When a leading U.S. guitar manufacturer decided to expand sales to Canada, it was fairly confident there would be strong demand for its high quality, intricately designed products. But what caught the company off guard, were the numerous problems it faced in navigating the U.S./Canada customs process, and the difficulty in trying to resolve those issues. In fact, the manufacturer found the compliance process to be so cumbersome, that it questioned whether or not its Canadian expansion was worth the effort.
Fortunately, the manufacturer enlisted the services of a qualified logistics provider to completely overhaul its approach to customs compliance. The manufacturer quickly learned that (a) border compliance is a fairly straightforward process, if you understand what’s required; (b) proper classification and valuation of products are critical; (c) the U.S. and Canadian governments maintain programs to ease — even eliminate — duty obligations; and (d) it was not alone — most businesses need the help of a customs expert to navigate the process.
Non-Resident Importer status allows U.S. businesses greater access to Canadian markets
U.S. manufacturers doing business in Canada quickly learn they are at a disadvantage when competing against Canadian firms. U.S. businesses are unable to collect Canadian sales taxes at time of purchase, and not allowed to clear shipments through customs. But, the Canadian government administers a “non-resident importer” (NRI) program, which levels the playing field. As a NRI, a U.S. business acts as an “importer of record,” eligible to collect taxes upfront and clear goods through customs.
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For many U.S. businesses, NRI status is a game changer. Our guitar manufacturer, for example, faced the unpleasant situation in which its Canadian customers, mostly music store operators, had to physically go to a customs office to collect their instruments and pay all outstanding taxes. The problem though, is the program is not widely advertised, so unless a business has a thorough understanding of Canadian customs, it will likely not avail itself of the NRI program.
Duty Drawback allows Refunds for Duties Paid on Goods Subsequently Exported
Another often-overlooked and under-advertised opportunity is the duty drawback program, through which a U.S. business can receive a refund on import duties paid on goods that are subsequently exported. As an example, consider a U.S. manufacturer that imports motors from a foreign country. The motors are then used in the assembly of washing machines, which are subsequently exported to customers in various foreign countries. The way drawback works, the manufacturer may be entitled to get back as much as 99 percent of the duties paid when the motors were initially imported.
Many businesses have been able to recoup millions of dollars in import duties from this program, but there is an extremely complicated and detailed filing process. So complicated, that most eligible businesses do not even bother trying to navigate the process, leaving an estimate $2 billion each year in unfiled claims. Imagine if your business was legally entitled to thousands of dollars in duty reimbursements!
Tariff Classifications – Slight Variations can have Big Consequences
Although payment of duties is an integral part of the import/export process, there is nothing to gain from paying more duties than necessary. There is much to gain though, from taking the time to ensure that products are charged the least amount of duty possible. But how is this possible?
Every product entering the United States must bear a 10-digit identifying code, as found in the Harmonized Tariff Schedule of the United States (HTS), which is maintained by the U.S. International Trade Commission. The HTS includes more than 17,000 different product classifications, and code assignments can vary based on slight product variations.
A rug hooked by hand, for example, would bear a specific tariff code — and have a different duty assessment — than a rug hooked via a machine. Care must be taken to ensure that the assigned tariff code exactly matches a product’s components and characteristics. If this sounds confusing, you’re not alone. Consider a message posted on the Customs Border Protection (CBP) website: “Be aware that the HTS can be very complicated. If you self-classify an item and the classification is incorrect, the mistake can be costly.”
NAFTA Eligibility
Among its many components, the North American Free Trade Agreement (NAFTA) eliminated tariffs on virtually all originating goods traveling between the U.S., Canada and Mexico. But determining whether or not a product fits within NAFTA’s terms for “origination” can be tricky.
Under NAFTA, origination is not restricted only to goods produced within the U.S., Canada, or Mexico. Instead, the agreement makes allowances for products to include percentages of non-NAFTA materials and still qualify for preferential benefits. To determine eligibility, an exporter must have detailed knowledge about a shipment, including production information for every component part.
Critical to this, a product must be assigned the correct tariff classification; and once the proper code has been assigned, the appropriate NAFTA “rule of origin” must be applied. The “rules of origin” determine if a product, based on its production history and components, qualifies for NAFTA free trade benefits.
So, as the above discussion makes clear, options exist to help an informed business manage the border clearance process by minimizing duty obligations and maximizing efficiency. But a common theme running through each -- these programs are complicated -- and probably not endeavors a typical business is equipped to undertake. But help is available. For a qualified logistics provider or customs brokers, participating in any of these programs would be “just another day at the office.”
John Costanzo is President of Purolator International.
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