Are your HS codes your business’ weak spot?

Harmonized System (HS) tariff codes calculate tariff rates for all internationally traded products. Required by global customs authorities, unlike sales and use tax codes, tariff codes are a requirement for the classification of goods and services which are traded across the world.

Every five years the codes are reviewed by the World Customs Organization (WCO), which then releases updates to the HS categorization. These changes are made to reflect technological progress, trade patterns and environmental impacts to ensure items are being classified for the correct customs tariff. For example, consumer products that have evolved to be manufactured from sustainable materials or the introduction of new products into the market.

On January 1, 2022, updated HS nomenclature came into force. In the latest update, approximately 870 codes were removed and 940 were added.

If you are an importer or exporter or involved in cross-border transactions, then you will need to review and change your existing impacted HS codes or need to start using new HS codes from this date.

Nicole Morton, a Cross Border Solutions Manager who works with Avalara’s customer portfolio of ecommerce retailers to support their international growth plans said: “The latest updates to the HS codes reflect many products which are unlikely to have been around five years ago. Many customers aren’t aware of their HS codes, let alone know they need to update them. From the conversations I have with customers on a daily basis, I estimate 70-80% of retailers are using incorrect codes for some of the markets they trade into.

“In the case of one ecommerce retailer we’ve been working with, they undertook an audit of their HS codes to determine their accuracy. Having conducted a thorough review, they found over 62% were incorrect. In another scenario, where codes have changed over time, in some cases, they were paying 7.9% duty on their products rather than the 2.9% they were obliged to pay. In this example, it was a product that is widely produced, however as they were manufacturing it with sustainable materials, it was subject to a more favourable rate. This is potentially costing them both money and customer loyalty. 

There are a series of universal digits contained within the code, however, the rest of the code is country-specific.”

Certifying the correct code is being applied is the responsibility of the business which is selling the goods. In the eventuality a code is not recognised by local customs, the highest levy is likely to be applied. With many SME retailers not having the luxury of an in-house tax specialist, HS codes are a frequent weak spot for many business owners.

Part of the reason incorrect HS codes go undetected is due to the adoption of the code used by the original supplier. The other reason is, for retailers who are selling the product on, it’s the customer that is responsible for the duty – so unless you have confidence that the products you are receiving have the correct codes, you’re not going to know if they’re correct or not. It’s a problem many don’t realise they have.

Nicole continues: “We have to remember that businesses aren’t built based around tax obligations. In fact, few leaders will stop to consider their tax obligations from the outset of setting up their shop. Although you might have had tax advice or a tax specialist on hand initially, as your business grows and evolves, expansion often doesn’t include looking at each of the new products to see how they’re being classified and whether the correct tariff is being paid.”

With the plethora of tax changes that were introduced at the start of 2022, now is a good time to pay closer attention to your HS codes. More often than not, there are savings to be had.

If you’re ready to take the next step, Avalara can help. Our HS code audit services are now available in over 60 countries. 

Find out more at Get your HS codes right and keep your cross-border sales switched on.

Or Contact one of our experts for a no-obligation discussion on how we can help.

Sales tax rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.