Classifying Your Imported Products to Maximize Duty Drawback

I am joined by Jay Charkow, who's the president at ITM, and we also have with us today
one of our existing clients, Peter George. Peter's company has worked with us for years
and we've managed a duty drawback program. But today we're going to talk about classification. And Peter has come to us with an opportunity for a classification review.
We thought that it would be great to sit down with him and have him tell us a little bit about his product and determine if he is classifying his products properly.

We hope you will gain some valuable insight into the world of customs tariffs. With all the supply chain challenges the world is facing, our aim is to maximize your duty drawback dollars and boost your bottom line. We hope you'll subscribe to our podcast to stay current with each new episode in which will unveil numerous ways to improve your international trade profitability. Thanks for listening.

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Thanks, everybody, for tuning in today. I am joined, as I typically am, with Jay Charkow, who's the president at ITM. Thanks for sitting down with me today, Jay. Good morning, Joe. It's always a pleasure. And we also have with us today one of our existing clients. Peter George is with us today. Hi, Peter. Hi, Joe. Thank you for having me. Peter's company has worked with us for years and we've managed a duty drawback program. But today we're going to talk about classification. And Peter has come to us with an opportunity for a classification review. we thought that it would be great to sit down with him and have him tell us a little bit about his product. And then Jay and I can talk about how we're going to review the product to determine the correct classification. So, Peter, what what is it that you are importing? Yeah, absolutely. Jill. again, thank you so much for having me here today. So my company Imports is an automatic locking pill dispenser with a built in alarm China. Right now we're paying about 3.9% duty on those imports. But due to the 3 to 1 tariff for paying an additional 25% as well on a monthly basis, you know, we're bringing in about 100,000 in payable duty in terms of imports. So that's, you know, a high level overview of what we're doing. So you're taking a pretty big hit on those 301 duties, which is not uncommon. There are a lot of companies that are that are suffering with that. So we're going to take a multifaceted approach to analyzing the classification. And I'm going to have Jay talk us through that process a little bit, if you would. Sure. One of the issues with classification is that people allow their customs broker to classify goods for them. And the fault there is that the broker doesn't really understand your product. So in order to get the proper classification, one needs to combine expertise in the harmonized tariff schedule along with the technical information required to put it into the right category. And what we do is we look at both parts of it, analyze it and come up with the proper classification. So when we look at the harmonized tariff system, harmonized tariff schedule, just so Peter can learn while he's here, because I'm sure he's interested in what we're going to do. What do we take into account? I know we start with the general rules of interpretation and then we move on into the actual meat of the tariff. And what particular pieces do we pay attention to when we're determining the classification? Well, you have to look at the tariff in a very logical way. And the way you look at it is you start at the upper level, the four digit codes, and you move to the six digit codes and the eight digit codes. And in doing that, you get a more refined understanding of what the product is. And what happens is many companies don't take it all the way down to the proper level. And in doing that, they're always overpaying some duties. Our experience has been that 90% to what comes into the country is classified properly. 10% is classified improperly. And of that 10%, 90% is overpaying duties. And it's all because they don't do a proper analytical analysis of exactly what the product is and how it fits into the harmonized tariff. So when we look at Peter's product and we've actually already looked at it and he was bringing it in under the harmonized Tariff heading, Chapter 19 one, which carries its own chapter, notes and heading notes and all that information. But what we did was we reviewed that particular heading. We reviewed the tariff in terms of the section notes, the chapter notes the general rules of interpretation. And then we moved on to the cross rulings, which are a tool we can use that's online. That is a listing of all the rulings that Customs makes daily and they rule on all different types of things, and they post the rulings up onto the site where you can review it. Can you talk a little bit about the cross rulings and what what access we have there to what's available? That's a very good point, Joan, because many organizations, many brokers that analyze or classify things do not use the cross rulings. And even though classifications of agents numbers do not change, very often, rulings can move things from one category to another. And it's a real opportunity because the people that utilize the rulings and go to customs and ask for a clear understanding of what the product is and it clear Egypt's number usually get it and they put their product into a category that's more favorable to them. And many, many times companies have an opportunity to put their products into a similar category. And this is a key area of classification that most brokers just do not take advantage of and is important if you want to get your product classified properly. And also, as I mentioned before, get a lower duty rate. And using this tool, we conducted a search and we found that Customs has made a ruling in regards to a product very similar to yours, and they have determined that it does not belong in Chapter 91, but instead in chapter 85. And when we read that ruling, we went back to the tariff and we looked at Chapter 85 and we looked at the applicable headings and we found that we could move it into that chapter and it moved the base NHTSA number based on the switch in the yes number, moved the base duty rate from 3.9% to 0%. And the 301 duty is also going to come down from 25% to 15%. So hopefully that's good news to you in terms of how much duty you're paying. Yes. No, absolutely no. Obviously, paying less duty at the end of the day is beneficial to my company. And, you know, financially as well. So very glad to hear that. There's another point here that must not be overlooked. And the point being that you want to be have the proper classification. The regulations are very clear. There's penalties if you misclassify things and you should not try and move things into a lower duty rate just to save money. What you do is have to classify it properly. And one of the things, if you do the kind of analysis that Jill is talking about is that you do get the proper classification. And in many cases there is an opportunity to save money in doing that. So now that we've determined what we know is the proper classification and we know that Pete's company is in compliance and there are no problems with what the classification is going to be. We are going to instruct you to start using that it's going forward, but then we can also go backwards and we can get you some money back. J.D., you want to talk a little bit about how we can do that for them? Sure. If you've misclassified something, the customs regulations allow you to go back roughly six months and you can look at all of the entries that you brought into the country over that period of time and protest them with the government by citing the ruling. If that's the case and if not, you can put your argument together and allow customs to review it. And in many, many cases what they do is they refund the money for the overpayment of the duties for the misclassification. And another thing we didn't talk about, but you can also do. Had there not been an existing ruling and we had made this determination that the NHTSA number was incorrect and and the subsequent one was correct, we could go for our own ruling. Correct? Absolutely. You can present your case to CBP and have them analyze the data that you have and in turn get a ruling for your own product. Now, for most people listening today who does the most? Who does the majority of the classification for importers and why are so many mistakes occurring? Well, I think the the issue is that people do not analyze their product enough, as I mentioned before. What you need is a good understanding of the tariff, which many customs brokers have, plus a very good understanding of the product being analyzed, classified, and many brokers just don't have the time to look in detail of what the product is really and just dump it into a category that is easy to define. And sometimes that goes down. And for people familiar with the harmonized tariff schedule, what happens is you go down the list and it gets into an other other category. And the other other category usually has a higher duty rate than one of the categories above that. And to get it into a category above that, you need to really understand what the product is and look at the rulings if they exist in cross and move it into that category. And I think an important thing to mention is that most importers just defer to their brokers. And like you mentioned, the brokers don't know the product. They certainly know that they the. Yes, but they don't know what the what the customer what the client is importing. And they're going to pick a generic classification and text usually and other other category, which is a higher duty rate rather than taking the time to dig in and figure out what the product really is. Exactly. We had a situation recently where people were importing a hemostats, which is like a bandage, and that thing was classified. The product was classified as a gauze, which it really is. It looks like a gauze that can be put on a wound. And we did the analysis and found out that this is really a medical issue and belonged in a category where instead of a 7% duty, it was allowable. It was really classified under a three and a half percent duty, which was a savings of over$150,000 for our client. And the other point was that it was classified properly before it was misclassified, and now it's classified properly. And there was a savings in doing so. Right. And that's the most important thing. We want everything to be compliant and accurate, and that's the approach that we take with all of these tools available. Exactly. Compliance is really the key. You can't put things into a MySQL into a classification category just to save money. It has to be classified properly. And in reality, sometimes when you do classified things properly, the duty rate goes up. And indeed, if it is where it belongs, at the higher duty rate, one must be sure to put it into that category and pay customs any duties to them to be compliant with the regulations. Well, and in your case, we got you. We got you some savings, it looks like. And we're going to put all that together for you and go backwards and protest those entries and get you a little bit of that money back that you overpaid. Yes. No, absolutely. And you know, my team definitely appreciates ITM for all their, you know, digging and finding out these misclassified items. You know, something that we didn't recognize at the start and, you know, they were able to solve it for us. Those, you know, misclassified items and get the proper SKUs and put them where they need to be. And just one thing is you should remember those listening to the podcast, that classification is more of an art than a science. You have to really understand all aspects of it and figure out the best way to approach it. Look for the rulings. Understand the tariff. Understand the product and you will be able to classify your products properly. And also, in the ultimate scheme of things, maybe save a few bucks. We do that and we're happy to review your circumstances and offer you a no cost analysis of what the program would come out to be, and people should reach out to us with any questions. Absolutely. Well, thank you for joining us today and. You guys for having me. Appreciate it. We look forward to continuing our relationship in the future. And Jay, as always, thank you for your expertise and giving us something to talk about and think about. It's always a pleasure to be on a podcast with you, Joe. Very good. Until next time. Thank you all.