When you're importing or exporting goods, it's legally required to pay certain taxes. These will depend on the types of products. Commodity codes are used to classify different goods so you can pay the correct amount of tax. Each type of product will be assigned a commodity number according to the International Harmonized System (HS).
Commodity codes identify products or groups of products in international commerce. Customs authorities use these numbers to determine the duty and taxes for specific goods.
Any business involved in international trade uses the Harmonized System to classify goods for import and export. Think about it: the same products have different names in different countries. Additionally, there are millions of goods available on the market. Without a universal classification system in place, international trade would be thrown into chaos.
The Harmonized System was developed in 1988 and applies worldwide. All countries globally use the same HS code to classify a specific product that crosses their borders. A commodity number has six digits; the first two represent the product category, the next two designate the subcategory and the last two are even more specific.
Let's take the commodity code 010599. The first two digits, 01, designate the category, Animal & Animal Products. If you add 05, you'll obtain 0105, which designates the subcategory Live Poultry. The last two digits, 99, represent a highly specific subcategory, namely live poultry weighing more than 185 grams.
Commodity codes identify products or groups of products in international commerce. Customs authorities use these numbers to determine the duty and taxes for specific goods. Even though a typical HS code has six digits, some countries add additional digits to categorize the products further.
Companies that import goods in the United States must comply with the Harmonized Tariff Code Schedule or HTS. Unlike the HS, this system uses 10-digit commodity codes. The first six digits are based on the international HS, while the next four further distinguish goods in certain categories. This means you can convert a Harmonized Tariff code to an HS code by removing the last four digits.
The HTS also uses Schedule B codes to classify the products further. This system is regulated by the U.S. International Trade Commission, while the HS falls under the World Customs Organization's responsibility. Whether you import or export goods, it's vital that you understand and use the correct commodity codes.
Import and export laws, as well as duty and tax rates, are linked to various commodity codes. If you fail to use the correct commodity number, you may receive a fine. Additionally, you could be charged with fraud. An incorrect number can lead to any of the following situations:
- Goods may be denied preferential duty treatment.
- Buyers may incur additional costs.
- Import clearance may take longer.
- The products may enter another country.
- The products may be classified incorrectly.
- Official trade statistics will be inaccurate.
For example, using the wrong commodity number so you can pay less tax is considered fraud. Furthermore, your products may be seized or delayed by the customs.
Before you start importing or exporting goods, find the right commodity code. Check the HS or the HTS database depending on where you operate. And if you sell products or services online, you can access the UNSPSC database. This system applies strictly to eCommerce and works similarly to the HS wherein each category and subcategory of products is assigned a commodity code.