TRADE ALERT

 Significant Overhaul of the U.S. Harmonized Tariff Schedule

(December 4, 2006)

The international Harmonized System (HS) is the preeminent international code for classifying products and reporting trade data to governments.  Approximately 190 countries  use the HS, and 98% of  merchandise in international trade is identified using this system.

The World Customs Organization (WCO) has approved the third major revision of the (HS) scheduled for implementation on January 1, 2007 (or on a later date if delayed).   HS updates are conducted every 5 years through the WCO.  This third update is extraordinary since it amends 83 of the 97 chapters of the HS, affecting some 240 headings. Essentially, multiple subheadings have been deleted, divided, and inserted with significant impact.  In addition, selected legal texts, section notes, and chapter notes are being changed. 

These revisions are being implemented to account for technological innovation, change in trade patterns, clarification of texts to ensure uniform application, adoption of the nomenclature to reflect trade practices, and amendments related to the monitoring and control of social and environmental fields. 

The proposed classification amendments to the HTSUS (United States) were generally not intended to impact an item’s current rate of duty. However, because some HTSUS headings are being deleted and combined with other headings and subheadings, the reclassification may ultimately result in duty rate changes.  Prudent importers/exporters need to ensure that they have a comprehensive understanding of the changes as well as a corresponding collection of additional legal and factual information.  It is clearly not just a matter of converting a classification from one HS number to another.  Each affected product should be reevaluated under the revised, and as yet unpublished, rules.  The full ten-digit HTSUS classification has not been published, nor have the rules of origin for any tariff-based trade programs.

U.S. Customs laws demand administration and enforcement of the HTSUS at the full tariff item (10 digit level).  Unless the transition to the 2007 HTSUS is managed appropriately and within the spirit of “reasonable care", as promulgated under the Customs Modernization Act, misclassification may arise.  This could be construed as a "material violation" under 19 U.S.C. 1592 which could then result in an extraneous increase in voluntary disclosures or penalty cases.

 

 

 

The 2007 changes for HTSUS Chapters 1 – 97 have been drafted at the 10-digit level; however it is not known when they will be made available to the public or  U.S. Customs and Border Protection.

 

Once available, it may take a great deal of time for all affected parties to update product classifications and/or automated systems for the 10-digit and other HTSUS changes, and the legal requirement that the proclaimed changes take effect no sooner than 15 days after the proclamation is published in the Federal Register may not provide the necessary lead time.

 

As Customs and Border Protection and other federal agencies are essentially strapped for adequate resources to prepare for these changes, it is likely that the implementation of the 2007 HTSUS will be delayed beyond the intended implementation date of January 1st. 

Importers should continue to prepare contingency plans for their supply chain.  Prior planning will ensure a better transition by taking existing HTSUS classifications and determining what products will require additional/different information to classify them under the new tariff schedule and what, if any duty implications will result from the modifications.

These changes will also have an impact on Schedule B commodity numbers.  Schedule B is the official schedule of commodity classifications to be used by shippers in reporting exports from the United States.   The number is reported on the Shippers Export Declaration form, along with a detailed description of the goods.    

In addition, the changes may affect an item’s eligibility for preferential treatment under the various U.S. Free Trade Agreements. These free trade agreements are based, in large part, on a tariff shift analysis to determine eligibility. Importers are encouraged to begin reviewing the proposed changes to identify products that may be affected including re-certification of Free Trade Eligibility in 2007 for identified products. To meet “reasonable care” obligations importers need to review the tariff shift rules conferring origin under all U.S. Free Trade Agreements used to import goods with preferential duty treatment. It is essential to maintain continued trade compliance through the transition to the new tariff.

As the 2007 modifications will supersede all prior court rulings, to better protect yourself and your company under the law, Deringer suggests you obtain a written ruling from Customs and Border Protection’s Office of Regulations and Rulings. 

 

 

The draft changes to the HTSUS can be viewed at the U.S. International Trade Commission (ITC) website (http://hotdocs.usitc.gov/docs/tata/hts/APPXD.pdf ).   See especially Appendices B, C, and D which contain the draft tariff language and correlation tables comparing current HTSUS with the  2007 HTSUS.  These classifications are only to eight digits at this time; the last two digits come from the US Bureau of the Census and are forthcoming. The ITC also provides a detailed description of the changes at http://hotdocs.usitc.gov/docs/tata/hts/APPXB.pdf. These tools are useful in determining the impact of the changes to your business.  The actual 2007 HTSUS should be published later this year or early in 2007.

Deringer's consulting & regulatory affairs group offers a full scope of services to support importers/exporters, carriers, and supply chain partners, and can assist importers in obtaining rulings and researching how these modifications may affect them. 

For more information regarding this advisory, please call 518-297-3511, or email us at consulting@anderinger.com