Navigating the Customs Labyrinth
Complying with the Customs rules and regulations governing imports may feel like you're caught in endless twists and turns. Here's how to master the maze.
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In 2015, the value of goods imported into the United States topped $2.2 trillion, the U.S. Census reports. The number of trade-related rulings within the U.S. Customs and Border Protection (CBP) database tops 190,000, while the U.S. Harmonized Tariff Schedule spans 99 chapters. "It's a bit of a labyrinth to bring goods into the United States," says Amy Magnus, director, customs affairs and compliance with A.N. Deringer, a St. Albans, Vt.-based supply chain solutions provider. "But it works."
Importers need to know what they're doing, however. Ensuring goods proceed through Customs as smoothly as possible requires using "reasonable care with everything involved in international trade," says Nick Mauro, director, global supply chain with Hampton Products International Corporation, a residential hardware, lighting, and travel security products company. Based in Foothill Ranch, Calif., Hampton Products imports more than 1,000 containers annually. Importers need to understand the relevant regulations, and ensure information such as product descriptions and classifications is complete, correct, and submitted to the CBP expeditiously.
Demonstrating reasonable care is not just a best practice—it's a legal obligation. "The law says an importer must use reasonable care," says David Craven, partner with Riggle & Craven, a Chicago-based law firm focused on international trade and customs law.
What's more, the fines for violating anti-dumping or countervailing duty regulations can exceed the value of the goods themselves. "Fines can cripple the shipment's potential revenue," says Ben Bidwell, director of global transportation customs services with C.H. Robinson, a supply chain and logistics firm based in Eden Prairie, Minn.
Ensuring your products proceed smoothly through the customs labyrinth requires starting before they leave the factory. Importers need to know "what the product is, what it is made of, and who regulates it," says Jennifer Diaz, founding partner with Diaz Trade Law, P.A., in North Miami, Fla. "The CBP won't hold your hand."
Moving products through CBP involves monitoring both the goods themselves and the associated data. "The goods and the data are two separate animals," says Steve Zisser, president with Zisser Group, a law firm focused on international trade. CPB typically focuses on the information.
The information importers submit to the CBP includes descriptions of the buyer, the seller, and the merchandise, as well as a product's classification according to the Harmonized Tariff Schedule (HTS).
"The more information and the more complete the documents, such as the invoice and packing slip, the smoother the transaction," says Norman Harris, corporate compliance manager with Norman Krieger Inc., a freight forwarder and customs broker.
Targeting Red Flag Shipments
CBP relies on a "proprietary targeting algorithm" to determine which shipments warrant further investigation, says Marc Roy, vice president with eCustoms, a trade compliance solutions provider. The algorithm focuses on a number of factors, including shipper history, the goods they're importing, and the countries through which the products traveled. For instance, the CBP might flag shipments that passed through high-risk countries.
The government also checks "things that don't seem to fit," Zisser says. Documents that show a well-known electronics company importing dairy products, for instance, would raise suspicions.
In addition to CBP, more than 40 other federal government agencies can require information on imports. That means providing just the SKU or style number isn't enough.
To meet Consumer Product Safety Commission requirements, for example, some imported apparel must undergo flammability testing that's conducted by an accredited agency. "When you're determining which manufacturing factory to use, have these considerations in place," recommends Laura Rabinowitz, special counsel with international law firm Kelley Drye & Warren LLP.
To aid in these efforts, trade compliance professionals should establish relationships with their colleagues in procurement, suggests Greg Maddelini, customs brokerage marketing manager with UPS. They also should watch for individuals outside procurement—say, within R&D—purchasing items, even one-offs, he adds.
Mauro works with Hampton's technical engineers and marketers to determine the Harmonized Tariff Schedule codes for new products. They also discuss or ask for a ruling from CBP if the classification isn't straightforward. The classification determines each product's duty and landed costs, so accuracy is key. These steps occur before the product reaches a port.
Down in the Dumps
Similarly, importers need to determine whether the goods they're considering importing are subject to anti-dumping duties or countervailing duty regulations. Countervailing duties can come into play when U.S. importers bring in goods that have been subsidized by the government of the country in which they're manufactured. The duties are intended to level the playing field for domestic manufacturers. Anti-dumping duties are intended to address imports that are priced below market value and harm the domestic industry.
Determining whether products fall within an anti-dumping or countervailing duty regulation "can get technical and involve days of emails and calls between importers, brokers, and manufacturers to determine if they're covered," Bidwell says. Moreover, the determination can come down to esoteric factors, such as the kind of steel used.
For instance, anti-dumping orders currently are in place for many aluminum extrusions from China, says Lawrence Friedman, president of the Customs and International Trade Bar Association. However, the provisions exclude certain finished products and aluminum alloys.
When the Department of Commerce issues an anti-dumping order, companies should review their supply chains and analyze the possibility and benefits of changing the source country or product to legally avoid the duties. However, "smart importers are careful to properly document their analysis," Friedman says.
An importer also can ask the Department of Commerce for a ruling stating the new product falls outside the scope of the duty. "If importers don't do this, one allegation or investigation will potentially cause them to have to defend their position," Friedman adds.
Importers also need to check that their products don't violate trademark and copyright protection. "Customs continues to treat the protection of trademarks and copyrights as a priority," Friedman says, and may seize goods if the importer can't show a trademark was legally applied.
Classification and Valuation
Goods coming into the United States are classified using the Harmonized Tariff Schedule. The classification derives from the "essential character" of a product, Mauro says.
For some goods, the classification process is straightforward. Other products, however, resist easy classification. Hampton, for instance, makes ratchet tie-downs, or long straps used to secure goods on cargo trucks. In CBP's view, the essence of the good is the ratchet, not the tie-down itself. As a result, ratchets fall into the category "other mechanical devices," Mauro says.
Importers with questions can turn to CBP's database of rulings for guidance. However, the number of rulings currently tops 190,000. Importers also can prospectively ask for a ruling before they bring a product into the United States, says Christopher Kane, partner with Simon Gluck & Kane LLP, a firm concentrated on customs and international trade law.
Imported goods also need to be assigned estimated values, another area that can get complicated. For instance, when apparel is designed outside the United States, the design work is added to the value of the goods.
"Customs will ask where the design work was done," Rabinowitz says. "If it was outside the United States and isn't included in the value, the importer can get a penalty."
CBP considers companies to have used "reasonable care" when they take steps such as analyzing the goods being imported, asking experts for their insight, and reviewing the Rules of Interpretation to determine valuation and classification.
"If CBP has questions, it will ask to see the documentation," Bidwell says. "An incomplete, illegible, or inaccurate record tells Customs the importer isn't doing a great job managing its compliance responsibilities."
Regular and ongoing data cleansing is key. For instance, it's not unusual to find one company has multiple Manufacturing Identification Codes (MIDs), each differing by a single letter or number, for the same supplier. "A best practice is a single repository of data accessible to those who need it, populated with the most accurate and up-to-date trade data," says Suzanne Richer, director of trade advisory service for Amber Road, a global trade management solutions provider.
Going for Brokers
Most importers work with customs brokers, as few have the resources to remain up to date with the rules, regulations, and processes used to move goods through Customs.
Before partnering, both sides will want to check out the other. Because the CBP views brokers as agents of the importers of record, and expects assistance in identifying bad actors, brokers may ask for documents to verify the importer's tax identification number, and the company name and address. They also may check government records to make sure the organization is on file as a corporation or LLC. "Brokers are the first line of defense," Harris says.
Brokers also ask for power of attorney, which CBP requires. The power of attorney authorizes brokers to act on behalf of importers' customs operations.
For their part, importers want to work with brokers who understand their business and products. They also should have good relationships with the workers at the ports where their goods enter the United States.
While a strong broker is key, engaging one doesn't relieve importers of responsibility for complying with customs regulations. "Importers are responsible for submitting correct information on the customs declarations," Mauro says.
Ensuring compliance with CBP regulations is more than a one-time event; it requires ongoing monitoring and training. At Hampton, for instance, Mauro and his team conduct random audits, where they ask both employees and the company's computer system to generate 30 random part numbers and their HTS codes.
"Then we come back together and see if we agree," Mauro notes. If not, they might submit a request for a customs ruling, which can be done online and typically takes 20 to 30 days.
Hampton also has created an import compliance manual that codifies the company's processes. Mauro and his colleagues periodically conduct internal compliance audits, checking that the company's processes continue to follow the procedures outlined in the manual.
Mauro also analyzes reports he generates from CBP's Automated Commercial Environment (ACE) system. "We line up each shipment by filer code, broker, supplier, ports of entry, and estimated duty payments, to see if anything stands out," he says. For example, most of the company's shipments go through either the Port of Long Beach or the Port of Los Angeles, so if one enters the United States through a different port, they follow up.
Many importers benefit from participating in some CBP initiatives. One is the Cargo Service Messaging System (CSMS), a searchable database of messages of interest to importers and carriers. Data might include regulatory changes or even day-to-day events that can impact shipments, such as weather events.
Another initiative is the Broker-Known Importer Program (BKIP), a voluntary program of the National Customs Brokers and Forwarders Association of America (NCBFAA), supported by CBP. Through BKIP, customs brokers alert CBP that the importer on an entry is known to the broker and that the broker has advised the importer of their compliance responsibilities pertaining to customs regulations.
"This tells CBP the broker is vouching for the importer," Mauro says. That may help shipments move more quickly through customs.
Importers participating in the Customs Trade Partnership Against Terrorism (C-TPAT) sign an agreement to work with CBP to protect the supply chain, identify security gaps, and implement specific security measures and best practices, among other steps. C-TPAT partners also provide CBP with a profile outlining the specific security measures the company has in place. C‐TPAT members are considered low risk and are therefore less likely to be examined, according to the CBP.
Among other requirements, importers who want to participate in C-TPAT typically need to conduct and document annual factory visits, and demonstrate that they know where their merchandise is produced and who's manufacturing it.
"C-TPAT is based around the physical security of cargo—making sure the cargo remains secure from the manufacturer's warehouse to the buyer's premise, and that nothing can be planted into the cargo," Magnus says. Even if an importer decides not to participate in the program, the required steps can add value.
The Trusted Trader Program represents the "highest status within Customs," Richer says. According to a 2015 CBP announcement, this program "will streamline the process through which importers can establish to CBP that they strive to secure their supply chains and strengthen their internal controls for compliance with the existing laws and regulations administered or enforced by CBP." The program also should increase overall trade efficiency, according to CBP.
Some importers avoid these types of programs, assuming the entry requirements are too difficult or require divulging too much information. That's often an incorrect assumption. For instance, the Importer Self-Assessment (ISA), required for entry into the Trusted Trader Program, typically requires that an organization demonstrate to CBP its internal controls and ability to manage and monitor future compliance obligations. The review takes place over two days.
In contrast, a focused assessment, or customs audit, can take 18 months and be highly intrusive. "While companies must still prepare for entry into ISA, CBP is seeking to work in partnership with them, so the two sides work hand-in-hand toward a common goal," Richer says. Unless it uncovers significant problems, CBP typically works with organizations to get them into the program.
Most supply chain professionals' responsibilities extend beyond ensuring their goods move smoothly through Customs. They also want to move them at the lowest possible cost, while still complying with regulations. That means taking advantage of legal ways to reduce tariffs and duties. "Always look, investigate, and re-investigate," Zisser says.
Importers should revisit opportunities at least once each year to ensure they're taking advantage of any new developments. "Stay flexible and nimble, and explore," Zisser adds.
Managing the customs labyrinth starts early and requires continual monitoring. By understanding the relevant regulations, submitting complete information, and taking advantage of government initiatives, importers can navigate the customs maze and get their goods moving in no time.