Think that HS classification audits aren’t worth the time or effort? The Canada Border Service Agency’s (CBSA) 2022 report on Import Compliance Verification Priorities proves otherwise.
Even though the audits are designed to uncover non-compliance in Classification, Valuation and Origin, it’s classification that remains far and away CBSA’s main focus with 83% of 1825 targeted companies examined for misclassification.
To date, the 19 commodities on the agency’s current list of HS classification targets have averaged a 74% rate of error and netted a total of $223 million in duties recovered and penalties assessed – a whopping $226,842 per case.
While certain commodities, such as pickled vegetables (60%) and footwear valued at $30 or more per pair (67%), reveal unacceptably high rates of misclassification, certain commodities stand-out as particularly bad. These include:
- Bicycle parts, 92% of cases in error
- Cellphone cases, 92% of cases in error
- Batteries, 98% of cases in error
- LED lamps, 100% of cases in error
For LED lamps, Customs found that light-emitting diode (LED) lamps (i.e. “light fixtures”) were misclassified under Heading 85.39, which provides for light bulbs and are imported duty free, instead of being properly classified under Heading 94.05, which attracts an MFN duty of 7%.
CBSA auditors also discovered 31 cases of misclassification of gloves that resulted in nearly $3million in duty underpayments. The agency found that importers misclassified their gloves in chapters 39 and 42 to avoid paying the 18% MFN duty that would have been assessed had they been properly classified in chapters 61 or 62. The error rate for classification of gloves was 78%.
Similarly, 82% of cases involving furniture importers were non-compliant, yielding duty underpayments of more than $3.5 million (an average of nearly $43,000 per case). Apparently, importers misclassified domestic furniture as non-domestic in order to avoid paying duties altogether.
Despite CBSA’s advance warning, importers should know that not all audits are based on the Agency’s verification priorities. All importers are at risk of random or compliance-based verification audits.
For customs and fiscal authorities, the business case for classification audits is a compelling one – the commodity classification process is error prone, the revenues recovered are great and, with automated tools such as Avalara’s 3CE HS Verification Engine, the cost of recovery is minimal. For businesses, having a process in place to ensure that goods have been classified correctly is essential… especially as monitoring and enforcement becomes more automated.