Importers bear the burden of complying with all U.S. laws and regulations when their goods enter the country. Failure to exercise reasonable care in this effort can result in long delays in the release of merchandise, and the imposition of stiff penalties.

Relaying the information necessary for full compliance to a staff that isn’t fluent in technology can be extremely challenging. As a result, it’s important to simplify concepts and follow some basic principles.

The practice can be narrowed down to four main points of compliance:

What is it? The Harmonized Tariff Schedule of the U.S. (HTS) classifies and defines internationally traded goods. In order to import a product, the item must be assigned an HTS code that corresponds with the country of import. The first six digits of the HTS code, based on the Harmonized Commodity Description and Coding System developed by the World Customs Organization, identify all items in international trade, and are the same for all countries that use it. The last two to four digits are country-specific. In the U.S., the last four digits provide the duty rate and balance-of-trade statistical reporting suffix for imported goods. These codes not only determine the duty rate of the traded product, they also keep a record of international trade statistics that are used in nearly 200 countries.

What is the value? Value is typically the price payable when the transaction is nearly closed. There are other value considerations, such as transfer-pricing issues when the parties are related, the provision of goods (such as raw materials and molds) to the vendor at reduced or no cost, and changes to the value after the fact.

Where is it from? Country of origin is more than where the shipment originated. Each item is accompanied by specific rules to determine its proper designation, which is dictated by the HTS. Once established, the origin can cause increases or decreases in duty. For example, some items from China require additional duty, while the same item from a less-developed country might qualify for reduced duty under the Generalized System of Preferences (GSP) program.

What is the quantity? The most straightforward of the points, quantity nevertheless has important elements to be considered. The HTS number dictates which unit of measure is reported when making an import declaration.

The combination of these four points underscores the importance of compliance. The bottom line is about money:

• HTS + Origin = Duty Rate
• Duty Rate + Value + Quantity = Revenue to Government

Simply put, when U.S. Customs and Border Protection audits a company’s import compliance, it seeks to ensure that it was paid what it was owed. Formerly a part of the U.S. Department of Treasury, CBP essentially audits companies for the same reason as the Internal Revenue Service.

Each of these points of compliance yields its own level of complexity. Origin can include qualifying for free trade agreements, and even restricted party screening of vendors. Certain HTS determinations might require declarations to government agencies that regulate relevant products, or a license for items like steel, fish and wildlife goods. Value can be affected by basic decisions like shipping CIF (cost, insurance and freight) or FOB (freight on board), all the way to complicated calculations such as first sale.

Records must be kept to document that each of the points of compliance are correct and available for review. Examples of the types of things that records should document include:

• What is it? Reasonable care should be taken to ensure that the proper HTS code is used. This doesn’t mean selecting one based on the lowest duty rate.
• What is the value? Payments to the vendor should be able to connect to the import declaration. Assists are often paid outside of the import transaction, but must find a way to be connected.
• Where is it from? Just because the shipment is from a particular country doesn’t make that country its origin for import compliance purposes.
• What is the quantity? Most import declarations are based on shipping documents, such as invoices and packing lists. But do they match what the warehouse received? If it received more than what was declared, there’s value in the extra items, which affects the duty calculation.

Any record that tracks with the points of compliance should be able to be matched to the import declaration. In many companies, these records are segregated within their area of origin. For example, accounting has vendor payments; engineering has product specifications that affect the HTS, and production has informal information about where the processing takes place, which determines origin. The compliance officer is responsible for connecting all the dots across many departments, often with short notice.

The cost of getting compliance wrong can take the form of unexpected duties and penalties. With so much on the line, compliance professionals shouldn’t be relying on limited tools such as spreadsheets and paper documents. To control their compliance efforts, they need to invest in a reliable globe trade management (GTM) application. By understanding the scope of their operations, companies can define their technology requirements, gain real-time visibility of product movements, and identify strengths and weaknesses in their compliance and logistics processes.

Moreover, GTM applications allow for management by exception, meaning that the system can automatically generate all documentation required for compliant trade on its own. When choosing a GTM provider, always consider the functionality you’ll need for your envisioned future footprint.

Eric Dalby is director of FTZ and GTM implementations at QuestaWeb, Inc., a provider of multinational trade software.