of the consequences that you can face:

• For a shipment in transit:
  • Rejection or seizure at the border
  • Costs for storage, inspection, or failed delivery
• Wider implications:
  • A backdated duty bill for previously misclassified goods
  • An additional financial penalty on top of the backdated duty bill
  • Removal of a customs licence or AEO certification
  • Ineligibility for government or tenders
  • Criminal charges, imprisonment, or blacklisting of directors
  • Reputational damage from publicity

As you can see, these penalties for misclassification can be severe. Therefore, it is crucial that your business works to both use the correct commodity code and defend any decision during an audit.

Your Risk of Audit

A customs audit can occur at any time as a random check or as part of your compliance with licensing. They can also be triggered by the discovery of a misclassification during a routine border inspection, which then triggers a deeper audit. These audits not only cover your commodity code, but can also cover your process of goods classification.

Therefore, you must have a comprehensive approach to classification. It is not only about having the right commodity code, but also about the information you hold on your products and your process of determining your classification. The commodity code that you choose affects your entire supply chain, and this is why it is so important to get it right.

Customs Support Group’s dedicated classification specialists work with businesses of all industries to map their commodity codes worldwide, using their expertise to safeguard clients from unexpected charges, delivery delays, and legal problems throughout their supply chain. Contact us today to see how they can protect you.

Why Customs Classification Can be Complicated

Many classifications are straightforward. However, this also means that simple mistakes are easily made. Often, our experts find that a misclassification has occurred because of a basic oversight, or because there are exceptions to the obvious choice which means that a different commodity code should have been used.

Here are some examples of common reasons for misclassification:

• Using the titles under a commodity code instead of the deeper notes
• Not reviewing the technical composition of a product when making a decision
• Not checking the notes for exemptions under certain conditions
• Relying on the exporter when they may have it wrong or your country may have different rules

Some of these are very easy to overlook when making a classification decision, but can have huge implications later on. The risks are not only for importers, either, as exporters can face severe penalties as well – especially if there are transit documents or dual-use goods involved.

How to Safeguard Your Business from Risk

The risk of using the wrong commodity code is twofold. You have any associated charges of switching to the right classification, such as an increase in duty rate, and you also have the penalty for the misclassification. The latter will depend on the nature of the misclassification and the reasons for the occurrence.

To protect yourself, here are a few best practices for using the right commodity code:

• Gather Information: Obtain technical data, ask for full descriptions, and work with your suppliers to ensure that you have everything you need to make an accurate classification.
• Take Ownership: You are responsible for goods classification if you are involved in the customs clearance. The authorities will not prosecute your supplier or buyer for misinformation.
• Keep Records: Hold information on your products, classification decisions, and any notes on why they were made. Ensure that you are able to provide explanations in the event of a misclassification.
• Legally Verify: Gain clarity by applying for Binding Tariff Information from customs, which will give you legal certainty on your commodity code decision – or guide you to the right choice from the start.
• Review Regularly: Codes and conditions change, and you shouldn’t wait for an audit to check that your goods classification is still correct.
• Seek Clarity: Work with a specialist to lend their expertise to your classification. From asking the right questions to enriching your data, they’ll help you make the right choice and safeguard your business.

How Customs Support Group Can Help You Stay Compliant

Customs Support Group has dedicated classification specialists working across 14 countries, providing local and global expertise for businesses of all kinds. With our help, big brands and complex operations can simplify their goods classification processes, safeguard their compliance, and improve their efficiency worldwide.

You can rely on us for:

• Professional Advice: Many of our classification experts have real experience with and inside customs authorities, giving them practical insights into how decisions are made and audits are executed.
• Comprehensive Support: Available throughout Europe and providing global classification services, we help you to manage duty rates, paperwork requirements, and compliance nuances worldwide.
• Digital Efficiency: Our industry-leading CustomsTech solutions have been rigorously tested across multiple customs territories and industries, improving data accuracy, speed, and security.
• Application Assistance: Whether you need Binding Tariff Information, a customs permit, or help with renewing your AEO, our experts can help you to improve your success rate from the start.
• Risk Management: If a misclassification is discovered during our process, we will help you to mitigate the consequences. It is always better to report it, and we will help you to get it right going forwards.

Together, we can safeguard your business, make it more efficient, and keep you trading across borders with minimal disruption. Contact us to find out more.