If you’re going to import or export goods — and, surprisingly, even if you’re not — it’s important to learn how to determine the Harmonized Tariff Schedule (HTS) classification of your products. This code is used for determining the duty you pay, as well as a host of other elements of trade law, from quotas to Free Trade Agreement qualification, to the countless regulatory requirements managed by agencies other than U.S. Customs and Border Protection.
Import duties have been around for thousands of years, but they started out simply. Governments have always had to collect taxes somehow, and imported goods — particularly goods that might compete with local goods — have therefore always been a popular target. Over the course of time, countries decided to set different duty rates for clothing, food, beverages, furniture. Then they then broke it down further with different rates for cotton or wool, for meat or vegetables — then further still, breaking down each of these into dozens of specific varieties based on an item’s content, quality, level of processing, and more.
By the 1970s, every country on Earth had its own duty schedule, with import and export tariff books three or four inches thick. With thousands of different codes for every possible product that could be imported or exported, every country’s book looked completely different. The regulators of the world decided that life would be much easier for everyone if we shared the same coding system for this process. It took them a while, but by the mid-1980s, the World Customs Organization (WCO) released their masterpiece, and the Harmonized Commodity Description and Coding System was born.
In this system, all the products on Earth — all the physical goods that could possibly be traded, from raw materials to finished products — are divided into 99 chapters. The chapters start with animals and plants; moving on to food products; then to elements, minerals, and chemicals; and finally moving on to completed machines, electronics, furniture, and vehicles by the end of the book.
The system is harmonized, meaning that interpretations are intended to work according to the same rules, and the first six digits of the code are intended to be identical globally. This allows for each country to differ in the last few digits based on how much detail each country wants to go into, and how many different duty rates they want to apply to the same general product group. One country might have a dozen different duty rates for steel screws but only one duty rate for steel nuts, for example, while another might reverse that difference. Such country-specific choices are handled in the last few digits of the country’s code.
Because we in the United States have set 10 digits for our version of the HTS, we hope and expect that the first six digits of our code will be the same in every country we work with, and only our last four digits will be specific to the U.S.
Why You Should Care About the HTS
The HTS system applies to every import and every export; that alone is a good reason for the small-business owner to pay attention to it. But the HTS system is about more than just straight duty rates. There are many reasons why the HTS code of your product might affect your business, whether you export or import, or even if you are a totally domestic company, selling your product only to fellow American customers.
Here are a few of the major issues determined largely by a product’s HTS code:
- Duties: The basic duty rate the importing country applies to the shipment. This is usually a percentage of the Customs value, which is usually the transaction value — the full price paid or payable for the goods — but duties can also be based on quantity or other units of measure.
- Other Taxes Assessed on Top of Duties: Many countries assess a Value Added Tax (VAT) upon the value of goods plus the duty, so getting the classification wrong could mean causing your customer to get the VAT wrong too.
- Import or Export Quotas: The U.S. has far fewer quotas than we used to, but many countries still have a lot of quota limitations on both inbound and outbound trade.
- Export Controls: Most of our export control licensing regimes are based on the dual-use and munitions list systems — the Export Administration Regulations (EAR) and the International Traffic in Arms Regulations (ITAR) — meant to keep certain goods out of the hands of hostile governments and other groups that threaten U.S. interests. Still, some of our export controls — such as those placed on Russia in response to its annexation of Crimea — use the HTS. Many other countries use the HTS exclusively for their export controls.
- Free Trade Agreement (FTA) Certificates: The HTS code determines the qualification tests required to generate most FTA certificates. It’s not enough to have made a product here; that’s just the starting point. To qualify for the new United States-Mexico-Canada Agreement (USMCA) — the recent replacement for NAFTA — the U.S.-Australia FTA, or most of our other FTAs, you have to look up the specific Rules of Origin for each product’s HTS code, and perform the specific tests required for it in the agreement. Otherwise your product cannot claim duty-free status — and yes, those rules are very different from FTA to FTA, and even from product to product.
- Other Regulatory Agency Requirements: Customs is only one of many government agencies involved in importing and exporting. The U.S. Food and Drug Administration (FDA), U.S. Department of Agriculture (USDA), Environmental Protection Agency (EPA), Federal Communications Commission (FCC), , and many other government agencies govern some import shipments, but they don’t all participate in the import process. In most countries, Customs acts as the gatekeeper for all these agencies and their international counterparts, and builds triggers into their systems so that they can tell from the HTS code whether another agency might also need to be involved to authorize an importation.
- Anti-Dumping, Countervailing, and Other Punitive Duties: In addition to the basic duty that applies to all imports, governments occasionally decide that one or more foreign governments are breaking the rules of international trade, such as by subsidizing exports below cost in order to intentionally hurt our market. Such findings result in often-astronomical additional duties, such as the 10% and 25% punitive duties that were all over the news in 2018, or the even higher 50%, 100%, even 150% or more anti-dumping duties (ADDs). These programs aren’t always directly tied to the HTS code, but U.S. Customs uses the HTS code to flag the entry so the case can be analyzed and applied.
- Classification of Other Products: This may seem strange, but it makes sense: HTS classification doesn’t occur in a vacuum. Some products are specifically provided for in the book, while many are not. If you’re making a part for something else, for example — say, a door panel for a refrigerator or a base for a toy — the classification of your part may or may not be partially determined by the classification of the master product for which it was made. (This complicated issue — parts classification — is an entire subject on its own.)
If you think about it, it becomes clear that you need to know your products’ HTS codes even if you never intend to import or export them yourself. A business should know the duty rates on its foreign competitors’ products, for example, in order to better judge how to price its own domestic products to be competitive. You might never sell your product internationally, but your domestic customers may ask whether your products qualify for the USMCA — or one of the many other FTAs — to help with their resale opportunities.
And if your product is export-controlled, then that fact governs who you can consider as vendors, carriers, customers, and engineers. Classification really isn’t just an import-export issue, after all.
Reading the Harmonized Tariff Schedule
Many countries publish their tariff codes online, and the U.S. is no different. The most current version of the U.S. HTS is always found on the United States International Trade Commission website.
While you can still obtain the books on printed paper, using the physical book can be a labor-intensive process, because the code is updated at least a couple of times every year, meaning that a physical copy is always out of date in a matter of months. The online version is always kept current.
Every seven years, the WCO gets together for a global review, standardizing the shared six-digit schedule to cover the many changes and additions that member nations put in place since the last such harmonization. Each country’s annual updates include plenty of code changes, but that international review usually results in updates numbering into the tens of thousands as new compounds, new foods, new technologies, even new legal distinctions become represented by classifications of their own. Even if you never imagined your particular products being involved, it is always possible.
The Parts of the HTS Code
To walk through the HTS code, we need to begin with a few definitions.
As mentioned before, the book is organized into 99 chapters, and only the first six digits are universal. The segments each have their own legal status, and play a particularly important role not only in duty determination but also in FTA qualification.
As an example, consider the HTS code 9506.51.2000, the classification for tennis rackets:
- Chapter: The chapter is literally a chapter of the HTS book and also constitutes the first two digits of the classification number — in this case, 95.
- Heading: The heading is the first four digits and is matched to a specific grouping of materials or products — in this example, the heading is 9506, which covers a broad range of athletic equipment, sports, and games.
- Subheading: The subheading is the first six digits and covers the finest level of detail that the WCO intends to be globally identical. In this example, the subheading is 9506.51 for lawn tennis rackets and parts thereof.
The full 10-digit number is simply called the HTS code or classification, and provides the opportunity for each country to delve into as much or as little further detail as it wants. The U.S., in this example, further subdivides 9506.51 into completely strung tennis rackets, complete but unstrung rackets (ready to be strung), and parts and accessories for their assembly. In this example, 9506.51.2000 represents fully strung tennis rackets that are ready for use. The U.S. has assigned a higher duty rate to these completed tennis rackets than to unfinished, unstrung rackets (9506.51.4000), which must be assembled — presumably in the U.S. — before being ready to sell.
The description shown next to the classification is legally binding. Pay close attention to such details as whether words are separated by semicolons or commas, and whether they mention including “parts thereof” or not. These kinds of issues govern Customs’ judgment when ruling on a challenging classification question, of which there are many.
Units of Quantity
The book may simply show an X here. If it asks for numbers, net weight, linear meters, or other measurement of quantity, it may be simply for reporting stats or might also play a role in the determination of duties or other fees, or even quota limits. Note also that Customs usually requires metric measurements, so you may need to do conversions if you buy or sell in English measures like pounds, feet, or gallons.
Columns 1 and 2
In the U.S., we have split our duty rates into two groups. The first is the “Most Favored Nation” (MFN) group, or Column 1. Contrary to its exclusive-sounding moniker, all but two countries on earth get these Column 1 rates. That leaves two countries — Cuba and North Korea — to get the astronomical Column 2 rates. This is a holdover from the Cold War; Column 2 used to include the USSR and the captive nations of Eastern Europe, but they were all moved to Column 1 when the Iron Curtain fell in the early 1990s. Because Americans are banned from almost all commerce with Cuba and North Korea, you will most likely never encounter Column 2 in your business at all.
General and Special Subcolumns
Column 1 is itself split into two subcolumns: General and Special. A product qualifies for the duty rate listed in the Special column — which is usually zero — if it meets all the following requirements:
- The product was made in a country or country group listed in the Special column.
- It was imported from there directly.
- You have proof — generally in the form of a certificate from the vendor — that the product qualifies for the agreement.
If all three requirements are not met, then the product reverts back to the duty rate shown in Column 1’s General subcolumn.
Some classifications are followed by a footnote, which refers to an entry later in the book, in chapter 98 or 99. These are generally additional punitive duties — anti-dumping, countervailing, or Section 301 duties that are sometimes country- or vendor-specific, but not always — and sometimes also include other provisions such as import quotas. If your product is covered by a footnote, check it right away. If applicable, these duties are usually enormous, doubling or tripling the bottom-line cost of the imported product.
Examples: Table Tennis Sets and Golf Clubs
For a high-level illustration, here are a couple of examples from the HTS in the U.S.
Let’s look first at table tennis sets. We find these at 9506.40.0000. As you can see, the U.S. doesn’t break down this product category at all; your paddles and table tennis balls are all classified with the same code, which carries a 5.1% import duty rate, assessed on the Transaction Value of the shipment — note that Column 2 says they’d be subject to a 30% duty coming from Cuba or North Korea, but you won’t be importing theirs.
You can see that the Special column is chock full of entries. It turns out this product category is provided for in many of our trade agreements, making it duty-free if the shipment qualifies. Each code in this column represents a country or group of countries that can qualify for duty-free importation of these goods. “A” is the Generalized System of Preferences (GSP) program that covers about 140 countries of origin. “AU” is the reciprocal free trade agreement between the U.S. and Australia. “BH” is the reciprocal free trade agreement between the U.S. and Bahrain. “CA” and “MX” mean Canada and Mexico. There’s a list explaining all these codes at the beginning of the HTS book, in the section titled General Notes.
All in all, about three-quarters of the nations on Earth participate in one or more of these programs, either as reciprocal FTA partners or one-way beneficiaries. Just remember, the goods only get this duty-free treatment if they were imported directly from the named country or through another member of the same agreement, and if your vendor can prove qualification if the government audits you. Don’t take advantage of the USMCA or any other such free-trade program without a certificate from your supplier.
This was an easy one. Now let’s look above it to golf supplies. Here we see different classifications and duty rates for golf clubs — 9506.31.0000 with an import duty rate of 4.4% — vs. golf balls, which are classified as 9506.32.0000 and trade freely with no duties in general.
You’ll note that there’s a list of potential trade agreement duty breaks in the Special column for the golf clubs, but not for the golf balls. Why not? That’s because if the product is unconditionally free — carrying a zero duty rate normally — then there’s no point in worrying about the free trade agreements. The system only lists the possible special programs if the product would otherwise be dutiable.
It’s easy to get lost in the questions of “Why?” when reading through these pages. Why are golf balls duty-free but not golf clubs? Why are cross country skis duty-free, but not alpine skis?
The reasons vary. It could be because one group of importers or manufacturers had an effective lobbyist at some point long ago, or because the government needed revenue one year and looked for things to tax that few would notice or complain about. There are a thousand reasons, and unless you’re in a position to lobby Washington on the matter, it’s usually best not to worry about it. These rates are usually out of our hands; we just need to understand them and make sure we classify our goods correctly.
And this is critical: While some products are very clear in the HTS, many are not. Some classifications are vague, some are incredibly specific, requiring a full understanding of material content, specific measurements, manufacturing methods, and intended use.
Don’t assume that you can always find the correct classification for your product on your own. If you do any importing and exporting, you should already have a Customs broker and freight forwarder who can assist in these matters. Hiring outside consultants for a full line review is sometimes wise.
“The Mod Act”
The Customs Modernization Act of 1993 clarified the requirement that businesses own the responsibility for getting all this right — that’s you, not your Customs broker or freight forwarder. The Mod Act established an obligation in the business community to take reasonable care to act in an environment of informed compliance, and stipulated that in most cases, businesses cannot simply blame their broker or forwarders for errors.
So, yes, you should usually use brokers or forwarders because they are the experts, but always remember that they are not mind-readers. They depend on you giving them all the information they need to provide good advice. In the end, it’s the importer or exporter, not its outside consultants, who will be held responsible for getting this stuff wrong.
The HTS pages aren’t the only resource that you or your consultants will use to classify your products. Each chapter has guidance notes at the beginning, called chapter notes, and each group of chapters is likewise preceded by a set of section notes. These must be checked in concert with the review of the codes themselves. There’s a set of general rules of interpretation at the beginning of the book that’s shared by almost every country on Earth, which sets forth an order of priority across the HTS. Part of the deal in getting countries to join this harmonized approach was agreeing to go through the classification process the exact same way as everyone else.
Several free and easy-to-use primary resources are available online.
The Harmonized Tariff Schedule site hosted by the U.S. International Trade Commission includes not only the 100 chapters of HTS classifications themselves, but also critically important rules and definitions governing each chapter. The book begins with general notes, including the General Rules of Interpretation (GRI), which provide the globally standardized order to use when seeking the right classification for items not specifically identified in the book.
Another helpful resource is the Customs Rulings Online Search System (CROSS) database from U.S. Customs and Border Protection, where you can read the specific guidance that other companies have sought on products or questions like your own. The site allows you to search Customs rulings on matters such as a product’s classification, as well as origin determination, origin marking, valuation rules, and other decisions. Although these rulings are only binding on the products and importers specifically named, they enable any reader to understand how Customs views a complex question, and can be cited as support for your own case if you file a ruling request yourself.
There are other resources for complex classification challenges, such as The Explanatory Notes volumes from the WCO, court decisions from the U.S. Court of International Trade, and rulings by foreign countries’ Customs ministries. These are difficult for the American layperson to get at, but when needed, your broker, forwarder, or other consultants can access them.
How Are Duties Calculated and Paid?
Once you know the product’s classification, you can figure out what your duty will be. Let’s consider the aforementioned table tennis set, with its 5.1% duty rate.
In most cases (there are exceptions), we pay duty in the U.S. based on the transaction value — the actual price paid or payable — not counting international transportation. (This issue isn’t globally standardized; many countries assess duty on the full delivered price.)
So let’s say you bought $10,000 worth of table tennis paddles and balls from a European vendor, on a delivered basis, so your vendor charged another $1,000 for the international transportation piece, for a total invoice value of $11,000. You can deduct that transportation amount when you have supporting documentation for it, such as a rated freight bill showing that the actual international freight charges were $1,000. We multiply the $10,000 times 5.1%, and our duty is a simple $510.
We aren’t done quite yet, however. We will have a small merchandise processing fee that Customs charges even on duty-free items. And if we imported the shipment by ocean through a U.S. seaport, there’s also a tiny harbor maintenance fee to add. Together, these add just under another half percent to our Customs payment. In addition, as mentioned earlier, many other products are hit by high punitive duty rates, such as anti-dumping and countervailing duties. These are cumulative, and your Customs broker’s computer system will catch the red flags to identify which duties may apply as long as your value, classification, and country of origin are correct.
Before leaving this question, it must also be asked, how sure are you of that $10,000 value of your goods? “Well, that’s what’s on the invoice,” you may say. But what if there’s something else going on behind the scenes, something not mentioned on the invoice? What if you paid the vendor a couple thousand up front to tool up for the job? Or what if you sent your supplier a mold or model first? Or if you sent the vendor some parts to use these components in their assembly?
Almost anything you’ve sent to a foreign vendor — not just money, but anything if it increases the value of the final product that you import — is usually going to have to be declared on your import documents as part of the total dutiable value of the import.
These valuation issues are the subject of another article, but be aware of this general point for now: always declare the full, actual price paid or payable. If there were more payments that aren’t reflected on the invoice, then you will need to tell your Customs broker about them so the broker can add them in if they are dutiable. You must never under-declare the value because that would cause you to underpay the duty. And that would make U.S. Customs think you did it on purpose, which would open you up to charges of fraud. Accuracy is critical at every stage so the regulators don’t suspect you of dishonesty — not only in HTS classification, but in value, origin, and many other related areas as well.
The import-export world is fascinating, with millions of codes, complicated rules, and efforts by well-meaning bureaucrats to ensure international trade is managed as fairly as possible. But it can be a huge challenge as well, and therefore can’t be taken too casually. This isn’t taught in school; most companies learn these lessons the hard way — through fines and penalties. That’s not the best way to learn anything!
The Customs brokers who file documents on your behalf are limited by what the seller and buyer have told them. If shipment documents are incomplete or if descriptions were misleading, a broker can’t help but make mistakes.
The job of the business owner is therefore to think through all this and be proactive, sharing everything you can think of that might be relevant with your Customs broker, so the broker can give you the best possible advice, and help you protect both yourself and your customers from the risk of Customs assuming you did something wrong — or, worse yet, thinking that you did something wrong on purpose.