HTS Codes: Stop Losing Millions
In the ever-evolving world of international trade, seemingly minor details can have monumental financial implications for businesses. With new tariffs constantly shifting the landscape, understanding obscure trade codes isn't just good practice—it's essential for survival. Today, we're diving deep into how a tiny metal part can cost a $100 million company millions, and what businesses are doing to navigate this complex, costly maze. Get ready to uncover the hidden world of Harmonized Tariff Schedule (HTS) codes and "tariff engineering"!
Imagine running a wildly successful company, pulling in $100 million in revenue, only to discover a small error in your product classification is costing you a fortune. This was the reality for Kim Vaccarella, CEO of Bogg Bag, a viral beach tote maker. Her team, scrutinizing every item in their catalog under the shadow of new tariffs, found a crucial mistake: a zinc alloy key ring was incorrectly classified as stainless steel under the Harmonized Tariff Schedule (HTS).
This seemingly minor oversight led to duty rates being 30% higher than expected! As Vaccarella put it, "As if the tariffs weren't bad enough, getting charged incorrectly adds to the mayhem." The HTS is a government master list of about 20,000 product codes. While average US tariff rates used to hover around 1.4%, new tariffs have pushed this closer to 18%. For Bogg, reclassifying that small part as zinc alloy, which carries a lower tariff, became a critical move to bring costs down. It just goes to show, even the smallest component can pack a huge financial punch if mislabeled.
To combat these rising costs, many businesses are turning to a well-established, and completely legal, strategy known as "tariff engineering." This involves subtly tweaking product materials, design, or even how an item is used to qualify for a lower duty code. It's about playing within the rules to optimize costs.
Here are a few fascinating examples:
- The Beanie Blend: Emil Stefanutti, CEO of Gaia Dynamics, shared how one client altered a beanie's material blend. By shifting it from 50% wool to just over 50%, they moved it into a different tariff category, saving 4.2% on every single beanie sold! Talk about a smart material choice.
- Motors and Their Purpose: Vinny Licata of Fictiv highlights how a product's use can change its classification. A motor designed for a medical device might fall under a different, lower tariff code than an identical motor intended for a car. It's all about how you position and categorize your product.
- Walmart's Material Shift: Even retail giants like Walmart are in on the game. CEO Doug McMillon noted that suppliers are "shifting materials from tariff-impacted components like aluminum to fiberglass, where there is no tariff." This shows a proactive approach to design and sourcing to avoid tariff hits.
These examples underscore the ingenuity businesses are employing to navigate the complex world of trade tariffs and protect their bottom line.
While tariff engineering offers a legal path to savings, simply getting HTS classification wrong can lead to severe penalties. Think of it like misdeclaring your taxes – the government doesn't take kindly to it!
The costs of an HTS error can range from:
- Higher Duties: As Bogg Bag experienced, simple misclassification means paying more than you should.
- Fines and Seizures: Customs authorities can impose hefty fines or even seize your goods.
- Reputational Damage: Beyond monetary costs, a company's reputation can take a hit if they're perceived as trying to evade duties.
The penalties escalate based on the severity of the mistake:
- Simple Mistake: Costs based on owed duties or a portion of the goods' value.
- Gross Negligence: A significantly higher financial penalty.
- Fraud: Can cost you up to the full value of the entire shipment!
A stark example is Ford, which agreed to pay a staggering $365 million in March 2024 after being found guilty of misclassifying vans to dodge a 25% tariff. This was one of the largest customs penalties in recent history, serving as a powerful warning to all importers. The Department of Justice's Criminal Division has even made trade and customs fraud a top enforcement priority, meaning the scrutiny is only increasing.
With increased tariffs and stricter enforcement, businesses are no longer just looking to lower costs; they're prioritizing compliance and visibility. Trade lawyers are seeing a massive surge in HTS classification queries, and audit requests at trade-tech startups like Gaia Dynamics now make up 40% of their business. Companies are realizing they need to audit everything in their inventory, not just new imports.
Vinny Licata from Fictiv advises clients to calculate the all-in cost of getting a product to its final destination, rather than narrowly focusing on tariff percentages. His blunt advice: "Even if you bring it to the US, you will just have a higher labor rate." Since there's "no way to avoid a higher cost," the focus shifts to better cost management.
This new reality is also driving significant supply chain diversification. Bogg Bag, for instance, had relied exclusively on Chinese factories for over a decade. Now, they've shifted 30% of their production to Vietnam and aim for 50% outside China by early next year. While tariffs and disruptions have put their 2025 revenue target of $170 million out of reach, CEO Kim Vaccarella has resisted passing costs onto consumers, keeping her original bag model at $90. Instead, she's finding that protecting margins comes down to those few crucial digits in the HTS code.
"Now we're hyper-focused on paying attention to what we're using to make sure that we're not getting killed in tariffs on a particular product," Vaccarella shared. This vigilance is the new standard for success.
Q2. Can "tariff engineering" be considered illegal?
A. No, tariff engineering is a well-established and legal strategy. It involves making legitimate changes to product materials, design, or intended use to qualify for a different, lower tariff code. It's about optimizing within the legal framework of trade regulations, not evading duties through fraudulent means.