With recent increases in U.S. tariffs and the increasing complexity of determining applicable duties for different products, importers are looking for ways to reduce their tariff exposure. Since a product's tariff treatment begins with its tariff classification, importers will be examining classifications carefully.
Under U.S. customs law, the duty rate for an imported product is determined by its classification according to the Harmonized Tariff Schedule of the United States (HTSUS). At entry, the importer is obliged to use reasonable care to propose an accurate classification of the goods, which should be based on the goods' actual characteristics, composition, and intended use. U.S. Customs and Border Protection (CBP) then uses the HTSUS and a detailed set of rules, including the General Rules of Interpretation (GRIs), to determine the final classification.
There may be a temptation to declare a product using a tariff classification that does not reflect the character of the goods, simply in order to achieve lower tariff liability. Such practice is plainly illegal and can expose importers to serious consequences. There may be, however, legitimate ways to modify the composition or design of a product so that it properly falls within a more favorable tariff category (so called "tariff engineering"). An example involves women's slip-on shoes. According to HTSUS, shoes with "outer soles of rubber, plastics, leather or composition leather and uppers of textile materials" are subject to a higher import duty than other shoes with "outer soles of textile fabric." The slip-on shoes in question had an outer sole composed of a unit-molded rubber/plastics material to which a thin layer of textile material had been applied. In a ruling, CBP agreed that the layer of textile material was a constituent material and allowed the shoes to be classified under the lower-tariff category.
The point with tariff engineering strategies is that the product is actually changed to meet the requirements of a particular tariff classification. Thus, companies should ensure that the product's new form qualifies for the intended classification under the HTSUS, GRIs, and other applicable guidance; maintain records of the design choices and evidence that the new classification is accurate; and conduct an internal assessment or obtain external confirmation, such as consulting with a specialized firm or requesting a binding ruling from CBP, as the importer did in the slip-on shoes case mentioned above.
By contrast, misclassification – whether by providing inaccurate descriptions, omitting key details, or intentionally choosing an incorrect code – violates U.S. customs law and should be avoided. Misclassification of goods can lead to significant legal and financial risks. An improper classification can trigger a comprehensive review by CBP to determine the correct classification and assess the appropriate duties, a process that can be both time-consuming and costly. It can also lead to the revocation of the importer's trusted trader status under the Customs-Trade Partnership Against Terrorism (CTPAT) program, which would entail heightened scrutiny by CBP and increased customs delay and costs. If CBP determines that goods have been misclassified, it will require payment of the correct duties and, if the misclassification is found to be negligent or intentional, impose substantial civil penalties. In more serious cases involving fraud or conspiracy to defraud the government, CBP frequently refers matters to the Department of Justice (DOJ) for civil and criminal enforcement. Such cases can result in significant fines and, in egregious circumstances, imprisonment for individuals involved. For example, in 2023, DOJ resolved a case involving a vitamin importer accused of deliberately misclassifying over 30 products under the HTSUS to avoid paying customs duties. According to the settlement, the importer had hired a consultant to review its tariff classifications and discovered that the correct codes would have resulted in higher duty rates than those it had previously used. Despite this knowledge, the company admitted it failed to update its classifications for more than nine months and did not pay the duties it owed from earlier misclassifications. As part of the settlement, the importer was required to pay $22.8 million plus interest, including $10.8 million in restitution. Notably, this case was filed under the whistleblower provisions of the False Claims Act, which permit private parties to file suit on behalf of the United States for false claims and share in a portion of the government's recovery. Recently, DOJ has shown a renewed interest in using the False Claims Act to prosecute customs fraud.
A common misconception is that a party is not exposed to liability if the party is not listed as the official importer of record. However, in U.S. v. Trek Leather, the Federal Circuit held that personal liability under 19 U.S.C. § 1592 (which prohibits fraud, gross negligence, and negligence in connection with the entry, introduction, or attempted entry of merchandise into the United States) can apply even if a party did not formally enter the goods. As a result, business and individuals should remain vigilant about potential customs misconduct anywhere in their supply chain, since liability can extend to any person or entity involved in the importation process or customs declarations. Notably, even in Delivered Duty Paid (DDP) transactions (where the foreign seller typically manages customs clearance and pays the duties), importers may still be held accountable for customs fraud.
In sum, manipulating product classifications to evade tariffs is illegal and can result in severe consequences. While legitimate maneuvers such as tariff engineering exist, they must be handled carefully to withstand regulatory scrutiny. With the increasing complexity brought on by reciprocal and secondary tariffs, accurately assessing merchandise classification has become even more challenging. U.S. businesses must ensure that their classification practices are in strict compliance with U.S. customs law and must not delegate their obligations to upstream parties.
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