When cross-border e-commerce businesses ship products into different countries, an important consideration is including local duties and taxes into the product's price. In terms of best practice, this reduces customer post-purchase friction. No two countries are alike in terms of legislation and regulations, so just how are these fees calculated?
In 1988, the World Customs Organization created a single system to classify every product traded between countries, referred to as the Harmonized Commodity Description and Coding System (HS). This system allows the participating countries to classify traded goods in a standard way for customs purposes, making it an important component of cross-border selling. The six-digit HS code is created by referencing a table that contains over 5,000 commodity groups that uses well-defined rules to achieve uniform classification.
The HS six-digit code assigned to each item is comprised of three, two-digit designations. Let's have a look at a few examples: The HS code for brass earrings (711719):
- Two digits (71) for the HS chapter (i.e. stones and jewellery)
- Two digits (17) for the HS heading (i.e. “imitation jewellery”)
- Two digits (19) for the HS subheading (i.e. other items of base metal)
The HS code for leather handbags (420221):
- Two digits (42) for the HS chapter (i.e. leather)
- Two digits (02) for the HS heading (i.e. travel goods, handbags, wallets, jewellery cases)
- Two digits (21) for the HS subheading (i.e. handbags surface of leather or composition leather)
The HS code for sunglasses (900410):
- Two digits (90) for the HS chapter (i.e. optic, photo)
- Two digits (04) for the HS heading (i.e. “spectacles, goggles”)
- Two digits (10) for the HS subheading (i.e. sunglasses)
The operational impact of product harmonization
In addition to the HS code, countries also have their own product classification codes. These need to be assigned to each product sold cross-border in addition to the HS code. In other words, every product shipped to another country must have a country-specific classification code. For retailers shipping one or two products to just a few countries, this is manageable. But for online merchants offering a breadth of product categories, this classification process can become cumbersome when selling internationally.
An e-commerce business frequently adding new products to their website for sale to consumers in different countries could amass a large resource spend on dedicated staff looking up individual codes for every product going out the door. The staffing burden can be hefty given the time it takes to research all the information. The in-depth nature of this task also utilizes interpretation that could create a business risk, with incorrect HS codes being assigned to products. For smaller businesses, the apprehension of taking on all that work can often become a deterrent for selling into new markets.
The risks associated with product harmonization
Penalties are also a threat. Wrong codes, or worse not having them at all, could mean delivery delays while local customs offices hold onto shipments until the codes are in order. According to the June 2018 Edition of the WCO News Magazine, the penalties are administered by local customs administrations to penalize incorrect tariff calculations. ‚Penalties can be devastating, considering the penalty amount assessed, plus possible additional duties and taxes, which can result in an additional payment that the importer did not consider when pricing the imported goods for sale. All of their profits and more may be lost.” Monetary fines are both a possibility and costly, however, officials will typically work with merchants as long as the retailers communicate good reasons for assigning certain codes to specific product categories.
Demonstrating "reasonable care" is important and means showing that good faith efforts were made to determine the classification. Showing evidence that illustrates why the decision was made, such as product specifications or rulings, can be important for clarifying situations where customs officials get involved.
A particularly vexing problem is when products are held at the border because of a classification issue. For instance, the food and beauty industries deal with a host of different country-specific regulations regarding ingredients. A food or beauty item incorrectly classified as a restricted item in a certain country could result in the destruction of an otherwise safe product at the border. In less extreme cases, incorrect or inaccurate classifications could delay the delivery of a package into the country, causing the consumer to wait longer than expected to receive their order.
In the U.S., a 10-digit HTS and Schedule B code for goods are required for export goods. Similar to HS codes, failure to properly classify products can lead to complications, fines, and delivery delays.
Achieving product harmony
On a positive note, struggles with product classification have provided opportunities for businesses to create software and new technologies that automate the product classification process. These solutions have allowed the marriage of tariff codes and massive product lines to take place almost instantaneously. What used to take hours setting up product inventory for a new international market is now possible with the click of the mouse.
Flow's solution, for example, takes product catalogue information, descriptions, pictures, and any other available attributes and automatically determines the product's global HS code and each country's tariff code. The system then produces a customs-ready description for the commercial invoice. All within seconds. You can rest easy that you have all the necessary paperwork in order, and your international customer can receive their order quickly and without a hitch.