Customs Compliance: Get it Right the First Time

Canadian customs laws and regulations are complex and ever-changing, and importers large and small appreciate the challenges inherent in navigating such a system.

Non-compliance with customs requirements carries a range of penalties, the severity of which varies with the nature of the infraction. And while the monetary penalties may not be catastrophic, the non-monetary impact to a company’s reputation can be damaging and long- lasting.

Importers have a responsibility to know and follow the law. Not knowing the rules is no excuse for breaking the law.

Take your responsibilities seriously

Even if your company has been doing things a certain way for many years, that does not mean it’s the correct way. Take a careful look at your import practices on a regular basis – don’t get stuck in a comfortable rut or lulled into a false sense of security based on past experience.

Your suppliers are key partners in trade and are responsible for entering accurate information on the exporter’s documentation. But ultimately, it’s importers – not brokers – who are responsible for providing accurate customs declarations and who will bear any extra customs costs (duties, penalties, service fees, etc.) resulting from non-compliance.

Things to keep in mind:

1. Never import a new product without checking with customs to find out what information is required. The requirements can vary over time, between products, and based on the country of origin.

2. Require your supplier to provide all the information you will need to provide on your declaration, before they ship the goods to Canada.

3. If you don’t already use a trusted customs broker, find one! Then provide them with as much information as you can on the goods you’re importing. Too much is better than too little.

4. Importers have five days from the date of release before their customs broker is required to account for their goods. Notify your customs broker immediately if you learn new information in this period.

5. If you realize you’ve made an error in your customs declaration, make the correction within 90 days to avoid incurring penalties.

The U.S. Customs Modernization Act (the “Mod Act”) is part of the North American Free Trade Agreement Act and pertains to improving compliance and enforcement with U.S. customs laws. Among other things, the Mod Act places legal responsibilities on the importer for declaring all relevant information with respect to goods imported into the U.S. (information such as the value, classification, and rate of duty, among others).

A prominent feature of the Mod Act is informed compliance. This has two sides: U.S. Customs and Border Protection (CBP) has a responsibility to communicate its requirements to the importer while importers, in turn, are responsible for using reasonable care to ensure that they provide accurate and timely data to CBP regarding their importations.

The three levels of non-compliance – negligence, gross negligence and fraud – carry monetary and other penalties in increasing order of magnitude. These penalties are usually much greater than comparable penalties levied by the Canadian side (Canadian Border Services Agency) for imports into Canada.

Levels of culpability for CBP non-compliance are:

• Negligence: a failure to comply due to not exercising reasonable care*;
• Gross Negligence: a failure to comply, with “actual knowledge or wanton disregard” for the requirements; and
• Fraud: a failure to comply due to “voluntarily and intentionally making a false statement or committing another non-compliant act.”

*Reasonable care is a bit of a mushy term. It’s not defined in the Mod Act (U.S. Customs Modernization Act) and the concept has been evolving ever since the act came into force in 1993.  But don’t be left scratching your head. Two important actions you can take to ensure you’re exercising reasonable care are: 

1. Developing and following a customs compliance plan for your company, and
2. Teaming up with a licensed customs broker.

The determination of non-compliance is based on human scrutiny and judgment, and is carried out by CBP representatives. Even a minor error of omission or valuation estimate on a customs form could trigger an investigation and potentially result in penalties. This is why a keen knowledge of the requirements and diligent oversight of importation practices are essential for a smooth import experience.

Amassing this expertise and having the time and resources to ensure success importing into the U.S. takes time and effort. Not everyone has the time and in-house expertise to successfully pass through CBP scrutiny.

Create an in-house Customs Compliance Plan

Companies doing regular cross-border business with the U.S. are well advised to create and implement a customs compliance plan. Such a plan should include programs and procedures to:

• Document and store records of import activities (keeping in mind that records must be kept for five years);
• Ensure goods are properly classified and valued, and the country of origin correctly declared;
• Confirm that what was entered before receiving goods was actually received (with respect to both type and quantity of items);
• Respond to any customs requests for information, in consultation with your customs broker;
• Verify qualification for any special tariff or duty rates; and,
• Update and amend the plan as needed.

Once you’ve created a plan that suits your business, be sure to follow it and update it as needed to keep it relevant. Once the system and procedures are in place and working, there’s a very good chance you will have exercised the reasonable care required by Customs.

More information:

Part 1: U.S. Customs Compliance.  What's involved?

Part 2: U.S. Customs Non-Compliance. Penalties vary

 Know your stuff

You need a detailed understanding of each of your products, its country of origin, its value and which government agencies regulate its import or export. Some goods are also subject to special duties.

Most important, perhaps, is determining the correct tariff classification for each product – something that demands that you “know your stuff.”

You need to know your products inside and out – literally, as a product's composition can affect its tariff classification.

 Get the HS classification right

A Harmonized Tariff Schedule (HTS or HS) code is a 7- to 10-digit product code the border agencies assign to every good based on its name, use and materials used in its construction. These codes determine the tariff and duty rate for each traded product.

One of your best bets for staying off of the border agency’s radar is to always use the correct HTS code. Don't try to beat the system. Assigning an inappropriate classification for the sake of lower tariff and duty rates can fetch penalties of up to 48 percent of the goods' value!

 Check – and double check – your entries

Confirm that you’re using the correct HTS classification, the correct value and the correct country of origin. For questionable products, you can search previous Customs rulings (for example, at CBP’s Customs Rulings Online) or request a binding ruling from the border agency.

 Don’t let your HTS classifications collect dust

If your current HTS classifications are more than a couple years old, it’s definitely time to put them to the test. Beyond the importance to your company’s compliance (and its border agency profile) to keep up with duty rate revisions, you don’t want to miss out on a lower duty or even a free trade agreement.

The border agencies regularly modify their product classifications, so a code you chose two years ago may not be valid today.

 Keep complete, up-to-date records

Preserve the paper trail that proves you used reasonable care in conducting your Customs-related business.

 If the unthinkable happens – a Customs audit! – don’t panic

And whatever you do, don’t respond until you’ve consulted with a Customs compliance professional. 

Importers have an obligation to correctly classify their goods for tariff classification, and to understand the potential ramifications of incorrect tariff classification.

The benefits of knowing the nature of your goods will result in more accurate tariff classifications and duty rates, which will reduce your chances of border delays, and penalties during an audit. Your business will run smoother and more efficiently when you fully understand the nature of the goods you’re importing. 

How complicated is it?

It’s not surprising that mistakes can happen when classifying goods – this stuff is complex. Here’s just one example:

• Vegetables, fruits, nuts and other edible parts of plants that are prepared or preserved in vinegar with an acetic acid concentration of 0.5% or greater are most often classified in heading 20.01 of the HS and, as such, are often duty-free under a most-favoured nation agreement.

• The same foods preserved in vinegar with an acetic acid concentration of less than 0.5% would more likely be classified in heading 20.08 which would make them subject to a 6% duty rate.

For greater certainty, seek out a tariff classification advance ruling from the Canada Border Services Agency on a products you import.

What’s the worst that can happen?

An incorrect tariff classification can result in you paying additional duties, taxes and penalties after importing. And since you will have likely sold the product to your customers by the time an audit takes place (audits can happen up to four years after import), any additional fees paid will eat into your profit margin. Monetary penalties for incorrect tariff classification can be very high, and it’s almost impossible to recover those costs after the fact.

What can you do?

Risks can be minimized by teaming up with someone who can provide the technical expertise required to properly classify your products at the time of import.

Most importantly, be proactive:

1.  Consider enrolling in a tariff classification course or request information and/or training from your customs broker that can improve your understanding of customs compliance and solidify your standing as an importer of record.
2. Research duty rates prior to ordering and importing a new product in order to know and understand the import costs involved.
3. If your company does not have a tariff specialist, consider partnering with a customs broker. These specialists will review the available supporting documentation in order to ensure a good understanding of a product’s characteristics and function for the purpose of tariff classification.

Use these questions to get a sense of your company’s performance and risks with respect to Customs compliance. Every time you answer ‘No’, take some time to consider the potential implications for your company.

 Management

1. Does your company have clear and measurable goals regarding compliance?
2. Does your management team allocate the resources needed to ensure compliance?
3. Do you have a compliance group that includes individuals not involved in  the Customs process?
4. Is regular training provided to help maintain your compliance efforts?

Standard Operating Procedures (SOPs)

1. Does your company have SOPs for compliance?
2. Does your company have SOPs for your suppliers and service providers to follow?
3. Do you adjust and update your SOPs when required?
4. Do you have an up-to-date Customs manual?

Technology

1. Does your company use EDI, imaging, online compliance documents and other technologies to facilitate compliance?
2. Does your company have the ability to track any shipment through the purchase order to payment (P2P) cycle by a unique identifier?

Audit prevention

1. Do you perform regular self-audits to test your compliance?
2. Is the information used to support your NAFTA or FTA claims verified?
3. Are NAFTA claims, either for receiving or issuing, supported by an audit trail?
4. Do you have HS methodology documentation for existing and new products?
5. Has your company established a post-entry procedure?
6. Have all previous Customs issues been addressed and resolved?
7. Does your company’s record-keeping allow you to provide documents on demand?

 Security

1. Has your company addressed supply chain security?